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Operator: Good day, and welcome to the Smithfield Foods' Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Julie MacMedan, Vice President of Investor Relations. Please go ahead. Julie MacMedan: Thank you, operator, and good morning, everyone. Welcome to Smithfield's Third Quarter 2025 Earnings Call. Earlier this morning, we announced our results. A copy of the release as well as today's presentation are available on our IR website, investors.smithfieldfoods.com. Today's presentation contains projections and other forward-looking statements. They are being provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or other factors. Please refer to our legal disclaimer on Slide 2 of the presentation for more information. Today's presentation will also include certain non-GAAP measures, including, but not limited to, adjusted operating profit and margin, adjusted net income, adjusted earnings per share and adjusted EBITDA. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our slide presentation on our website. Finally, all references to retail volume and market share are based on Circana data. With me this morning are Shane Smith, President and CEO; Mark Hall, CFO; Steve France, President of Packaged Meats; and Donovan Owens, President of Fresh Pork. I will now turn the discussion over to Shane. Shane? Shane Smith: Thank you, Julie. Good morning, everyone. I'm pleased to report that we delivered record third quarter adjusted operating profit of $310 million, which represents an 8.5% increase year-over-year and an adjusted operating profit margin of 8.3%. We achieved record third quarter results by delivering innovation, value and convenience to our customers and consumers and through a continued disciplined execution of our strategies. Our Packaged Meats segment achieved its second highest third quarter profit on record despite persistent higher raw material costs and a more cautious consumer spending environment. This underscores the power of our brand and private label portfolio strategy to deliver quality and value across all price points. Our Packaged Meats segment performance was driven by product mix improvements, our well-diversified portfolio of products and price points, new product innovation and operating efficiencies. Our Fresh Pork segment was pressured by a compressed industry market spread, which was driven by higher hog prices. As a result, a portion of our Fresh Pork profits moderated to our Hog Production segment, both were retained within our pork operations due to our vertically integrated model. In the face of challenging market conditions for our Fresh Pork segment, I'm proud of our team for mitigating more than half of the year-over-year compression in the industry market spread. Additionally, Fresh Pork has been navigating in a challenging tariff environment. To achieve the level of profitability that the segment has accomplished demonstrates our team's outstanding execution on all controllable aspects of the business, including optimizing the net realizable value of each hog and continuing to drive operational efficiencies. As I noted a moment ago, our Hog Production segment benefited from higher hog prices Additionally, the team has tirelessly executed our strategy to improve operational performance and lower our raising cost. Hog Production segment adjusted operating profit more than doubled since last year as a result of more favorable markets, coupled with the improvements on our retained farms. Now turning to our outlook for fiscal 2025. I'm pleased to report that we've raised the midpoint and tighten the range of our outlook for 2025 adjusted operating profit by staying true to our strategies and delivering on our commitments. Mark will share more details in a few minutes. Now I'll turn to our key growth strategies. Our five strategic growth priorities are as follows: Increased profits in Our Packaged Meats segment through enhanced product mix, volume growth and innovation; grow profits in our Fresh Pork segment by maximizing the net realizable value across channels; achieve a best-in-class cost structure in our Hog Production segment; optimize operations and deliver operating efficiencies in manufacturing, supply chain, distribution, procurement and SG&A; and finally, evaluate synergistic M&A opportunities across North America. First, in Packaged Meats, which is our largest and most profitable segment. Protein remains a growing category with quality protein representing a core staple in consumer diets. Consumers are also looking for value, convenience and new flavors. Our Packaged Meat segment is delivering on each of these consumer preferences without sacrificing profitability. Our 3-pronged strategy to grow Packaged Meat segment profit encompasses product mix improvements, volume growth and innovation. First, product mix. We remain focused on continuing to improve our product mix, which enhances margins and drives unit velocity. A key driver of this strategy is to confirm sales of our more commoditized heritage products, like large holiday hams, into increased unit sales of higher-margin products for everyday consumption, such as packaged lunchmeat and quarter hams. Smithfield Prime Fresh packaged lunchmeat continues to win with both customers and consumers. Our premium lunch meat offering delivers the quality of a freshly sliced daily meat without the wait. During the third quarter, while volume for the $6.3 billion packaged lunch meat category was down, Prime Fresh volume increased double digits, and we gained a full point of volume share versus the third quarter of 2024. This outstanding volume growth was driven by higher ACV and product innovation, and we see a long runway ahead. Our Smithfield Anytime Favorites quarter hams are another great example. Unlocked large holiday hams, quarter hams are perfect for everyday family dinners. They are also a great value, which consumers love. Smithfield Anytime Favorites quarter hams increased volume share by 5.7 points versus the third quarter of 2024. Another key component to unit sales growth is expanding our drive sausage offerings to capitalize on the popularity of pepperoni and salami. These products are growing faster than the packaged meats category as a whole and have higher margins. To position our dry sausage products with well-diversified price points, we market them under specialty brands like Margherita and Coronado as well as value brands like Armour. During the third quarter, our total branded dry sausage category grew volume by nearly 8% versus the third quarter of 2024. Second is volume. We participate in 25 key packaged meat subcategories in retail, 10 of which are valued at over $1 billion, and we see continued white space opportunities to grow volume and increase market share in each of these categories. Year-to-date, through September 28 versus the same time period a year ago, we grew branded market share in 6 of these $1 billion plus categories. We are driving volume in today's economy by delivering quality protein at a good value. Our portfolio of quality branded products spans multiple categories and price points and is an important competitive advantage for Smithfield. We are attracting and retaining consumers within our branded portfolio, even as they trade up and down the value spectrum. Value seekers are also turning to private label, which is a key competitive advantage for us. Retailers and food service operators look to us as a trusted partner who consistently and reliably deliver high-quality products at scale. Over the past several years, we have improved private label profitability, which represents just under 40% of our retail channel sales. Another great example of delivering value is in the sausage category, which spans all dayparts with an average retail price per pound of $4.23, our sausage offerings, help today's consumers get their protein cost effectively. Our sausage offerings collectively grew volume by 2.9% in the third quarter versus the third quarter of last year. In addition to delivering value, we are driving volume by investing behind our brands with direct-to-consumer advertising and by executing effective trade promotion. During the third quarter, our Smithfield brand launched a new We Speak Pork national advertising campaign. For decades, Smithfield has set a standard for quality and craftsmanship in pork. The new campaign is already driving positive engagement across digital and social platforms and helping us reach younger audiences with the focus on millennials and Gen Z shoppers. Beyond awareness, we are seeing early indications of stronger purchase intent and improved brand affinity. Earlier this year, we launched a new campaign for our Records National brand, themed Eckrich, the sausage that takes you home. We are also proud to continue our partnership with the College Football Playoff Foundation and its Extra Yard for Teachers initiative for the 2025, 2026 season. Our brand-building efforts are showing returns. Average cook dinner sausage volume increased 7.8% versus the third quarter of 2024, which was more than 5x the category growth. Next, product innovation. Innovation is an important pillar of our packaged meats growth strategy. We continuously develop new concepts to address emerging consumer trends. These new products target consumers through line extensions of our trusted brands, new flavors and more convenient packaging and sizing options. On October 1, we launched our Smithfield Mike's Hot Honey Bacon, a sweet heat innovation that merges our signature honey-smoked bacon with Mike's Hot Honey's iconic flavor. The product taps into the fast-growing sweet heat trend and strengthens our connection with younger consumers. It also serves as a strong proof point of how Smithfield is modernizing the category and driving brand relevance through innovation. This exciting new launch is spot line of Smithfield's We Speak Pork brand campaign. Another great example of an innovative product that aligns with evolving consumer preference for new flavors is our Curly's Ready In Minutes BBQ Meals. Curly's is the #3 brand in refrigerated barbecue meats and enjoyed the #1 year-over-year volume share increase during the third quarter at 1.4 points. The growth for Curly's is being aided by innovation from our New World flavors such as Korean barbecue Pulled Pork, Chimichurri Pork Carnitas and Thai Sweet Chili Pulled Chicken. Innovation is also a key driver of our 13.5% increase in foodservice sales in the third quarter versus the third quarter of last year. Despite high food away-from-home inflation, our innovative new offerings are attracting foodservice customers. Year-to-date, our foodservice sales increased over 10% with 3% volume growth. Key foodservice innovations include our Smithfield ready-to-eat bacon as well as 55 new limited time offers. We have introduced across value-added packaged meats categories. We are giving customers and consumers reasons to keep coming back. In summary, our Packaged Meats segment is successfully driving volume and profitability by improving our product mix, offering value, building brand awareness and delivering on product innovation. Now let's talk about our second quarter growth strategy, increasing our Fresh Pork segment profitability. We are focused on growing Fresh Pork operating profit by maximizing the net realizable value of each hog and driving best-in-class operating efficiency. A key to effective whole hog utilization is developing multiple channels as outlets for our fresh pork products and operating with agility across these channels. The execution of our strategy is why our third quarter results outpaced the significant compression in industry market spread. At a time when volume and consumer staples is challenged, our fresh pork segment delivered 5% volume growth in the U.S. retail channel. This was driven by consumers' desire for quality protein in their diets. We saw U.S. retail profit enhanced by value-added case-ready items. We also have increased profitability in our pet food and pharmaceutical channels. These channels offer alternatives to certain export markets for some of our products. Our Fresh Pork segment continued to deliver operating efficiencies and cost savings which also helped mitigate the impact of the compressed market spread on segment profitability. Now to our strategy to optimize our Hog Production segment. I'm proud of the team's work to achieve a best-in-class cost structure on our retained farms. Over the past several years, we have sold underperforming farms and improved our genetics, our nutrition and feed procurement and herd health. While we still have work to do, we are pleased with our progress to date, and we are already demonstrating the power of our vertically integrated model with our more streamlined hog production operations. Improved sow productivity and fee conversion are key contributors to our cost savings versus last year. We still have more room to benefit from continued optimization. We expect our raising costs will continue to trend lower from the benefit of our reform measures and our genetics and overall herd health initiatives. This year, our Hog Production segment is on track to produce under 11.5 million hogs, which represents about 40% of our Fresh Pork segment's processing needs. Over the medium term, we remain focused on actively resizing our business to reduce to approximately 30% the number of hogs we produce ourselves. We believe this will provide a sufficient assured supply of high-quality raw materials to our Fresh Pork segment, while reducing the impact of commodity fluctuations on our consolidated results. Next, our strategy to optimize operations and deliver operating efficiencies in manufacturing, supply chain, distribution, procurement and SG&A. Each year, we look for cost savings to offset inflation. We also dedicated a large portion of our capital investments toward automation, waste elimination and throughput maximization. Automation has enabled us to redeploy labor to higher-value activities as well as to reduce our overall labor count. We also continue to refine and optimize our transportation and logistics activities. Through these strategies, we continue to lower our overall operating costs. Finally, we continue to evaluate opportunistic M&A in North America to support our growth strategies. We will remain disciplined in evaluating complementary and synergistic opportunities for our packaged meats business. In summary, we delivered a record third quarter result through solid execution across all segments. Our Packaged Meats segment has demonstrated resilience in today's market, underscoring our ability to grow share and expand profitability over the long term. Our Fresh Pork and Hog Production segments support the packaged meats segment with an assured supply of quality protein, and our disciplined operating approach continues to help us navigate a dynamic macro environment. With that, I will turn it over to Mark to review our financials in more detail. Mark Hall: Thanks, Shane, and good morning to everyone joining the call. As Shane stated, we set a record for the third quarter adjusted operating profit and net income which reflected the resilience of our business model in a challenging market environment. Strong profit growth in our Hog Production segment more than offset market headwinds in our other operating segments, underscoring the benefit of our vertically integrated model. I'm pleased to report that we ended the third quarter with a strong balance sheet, and we have the financial flexibility to invest in growth and return value to our shareholders. Turning to the details of our third quarter results, starting with the consolidated results and then a review of our performance by segment. Consolidated sales in the third quarter were $3.7 billion, representing a 12.4% or $412 million increase compared to the prior year. This was driven by sales growth across all segments. Our record third quarter adjusted operating profit was $310 million with an adjusted operating profit margin of 8.3%. This was 8.5% higher than the adjusted operating profit of $286 million with a margin of 8.6% in the third quarter of 2024. Third quarter 2025 adjusted net income from continuing operations was also a record at $230 million and compared to $203 million in the third quarter of 2024. Adjusted EPS was $0.58 per share representing a 9.4% increase from $0.53 per share in the third quarter of 2024. Now on to our third quarter segment results. Our Packaged Meats segment delivered third quarter adjusted operating profit of $226 million, which was the second highest third quarter profit on record and a healthy adjusted operating profit margin of 10.8%. These strong results in the face of persistent higher raw material costs and a challenging consumer spending environment demonstrates the success of our Packaged Meats segment strategy. Third quarter packaged meat sales were up $2.1 billion, increased by 9.1% compared to the third quarter of 2024. This was driven by a 9.2% increase in the average selling price with flat sales volumes. Industry-wide, volume growth has been challenged due to inflation and consumers' tight budgets. As Shane mentioned, we were able to maintain volume by delivering innovation, value and convenience. The higher average selling price was driven primarily by higher market prices across the pork value chain with key raw materials such as bellies up 40%, trim up 35% to 68% and ham up 14% year-over-year in the quarter. Next, in Fresh Pork, for the third quarter of 2025, we delivered adjusted operating profit of $10 million and an adjusted operating profit margin of 0.5%. While this was down from the third quarter of 2024, it is an impressive achievement given the compression in the industry market spread year-over-year at roughly a $40 million unfavorable impact on profitability during the third quarter of 2025. By delivering outstanding execution on all controllable aspects of our business, our Fresh Pork segment results only declined by $18 million or less than half the market impact. Profitability was strengthened by sales and volume growth in the U.S. retail channel with profit enhanced by value-added case-ready items. We also grew volume and profitability in our pet food and pharmaceutical channels, executing well on our next best sales strategy. In addition, we continue to deliver operating efficiencies and cost savings, which helped mitigate the impact of the compressed market spread on segment profitability. Fresh Pork segment sales of $2.2 billion increased 12% year-over-year, primarily driven by a 12% increase in average selling price and flat volume. Turning now to Hog Production. We're pleased to report adjusted operating profit of $89 million for the third quarter of 2025 versus a profit of $40 million in the third quarter of 2024. The substantial increase was driven by improved commodity markets as well as actions we've taken to optimize our operations. Third quarter 2025 Hog Production segment sales of $813 million increased by 10.1% year-over-year. This was despite a 25% or approximately 850,000 head reduction in the number of hogs produced as part of our planned rationalization strategy. The third quarter sales increase was primarily due to increased external grain and feed sales of $120 million, largely due to sales to our new joint venture partners while our average market hog sales price was up 8% year-over-year, inclusive of the effects of hedging. Adjusted operating profit for our other segment, which includes our Mexico and Bioscience operations of $10 million in the third quarter was down $10 million compared to the third quarter of last year, primarily due to lower bioscience sales volumes. Our corporate expenses came in at $4 million below the prior year, reflecting our disciplined cost management strategies. In summary, we are pleased to deliver record third quarter operating profit and net income despite challenging market headwinds due to solid, consistent execution across all of our operations. Next, let's review our strong balance sheet and financial position. At the end of the third quarter, our net debt to adjusted EBITDA ratio was 0.8x, well below our policy of less than 2x. Our liquidity at the end of the quarter was $3.1 billion, including $773 million in cash and cash equivalents. This is well above our policy threshold of $1 billion of liquidity. Capital expenditures for the first 9 months were $246 million compared to $268 million for the first 9 months of 2024. We now expect to spend between $350 million to $400 million in capital expenditures this year, primarily due to the timing of projects moving into 2026. Approximately 50% of our planned capital investments this year are to fund projects that will drive both top and bottom line growth. This consists primarily of various plant automation and improvement projects as we continue to lower our manufacturing cost structure and better utilize labor. Reinforcing our commitment to return value to shareholders, we expect to pay $1 per share in annual dividend this year subject to the board's discretion. To date, we have paid dividends of $0.75 per share. Now on to our outlook for fiscal 2025. Today, we again raised our outlook for adjusted operating profit, this time by $25 million at the midpoint, given strong year-to-date performance as well as our forward outlook. This brings the total increase to $75 million since the original guidance we provided in March. While we continue to navigate higher raw materials and a dynamic consumer spending environment, we still expect to continue to increase total company profitability by executing our core strategies that Shane reviewed. First, we continue to anticipate total company sales to increase in the low to mid-single-digit percent range compared to fiscal 2024. Please note for comparability purposes, our sales outlook excludes the impact of Hog Production segment sales to the newly formed joint venture partners. Outlook for segment adjusted operating profit is as follows: For our Packaged Meat segment, we anticipate adjusted operating profit in the range of $1.06 billion to $1.11 billion. Our revised outlook reflects the impact of persistent higher raw material costs and a cautious consumer spending environment, including the potential impact of delayed SNAP benefits. For Fresh Pork, we now anticipate adjusted operating profit of between $150 million to $200 million. Our revised outlook primarily reflects the impact of the tighter market spread that we expect to see throughout the end of the year. For Hog Production, we've raised our anticipated adjusted operating profit range to $125 million to $150 million. Our revised outlook reflects the improved market conditions and better operational performance. As a result, we now anticipate total company adjusted operating profit in the range of $1.225 billion to $1.325 billion, which is a midpoint increase of $25 million from our guidance last quarter and $75 million from our original guidance. This primarily reflects the consistent execution by our flagship Packaged Meat segment combined with the benefits of our vertical integration. In summary, we're executing our strategy and delivering record results in a challenging market environment. We've raised our consolidated fiscal year 2025 adjusted operating profit outlook based on the stability of our $1 billion-plus Packaged Meat segment, combined with our ability to capture the outperformance of our Hog Production segment through our vertically integrated model. Our strategies are working, and we're well positioned to continue to grow profitability over the long term. Now I'll ask the operator to open up the call for Q&A. Operator? Operator: [Operator Instructions] The first question comes from Leah Jordan with Goldman Sachs. Leah Jordan: I just wanted to ask about packaged meats. I saw that volumes were flat in the quarter. You talked about a cautious consumer, you're even kind of considering some SNAP funding changes here. So as you look to the fourth quarter and maybe an early look into next year, how are you thinking about the balance of volume and price as top line drivers there? And I may have missed it, but I recall last quarter, you were talking about 1% volume growth in this segment for the full year. I mean, any change to that look as you think about elasticity in the current environment? Shane Smith: Thank you, Leah. Steve, do you want to take that question? Steven France: Sure. Thank you. So first, I'll start out on the retail side of the business. So I would say that despite a soft retail environment, we are gaining ground. So if you take a look at Q3, so retail sales were up 6%, and our dollar share and unit share were both up 0.1%, while the industry is flat on dollars and down 0.8% on units. So the big thing is we continue to execute our strategy to grow our value-added items and really focus on higher-margin units versus commodity bulk items, which really continues to drive our industry-leading profitability. So when you think about it, we're winning not only on our bottom line performance, but we're also seeing strong category performance. So a good example would be, in Q3, our ham units were up 11% versus last year, while the industry was down 1.7%. And then if you dig deeper into that ham category, Smithfield Anytime Favorites the quarter ham was up 3.8%, while the category was down 5.9%. And then as Shane touched on when he went through his opening comments, dry sausage really continues to deliver some excellent results with units up nearly 13% versus last year, while the industry units were down almost 2%. And of course, Prime Fresh continues to be an outstanding item for us and very positive results, not only for Q3 but also as we go through the year. Leah Jordan: Okay. That's very helpful. And then just sticking with packaged meats, just a little bit more on profitability, just given the continued input cost pressure there. And just how are you thinking about the ability to keep -- putting price through? And then as you kind of look into '26, how do you be thinking about the long-term margin recovery there in the time line there? Shane Smith: Yes. Thanks for the question. So first, I would say that I feel very good about where our packaged meats business stands today when you think about the sales increase that we were able to deliver in Q3, and also the strong profit margin coming in at 10.8%. So when you compare that to last year, obviously, yes, it's down slightly. And from a dollar standpoint, is down about $13 million. But I think the key point to take into account is that our overall costs were up about 12%. And just the raw material side that was over $200 million increase in Q3 this year versus last year. So I think that really shows the ability that we have to take pricing with our customers and also manage and mitigate some of those higher raw material costs with a lot of the different activities that chain had kind of walked through, whether it's from a manufacturing footprint standpoint and really lowering our cost, supply chain, SG&As and other areas. So when you take into account all those different initiatives, it's really helped us offset some pretty significant inflation, including about 20% increase in the raw materials that I mentioned. Operator: The next question comes from Heather Jones with Heather Jones Research. Heather Jones: I wanted to talk about your -- ask about your comment regarding another 30% decline in the final target for number of hogs. And I'm asking because the packaged meats environment is getting increasingly competitive, new capacity coming on, I think it's next year in sausage and bacon. So just was wondering how you're thinking about that ultimately and how you think about Smithfield's vertical integration as a competitive advantage vis-a-vis the rest of the space? Shane Smith: Yes, Heather, when you think about our production, if you go back to where we were back in 2019, we were raising about 17.6 million hogs. We began a process of lowering that down to about $10 million. So about 30% vertically integrated that you referred to. Today, as we look at 2025, we expect to be at about $11.5 million. And that will be, again, 40%. I think it's important to recognize where we've taken those hogs out. And so what we've done is removed our highest-cost farms. And so those are farms that are maybe they're geographically displaced, meaning there's an incredibly high cost in transportation, whether that means taken feed through the farms or grain through the feed mills, or moving those hogs to the processing plant. So even in this environment of increased profitability in Hog Production, those particular farms that we've rationalized on a per head basis would have been, in some cases, negative even in this environment. So we still -- it's still the right strategy to continue to reduce. Now as we go from $11.5 million to $10 million over the medium term, I would say, the process there is still to make sure we have an adequate number of hogs coming into the plants. So we'll do that in a number of areas or a number of ways, like we've seen in the East Coast for the last 2 years. We've reduced our exposure in the East Coast by converting contract growers into independent hog producers. And so overall, the goal of that reduction is to remove the commodity side volatility in Hog Production. So I still think 30% is the right number. I think we're on that path still, and we've seen that in the reductions to date. And I don't think it will have a negative impact on our hog availability going into the Fresh Pork business and ultimately feeding to the last part of your question, into the packaged meat side of our business. So we're really comfortable still looking at that 30% number from an overall vertically integrated model and the profitability with inside that model. So we're comfortable still continuing towards that 30%. Heather Jones: And the follow-up, just wondering, I mean, clearly, this year, input costs have been affected by widespread disease. But as we're thinking about over the next few years and more of the industry becomes forward integrated into packaged meats and all, are you all expecting more volatility on that belly side? And is there anything you can do to mitigate that, just less of those become available to trade on the open market? Shane Smith: Yes. Well, when you look at -- what we see, again, from the supply side, hog producers have been under pressure for a number of years now. And returning to profitability this year and seeing profitability when you look at the futures market out into 2026, though we don't hear of a lot of expansion that's taken place in hog production, at least not on a material level. You can look at what the USDA is calling for 2026, and they're calling pork to be up to about 28 million pounds. And so about a 3% increase. But then you look at the hogs and pigs report, and it's implying there's actually a decrease. And so we're aware of or conscious of what the industry is saying, but we're also paying a lot of attention internally to what we're actually seeing. 2025 -- early in 2025, there was a lot of disease, particularly out in the Midwest part of the industry. And we're paying attention to those external reports now to see what the disease outlook is as we go into these colder months where disease spread tends to be a little more prevalent. But I don't see a lot of expansion taking place on Fresh Pork side. Donovan, you want to talk to anything on the Fresh Pork side? Donovan Owens: Well, I guess, in terms of the availability piece, I think she's mentioning, we still believe we're going to see a robust product markets well into 2026. So I don't think we're going to -- we're not expecting expansion or the lack of disease in order to mitigate some of the markets we have. I mean we're very poised to see elevated pork markets, especially when you look at how the protein sector is sitting right now would be being so high. So we do believe our product categories are sitting priced reasonably. And when you compare against competitive proteins, then I think that's going to continue. And again, I know the question was really specifically around bellies and bacon. But we do think that we've had -- we've seen some recent pressure on the belly market, but still relatively high compared to historical market trends on bellies. And I think that we're going to see that relatively higher belly market continue well into 2026. Operator: The next question comes from Peter Galbo with Bank of America. Peter Galbo: Maybe to stick on the topic of cost inflation. I guess, Shane, like one of the surprises was how high some of the cut markets remained over the course of the summer between bellies and trim. But now even since the end of the quarter, those have come in quite a bit. So I just want to get maybe an understanding from you whether that's just normal seasonality in terms of what you've seen even since the start of the quarter? Or has there been any sort of demand destruction that's caused some of the hog markets to kind of roll a bit more? Additional color there would be helpful. Shane Smith: No, I don't think we're seeing demand disruption, Peter. I think this is normal seasonality that we're beginning to go through. As Donovan said a while ago, the belly market is still elevated compared to historical terms, where we're sitting at in the fourth quarter. So I don't think we're seeing any level of demand destruction across the industry. Again, we don't see and hear a lot of expansion talk, at least not at a material level across the industry. And so when we look at that going into 2026, especially with beef markets still at elevated levels. I think pork is set up to continue to perform well in comparison to the other proteins. And again, Donovan, Steve, I don't know if there's anything you would add there, but I really don't see any type of demand destruction taking place. Donovan Owens: Yes. From -- again, I'll just piggyback again on what we just talked about. We're in an elevated market. Hence, the -- much of the conversation about the compressed industry spread that is what's leading to that, but in relationship to some near-term relief, you're going to get the normal seasonality, which we see. We see in the markets back off as we head into Thanksgiving, but quite honestly, I don't think we're going to see a huge plunge in these markets. Demand is still very, very good for pork from what we see on our end. And we're going to continue to see that fresh pork demand surge as we get beyond the holiday season of Thanksgiving and we certainly see pretty good demand for the first quarter of 2026. So from the demand side, I think it's going to temper really any weakness because we just don't have enough supply right now in the market to come in and really, really hurt the overall structure of where we see pork prices. So I think pork is in a good situation as we head into 2026. Steven France: And I'll add -- I'll add to that real quick because we're having a lot of conversations on the belly side. But specifically on bacon when you think about Packaged Meats, so we're actually pleased with the overall performance that we've seen in Q3 for Packaged Meats. And despite the high belly market that we had to deal with, we've actually been very intentional on discipline in how we manage our pricing and promotions, and that's really to protect the category profitability during these inflated markets. And not only inflated, but also sustained throughout the quarter. So even if we have to give up a little bit of volume, but for the most part, across the board, our volumes flat, but it's really about managing those higher markets and making sure that we're working specifically with our customers, either on the retail side or food service side to make sure we're getting the appropriate promotions in place, but not just giving the pricing away or the product away because of high raw material markets and then trying to drop our pricing due to increased promotions or peak promotions. Peter Galbo: Great. And Shane, I actually wanted to get your perspective on beef as well. You mentioned it a little bit. I know it can be upwards of like 20% of your buy for packaged meats. Obviously, we've had some commentary out of the administration, both kind of informally and formally through USDA. But just -- how do you kind of see the beef trim markets shaping up over the next call it, 12 months? Do you feel like there's potential for some relief there? It can be, again, a decent chunk of your raw material buy and it's been a pressure point? So would love your perspective on that going forward. Shane Smith: Yes. Everything we see, Peter, is still reporting pointing to a recovery in beef being out in '27, later parts of '27. And I know there's been a lot of discussion recently in the last few days about Argentina and what can come in from there. If you look at what Argentina produces or what they're looking to go to, it could equate to about maybe 175 million, 176 million pounds. But to put that in context, the U.S. as an industry produces 25.5 billion pounds a year. So even if all of that export from Argentina was to come to the U.S., it represents about 1% of U.S. production. And about 85% of that is lean trim. Again when we think about the positioning where forecast from a value perspective as it relates to beef. I think we're really well positioned as a protein because, again, me personally, I don't see a material recovery in beef, again for another probably 18 months or so. Operator: The next question comes from Ben Theurer with Barclays. Benjamin Theurer: Shane, Mark, thanks for opening space for some questions here. Most of it has been asked, but just wanted to follow up a little bit within Packaged Meats across the portfolio, your brand versus private label. Obviously, a very successful give or take 9% increase here on pricing with essentially no impact on volume. So can you help us understand a little bit about the pricing initiatives and the mix effect maybe in between the different segments and the strategy you've been following? And how should we think about this price level as we move into the fourth quarter and maybe into the first quarter of next year? Is that something you think you could stick on? Or is there a component of it that might come back if the commodity markets were to come down? That would be my first question. Shane Smith: Yes, Ben, thanks for the question. And Steve, do you want to take that? Steven France: Sure. So I guess I'd start off by saying that when you think about the pricing and the elevated markets that we've been dealing with, one of the big things we have to our benefit is we've really reduced the volatility in our business through our formula pricing on our private label business. And then on top of that, we have our well-known brands, whether it's a national brand or regional brand along with strong consumer loyalty, really enables us to maintain those margins and pass along higher raw material costs. But at the same time, as Shane had walked through, we've been relentless on our operational efficiencies and lowering our costs. So all those things combined help us mitigate some of those higher raw material costs. And then how are we managing that? So when you think about some of the promotions that we run and not only what we're seeing, but also what we see our competitors do is that we are actually being very selective with our promotions. So we're focusing on quality over quantity. And we've really seen others in the industry do some pretty sporadic heavy discounting that might drive some short-term volume spikes. But the reality is it has limited impact in overall share growth or long-term consumer loyalty. So instead, we're focused on leaning into promotions that are more effective at driving volume and also keeping our brands top of mind. So the reality is our end game is to not trade dollars at the shelf with our competitors, but for us to build our brands actively with our retail categories, retailers categories. So really, our end goal is we want to make sure that we attract new consumers to a category. We also want to increase consumption. And at the end of the day, we want to reengage consumers that may have walked away from some of these categories. So I think when you combine all those things, that's how we're addressing the market and also dealing with some of these higher raw material costs. Benjamin Theurer: Okay. Got it. And then just for clarification, you've lowered the CapEx guidance for the year. So maybe a little bit of clarity here and like what is delaying that? Is that a delay? Or is that just a review? How should we think about the lower CapEx versus the prior guidance? Mark Hall: Yes, Ben, it's Mark. Really, it's largely just due to the timing of some projects that are shifting into early 2026, whether it's availability of the plant for downtime purposes, et cetera. We're going to continue to be prudent stewards of cash and make sure that the return justifies the investment, but we still have plenty of opportunities to grow the business and improve our cost structure through capital investment. So it's just -- it's really more timing than anything. Operator: The next question comes from Megan Clapp with Morgan Stanley. Megan Christine Alexander: Just a couple of follow-ups from me as well. First, on the Packaged Meats profit outlook, I was wondering if we could just go back to Leah's question, if you could just unpack the change and the deceleration kind of in the year-over-year profit decline that's implied in the fourth quarter for Packaged Meats? And is there any way to just contextualize to what extent does that just reflect maybe pricing lagging the raw material costs because they stayed higher for a bit longer? And how should we think about that correcting as pricing catches up in the first half of next year, if that's the case? Shane Smith: Steve, you want to go first? Steven France: Yes, I'd say it's really two things that I kind of touched on. So one is our ability to take pricing with the markets. And obviously, with the private label business that we have, it represents about 40% of our -- just our retail mix. So we have that flexibility to take that pricing as the market moves now. As far as timing, a lot of that depends on the categories. So there's a difference within categories as far as when that time will take into -- go into -- really go into effect. And then on the branded side, so we have that flexibility, same on the retail side and also the food service side to take pricing when it makes sense, depending on where that market is and also from a competitive standpoint. But the reality is, as far as what our outlook is for the rest of the year, it's really taking the best view that we have of our business today, but also where we believe the market is going to end up. So -- and that's really why we're providing that range. But when you think about the focus areas that we have, between our national and regional brands and the ability to be very disciplined about our pricing and also promotional strategy, but it's that mix optimization that you continue to hear us about or hear us talk about is really focused on growing our unit volume on high-profit items, innovation and then the operational efficiency. So when you take all those into account, those help drive that guidance that we provided for Q4. Megan Christine Alexander: Okay. That's helpful. And that's a good segue to my follow-up, which is just -- Shane, and you talked a lot about all the momentum you're seeing in the strategies and Packaged Meats, the mix improvements, efficiencies and innovation. Maybe if we just could take a step back. Can you give us a sense of what inning you think you're in on these strategies, particularly around the mix optimization and the efficiency side of things, just provided a lot of ballast in the margins this year? I'm just trying to think about how that trends through next year and beyond? Shane Smith: Yes, Megan, I don't know exactly how to call what inning we're in, last night's ballgame went 18 innings. So I don't know exactly what innings we would be in. But what I will tell you is like mix, you talked about mix. Is that something that's going to be an ongoing evolution. And so for example, if you think about our holiday ham components, we know just as an industry, we're going to lose 5% to 6% of that volume per year. Our goal at Smithfield is to replace that volume with more smaller packaging, everyday use type items. And so that will -- every year as we lose that holiday ham volume, we'll be transitioning that as well. In dry sausage, another category that Steve talked about, where we've seen just great growth. We invested in plant in Nashville a couple of years ago that's really given us a lot of capacity that now we're growing into and pushing into. So it's really going to be a never-ending look at our mix, where we should be, flavor profile. We've talked a lot over the course of the year about reaching younger consumers, and I think we're doing a great job with that through flavors, which again, continues to change that mix into the overall more profitable mix portfolio. But stepping even just outside of Packaged Meats and looking at the company in total, I think what you're seeing is the benefit of our unique supply chain runs our vertically integrated model. And so now that we've really streamlined the Hog Production operations. What we're seeing on the bottom line. Q3 was a record quarter for us. And what's interesting inside of that, if you look at the individual segments, it's not a record quarter for any one of our segments. But the collective company is making record profits. And so you're seeing where we see profit migration. So this -- we see hogs putting pressure on the spread, which is causing higher meat cost in our Packaged Meats business. But overall, a higher level of profitability. And so when I think about the momentum of the company, that's where I think about it, is across that vertically integrated model and making sure the bottom line is continuing to grow, that is continuing to generate consistent earnings and cash flow across the company. Operator: We have time for one more question. Our last question comes from Max Gumport with BNP Paribas. Max Andrew Gumport: You mentioned throughout the call the cautious consumer spending environment that you're seeing now. I was hoping you could expand on what you're seeing and how that's informing your outlook for the next several months? Shane Smith: Yes, Steve, you want to talk to the consumer environment? Steven France: Sure. So it's a good question. We actually spend obviously a tremendous amount of time really understanding what's happening to the consumer. So I would say from a -- from a settlement standpoint, it certainly remains cautious, and we really continue to observe value-seeking behavior. So this trend is really consistent across the industry. So higher income consumers are really demonstrating more resilience in maintaining spending levels. While we continue to see lower income households across age groups really becoming more selective than what they're spending. So I would say the bottom line is consumers are definitely feeling challenged, and they're adjusting their shopping habits by making more shopping trips with fewer items, opting for larger pack sizes, stretching meals and cooking at home more often, all those things are to really reduce their overall cost. Now despite these trends, we feel that we're in a great position because our protein really remains a clear priority for the consumer to provide their families, and pork products, whether it's fresh pork, with Donovan's team or Packaged Meats, the items are really doing well due to its affordability, also its versatility across both retail and food service. So really, when you think about it, our expensive brands that we continue to talk about and the portfolio that we have is really playing into the current state of the consumer because we have the ability to really capture that consumer across that pricing spectrum in a lot of different categories. And you've heard me mention several times that we've got strong brands that fit those needs for that consumer and it really puts us in a good spot. And then when you take into account private label as well, it really provides us the opportunity that as the consumer moves up and down that value spectrum. There's a good chance we can capture that consumer with a Smithfield made product, whether it's branded or private label. Max Andrew Gumport: Great. And then just related to that, you had mentioned in the prepared remarks that your outlook for 4Q, it embeds an impact from delayed SNAP payments. I was hoping you could quantify what that impact is that's embedded in your outlook for 4Q and then provide a bit of color for how you got to that quantified impact? Shane Smith: Yes. So I would say for SNAP, so we're definitely paying close attention to what's happening with SNAP right now. So obviously, there's a lot of uncertainty around the federal funding and the potential for benefit disruptions happening in November. Now with categories that we sell, so this is for the total industry, about 7.5% of dollars are really tied to SNAP usage. So while any reduction will be a major issue for those consumers who rely on that, the overall impact to our business would be relatively minor. At the end of the day, families still need to buy protein to feed their households. And we don't expect a dramatic shift really in demand for the products that we sell. Now that said, I'd say we're certainly concerned about the broader impact to the American consumer. And we're working closely with our retail partners to make sure we're promoting items that really deliver on strong value and affordability based on the current situation with SNAP. And we do believe that our diversified portfolio that I just talked about really gives us a significant competitive advantage, and we're better positioned than others due to our pricing strategy to deliver really quality products across that pricing spectrum that we continue to reference. And of course, that would also include our ability to produce private label products. So we're taking that into account. Obviously, it's a very fluid situation and continues to change, but we did take some of that into account into the guidance that Mark was referencing. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to President and CEO, Shane Smith, for closing remarks. Shane Smith: I'd like to thank everyone who joined the call today. We are pleased with our record third quarter results. I think the solid execution by our teams demonstrated this year underscores how well we're positioned to deliver growth and increase value for our shareholders over the long term. So thank you all for joining. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to the Beta Bionics Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, please be advised that today's conference is being recorded. I would now like to hand the conference over to Blake Beber, Head of Investor Relations. Please go ahead. Blake Beber: Good afternoon, and thank you for tuning in to Beta Bionics Third Quarter 2025 Earnings Call. Joining me for today's call are Chief Executive Officer, Sean Saint; and Chief Financial Officer, Stephen Feider. Both the replay of this call and the press release discussing our third quarter 2025 results will be available on the Investor Relations section of our website. The replay will be available for approximately 1 year following the conclusion of this call. Information recorded on this call speaks only as of today, October 28, 2025. Therefore, if you are listening to any replay, any time-sensitive information may no longer be accurate. Also on our website is our supplemental third quarter 2025 earnings presentation and updated corporate presentation. We encourage you to refer to those documents for a summary of key metrics and business updates. Before we begin, we would like to remind you that today's discussion will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management's expectations about future events, our product pipeline, development timelines, financial performance and operating plans. Please refer to the cautionary statements in the press release we issued earlier today as well as our SEC filings, including our Form 10-Q filed today for a detailed explanation of the inherent limitations of such forward-looking statements. These documents contain and identify important factors that may cause actual results to differ materially from current expectations expressed or implied by our forward-looking statements. Please note that the forward-looking statements made during this call speak only as of today's date, and we undertake no obligation to update them to reflect subsequent events or circumstances, except to the extent required by law. Today's discussion will also include references to non-GAAP financial measures with respect to our performance, namely adjusted EBITDA. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods. Any non-GAAP information presented should not be considered as a substitution independently or superior to results prepared in accordance with GAAP. Please refer to our earnings press release and supplemental earnings presentation on the Investor Relations section of our website for a reconciliation of non-GAAP measures to their most directly comparable GAAP financial measure. With that, I'd now like to turn the call over to Sean. Sean Saint: Thanks, Blake. Good afternoon, everyone, and thank you for joining. We're proud to share with you all today the details of our strong performance in the third quarter as well as discuss our updated annual projections for the full year 2025. Starting with our performance in the third quarter, we continue to make key advances across our business, both commercially and in our innovation pipeline. Demand for the iLet, both in existing practices as well as new practices continues to exceed our expectations. And in the third quarter, we saw a record number of both new patient starts as well as the percentage of those new patient starts going through the pharmacy channel. The iLet automation and adaptation continue to set a new standard for our industry, simplifying and alleviating the burden of managing diabetes for our users, their caregivers and their health care providers. but we're not stopping there. And we're continuing to push the envelope on key innovations to our pipeline that I believe will enable Beta Bionics to disrupt ourselves in the future and deliver even more life-changing solutions to people with diabetes and the community that supports them. During today's call, I'll begin by covering our Q3 results, which exceeded our expectations across the board. Stephen will then discuss our Q3 performance and updated full year 2025 guidance in more detail. Lastly, I'll share some exciting updates across our innovation pipeline, including iLet and some new features we recently rolled out; Mint, which is our patch pump in development; and lastly, our bihormonal system in development. Let's begin with an overview of our Q3 2025 performance. I'm pleased to share that we delivered $27.3 million in net sales, which grew 63% year-over-year. Q3 revenue growth was predominantly driven by 5,334 new patient starts in the quarter, which grew 68% year-over-year as well as our growing installed base of users accessing their monthly supplies for iLet through the pharmacy channel. In Q3, a low 30s percentage of our new patient starts were reimbursed through the pharmacy channel, which is significantly higher than the high single-digit percentage we saw in Q3 of the prior year and increasing sequentially compared to the high 20s percentage we saw in Q2 of this year. As of the end of Q3, Beta Bionics has greater than 80% of insured lives in the U.S. covered under formulary agreements with pharmacy benefit managers, or PBMs, including all the major PBMs that operate in the U.S. However, patients covered under those formulary agreements do not yet benefit from the pharmacy channel until the health plans that partner with those PBMs adopt the iLet for reimbursement under their pharmacy benefit. which is why the over 80% of covered lives under PBM agreements differs from the low 30s percent of our new patient starts that actually benefited from accessing iLet and its consumables through the pharmacy channel during the quarter. Driving adoption of the iLet as a pharmacy benefit at the health plan level remains a core focus of ours, and that is why we share the percentage of new patient starts going through the pharmacy as the right KPI to use to measure our progress in that channel, not just the PBM covered lives percentage, which does not account for pull-through at the health plan level. Shifting now to gross margin. Our gross margin in the quarter was 55.5%, up 212 basis points compared to 53.4% in Q3 of 2024 and up 167 basis points sequentially relative to 53.8% in Q2 of this year. Last quarter, we guided towards sequential gross margin expansion in Q3 of this year relative to the prior quarter. citing benefits of increased scale and manufacturing volume leverage, greater contribution of high-margin revenue from our growing pharmacy installed base and continued cost discipline. We delivered in all those areas in Q3 and expect that each of those factors will continue to provide a tailwind to gross margin in Q4, as Stephen will discuss in more detail shortly. Looking ahead, I'm confident in the direction this business is headed in. The iLet's highly differentiated, fully adaptive closed-loop algorithm is producing phenomenal real-world outcomes, and those outcomes are resonating with users, caregivers, providers and payers. We're expanding availability for the iLet in the pharmacy channel, enabling more people with diabetes to access insulin pump therapy with minimal to no upfront out-of-pocket costs. The 20 new territories we onboarded toward the end of Q1 of this year have hit the ground running, and they're validating our strategy to remain disciplined and highly selective in our sales force hiring as we look forward. With that, I'll hand the call over to Stephen to provide some additional color on our third quarter performance and full year 2025 guidance and later wrap up the call with some important updates on our pipeline. Stephen? Stephen Feider: Thanks, Sean. Approximately 70% of our 5,334 new patient starts in Q3 came from people with diabetes that used multiple daily injections prior to starting the iLet, which is an important representation of how much the iLet is expanding the market for insulin pumps and addressing an unmet need. We believe the iLet is a game changer given its unique simplicity and ease of use, powered by the most advanced adaptive algorithm available. Given its simplicity, we're able to reach a broader group of patients and providers that were previously inaccessible to existing automated insulin delivery players, and we're seeing that in our results. Turning to gross margin. The improvements we saw in our Q3 gross margin relative to the prior year and the prior quarter are driven by 2 primary factors: number one, growth in the pharmacy installed base, which generates high-margin recurring revenue and where we continue to see strong patient retention; and number two, lower cost per unit from higher manufacturing volumes, driven by growth in patient demand. Shifting to operating expenses. Total operating expenses in the third quarter were $32.2 million, an increase of 62% compared to $19.9 million in the third quarter of 2024. The increase in sales and marketing expenses relative to the prior year is driven by expansion of our field sales team, which still stands at 63 sales territories exiting Q3. The increase in R&D expenses relative to the prior year is driven by the Mint and bihormonal programs. The increase in G&A expenses relative to the prior year is driven by new costs related to operating as a public company. Let's discuss cash. As of September 30, 2025, we have approximately $274 million in cash, cash equivalents and short- and long-term investments. We are sufficiently capitalized to fund all of our key initiatives and positioned to begin generating free cash flow well ahead of historical diabetes peers. Turning to our updated full year 2025 guidance. We are raising guidance across the board. We project total revenue for the full year of 2025 will be greater than $96.5 million, up from our prior guidance of $88 million to $93 million. This means we project sales of at least $28.5 million in Q4 2025. For the full year 2025, we now expect 27% to 29% of our new patient starts to be reimbursed through the pharmacy channel versus our prior guidance of 25% to 28%. This implies that we project our pharmacy mix as a percentage of new patient starts in Q4 to be similar to the mix we saw in Q3. I want to point out a couple of factors that could create variability to the upside or downside in our pharmacy mix of new patient starts in Q4. On one hand, we continue to drive more adoption of the iLet under the pharmacy benefit at the health plan level, which pushes pharmacy mix higher. On the other hand, new patient starts in the DME channel tend to be strong in Q4 because many people have hit their out-of-pocket maximum and can receive their pump and supplies at no cost until year-end. Taking those dynamics together, we expect Q4 pharmacy mix as a percentage of new patient starts to be similar to Q3 but recognize there is potential for that mix to trend higher or lower based on those dynamics. Moving on to gross margin. We are raising our outlook to 54% to 55% gross margin for the full year 2025 versus our prior guidance of 52% to 55%. This means we project Q4 gross margin to be in line with or improve slightly relative to Q3. We are increasing guidance at the low end and midpoint of the range for a couple of reasons. Number one, embedded in our revenue guidance raise and pharmacy mix guidance raise is a raise in our expectations for new patient starts, and that increased scale should generate a lower per unit cost through manufacturing volume leverage. And number two, we expect to benefit from our growing pharmacy installed base, where the large number of new pharmacy users year-to-date, combined with the strong retention of those users, produces high margin recurring revenue in Q4 and beyond. We continue to contemplate the impact of existing and potential tariffs in our full year gross margin guidance. We are aware of recent initiatives focused on reevaluating the application of tariffs in our industry and do not have a reason at this time to believe that duty-free exemptions from custom components of the iLet and its consumables are in any jeopardy. With that, I'll hand the call back to Sean to discuss updates on our innovation pipeline. Sean? Sean Saint: Thanks, Stephen. As I've stated before, our goal with our pipeline programs is to disrupt the industry and disrupt ourselves. Let's start with an update on Mint, our patch pump in development. We've spoken at length in the past about the key advantages of Mint's 2-piece design architecture, where we believe we've chosen a design that creates an advantaged user experience relative to other patch pumps currently on the market and in development. Our design choices spanning from a patch change experience that doesn't require phone interaction to eliminating the need for recharging and to enabling firmware over-the-air updates are all in service of user experience. Add those advantages to our industry-leading algorithm, which has been shown to produce excellent clinical outcomes independent of user engagement, and we believe that Mint will be a true game changer when it commercializes. In Q3, we continued to execute according to plan on our Mint timelines and remain highly confident in our ability to gain 510(k) clearance for the product as well as manufactured at scale. Our goal remains to commercialize Mint with an unconstrained commercial launch by the end of 2027, meaning we expect to be able to fully support demand for the product by that time. Shifting to our bihormonal pump program. In September, we completed our pharmacokinetic, pharmacodynamic or PK/PD bridging trial for our glucagon asset. Full results from that trial are in line with our expectations, and we believe such results are supportive of the continued development of our glucagon asset for use in our biohormonal system and development. In Q4 of this year, we expect to initiate a feasibility trial of our biohormonal system to test it in humans for the first time with our glucagon asset before progressing the asset to any larger scale studies. As a reminder, the PK/PD study was the first-in-human trial for our glucagon asset, but the biohormonal system also includes our bihormonal pump and algorithm for insulin and glucagon dosing, and we're yet to test that system using our glucagon asset in humans such that we believe the best strategy is to run at least one biohormonal system feasibility trial before progressing to pivotal trials. There is no change to our expectations that we'll conduct concurrent pivotal trials to fulfill the requirements for a 505(b)(2) NDA with a chronic drug indication for glucagon and the ACE and IAGC 510(k)s for the pump and algorithm, respectively. We continue to be extremely excited by the biohormonal system's ability to transform clinical outcomes for people with diabetes, but more importantly, the ability to transform the way people experience their diabetes and shift their mindset from diabetes being a disease that they manage to simply a disease that they have. To highlight another recent win in our pipeline, on September 29, we received a special 510(k) clearance for certain feature updates for the iLet. These updates focused on improving the usability of the pump. We introduced an improved workflow for the cartridge change process to make it more seamless for the user and eliminated redundant low glucose alerts to ensure our users are focusing on the alerts that matter most, while reducing alert fatigue. These updates are illustrative of both the intent we have in listening to feedback from our users as well as the speed with which we operate in an effort to ensure our users' needs are consistently met every day. There's one more update that I'd like to discuss on the regulatory front. In late June, the FDA issued a Form 483 following an inspection. The Form 483 is primarily related to our customer complaint handling system and our criteria for reporting complaints to the FDA, which are ultimately reflected in the FDA's Manufacturer and User Facility Device Experience database, also known as the MAUDE database. The result of the FDA's inspection is not unusual in our industry as numerous precedents the agency has set for our peers at similar stages would suggest. We believe that in those instances, Beta Bionics and our peers likely develop similar definitions for what constitutes a reportable complaint prior to the FDA's feedback. And each company has successfully taken the steps required to align reporting with the FDA standards. We are no different, and our remediation efforts to the Form 483 are straightforward and well underway. Regarding the change to the criteria for reporting complaints to the FDA, we revised our definition of what complaints are reportable to better align with the broader industry standards. Our revised standard operating procedure for reportable complaints took effect in late July, which resulted in a notable increase in reportable complaints in August and September. To cite some examples of how our definition of reportable complaints has changed, prior to the 483, we were not reporting complaints such as the device screen cracking or a hypo or hypoglycemic event that did not require medical intervention. We now report these types of complaints to the FDA given they could result in an adverse event if ignored. I want to make something abundantly clear. While the number of complaints we have reported to the FDA increased, most notably in August and September after the new system went live, this is not the result of a change to the underlying complaint or adverse event rate relative to our installed base. In terms of what to expect going forward, since we received the Form 483 in June, we've submitted monthly progress reports to the agency. We're confident that our new complaint handling system and reporting system meets or exceeds the expectations laid out by the agency in their Form 43 observations. As part of this process, we will be applying the new reporting criteria to all historical complaints we have received since the iLet launched. That remedial filing process started very recently. As such, we expect to see the number of MAUDE entries relative to our installed base increase considerably from October to November and remain elevated until we have completed the remediation process as both current and historical complaints will layer on top of each other. We expect to complete the remediation process by the end of Q2 2026, at which time the number of MAUDE entries relative to our installed base will fall as historical reports are no longer being submitted. Shifting to the topic of type 2 diabetes. In Q3, we continued to see some health care providers prescribed iLet to their type 2 diabetes patients off label. We estimate that over 25% of our new patient starts in Q3 were from type 2, which is consistent with the prior quarter. While we're not committing to a specific timeline, we remain eager to pursue the type 2 diabetes label to the FDA. To conclude the prepared remarks portion of today's call, I want to highlight the key points that we hope you take away from our discussion. Number one, iLet's differentiation is resonating wider and deeper in the market. Number two, our commercial strategy is working, and we're continuing to execute relentlessly toward the goal of making iLet the new standard of care. Lastly, we're aiming to build the most innovative pipeline in the industry with the goal of disrupting the industry and ourselves, and we continue to make progress on each key pipeline initiative every day. This is a business that we believe is set up for sustainable success over the near, medium and long term, and we're excited to continue sharing updates with you all as we continue to execute. With that, thank you all for tuning in, and we'll now open the call for Q&A. Operator: [Operator Instruction] Our first question comes from Mike Kratky with Leerink Partners. Michael Kratky: The fact that you're creeping up on $100 million in revenue for the year and at a much higher rate of pharmacy mix than we've been expecting is super impressive. So, congrats on the ongoing execution. Just to that point, can you share some additional color on what's driving that momentum you're seeing? What factors really seem to be contributing to that demand? And can you talk about the cadence of new starts throughout the third quarter, specifically that's shaping your assumptions on the fourth quarter? Sean Saint: Yes, Mike, first of all, thanks a lot for that. Appreciate it. In terms of what's driving the quarter, I mean, frankly, I don't think it's anything different than it has been driving our success all along. We do see the iLet as a new category of device. And fundamentally, that takes a bit of time, right? We're not launching just another insulin pump here. We're launching an insulin pump that you have to think a little differently about -- and that takes time. And necessarily, we're going to see increased adoption as the world gets it more and more over time. And I think we just saw that continuing. But I don't think there's any particular initiative that I could point to uniquely in Q3 that really impacted the quarter. Stephen, can you comment further? Stephen Feider: Yes. Cadence in demand, I'll just address that briefly. It was generally consistent across the entire quarter. So, nothing, really to read into in terms of timing of demand and where it was relative to the upcoming quarter. Michael Kratky: Understood. And maybe just one quick follow-up. In terms of things that are out of your control, how does the government shutdown impact your assumptions on timing for the Mint launch, if at all? Sean Saint: I would say it doesn't currently have an impact on our expectations for timing. We reiterated those earlier in the call. Yes, I'll leave it at that. Operator: Our next question comes from David Roman with Goldman Sachs. David Roman: Maybe I'll just start with a further question on kind of what you're seeing in the underlying market dynamics. You talked about the 70% of patients coming from MDI converts. Can you maybe give us a flavor on the remaining 30% of the patients, whether that's coming from conversions of patients who are coming up for renewal. It looks to be a big bolus of renewal patients coming to market. Is that conversions from different pump therapy? Maybe just help us understand the balance of the growth drivers there and how you see that unfolding through the rest of '25 and into '26. Stephen Feider: Yes. Thanks, David. This is Stephen here. In terms of the remaining 30% that are coming to us from competitive pump systems, they're coming roughly 1/3, 1/3, 1/3 from the 3 primary competitors. And in terms of the outlook in the future, there's nothing that -- look, that bifurcation of our demand coming from 70% coming from injections and the other 30% coming from competitive pumps. That's been pretty consistent over the last 4 to 8 quarters. And there's nothing that we see in our business that would imply that the future will look any differently. I would say there's still a -- the market for insulin pumps in both -- in type 1 and type 2 is still very underpenetrated. I needs to remind you of those percentages. And so the large opportunity that still exists for a company like ours with a new and differentiated system remains in MDI, and I expect most of our demand will continue to come from there. David Roman: That's very helpful. And I appreciate you reiterating the timelines around the Mint full commercialization by the end of 2027. But can you maybe just remind us of the different steps that need to take place between now and then? For example, have you finished human factor testing? And what types of updates do you -- will you be able to provide us along the way? Sean Saint: Yes. I don't think we're going to provide any additional information on where we are at the moment. I mean, we would reiterate that generically, the 3 main steps that we need to look for here are 510(k) clearance followed by manufacturing readiness followed by launch. We've talked about those in the past. But I don't want to get into the details of exactly where our internal program is, less people read more or less into them than they deserve. So, for the moment, we'll reiterate our timelines, and we reserve the right, of course, at all times to update you as we know more. Operator: Our next question comes from Matt O'Brien with Piper Sandler. Matthew O'Brien: Can you hear me okay? I've had some technical issues. Sean Saint: Loud and clear. You got it, Matt? Matthew O'Brien: All right. Great. I appreciate the questions. Maybe just starting with those 20 new territories that you added in Q1. Maybe if you can just tease out the impact that those 20 territories are having here in Q3 because you don't typically see such a meaningful step-up here in the third quarter versus Q4 based on seasonality. So just maybe talk about how those reps are ramping and then kind of what's left for that group and that cohort as we think about maybe the next 18 months? Stephen Feider: Yes. All right. So, the territory -- the new territories that we added at the start of the year, are absolutely growing in their maturity and increasing in productivity, but the entire sales force on balance also is. So, if you looked at even just the quarter-over-quarter growth in new patient starts from Q2 to Q3, we saw an 8% uptick. And yes, that is driven in large part by the 20 new territories that we added in the start of the year, but the iLet is still new to almost every territory nationwide. And so we're continuing to see an uptick in new store sales, same-store sales across the entire country. Matthew O'Brien: Okay. And then maybe talk a little bit -- I wanted to ask a little bit more about Mint, but just maybe talk a little bit more about the 483 because that's a little bit of new information and how serious that is, your remediation efforts. It sounds like you're kind of on track already. So maybe just try to frame up the 483 for us, not that they're ever great to see, not that you take them for granted. but just how this one falls in terms of seriousness and then your ability to respond quickly. Sean Saint: Yes. Great question, Matt. I mean, it's tough to put a qualifier on something like that. I mean, obviously, the FDA issues 43 is when they find something to be important. But I think with the 43 as long as you're aggressive with dealing with the problem and you don't have a big problem, and we've certainly been that. We're very far along in our remediation efforts. New systems are fully in place at this time. And what we're seeing now, as we stated on the prepared remarks, is just the implementation of those systems and sort of remediating past complaints. But the new systems are in place at this time. And no, we don't foresee any ongoing challenges at all. Stephen, do you got anything to add to that? Stephen Feider: Sure. Yes. I think -- look, the FDA -- the interpretation of the rules for what's considered a reportable complaint and what's considered a nonreportable complaint actually leaves a lot of room for interpretation. And so we were interpreting -- before the 43 observation, we were interpreting the rules a particular way that we had a lot of confidence in, and we're not apologetic about. However, when the FDA did their observation, they disagreed with our interpretation, which is totally fine. They asked us to remediate the -- and use the new definition. And we, of course, complied. And to us, this is a very benign issue as long as we actually do what we say we're going to do. And so we're bringing it to your attention because we feel it's important to be transparent. There may be some misinformation out there about what -- why we've seen an uptake in reportable complaints in the MAD database. We don't see it as an issue at all, and it's kind of on brand for us to just answer the mail. And so hence, why we brought it up today. Operator: Our next question comes from Travis Steed with Bank of America Securities. Stephanie Piazzola: This is Stephanie Piazzola on for Travis. Congrats on a good quarter. Maybe just wanted to follow-up again on the increased complaints being reported. Maybe you can just elaborate more on the real-world performance and feedback and retention that you're seeing despite some of the complaints received. And if you could clarify, it sounds like you've made good progress on the remediation already, but some things will continue through Q2 of next year, if I heard that right. So maybe you can just clarify what's going to be outstanding through then. Sean Saint: Yes. First of all, I wouldn't read anything into the word complaint in this case. The insulin pump industry is -- if you look at the complaint rates that all insulin pump companies receive, it's somewhat shocking at some level. And the primary reason for that is that definition that Stephen alluded to earlier, where really anything, anybody calls in with a problem of your product or an experience issue and it gets reflected as a complaint, which is fine. Those are the rules. But I don't want anybody to hear, and I don't believe it's true that there's any complaint with the product that -- I don't know, the words here. Anyway, I wouldn't read too much into it. Second half of that question is -- I think -- I don't know. I think the kind of answered, Stephanie. Did we -- was there a part that we missed? Yes, I forgot the second half of your question. Stephanie Piazzola: It was just that you mentioned you made good progress on the remediation efforts that continue through next year. So... Sean Saint: Yes. Sorry, you want details on that, absolutely. So, what it is specifically, and I think we said this, but I'll give just a little more clarity. When -- over the time, we received calls, right? Everybody receives calls and you have to decide whether or not those get reflected as reportable complaints to the agency. So, what we're doing at this point is we're going back through all of those calls we've received since the dawn of time and reporting the ones that now qualify under the new definition as reportable events that did not prior. Does that make more sense? Stephanie Piazzola: Yes. Got it. Sean Saint: And we'll be done with that process by Q2 of next year. Stephanie Piazzola: Okay. Understood. Sean Saint: Again, the systems are now in place. The -- everything is working as it should at this point. We just have to go back and do all that catch-up work. That's all. Stephanie Piazzola: Okay. Got it. And then you talked about some of the positive growth drivers that you have this year and are going to continue into Q4. Maybe just thinking a little bit ahead to next year, how we can think about some of those continuing and then any headwinds that we should keep in mind for next year as well? Sean Saint: Yes. I'll start with that one, and then Stephen can add anything that he may want to. The primary growth driver that I listed was obviously additional understanding what iLet is. Again, I think there's -- when you look at data on adoption from health care providers, it really takes quite a number of years, in fact. So I think that we expect that tailwind to continue over time as people start to understand iLet better as we develop more and more of our own real-world evidence and get that get that evidence out there, showing the world how well iLet really is working in a real-world setting. So those continue, obviously. The other tailwind that I'll mention is obviously pharmacy adoption. There's a lot of reasons that pharmacy adoption is better for the business. It makes it easier to adopt iLet, easier to script iLet. Obviously, with the expansion of that, that's certainly going to be a tailwind, and we hope that the expansion of pharmacy adoption itself continues more into next year as well. Stephen Feider: And this year -- and by the way, thanks for the compliment, Stephanie, on the results. We're definitely happy with them. Sean Saint: Yes. Stephen Feider: The uptake that we've seen in pharmacy this particular year, meaning now in the low 30s percentage of our new patient starts, it's way exceeded even our internal expectations. And what it's really doing for next year's financials that's great is that we're retaining those patients at a very, very high level. And because of that, it's high-margin recurring revenue now that we have in this pharmacy installed base, which is the design of the whole program, and that's the intention of the whole program to move to a subscription-like revenue stream. And you're going to see that in our financials, and you've already been seeing that in even like the gross margin profile that we now, again, have this high-margin revenue that we've generated from our growing pharmacy installed base. Operator: Our next question comes from Michael Polark with Wolfe Research. Michael Polark: First topic for me was the 510(k) clearances you mentioned, a different cartridge change process and elimination of redundant low glucose alerts. I guess I'd just be curious the cartridge change process, what improved? How was it before? How is it now? And what kind of was the root cause, if you will, of too many low glucose alerts. Is that a software fix or another change? Sean Saint: Yes. So, on the first part, the cartridge change process, these are really just subtleties in the process, different screens and whatnot, user experience stuff. It's -- they're not huge, but we think meaningful. On the low glucose alerts though, I want to really make sure that one is really clear. With a system like an insulin pump, you can get, for example, an urgent low, a low, a very low. There's all different kinds of alerts and they can stack on top of one another and require you to clear each one individually and what have you, or you can look at it and take the most severe of those alerts and only deal with that one, for example. So, it's sort of related to that. It's just that you really have to clear 4 alerts at all in effect tell you you're low, that seems pointless, right? Does that make sense? Michael Polark: Yes, understood. The other one is just maybe kind of a look into '26 as well, a reminder on what's a good way to think about sales force expansion as you roll into next year? Any soft circle for number of territories that you would hope to add? Stephen Feider: Yes, of course. Good question, Mike. Yes, of course, we have our internal expectation of how many new sales territories we're going to expand and win next year, but I'm not going to talk about a forecast for 2026 that gives any indication as to what our revenue is going to look like. So unfortunately, I'm not going to share that number. Operator: Our next question comes from Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: On a really, really solid quarter. Just a curiosity question versus my model, and I could be unique in how I modeled it this quarter, but it feels like the bigger portion of outperformance, you outperformed on both my DME and PBM expectations. A bigger portion for me was related to DME. Was this just a modeling discrepancy on my side? Or was DME maybe a little bit stronger than you anticipated? Any specifics on maybe where the pumps are placed, which geographies you maybe didn't have health plans set up or anything to kind of call out that maybe drove that DME being a little stronger than my expectations? Stephen Feider: Yes. Good question, Frank. The outperformance in DME, of course, is just mostly driven by new patient starts exceeding expectations, but there actually was some favorability from stocking dynamics. in Q3 relative to Q2. And that created favorability in DME revenue in Q3 relative to Q2. There actually -- and you didn't ask about this, but there's actually the inverse impact we saw in the pharmacy supply kit revenue. There was an unfavorable stocking dynamic or had an unfavorable impact on revenue in Q3 relative to Q2. And what I mean by this in the case of DME is that the DME customers ended their quarter with more inventory on their shelves in Q3 than they did in Q2, creating, again, what I would call a favorable stocking dynamic in Q3. Frank Takkinen: Got it. Okay. That's helpful. And then maybe on the bihormonal timeline? I know you guys are talking about the feasibility study, but how should we maybe think about when you guys might formalize a cleaner timeline kind of similar to how you've talked about patch end of 2027. Will you do that with the bihormonal pump in the near future? How should we think about that? Sean Saint: Yes, Frank, look, we'd love nothing more than to give you a solid timeline on the bihormonal product. But -- and we obviously have internal expectations on that, that we have not shared. However, given the complexity of that particular product being -- having to get both CDRH and Cedar on the same page in terms of what a pivotal clinical trial looks like and all the requirements around the drug and frankly, our own evolution into a drug company as well, I think it would be a little bit premature to start putting timelines out on that now because, frankly, they could evolve as we learn. And as we get the agency, both halves of the agency on the same page with what it is that we're doing here. So not just yet, but please be assured that we're working toward getting most importantly, the product out the door as soon as we possibly can. But of course, the next step will be to help you all understand the timelines on that as soon as we can. But in the meantime, hopefully, you do see that we continue to make progress on the product, including, as I said, the completion of PK/PD and the soon implementation of the new feasibility trial, which we're excited about. Operator: Our next question comes from Jeff Johnson with Baird. Jeffrey Johnson: So Sean, maybe on that -- on the bihormonal question there. Even if you can't put a timeline out there, which I understand, can you just remind us, we're so accustomed to 510(k) pathways here in the diabetes space. We know kind of 6-month review processes. We know these tend to be 13-, 26-week trials, things like that. Once you do start a pivotal, how long would a pivotal for a bihormonal run as far as from -- in a single patient? I know it takes a while to enroll in first patient in, last patient in and all that, we'd have to estimate. But I guess my question is more, how long would the study last on a per patient visit or per patient basis? And then how do we think about the review timeline once you do get that data and submit it to the agencies, how long a review process could last? Sean Saint: Yes. Great question, Jeff. The ICH guidelines dictate that for a chronic drug indication, we need a year's worth of data on an individual patient. So, to your point, plus enrollment, et cetera, but the trial itself will run at least a year on at least -- well, not at least one on a number of patients. And then timelines for enrollment, timelines to review of that data, early interactions with the agency, but then the actual NDA submission itself, I believe, is a year. Jeffrey Johnson: One year on that, too, yes. Okay. That helps. And not a pharma guy, so never as strong there. But also then, Stephen, maybe can you just maybe quantify for us the stocking headwind in pharmacy and the stocking tailwind in DME at all and how much of that was on supply side? Just as we look at the supply revenue this quarter on a per patient basis in the pharmacy channel, it came down about 10%, 12% or so sequentially, and we keep trying to wrestle with how much of that is attrition versus stocking dynamics and all that. So, just maybe help us quantify, especially in the pharmacy channel, maybe what that stocking headwind was in the quarter? Stephen Feider: Yes, of course. I have 2 parts to this answer. First part is that I'm not going to quantify the exact dollar amount of the stocking impact in DME versus pharmacy, but the 2 offset one another nearly dollar for dollar in the quarter. So net neutral stocking impact with, again, favorability in DME, unfavorability in pharmacy. And then on your point about attrition and retention, -- while I'm not going to share retention rate or attrition rate, even though I know we get asked about it consistently, and this is for reasons that I think we've been very clear about, most notably that the competition doesn't share attrition or retention rates. I do want to point to one output of your model, Jeff, and I guess, any investor or analyst that has a model that I would sort of maybe alleviate maybe your feeling on that question. So, if you look -- the metric that I want to point your attention to is the number of pharmacy supply kits per pharmacy patient per quarter. And so the math there, what you can do -- how to do the math to get to that metric is you'll take the pharmacy revenue -- pharmacy supply revenue, I should say, in a given quarter, divide that by the price of each pharmacy supply kit, which you know is roughly $450 because that's what we've said. And then divide that again by your belief of what the pharmacy installed base is. So that's again, it's pharmacy revenue in a given quarter, divided by the price, $450 and then divided again by the pharmacy installed base. And what you're going to find when you run that metric in this quarter and in all the most recent quarters is that, that metric is well over -- well in excess of 3. And that's regardless of what attrition rate or retention rate assumption you use in your model, no matter how low you choose the attrition rate to be. And what does that say? If it's above 3, well, remember that a patient only uses 1 pharmacy supply kit per month. And so you would use 3 per quarter. So, by very virtue of that number, which is again, an output in your model, by that being above 3, I think that illustrates why there's not a retention or attrition issue at the business. So, I guess hopefully, that was helpful. But again, I won't -- I'm not going to talk specifically about attrition and retention, the number for reasons that we've communicated in the past. Jeffrey Johnson: Yes. No, that math is helpful. That's exactly how we run it in our model. I guess it's just we're trying to understand the 40% decline we've seen in per patient per pharmacy over the last 2.5 quarters. Stephen Feider: So I think you -- I think the other thing to remember is that you're going to see like, again, big deviations in that metric from quarter-to-quarter. meaning, yes, you did see a downtick in it this quarter. You've also seen uptakes in the same metric if you looked over trending over quarter-to-quarter. And what that really points out is that there are fluctuations in pharmacy stocking, and it does have a material impact on our revenue in a given quarter. But really, the reason why there is so much fluctuation is just think about how much our pharmacy demand has changed. We've gone from our guidance being low teens or low double-digit percentage up to now, we're in the low 30s. And so, pharmacy customers don't really know how much to order to keep up with demand. And that's a part of why you're seeing big fluctuations. Operator: Our next question comes from Richard Newitter with Truist Securities. Richard Newitter: Congrats on the quarter. Maybe just on the pharmacy channel and the percentage here. So, you're obviously exceeding your expectations, our model and I think consensus too, exiting -- you're on track to exit at a low 30s percent. Could you help us just think through where this percentage could reasonably get to? Or where we should not be -- what threshold we shouldn't be exceeding before you potentially are on commercial with a patch? Is this something that could be 50% exiting 2026? Or what's the threshold that we should be thinking about or put some bookends around it as we fine-tune our models because clearly, you're exceeding where we all had you on the trajectory. Sean Saint: Yes. I appreciate the question. Frankly, the frustrating answer for us and you is that we don't know. We're doing something nobody has ever done before, and that's push a durable pump through the pharmacy channel. To your point, we've exceeded our own expectations on what we can do there. We hope that those exceedances continue and that we can get even farther than even we think we can. But it's very hard for us to make a prediction on that, and I don't think we're frankly in any better position to do it than anybody else. We're just forced with going out and actually doing the work. So, I'm sorry, we can't make that prediction. But what I will tell you is that we'll try and make that number as high as we absolutely can. Richard Newitter: Okay. Fair enough. And then just on type 2 indication, I think, Sean, you've talked in the past that it's not something that you necessarily -- it's precluding you from moving -- moving that percentage higher. It was a little flat this quarter. I'm just curious, anything you're seeing? We have multiple players out there with an official indication and data. And you mentioned you're not going to commit to precisely the strategy and timing of what you're going to do to ultimately secure an indication. But if you could elaborate on how you're thinking about that and what your options are? Sean Saint: Yes. The first thing I would say is that I wouldn't look at it as flat. The percentage was the same and our new patient start, obviously, base grew. I don't think there's any benefit to Beta Bionics to grow that 30% or roughly 30% to -- or roughly 25%, excuse me, to something much larger. I mean, we need to grow our total new patient starts -- and to your point, we're not really out selling it. So, it kind of is what it is on a percentage basis, and that's okay. There's some other things that go into the dynamic as to whether or not we would make the decision to invest in that or when we make the decision to invest in that is what I should say, that I probably just can't get into at this stage because they result -- they relate to some internal product pipeline stuff. But yes, I don't know, I would say that we're doing as well as anybody effectively in that channel, and we don't even have the indication. So yes, I'll leave it at that. Operator: Our next question comes from Jon Block with Stifel. Jonathan Block: Anything to call out regarding just the competitive landscape? There's really been a good amount of focus there with the new entrant, but your competitive wins as a percent of adds actually ticked up a bit Q-over-Q and obviously had a huge growth rate if we look at it year-over-year. So just any color you can provide there with the landscape may be changing or maybe not? Stephen Feider: Jeff, yes, I appreciate the question. Short answer is no. It is a highly competitive industry. It's competitive not only just for recruiting the right type of sales reps, but every account has a lot of different sales reps that are trying to sell and get the attention of the HCP at that given account. But we're confident in what we have. We have a highly differentiated product, the easiest system on the market, we believe, to use for doctors, for patients, a compelling solution with the pharmacy reimbursement. And so, I don't see the market or the competitive landscape as meaningfully different than it was semi recently, and we feel confident. Jonathan Block: Okay. Stephen…. Stephen Feider: Sorry, that was Jon, my bad. Jonathan Block: All good. All good. Stephen, maybe I'll stick with you. I'm struggling with the guidance from gross margins in a good way. And I know you gave some reasons that you sort of said, hey, it implies flattish to slightly up GMs Q-over-Q for 4Q. But your pharmacy mix is largely consistent with the assumption is with 3Q. And we've seen a lot of scale, right, throughout 2025 when you just look at your sequential gross margin improvement despite pharmacy ramping as an overall percentage. So, can you just tell me why like that improving scale dynamic wouldn't resonate as much if you would in 4Q '25? Or is this maybe just leaving a little bit of wiggle room considering you really don't know the percentage DME versus pharmacy because of the deductible metric you brought up earlier? Stephen Feider: Of course. On the high end of the range, the gross margin guidance for Q4 is actually in line with the increase or the increase that we're guiding to in Q4 revenue. So, the increase in scale and the benefit that we would get to gross margin is actually sort of in line again with the revenue increase quarter-over-quarter. But on the low end of the range, you're right, that may like seem a little surprising to you that we're guiding to that low. Really, it just comes down to lack of predictability around the pharmacy reimbursement channel. There is a world where in Q4, we outperformed our expectations in pharmacy, which actually creates in terms of new patient starts. And what would that do is it would create a short-term headwind to revenue and gross margin. And that's one reason. And the second is that cost of sales -- well, look, we like to set -- the guidance philosophy around here is for metrics like this, we like to set expectations at a level that we have a high degree of confidence in. And with cost of sales, there can at times be things that are semi-unpredictable that could come up and be a onetime charge. I'm not suggesting I see any of those in Q4, but that can happen. And so hence, we like to be, I guess, a little cautious with large uptakes in gross margin guidance for that reason. Operator: Our next question comes from Jeffrey Cohen with Ladenburg Thalmann & Company. Jeffrey Cohen: Congrats on a strong quarter. Just one for us. If you could maybe talk about your special 510(k). Was this software only and was uploaded to all the units out there? And does that help or would that help in Mint development? Or are some of those updates being embedded into Mint now? Sean Saint: Yes. The -- it's a software upgrade. And as with all of our software upgrades, that's something that all of our users get a chance to download and use. And in fact, we always like to push people to our newest software. The -- I would say that part of those software upgrades are related to Mint and some not. Some of the way we do the alarms and alerts and alarms certainly will be reflected in Mint. -- cartridge change process, of course, has nothing to do with Mint whatsoever. So yes and no. But as with anything, Beta Bionics considers ourselves to be primarily user innovation, user experience company, I should say. And to the extent that those user experience things are applicable to Mint, we'll absolutely reflect them in that. Operator: Our next question comes from David Roman with Goldman Sachs. David Roman: I appreciate your taking the follow-up. And I hate to focus on the 483, but the MAUDE dynamic has become such a distraction for investors intra-quarter. And as we think about the kind of remediation process here, that does have the potential just to create some noise for people out there counting up MAUDE reports, which is sort of like a meaningless metric, but it does get a lot of attention. So, can you maybe just help us frame like how we should think about those reports when we see them, how to interpret the remediation filings? And just maybe help us kind of calm the obsession with counting MAUDE entries. Sean Saint: Great question. Well, look, to -- from our perspective, this is something that every company in the diabetes space has gone through at one time or another. I think, as Stephen alluded to, the guidelines associated with what constitutes a complaint or a report, I should say, are unclear at best, and we've all had to align our understandings with that of the agency. For anybody who really wants to dig in, I guess I encourage you to. You can go to the MAUDE database. That's the whole point of the thing. And you can look what's being submitted in our case, the case of any other company out there. You can look at rates. We've been fairly transparent with what our installed base is, et cetera, and you can compare those things. And we think we compare favorably. But in terms of how to think through it beyond that, I'd say that's hard to say. We don't see an underlying problem in our data here. The 43 itself had nothing to do with the actual complaints being received or the number of them. It had to do solely with the definition of the reports being filed as complaints, and that's all. So hopefully, that's clear. Operator: I'm showing no further questions at this time. I'd like to turn the call back over to Sean for any closing remarks. Sean Saint: All right. Thanks, everyone. As usual, we enjoyed discussing a strong quarter with you today. We appreciate your work to understand our business. And I guess we look forward to seeing you all next quarter. Thank you. Stephen Feider: Yes. Thanks, everyone. Operator: Thank you for your participation. You may now disconnect. Good day.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Celestica Q3 2025 Financial Results Conference Call and 2025 Investor and Analyst Day. [Operator Instructions]. I will now hand the conference over to Matthew Pallotta, Head of Investor Relations. Please go ahead. Matthew P.: Good morning, and thank you for joining us on Celestica's Q3 2025 financial results and investor and analyst day conference call. On the agenda for today's call, we will begin with our third quarter financial results, followed by our 2025 Investor and Analyst Day. At the conclusion of the prepared remarks, we will open up the lines for Q&A. Joining us on today's call to provide prepared remarks will be Rob Mionis, President and Chief Executive Officer; Mandeep Chawla, Chief Financial Officer; Jason Phillips, President of our Connectivity and Cloud Solutions segment; and Todd Cooper, President of our Advanced Technology Solutions segment. They will also be joined by Steve Dorwart, Senior Vice President and General Manager of Hyperscalers for the Q&A portion of our call. Please note that during the course of this call, we will make forward-looking statements, including statements relating to the future performance of Celestica, business outlook and anticipated trends in our industry and their anticipated impact on our business, which are based on management's current expectations, forecasts and assumptions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. For identification and discussion of these material assumptions, risks and uncertainties, please refer to our public filings with the SEC on SEDAR+ as well as the Investor Relations section on our website. We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. In addition, during this call, we will refer to various non-GAAP financial measures. We have included in our earnings release found in the Investor Relations section of our website, a discussion of those non-GAAP financial measures and a reconciliation to the most comparable GAAP measures. Unless otherwise specified, all references to dollars on this call are to U.S. dollars. All per share information is based on diluted shares outstanding and all references to comparative figures are a year-over-year comparison. Let me now turn the call over to Rob. Robert Mionis: Thank you, Matt, and good morning, everyone, and thank you for joining us on today's call. We are pleased to have the opportunity to speak with you today and to share some of the exciting developments in our business and our plans for the future. Before diving into the Investor and Analyst Day portion of our call, Mandeep will begin with a review of our third quarter results and provide our guidance for the fourth quarter. Mandeep, over to you. Mandeep Chawla: Thank you, Rob, and good morning, everyone. In the third quarter, we once again saw exceptionally strong demand in our CCS segment, which drove very strong overall performance across our key financial metrics. Revenue of $3.19 billion was up 28% and above the high end of our guidance range, driven by a very strong demand in our communications end market. Our non-GAAP operating margin was 7.6%, up 80 basis points, driven by higher margins across both of our segments. This once again represented the highest quarterly non-GAAP operating margin in the company's history. Our adjusted earnings per share for the quarter was $1.58, exceeding the high end of our guidance range and an increase of $0.54 or 52%. Moving on to some additional metrics. Adjusted gross margin was 11.7%, up 100 basis points, driven by higher volumes and improved mix in both segments. Our adjusted effective tax rate for the quarter was 20%. And finally, strong profitability and disciplined working capital management resulted in adjusted ROIC of 37.5%, up 850 basis points versus the prior year period. Moving on to our segment performance. Revenue in our ATS segment for the quarter was $781 million, down 4%, slightly lower than our guidance of a low single-digit percentage decline. The lower performance year-over-year was primarily driven by portfolio reshaping in our A&D business as discussed in past quarters. Our ATS segment accounted for 24% of total company revenue in the third quarter. Revenue in our CCS segment was $2.41 billion, up 43%, driven by very strong growth in our communications end market. The CCS segment accounted for 76% of total company revenue in the quarter. Our communications end market revenues increased by 82%, above our guidance of low 60s percentage growth. The growth was driven by very strong demand in data center networking, primarily for ramping 800G switch programs across our largest hyperscaler customers, complemented by solid demand in our optical programs. Revenue in our enterprise end market was lower by 24%, which was in line with our guidance of a mid-20s percentage decline due to a technology transition in an AI/ML compute program with a hyperscaler customer. Our HPS business generated revenues of $1.4 billion in the third quarter, representing growth of 79% and accounted for 44% of total company revenue. The very strong growth was driven by accelerating volumes in our ramping 800G switch programs. Moving on to segment margins. ATS segment margin in the quarter was 5.5%, up 60 basis points, primarily driven by improved profitability in our A&D business. CCS segment margin in the third quarter was 8.3%, an improvement of 70 basis points, driven by a higher mix of HPS revenues and benefits from operating leverage. During the quarter, we had 3 customers that each accounted for at least 10% of total revenue, representing 30%, 15% and 14% of revenue, respectively. Moving on to working capital. At the end of the third quarter, our inventory balance was $2.05 billion, a sequential increase of $129 million and a year-over-year increase of $226 million. Cash cycle days during the third quarter were 65, an improvement of 1 day versus the prior year and sequentially. Turning to cash flows. We generated $89 million of free cash flow in the third quarter, bringing our year-to-date free cash flow to $302 million. Capital expenditures for the third quarter were $37 million or 1.2% of revenue, while capital expenditures year-to-date were $107 million and also 1.2% of revenue. We anticipate capital expenditures to increase in the fourth quarter and for total annual CapEx to be approximately 1.5% of revenue. Turning to our balance sheet and capital allocation. At the end of the quarter, our cash balance was $306 million, while our gross debt was $728 million for a net debt position of $422 million. We had no draw outstanding on our revolver, leaving us with approximately $1.1 billion in available liquidity. Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.8 turns, an improvement of 0.1 turns sequentially and 0.3 turns versus the prior year period. As of September 30, we were in compliance with all financial covenants under our credit agreement. During the quarter, we did not repurchase any shares under our normal course issuer bid, and our year-to-date repurchases stand at $115 million. Looking forward, we will continue to be opportunistic towards share repurchases. And as such, we are in the process of renewing our NCIB program, which is set to expire on October 31. We expect to receive the necessary regulatory approval and to commence the new program in November. Now moving on to our guidance for the fourth quarter. Similar to last quarter, we highlight that our guidance figures assume no material changes in tariff or trade restrictions compared to what is in effect as of October 27, as any changes to these policies and their potential impact on our results cannot be reliably predicted at this time. Fourth quarter revenue is projected to be between $3.325 billion and $3.575 billion, representing growth of 36% at the midpoint. Adjusted earnings per share are anticipated to be between $1.65 and $1.81, representing an increase of $0.62 at the midpoint or 56%. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-GAAP operating margin would be 7.6%, an increase of 80 basis points year-over-year. We expect our adjusted effective tax rate for the fourth quarter to be approximately 20%. Finally, let's review our end market outlook for the fourth quarter. In our ATS segment, we anticipate revenue to be down in the low single-digit percentage range as growth in our Industrial and HealthTech businesses are being offset by lower volumes due to portfolio reshaping in our A&D business and market-related softness in our capital equipment business. In our CCS segment, we anticipate revenue in our communications end market to grow in the high 60s percentage range, supported by continued strong demand for our data center networking switches, including ongoing ramps in multiple 800G programs. In our enterprise end market, we expect to resume growth in the fourth quarter with a low 20s percentage increase in revenue, driven by the ramping of a next-generation program for hyperscaler application in AI/ML compute. Based on our guidance for the fourth quarter and strong year-to-date performance, our latest 2025 financial outlook now calls for revenue of $12.2 billion, up from $11.55 billion previously, reflecting year-over-year growth of 26%. Our adjusted EPS outlook has increased from $5.50 per share previously to $5.90 per share, implying growth of 52%. Our non-GAAP operating margin of 7.4% remains unchanged. We are also increasing our free cash flow outlook for 2025 from $400 million to $425 million. And with that, I'll turn the call back over to Rob to begin our 2025 Investor and Analyst Day. Rob, over to you. Robert Mionis: Thank you, Mandeep. In the rest of our time this morning, we would like to provide you with a view of where our business stands today and the strategy that got us here. Importantly, we'll then share our view on where we are headed as a company, including our significant market opportunities and the investments we are making in our operations and technology road maps. Celestica is our global technology platform solutions company. As our fundamental value proposition, we leverage vertically integrated capabilities and provide customized solutions enabling our customers to deploy leading technologies at scale, achieving rapid speed to market. Our goal is clear: to lead and accelerate market advancements in our focused technologies. We achieved this by proactively investing in next-generation technology road maps and the advanced capabilities required to deliver those technologies to market. Celestica leverages our comprehensive vertically integrated capabilities to deliver leading technology platform solutions. We offer complete end-to-end capabilities, starting with design and engineering through manufacturing and supply chain management to software and aftermarket services. The depth of our system-level capabilities and expertise is best reflected in our technology solutions for the data center across networking and AI/ML compute. However, we leverage a set of competencies and strengths across a range of markets and technologies. Customers have the flexibility to leverage all or any combination of our capabilities to build tailored platform solutions for their entire product life cycle. So let's look at where we stand today. As Mandeep shared, we are currently delivering the strongest financial performance in the company's history. We will dive deeper into both of our segments shortly to discuss the fundamental factors driving our performance and our plans for the years ahead. However, first, I would like to take a brief look back at how we arrived here. When I took the CEO role in late 2015, my first action was to solidify the core leadership team. However, the real inflection came in 2018 when we began executing a comprehensive transformation to reshape our business. This was a fundamental shift. We aggressively ramped our investment in design engineering and technology road maps for the data center, while we deliberately disengaged from low-margin, low complexity programs that offered limited opportunity for differentiation and value add. By 2020, we introduced our 400G switch, marking a pivotal moment in our HPS business, establishing our presence in the high-performance Ethernet switch market. Since then, we have rapidly grown our hyperscaler portfolio, reshaped the margin profile of our business and entrenched our position as a technology leader and key enabler of AI infrastructure solutions for the world's largest data center customers. Yet the changes made to date may seem modest in comparison to the opportunities that lie ahead. We are currently navigating the most rapid period of change in our company's history, and the pace of that change continues to accelerate, driven by the massive investments in AI infrastructure by our customers. Celestica's culture is rooted in the pursuit of progress, and we are incredibly excited and motivated by the opportunities in front of us. During this period, we have seen accelerating momentum in the growth of our business, and we are capitalizing on this strength. Based on our 2025 outlook, we are on track to deliver our strongest performance on record. There are a number of key drivers supporting the sustained improvement in our performance. The first driver is capturing share in high-growth markets with the cornerstone being our presence in AI data centers. Next, demand for our HPS product offerings are rapidly shifting our entire portfolio toward higher complexity engagements, where our design collaboration and value add are critical to our customers' success. In addition, growing volumes are fueling improved operating leverage, and we relentlessly drive productivity and efficiency across our global network with a strong focus on operational excellence. Our global network operating across 16 countries is essential part of our value proposition. Our customer-centric network strategy provides a reliable and consistent supply chain solution, allowing our partners to derisk their geographic exposure, a capability that's essential in the current climate of geopolitical and trade uncertainty. We have been and continue to make significant expansions and upgrades to our network funded by operational cash flow to support the growing demand and program ramps with our AI data center customers. Demand for North American capacity remains strong, especially within the United States. To accommodate this, we are continuing to deepen our footprint in Texas. We're expanding square footage and increasing our power envelope at our Richardson site with capabilities to support the production of thousands of additional advanced AI racks annually. We are adding to our global design engineering network with a new hub in Austin for closer customer collaboration. We are also in the process of finalizing plans for an additional large-scale manufacturing site in the state to support continuing growth with one of our largest customers. We are equally committed to supporting our customers by investing for growth in Asia, where we continue to make significant additions to our largest campus in Thailand. We are seeing incredibly strong demand from hyperscaler and digital native customers for tight capacity with significant production ramps planned to commence through 2027 and into 2028 across networking and compute. This proactive and regionalized investment strategy ensures we retain a flexible and reliable network positioned to meet our customers' evolving needs and accommodate the significant growth in demand from our customers. Operational excellence is ingrained in our company's DNA and an integral pillar of our competitive differentiation and value proposition. The Celestica operating system is our standardized framework that ensures unmatched consistency in quality, reliability and on-time delivery across every one of our global sites as we deliver hundreds of highly complex programs simultaneously. One of the core components is our culture of accountability, emphasizing execution and safety. This is reflected by our performance in these areas, tracking well above industry benchmarks, including 0 critical excursions to customers. We pride ourselves on our customer-first mindset, evidenced by our history of deeply entrenched collaboration in design and engineering, where we have positioned ourselves to act as an extension of our customers' teams. Another operational priority is our continuous investment in our advanced manufacturing capabilities, including automation and testing, which are critical to enabling product road map development and speed to market in deploying new technologies. Next, I want to briefly detail a case study that will help bring to life our competitive differentiation enabled by our core success drivers. In this instance, a hyperscaler customer approached us to collaborate on the design of our first of its kind rack-scale liquid cool 1.6T networking solution needed in order to accommodate the increased density and power requirements of the latest generation AI networking platforms. This highly customized design was intended to be integrated into the new state-of-the-art data center architecture. The customer required an accelerated road map to allow the solution to be early to market, leveraging Broadcom's Tomahawk 6 SC silicon, making speed to market a key consideration. In addition, the customer required multi-node manufacturing capabilities in Asia and the U.S. to support the delivery of the program. As with many of our key engagements, managing complexity was a defining factor. Celestica was awarded the program earlier this year based on a strong working relationship with the customer and their confidence in our industry-leading design engineering. They also valued our advanced manufacturing capabilities, specifically our ability to operationalize highly complex production lines for liquid cooled racks at scale and to do this faster and more seamlessly than other potential partners. After receiving initial Tomahawk 6 samples earlier this year, we quickly stood up an operational prototype for the 1.6T switch and believe we were the first team anywhere to have done so. The program is scheduled to begin mass production next year. As this example and our discussions today will illustrate, Celestica's success is driven by the unique combination of 3 core factors. First, we occupy industry-leading positions in markets with strong structural tailwinds and higher barriers to entry, supporting multiyear runways for growth. Our largest and fastest-growing market presence is within AI data centers, supporting high-performance networking and custom ASIC AI/ML compute platforms. Second, with these focused markets, we seek to accelerate market advancements through technology leadership. Our early-stage investments in R&D and next-generation product road maps support our ability to remain at the leading edge of technology transitions and enable our customers' speed to market in deploying new technologies. We separate ourselves by helping our customers address complexity and by solving the hardest challenges effectively. Third, we are steadfastly focused on maintaining best-in-class operational execution. Our global footprint, combined with the rigorous processes of the Celestica Operating System, ensures we can manufacture and deliver the highest complexity products without compromising quality and reliability. Fundamentally, these 3 factors serve as a foundation of our success and our unwavering confidence in the opportunities ahead. I'd like to now turn the call over to Jason to walk us through our CCS segment. Jason, over to you. Jason Phillips: Thank you, Rob. It's great to be here with you this morning. The past several years have seen our business on an incredible growth trajectory. In the midst of what is potentially the most significant secular investment cycle in a generation, we are in the incredible position of supporting the world's largest data center customers in their massive infrastructure buildouts to enable the growth in applications of artificial intelligence. This year, we are tracking towards $9 billion of revenue, more than doubling the size of our business from just 3 years ago. Alongside this growth, our business mix has shifted towards higher complexity customized programs within our HPS portfolio, helping drive strong profitability. Double-clicking on our HPS portfolio, we are expecting to deliver approximately $5 billion in revenue for 2025, an incredible 80% growth, which speaks to the tremendous uptake from customers for our offerings. We take a long-term view towards our investments and product road maps, investing early to help customers accelerate deployment of leading technologies. We have consistently grown our investments in R&D over the years. We increased our spend more than 50% this year, and we expect at least a 50% increase in 2026 in support of new program wins that will ramp beginning over the next 2 years. Our design engineering talent is an important differentiator for our business. We have scaled our team today to more than 1,100 dedicated design engineers, supporting both hardware and software solutions across 7 global design sites and growing, and we expect to add several hundred additional resources in the immediate future. Our recognized leadership in design has been critical to winning the many new programs, which are driving our growth. Next, we'll take a look at some of the key technology developments and design challenges we are seeing in the data center and where our team is making investments to address those opportunities. Importantly, as a platform solutions company, we are aiming to address these challenges at the systems level. In AI/ML compute, we are making investments in our rack-scale capabilities to support applications for both training and inferencing workloads, which we will touch on more shortly. To stay ahead of the latest advances in liquid cooling, Celestica is building proof of concepts for our next generation of solutions, which includes innovations in single-phase, dual phase and emerging liquid metal technologies. The rapid advances in switching silicon bring with it increasing complexity in designing the latest networking platforms, particularly challenges in addressing power density and signal integrity. Celestica is addressing these by driving innovations in our switch designs for 200-gig SerDes solutions to support 1.6T platforms and are planning early-stage investments for 400-gig SerDes to support 3.2T platforms. We're also staying close to the advances in optical technologies that will increasingly be utilized in high-performance networking such as linear pluggable optics, co-packaged optics alongside other interconnect technologies such as co-packaged copper. As an example, our latest 800-gig and 1.6T switch designs support LPO for optimized power efficiency. And we are in the early stages of our product road maps for our future generations of switching solutions that will accommodate CPO technology. We also see scale-up networking, which supports high-speed direct connectivity between accelerators as an emerging multibillion-dollar new market opportunity that is being unlocked in large part by the move towards open standards, supported by industry initiatives like UALink and Ethernet for scale-up networking. We are already on the path through recent program wins towards productizing our first solutions for scale-up Ethernet, which will leverage Broadcom's Tomahawk 6 silicon. We look ahead at emerging technologies by proactively investing and collaborating with our ecosystem partners to define future product road maps. This enables speed to market and establishes Celestica as an essential partner for our customers' next-generation deployments. As noted, Celestica looks to address technology leads at the system level. And accordingly, we have invested in developing capabilities to support full platform solutions. Our customers engage with us to support a wide array of programs and technologies and leverage the depth of our capabilities to varying degrees. However, we have increasingly observed our hyperscaler and digital native customers seeking bespoke solutions for rack-scale systems, making our full suite of capabilities across multiple technologies increasingly essential. Critically, we are seeing this demand in both networking and AI/ML compute, where customers are seeking solutions for both custom ASIC and emerging merchant silicon platforms. Beyond designing the hardware for base technologies in networking, compute and storage, our engineering teams are supporting customers in orchestrating, testing and optimizing their rack-scale solutions, including the customization of software platforms as well as aftermarket services. Our ability to deliver system-level solutions of this kind requires our breadth and depth of capabilities in all of these areas with the ability to integrate them into a seamless solution for the customer. Software is an increasingly critical component of our comprehensive solutions. To support this, we are making focused investments in our capabilities, having grown our global team to nearly 400 dedicated software engineers. We believe that open-source network operating systems, namely SONiC, are positioned for continued market adoption driven by the desire for vendor diversity, cost effectiveness and sustained improvement and innovation. We have a long history of working with SONiC and our proficiency with this platform is well respected in the industry. Our Celestica solutions for SONiC customizes and hardens SONiC features, providing customers bespoke solutions with an open-source base as well as related support services. But our software capabilities go beyond SONiC too, as we offer customers the optionality to leverage third-party solutions. And for hyperscalers using a proprietary network operating system, our software knowledge allows us to provide critical support with switch abstraction interfaces, ensuring silicon interoperability across the fabric and to assist with network operating system debugging and testing of customized hardware. Our ability to deliver a diverse range of leading solutions is significantly enhanced by our ecosystem of partners across both silicon and software. Leveraging these relationships, we work closely and proactively with our technology partners, aligning years ahead of time on next-generation product roadmaps, enabling us to be early to market and deploying leading-edge solutions for our customers. And our technology partners attest to the critical part we play in productizing and delivering these leading-edge solutions to the market. Broadcom's President and CEO, Hock Tan, highlights the significance of our capabilities and execution by recognizing Celestica as their preferred provider for the most technically demanding data center platform solutions. The strategic relationships between Celestica and industry leaders like Broadcom are a powerful testament to the importance of our role in enabling these critical technologies. Now let's take a deeper dive into our market opportunities. As mentioned, we are witnessing a generational secular investment cycle in data center infrastructure, driven by artificial intelligence and cloud adoption. Many of the indicators from the companies leading this investment across silicon designers, hyperscalers and the emerging leaders in large language models point towards a multiyear runway of continued growth in data center CapEx. Annual data center CapEx is forecasted to surpass $1 trillion by 2028, with commentary from leading voices in the industry suggesting this could prove to be conservative. These companies regularly highlight constraints in compute capacity driven by the increasing demands from both training and inference. All of these companies have signaled their commitments to continue to grow their investments in AI infrastructure, which aligns with the forecasts and planning discussions we are having with our customers. Within our portfolio, hyperscaler customers have continued to be the primary driver of our revenue growth over the past several years. Demand remains incredibly strong and is supported by solid visibility based on program awards that are expected to begin ramping over the next 2 years. Furthermore, we're unlocking the next wave of expansion with our digital native customer portfolio, which is poised to ramp meaningfully starting in 2027 with the delivery of our first HPS rack-scale custom AI system, which we initially announced in January. Our broad portfolio exposure to AI-driven investments from the largest and most established players in the sector ensures our business is exceptionally well positioned to capitalize on this opportunity. Moving on, we'll discuss the opportunities across our markets. Our communications portfolio is anticipated to generate $7 billion in revenue in 2025, an exceptional 78% growth. Our portfolio is anchored by our networking solutions with our 800-gig switch programs comprising the largest share and our most significant growth driver in 2025. We anticipate that continued growth in 800-gig and multiple ramps in 1.6T beginning in 2026, including strong engagement in scale-up Ethernet, support a robust multiyear growth outlook for our networking business with our existing customer base alone. In addition, we also have a growing funnel of opportunities for both scale-up and scale-out applications across a diverse set of new and existing customers. We believe that our technical expertise and recognition as a market leader in networking places us in a solid position to continue to grow our portfolio. At the Open Compute Project Global Summit earlier this month, we announced the latest additions to our growing family of high-performance Ethernet switches as part of our HPS portfolio, the DS6000 and DS6001. The DS6000 series utilize Broadcom's Tomahawk 6 silicon and are designed to support port speeds of up to 1.6T with routing optimized for AI/ML workloads across both scale-up and scale-out networking. Notably, the DS6001 incorporates direct-to-chip liquid cooling technology. We anticipate availability later in 2026. These latest designs are a testament to our continuous innovation and our commitment to accelerating market advancements through technology leadership. We believe our optimism regarding our networking business is well founded. Our market share leading portfolio is supported by a number of company-specific and market-level tailwinds, which position us to continue to succeed in this fast-growing market. The latest forecast suggest that the TAM for high-bandwidth Ethernet networking is projected to reach $50 billion by 2029. Within this market, the 800-gig and higher segments are projected to grow even faster than the overall market at an impressive 54% CAGR driven by upgrade cycles led by hyperscalers and leading large language models' providers to keep pace with the demands of the latest AI workloads. Based on the engagement we've seen already, we think that the adoption of scale-up Ethernet is going to be a really meaningful opportunity and additive to the growing overall Ethernet TAM. In our case study earlier, we highlighted the increasing technical challenges with each successive new generation of networking technology, which we have proven highly capable of navigating. However, there are a number of additional highly favorable dynamics that we believe make this market an incredibly important opportunity. We'll touch on a couple of those now. One of the core challenges in building AI data centers is scaling of the infrastructure. While the increasing computational power of accelerators or nodes is driving requirements for greater bandwidth, a critical compounding dynamic is the nonlinear growth in connectivity required as the number of accelerators within a cluster scales. The largest fully operational cluster today is believed to consist of roughly 200,000 accelerators. However, commentary from leading silicon companies suggests that multiple hyperscalers plan to deploy clusters consisting of up to 1 million accelerators within the next couple of years. This rapid scaling in compute capacity required to support leading AI models requires huge increases in networking infrastructure, including high-bandwidth Ethernet switches, which comprise the majority of our communications portfolio. The build-out of AI data centers is fundamentally shifting the share of spend towards back-end networking, which is expected to grow more than twice as fast as front-end spending. Back-end networking connects the compute clusters used for training models, while front-end connects the network to the external world, primarily for inference traffic. The unique demands of back end align with our competitive strengths, in particular, more intense performance requirements where factors like high bandwidth, low latency and sustained high utilization are an absolute necessity. The back end also necessitates shorter refresh cycles required for the network to keep pace with the increases in computational power. Since our switch revenues are predominantly comprised of back-end shipments, we have meaningful exposure to the highest growth segment of the market. Our customers tend to be early adopters, and we help them accelerate their deployments of the newest switching platforms early on in upgrade cycles. This is reflected in our leading market share on the highest bandwidth and Ethernet switching for the data center across each of 200-gig, 400-gig and 800-gig platforms. Today, our cumulative market share across all of these speeds as measured by total ports shipped is 41%, more than double the next largest competitor's volume. As the technical complexity rises with each generation of the technology, designing high-performance switches becomes increasingly challenging and fewer and fewer competitors can do it effectively. Managing this complexity and helping customers achieve speed to market with new technologies are what we really excel at, allowing us to secure the strongest share in the earliest stages of every new upgrade cycle. We see custom solutions for high-performance AI networking platforms being widely adopted by our leading hyperscaler customers. This model offers the benefits of vendor diversity, cost effectiveness and highly tailored solutions, which become more pronounced as their infrastructure deployments scale. Consequently, we believe hyperscalers and increasingly large digital native customers will continue to leverage these solutions. In this segment of the overall market, Celestica's share leadership is even more pronounced as we account for the majority of the total spend, 55%, having grown our share meaningfully over the last couple of years. Securing mandates and consistently executing on high complexity customized solutions for the largest customers in the industry reflects our competitive advantage and continues to validate our market strategy. Moving on to our enterprise market, which includes our AI/ML compute and storage businesses. Our portfolio revenue is projected to be about $2 billion in 2025, and we expect to see meaningful growth in 2026, significantly exceeding our previous peak revenues from 2024, as we ramp the next-generation AI/ML compute program. Looking further ahead, 2027 is expected to be another transformative year as we plan to ramp production for the rack-scale custom AI system with a digital native customer. The design work for this program is well underway, and we expect to receive initial XPU deliveries in the second half of 2026 to support early test deployments with full-scale production expected to commence in 2027. The scale and scope of the custom solution, including design, manufacturing, orchestration and deployment for a leading-edge system of this nature is incredibly complex. But as we've highlighted, these are the kinds of challenging engagements where Celestica truly thrives. We anticipate this program will serve as a landmark proof point, showcasing our full suite of system-level capabilities. Shifting to the market outlook, the TAM for accelerated compute is expected to grow to nearly $500 billion by 2029. Some of the tailwinds driving this growth are particularly favorable for our business. Given that our compute business is focused almost exclusively on solutions supporting custom ASIC platforms, we are positioned to benefit from the highest growth segment of the AI server market. Overall, the constraints on capacity we spoke about earlier, currently being experienced at the largest hyperscaler and digital native customers continue to highlight the clear requirement for more compute infrastructure and the strong demand in this market. As mentioned, Celestica's market strategy is focused almost exclusively on the custom ASIC segment, which is forecasted to grow roughly sixfold over the next several years. An increasing number of the largest data center players in the market continue to pursue development of custom ASIC platforms, and we are seeing this trend within our own customer base. The architectures of these chips are designed to be optimized to support a customer's specific workloads with the intention to deliver lower hardware cost, power savings and overall better price to performance than a general-purpose GPU. As AI models become more highly specialized, custom silicon architectures will also be an increasingly important means to enable differentiation and performance between models. And as compute infrastructures grow and scale, the benefits to deploying a custom ASIC platform successfully are magnified. Because custom ASICs also require highly tailored bespoke systems to be designed around the silicon, customers often require greater support from solutions providers, presenting us with better opportunities for value-added engagement on engineering and design. We believe this fast-growing segment of the market better lends itself to our competitive strengths in customization and managing complexity and that there are fewer players that have our track record in supporting these kinds of platforms at scale. We are exceptionally optimistic about the future of our CCS business. We have confidence in our outlook, supported by visibility to upgrade cycles, strong customer demand forecasts and a robust pipeline of potential new opportunities. And we feel that we are in a prime position to capture the incredible market opportunities in front of us. With that, I would now like to hand the call over to Todd, who will take you through the latest in our ATS segment. Todd Cooper: Thank you, Jason. It is great to be with all of you this morning. Since we spoke last year, we've been focused on strategically remodeling the ATS portfolio for higher sustained profitability and higher mid- to long-term growth. Specifically, our previously discussed reshaping activities in A&D are offsetting otherwise solid base demand across the segment, leading us to expect revenues in 2025 to be approximately flat year-over-year. We have already seen the significant benefits of these actions on our profitability. After exiting 2024 with a segment margin of 4.6%, we have already improved to 5.5% in the third quarter of 2025 and expect to achieve 70 basis points of full year margin expansion. Looking ahead to 2026, we anticipate revenue to be approximately flat to mid-single-digit percentage growth. We are seeing strong growth in our Industrial and HealthTech businesses. However, this demand will be partially offset by further selective reshaping across some of our markets. Over the medium to long term, our objective is to grow our portfolio at or above the growth rates of our underlying markets on a consistent basis, while balancing growth with sustainably higher profitability. Our target financial framework for this segment is supported by our engineering-led strategy and our focus on deepening our long-standing relationships with the leading customers in our markets. Over the past number of years, our ATS business has made investments to deepen our engineering base by developing market-focused teams with specialized expertise in their respective industries technologies. Today, our team constitutes a global network of highly talented engineers along with labs and advanced manufacturing sites to support our customers across regions and markets. Engaging customers early in the product life cycle strengthens our relationships by allowing us to offer a more holistic vertically integrated solution. This approach more fully leverages our core competency as an organization, helping our customers navigate complexity and solve hard problems, while having the added benefit of reinforcing our value as a highly capable partner and driving higher margins for the portfolio. Today, about 1/3 of our more than 100 customers engage with our teams on engineering services, relying on us for support in testing, design as well as in accelerating their time to market on new product development. We believe this presents an excellent opportunity to deepen our engagements within our existing customer base. And lastly, as discussed earlier, we are also continuously assessing and actively managing our customer portfolio. Our commercial strategy is focused on deepening our long-standing relationships with the leading Tier 1 OEMs in our markets. In pursuit of growth, we are intensely focused on maintaining the quality of our customer base and having a strong margin profile for our portfolio. Now I'd like to briefly walk through each of our businesses, starting with Industrial and Smart Energy. In our industrial and smart energy portfolio, we anticipate growth in 2026, driven by demand recovery in our macro-sensitive end markets. Longer term, we are engaged on exciting new opportunities in robotics and automation as well as in on-vehicle technologies such as telematics and battery energy storage for heavy industries. We are also pursuing programs in the growing data center power infrastructure market, including power distribution, conversion and control equipment, leveraging some of our hyperscaler relationships. While it is still early days, we are encouraged by the traction we are seeing. Next, let's move to Aerospace and Defense, which as a U.S. military veteran is near and dear to me. Our 2026 outlook sees base demand remaining healthy, supported by the ramping of new program wins, although we expect that growth will be offset by tougher comps from the first half of this year, driven by our reshaping activities. Longer term, we project healthy demand from U.S. and European defense spending, which we expect will become a greater share of the portfolio. And in our commercial aerospace business, we expect to see growth aided by program ramps with new and existing customers. Moving on now to semiconductor capital equipment. In semiconductor capital equipment, we saw strong growth in the first half of 2025, although we are seeing a moderation of demand in the second half, consistent with the broader sector. We expect this to continue into at least the first half of next year as our customer conversations indicate foundries are holding off on adding more capacity until there is greater clarity on tariffs and trade restrictions. To obtain greater efficiencies in our network, we are taking this opportunity to consolidate demand across some of our sites. At the same time, we are continuing to ramp new high-complexity programs in lithography and advanced semiconductor packaging. Long term, we believe the significant push for the near shoring of wafer fab capabilities in the U.S., Europe and China, driven by geopolitical factors is expected to support healthy demand for new capacity. We have exceptional capabilities and proof points in the semiconductor capital equipment market and anticipate this demand to serve as a tailwind for our business starting in the second half of 2026. Finally, in our HealthTech business, overall demand remains robust, and we continue to make a concentrated effort towards driving higher portfolio exposure to this market. Last year, we discussed our investments in advanced manufacturing, automation and testing capabilities to support new wins in diabetes care, which are expected to ramp in 2026. Now as we approach the beginning of those ramps, we are anticipating more than $100 million of growth in our HealthTech business in the coming year. In closing, our focus remains on driving high-quality, sustainable growth. We are successfully executing strategic commercial decisions to reshape our portfolio, which is already yielding significant improvements in profitability. Our portfolio is supported by healthy underlying near-term demand, along with solid long-term fundamentals. We remain confident that our thoughtful approach in each of our markets will position us to drive sustainable and profitable growth for the ATS segment. With that, I would now like to turn the floor back over to Mandeep, who will discuss our financial outlook and capital allocation priorities. Mandeep Chawla: Thank you, Todd. The outlook for the financial performance of the business in 2026 continues to be very strong. We anticipate revenue of $16.0 billion, representing 31% growth compared to our 2025 outlook. At the segment level, CCS revenue is expected to grow by approximately 40%, driven by strong market tailwinds and program ramps in both our enterprise and communications end markets. Our outlook assumes continued strength in networking, supported by 800G demand growth and the ramps of our earliest 1.6T programs in the second half of the year. In AI/ML compute, we anticipate very strong growth as we reach full volume production of our next-generation custom ASIC program for hyperscaler applications. In ATS, as noted, revenue is projected to be flat to up in the mid-single-digit percentage range, as healthy base demand and new program ramps are partially offset by our reshaping activities to drive higher profitability. We expect non-GAAP operating margin to expand by 40 basis points to 7.8%, driven by favorable mix and productivity improvements. Our non-GAAP adjusted EPS is projected to be $8.20, which would represent a 39% increase year-over-year. We are targeting non-GAAP free cash flow of $500 million. This model represents our preliminary high confidence outlook for the coming year, and we will continue to update you on our forecast as the year progresses. Importantly, our confidence extends beyond 2026. First, AI-related demand for data center technologies in our CCS business remains very healthy, and we are seeing many signals that suggest these secular dynamics have a multiyear runway ahead. Second, we have solid visibility to the ramping of significant new programs with start dates out to 2027. Our view for 2027 assumes multiple ramps with hyperscaler customers with new programs supporting the 1.6T upgrade cycle, including scale-up solutions and a next-generation custom ASIC compute platform. We also anticipate the commencement of mass production of our rack-scale custom AI system program with the digital native customer. As a result, we expect these strong growth dynamics to persist. And in support of this, we are aligning our capacity with our customers, assuming that this trajectory continues into 2027. As we continue to manage our financial priorities through this period of high growth, we intend to maintain a steadfast focus on maximizing shareholder value. We aim to achieve this by compounding our adjusted earnings per share in a sustainable manner over the long-term. This requires us to remain thoughtful and measured in our approach to pursuing earnings growth by assessing current and potential new business through the lenses of margin sustainability, alignment with our long-term strategy, our competitive advantages and return on invested capital. These guideposts help us to maintain discipline in managing our growth and evaluating our commercial opportunities. Our consistent execution and disciplined approach to financial management has delivered improvements in each successive year across each of our key metrics. Based on our 2026 outlook, we expect revenues to more than double relative to 2022 and to lead to a more than fourfold growth in adjusted EPS over the same period, driven by the sustained expansion of our non-GAAP operating margin. We believe there is still room for additional operating leverage in our business beyond 2026. We anticipate maintaining our solid trajectory and compounding our adjusted earnings per share, which we believe will continue to translate into strong return for shareholders. Taking a closer look at free cash flow. We have managed to consistently generate free cash flow on a quarterly basis going back many years, enabled by our strong working capital management and operational discipline. We also continue to grow our free cash flow, while simultaneously funding the rapid expansion of our business. Next year, capital expenditures are expected to rise to between 2.0% and 2.5% of revenue, funded by operational cash flow as we invest in our network to support the growth we anticipate over the coming years. We will maintain a disciplined approach to CapEx and working capital management as we ramp these investments. While the primary aim of our investments is towards driving compounding of our adjusted EPS over the long-term, adjusted ROIC remains an important measure that we use to assess the quality of our investments. This has been reflected in our strong earnings growth directly translating into meaningfully higher returns on capital, which now sits at 35% year-to-date in 2025, having nearly doubled since 2022. This rigorous focus on capital efficiency seeks to ensure that our growth is high quality and that we continue to direct our resources towards its best and highest return use. Our capital allocation strategy is built on 2 core principles: discipline to ensure we pursue the highest returns and best use of capital and strategic flexibility to maintain optionality to execute on new opportunities as they arise. Today, our highest priority for capital is to reinvest in the business to support long-term growth and the significant organic opportunities we see over the next several years. We also continue to assess M&A opportunities in a disciplined and selective manner, where acquisitions can serve as a complement to our organic growth and help accelerate our strategic road maps. Our CCS funnel is primarily focused on adding or enhancing our capabilities in areas such as services and design engineering. And in ATS, we are looking to balance our portfolio by adding exposure to or scale in desirable markets that possess strong fundamentals. And finally, we will continue to return capital through share buybacks on an opportunistic basis. Over the past 3 years, our share price performance has significantly outpaced the broader indices and the majority of our peer group. Our stock price reflects the very strong trajectory of adjusted earnings growth we've delivered over the last few years. We are confident that this strong earnings compounding will continue as demonstrated by the 39% adjusted earnings per share growth implied by our 2026 financial outlook. We believe that our valuation is supported by this strong track record and our anticipation of future growth. With that, I'll now turn the call back over to Rob for his closing remarks. Robert Mionis: Thank you, Mandeep. Before we close out, let me briefly reiterate the 3 key drivers that are the foundation for our confidence in our continued success. We are very optimistic about the future of our business. As I stated earlier, we are navigating a period of rapid but positive changes and the pace of those changes only continues to accelerate. We believe the next several years present a truly remarkable opportunity for our company. We hope that all of you leave our call today with a richer understanding of our unique combination of capabilities and the strategic approach that enables our success. We provided perspective on our long-term vision, highlighted by the proactive investments we're making today to capture the opportunities we've discussed. We have the utmost confidence in our organization's talent, our commitment to excellence in delivering for our customers and our ability to execute on our strategy. Thank you for your time and continued support. I will now turn the call back over to the operator to begin our Q&A period. Operator: [Operator Instructions] And your first question comes from the line of Mike Ng with Goldman Sachs. Michael Ng: I guess, first, just on the investments that you're making in R&D, the 50% growth next year and the capacity expansions through 2028. I was just wondering if you could talk a little bit more about some of the key products that are supporting your visibility into these investments and are most of the investments grounded by expansions in customers that are new or existing? And then just as a quick follow-up, I noticed you talked about the new storage platform win with the hyperscaler in 2026. Is that with your current hyperscale AI/ML compute customer, or is that somebody else? How would you size the opportunity in hyperscale storage? Jason Phillips: Mike, this is Jason, and welcome, and we're glad you're covering us. So as we look at our R&D spend and investments year-over-year, we've been making significant increases now for quite some time, and they are directed at where we are focusing our strategy and our opportunities largely around networking, AI/ML, and I would say, storage, rack level solutions and then everything you need to bring that total rack level, fully orchestrated rack level solution together, inclusive of software, liquid cooling, power, et cetera. So that's where we've been focusing our R&D spend. And we've also been making significant, I'd say, advancements and investments in our engineering network. We've now moved up to over 1,100 engineers, 400 of those are in software. We've moved to 7 design centers of excellence. And we're also looking at increasing that in places like Taiwan as well. Stephen Dorwart: Yes. And with regard to the specific customer that you inquired about, it is an existing customer. We have a long-standing relationship with this company, and we've continued to evolve the relationship from providing single system level solutions up to fully integrated rack solutions, of which this engagement is. And that's part of our normal process to go and evolve with our customers. With regard to storage, we have a few different opportunities where we're engaged in storage. It's less prominent than we would see in networking or our ability to extend some of our networking capabilities into the AI/ML compute space. Operator: Your next question comes from the line of Karl Ackerman with BNP Paribas. Karl Ackerman: You noted that Thailand and Texas could see a doubling of capacity from 2024 to 2027, yet CapEx will only be 2% to 2.5% of sales. Could you speak to what assurances your largest customers are giving you to support this capacity growth, whether that is in the form of multiyear volume commitments and/or combined investment in tool CapEx? Mandeep Chawla: Yes. Karl, it's Mandeep here. Thanks for the question. So we've been very disciplined on our capital expenditures for many, many years. We're tracking towards 1.5% right now for this year. And as the revenue continues to grow, the dollars obviously are growing as well. So we're on track on just under $200 million of CapEx this year. We're anticipating right now somewhere between $300 million and $400 million of CapEx next year. And these are investments that are tied to customer programs. We don't have a built-in and they will come approach. It's always tied back to customer engagement. And so we have very good visibility on the demand profile going out multiple years. So it gives us confidence to be able to invest in these types of areas. The only other thing I'll mention, and then I can have Steve ask a little bit or comment a little bit on the customer engagement on our expansion. But I just want to make a note that only about 40 basis points of our CapEx spend is maintenance. And so if we're going to spend 2% next year, then that means 1.6% is all on growth, and that gives us a tremendous amount of discretion on where we put those dollars. And so we think that right now, that's sufficient. Stephen Dorwart: This is Steve again. With regard to visibility to forecast and customer demand, we currently have about 12 to 15 months of real solid forecast inputs and demand inputs from our customers, largely around their 2026 budgeting and spend commit processes. But in many cases, we have visibility beyond that. In some cases, for specific customers, specific programs. There's a certain amount of ASICs, for example, that they may have committed to, and it gives us some assurance as to the longevity and the size of the overall program. So we do get extended visibility through being similar to that. Karl Ackerman: Understood. And if I could for a follow-up quickly. Your growth in CCS is notable, which appears driven by your networking switch opportunity in HPS. Could you speak to the relative mix you have today on 800-gig switch ports? And I suppose as you think about the trajectory of 1.6 next year, could you speak to the opportunity you have in liquid-cooled-based switches, which appear to be a growing opportunity for you, both in '26 and '27? Stephen Dorwart: Yes. Karl, from a number perspective, why don't we start, we've been seeing tremendous growth in 800G this year to the point where we'll end 2025 with roughly a 50% split between 800G and 400G in terms of the products that we're delivering. As we look into 2026, we're seeing the 800G demand, in particular, accelerating. There are going to be projects where 400G continues to be used. We've been given some examples by our customers where 400G is expected to be used for many years still. But the growth is primarily going to come from 800G. On the 1.6T program, we won a number of them. And we have one customer right now where we have visibility to that ramping towards the back end of next year. And so one of our customers will be really taking up their 1.6T awards, but then we anticipate further 1.6T ramps as we go into 2027. And so the portfolio is shifting to the higher-end technologies as we would have expected. Jason can add on that. Jason Phillips: Karl, I would say when you look at where we carved out this industry-leading position in networking, it started in 400-gig, and we were able to translate all of those engagements into 800-gig. And those engagements have been expanding incrementally to new opportunities, and we fully plan to translate all of our 800-gig engagements into 1.6T as well, and we're on track to do that. And liquid cooling plays a key role in those solutions, particularly on 800-gig and 1.6T. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: And maybe if I can start with the digital native customer that you're expecting to ramp in 2027. And we've seen multiple sort of announcements from some of your partners around sort of the sizing here. But trying to sort of think about how should we think about the magnitude of the implications for you starting in 2027. Maybe if you can give us something to point us in the right direction of sizing relative to your enterprise business today? And do you have -- what are you thinking in terms of capacity to then sort of cater to that magnitude of the digital native customer ramp? And I have a quick follow-up. Mandeep Chawla: Yes. Samik, it's Mandeep here. Thanks for the question. So we're very excited still about the engagement we have with this digital native customer. We are very actively engaged with them on the design cycle and that's going to continue as we go through next year. Our plan of record right now is that we would not see mass production begin in 2027. And so when we've given an outlook of $16 billion for next year, that does not include any meaningful level of revenue coming from this digital native opportunities. The gate to that is really in terms of timing is really going to be around silicon availability. And so if silicon is available sooner for mass production, then we may be able to produce sooner. Right now, our assumption is that we will receive samples in the middle of '26 and then again, go towards mass production in '27. From a capacity perspective, we are working with the customer very closely on where -- how we can support them both in Asia as well as in North America. When we are talking about 2% to 2.5% of CapEx for next year, that's inclusive of the capacity that we're going to need to deliver what we're already seeing in 2027. Jason can add a little bit more. Jason Phillips: Yes, Samik, I would say, with all the growth we're seeing across the portfolio, we're also excited about what I call a healthy competition on who will be our largest customer in the next 2 to 3 years. Stephen Dorwart: So the way to think about it right now, Samik, is going to be that we believe it will be at least a few billion dollars in the first year, multiple billions of dollars, I'll say. One of the areas, of course, that we still need to line up on is the treatment of the silicon isn't included or not included and we're still having those conversations with our customer and our providers. Samik Chatterjee: Okay. Got it. And a quick sort of follow-up on 2027 outlook. I know you're saying the growth momentum continues into 2027. And I didn't hear you explicitly say that -- so just wanted to confirm from everything you're telling us in terms of new program ramps in 2027, the growth acceleration in 2027 should be higher [ rated ] to the growth that you're forecasting for 2026, just with the digital native customer, the 1.6T ramps. Is that a fair statement? Stephen Dorwart: Yes, of course. So I'll give you a framework on how to think about 2027. Obviously, we're not going to be giving numbers at this point. It's just too far out. But we are very confident right now on the demand profile that we're seeing and the awards that we've been receiving over the last 12 months or so, in many cases, don't have programs that even ramp until 2027. That being said, it's probably 12 months too early to talk to you about what 2027 really is going to look like. The way I would just think about it right now is our CCS business grew by about 40% in 2024. It's on track to grow about 40% right now in 2025. And our outlook or guidance for next year is essentially implying about 40% growth again in CCS in 2026. And so at this point, I think it's fair to continue to extrapolate that as you bring it forward. We do have many opportunities that could be -- that could accelerate that and could go above. So to your point, it could be through the digital native win that we're ramping as well as other really strong programs that we've won with some of our largest hyperscalers. But right now, we think at least 40% into 2027 is what we're -- we have visibility to. And then just on the ATS side, ATS this year is going to be approximately flat or we said going into 2026, it's going to be low single digits. The growth should resume at a higher level as you go into 2027. And I think the way to think about that right now is high single digit. Operator: Your next question comes from the line of Ruben Roy with Stifel. Ruben Roy: Sorry about that I was on mute. Mandeep, maybe to follow-up on that just last topic. You talked about potential additional operating leverage beyond '26. I'm just wondering, how you're measuring the potential for operating leverage relative to this really strong revenue growth that you guys are seeing, especially as we went through some of the new design activity, kind of increasing design activity with your customers, rack levels, designs, et cetera. Just do you have some thoughts on longer-term operating leverage? Mandeep Chawla: Yes. Thanks for the question. So we continue to see the benefits of both operating leverage as well as positive mix in our numbers, on track for about 7.4% operating margin at the company level for 2025, and we're guiding that, that can expand now going into 2026. We do continue to believe that there's opportunities for even more margin expansion. But again, I'm not giving formal numbers for '27 at this point. When you look at our ATS business, the business has done very well on doing some selective pruning in order to really focus on the highest value engagement. And so we're really happy with the margin expansion that we've seen in ATS already. And we think that there's opportunities to continue to expand and get it above 6%, hopefully in the near to medium term. On the CCS side, which is operating in the low 8s right now, what's working to our favor is the fact that we will continue to be seeing growth in networking, which are primarily our HPS products. And our HPS products are accretive to the company and accretive to CCS. And so as we see growth in that area, we will continue to see some margin upside. That being said, we do continue to evaluate how we can support our customers on multiple areas such as doing complex rack integration work. And so sometimes that will be margin dilutive. And so we're always managing mix, but we think that there's a lot of opportunities for expansion. Ruben Roy: Thanks for that detail, Mandeep. And if I could ask a question -- a follow-up question for Jason. A lot of discussion around scale up networking just in recent weeks, with a new standard announced, et cetera. You talked about a multibillion-dollar new market opportunity for Celestica, specific to scale up. And I'm wondering if you can maybe hash out a little bit around that opportunity relative to scale out. Do you have some sort of advantage as you discuss scale up with your customers, given how well you're doing on the scale-out switch side? And maybe just a little bit around the competitive environment, how you see that playing out over the next several years as you think about your scale-up opportunity. Jason Phillips: Yes. Ruben, yes, I would say we're well positioned for the scale of opportunity, and that comes from incumbency, and I would say, capability. When you look at, as you mentioned, a lot of where we carved out this industry-leading position in 400G, it started largely and I would say, scale out. And now it's starting that capability, and that value proposition is very much applicable to scale up. We've talked about a large digital native where we provided a fully orchestrated rack and solution. I mean that's a great example of a great -- a significant scale-up opportunity. So I would say that we have a large and growing funnel of opportunities, and we're going to be very mindful about where we have our most strategic engagements as we continue to grow and look at taking share. Operator: Your next question comes from the line of Tim Long from Barclays. Timothy Long: Yes, Two, if I could as well. First one on kind of HPS. I think this digital native is a good AI/ML win for digital native. So curious about the pipeline that you're talking about for other kind of compute-related opportunities. Could you just talk about that funnel and how we should think about new opportunities being HPS or not, number one? And then number two, just back to that -- the networking piece. As you look at new customers outside your large [indiscernible], should we assume those are mostly SONiC related? Or do you see opportunities for other Neo clouds or others to maybe develop their own switching stack where -- and what are the competitive differentiations for you with SONiC versus other proprietary NOS? Jason Phillips: Tim, Jason here. So on AI/ML compute, I mean you commented on it, I think digital native win that we've talked about would be a great example of where we've deployed our entire value proposition into a fully orchestrated solution, driving an AI/ML solution. We talked last year a bit about POCs that we're doing with silicon providers, and we talked about the AMD MI355 example, and that POC has garnered a lot of attention, I would say, in the industry. And so we have a large and growing funnel of opportunities in AI/ML. But we're going to be very, I'd say, very focused on where we have the strongest strategic alignment and where we believe the program will be successful in the AI architecture and ecosystem. So growing funnel of opportunities, but we're going to be careful about where we engage and where we believe the adoption rates will be higher. Unknown Executive: Yes. With regard to these opportunities, I think one of the things to consider is just the strong position that we have in networking and its applicability to these AI compute kind of opportunities. So there's a lot of things that transfer over the network connectivity, the signal performance, power, density, design, all those things are also very applicable and relevant in the AI space. So we continue to leverage our networking strength to win in new opportunities in the compute space. With regards to software, most of our hyperscale customers drive their own NOS, but they rely on us to provide the key layers in the stack and have full testing and qualification capabilities of their software on our system. There's also more comprehensive choices that are emerging now, and our customers are evaluating those. We still have a full -- fully capable and broad software engineering team, and we're working to support many of our customers with these new software technologies. And we continue to support them at the firmware level in most of the networking and compute systems that we do today. Operator: Your next question comes from the line of David Vogt with UBS. David Vogt: So maybe for Rob or Mandeep, I want to unpack the CCS business for a second. Obviously, switching has been sort of the driver of the business the last 2 to 3 years. And you kind of talked about over the next several years, switching growth or maybe data center CapEx growth being kind of in the mid-20s. Are you sort of inferring that ultimately, the bigger driver over the next 3 years plus will be sort of the compute opportunity along with ancillary opportunities like optical as we think about '27 and '28? Just trying to get a sense for how you're thinking about the composition of product within broadly defined CCS going forward. And then I have a follow-up. Unknown Executive: David, I'll start, and I'll ask Jason to chime in. We have a very strong position with the hyperscalers on networking across the board, given that position, we're looking to grow our share of wallet into other areas. And one of them, in particular, we do AI/ML compute. And with others, we're in several advanced conversations to expand our solutions to them, especially on the HPS front where we're not just build it, but we actually have some engineering and design content in supporting them. Jason elaborated on a couple of those opportunities, and I'll turn it over to him for additional color. Jason Phillips: David, so thinking about the CCS business overall, I mean, we've got a lot of strength in our hyperscaler digital native portfolio in networking, AI/ML, specifically on the custom side, there's incremental opportunities we've talked about at scale up as well as merchant AI/ML solutions. So there's a lot of growth, a lot of potential, a lot of funnel of opportunity there. When you look at the value proposition that got us where we are, there's a lot of opportunity to take that and pivot into the very large enterprise space. And we're going to do that in a very disciplined way. I've talked about that in the past. We have a portfolio solutions business today where we have branded product. We have SONiC, we have Celestica SONiC offering that's enabling that. We have a growing services capability that's rounding out the capability that will allow us to play more effectively in enterprise as well as hyperscaler. So we're effectively doubling down on our enterprise efforts. I recently just brought in Ganesha Rasiah. He's our Senior Vice President and General Manager of our Enterprise line of business, and he will be leading the charge as we chart our course on where and how we're going to double down in enterprise. And it's going to be underpinned by all of this value, the scale, this capability that we've established in our hyperscaler space and applying it to specific markets within enterprise to be successful. Thomas Ingham: Great. No, that's helpful. And maybe just maybe one more for Jason then. On the enterprise portfolio since you're talking about expanding capabilities and bringing in new talent looking for new opportunities, you did reference, I think, in the deck an opportunity for a new hyperscaler application in storage for '26. Can you kind of expand upon that, kind of what that actually is and maybe share what the customer is looking for and what you're bringing to that solution going forward? Jason Phillips: Yes. Maybe I'll start, David, and then I'll ask Steve to weigh in as well. I mean we do think storage is -- it's going to be an opportunity with AI. There's more and more data that is out there. And we're seeing it specifically, we've got some traction in the hyperscaler space on a specific program where there's a specific use case, I would say, that's being adopted, but we also think there's more opportunity for storage and enterprise as well. We've had a solid high-end storage business in enterprise for a long time. We're well positioned with the market leaders there. And I think storage is an opportunity as AI continues to deploy. Stephen Dorwart: Yes. And this is Steve. I will just add to that, that we have had some success, as noted here with hyperscalers and providing custom storage solutions to them. We're being very selective about where we engage and finding areas where we think we can differentiate and bring value to our customers. And so it's a narrower scope today for us, but there are opportunities, and we intend to continue to build on the success that we've had there. Operator: Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Thanos Moschopoulos: Can you provide some color with respect to the growth that you're expecting in CCS outside of hyperscalers and digital natives, so like OEMs and other types of customers, what would your outlook be for that in '26 and beyond? Mandeep Chawla: Yes, in terms of the incremental growth opportunities, we've talked about scale up is a very large market where we're getting a lot of traction. I would say, while our AI/ML business has been largely underpinned by the custom level solutions, there is a growing set of opportunities. We're getting a lot of traction in merchant-based AI/ML systems that represents a number of opportunities for us. And then I'd say fully orchestrated rack level solutions continues to be an opportunity as well as the services that we were wrapping around our solutions as well. Thanos Moschopoulos: Specifically in terms of, I guess, OEM type customers and maybe enterprise campus type opportunities or other beyond hyperscalers, digital natives. Is that forecast to grow meaningfully in '26, or is the growth in '26 primarily driven by your core hyperscalers? Unknown Executive: The growth is underpinned by our hyperscalers. They are leaning heavily into both switching as well as compute. But the rest of the portfolio is still growing as well. We have a large optical program that goes beyond the hyperscalers. We're seeing very nice growth in that area, and that product be used directly into data centers. We've announced that we are building a 1.6T switch with an OEM on their behalf. And so that's going to see some growth. But we do -- there is a very high level of growth coming from hyperscalers versus the others. Operator: Your next question comes from the line of Steven Fox with Fox Advisors. Steven Fox: Just one question on the HPS business. I know you don't give margin -- specific margins on the business. But I was wondering, given all the programs you see in the future and how you may be vertically integrating more, sometimes, I guess, additive, sometimes dilutive to margins. How do you see the direction of HPS -- just the HPS business going and why? And of course, that would be excluding any kind of changes in your consignment activities like with the new program. Mandeep Chawla: Yes. So we're very excited about what's happening in the HPS portfolio. We're on track this year to spend probably about $120 million on R&D. Next year, we're going to be increasing that by at least 50%. It could be as high as $200 million. And that's just reflective of the engagement that we're tied to. Today, this year is probably going to be about a $5 billion portfolio. That $5 billion is the vast majority of it is switching. And in the switching scenario, it actually does include the silicon, as you know, so it's turnkey. And yet, we still make very good margins in this area, margins that are accretive to ATS right now, which is 8.3%. I know the question sometimes comes what's the exact number, but what we just say is it's accretive. As we look at the portfolio going forward, we continue to see very strong growth on the networking side, but now we're starting to see compute come in as well. And so as compute comes in, especially as you think about this large digital native win, we've got to think through still on how sort of things can be provided. But today, our compute programs [indiscernible] to us. But overall, we are getting paid for the value that we're bringing forward on the engineering side. Operator: Your next question comes from the line of Paul Treiber with RBC Capital Markets. Paul has actually lowered his hand. So we will move on -- and your next question comes from the line of Robert Young with Canaccord Genuity. Robert Young: The 40 basis points of margin expansion -- operating margin expansion in the 2026 guidance, just against all of the big jump in scale and some of the shift to higher-end networking technology and the software mix. It just seems a little bit conservative. And so relative to some of your networking peers, margins are lower. And so I was wondering, is pricing a strategic advantage for you? Or are there any headwinds to note? I think you already mentioned the fact that the full rack solution isn't ramping until 2027. But are there any other headwinds there to note to better put that 40 basis points expansion in the context? Mandeep Chawla: Yes. So I'll start and then I'll let Jason or Steve talk about the commercial environment and our ability to capture share with price. But essentially, what's happening right now is that when you look at the 7.8% next year, and again, you're putting 40% growth on the CCS business, maintaining the margins that CCS has and maintaining the margin that ATS has will yield that 40 basis points improvement. We are working towards expanding margins in both businesses, and we do believe that, that is an opportunity. It's early on in the year, and so this isn't that different than the approach that we've taken in previous years, which is we will guide margins in terms of where we are today, knowing that we are working on various levers to expand that. But I would say more to come as we go through 2026. Jason Phillips: Rob, and I would just comment on where we're seeing the values where we're driving the differentiation from our competitors. It's largely a technology leadership, customization for optimization and then our advanced manufacturing processes and execution. I mean we've pivoted now that we're into platform solutions, we pivoted from a technology partner to a technology leader. We believe we were the first with a fully functioning 800-gig switch. We believe the same on 1.6T. Those are examples of technology leadership that our customers are relying on. Secondly, the ability to optimize -- to customize these solutions for our customers' specific architectures for optimization in those workloads in those large language models, that continues to be a strong area of differentiation for us. And then the last piece would be the advanced manufacturing processes and capabilities, which I believe is often underestimated and undervalued. It's very difficult to take these very complex designs and put them through the new product development process and then ramp at scale into production, it's not easy to do. And those continue to be areas that our customers value. Stephen Dorwart: This is Steve. I would just build on what Jason had said there. When we deliver this differentiated value, and we do it reliably and consistently over several different platforms or iterations of -- new iterations of same platforms, there's a lot of strengthening of our incumbency and our customers start to recognize the value of our solutions and we're less compelled to compete on price. And so that's a key part of sustaining and maintaining the margin trajectory that we have. And it's also a function of the opportunities that we choose to pursue. So we have a tremendous amount of opportunities in front of us. We're moving away from the more transactional engagements and focusing on those operations -- those opportunities where we can really differentiate, as Jason said. Unknown Executive: And Rob, I would just add to that. There's -- in the -- every now and then, we'll see a competitor will -- I mean the competition is stiff and there's a lot of competitors coming in and we'll lead with price. And every now and then we'll see someone will chase a program on price only that 3 to 6 months later haven't come back due to challenges with execution and delivery. Robert Young: That sounds great. Second question for me would be just on the shorter refresh cycle you noted in networking and maybe the quicker move to 1.6 to 3.2. Does that make it harder for new entrants? I would assume that in existing data center deployments, it's very hard to dislodge Celestica. But maybe if you could talk about that as it relates to greenfield and new build, and I'll pass. Jason Phillips: Yes. Maybe, Rob, I'll start, and then I'll hand it over to Steve. So as you -- first of all, technology, the generations are getting quicker and it's getting faster. So if you're behind, they're going to have a harder time keeping up. So we saw a lot of folks struggle in 400 as we went into 800. As you go in from 800 to 1.6, it's getting faster and it's getting harder. So if you weren't optimized around 800, you're going to really struggle to get into 1.6T and the same applies to 3.2, et cetera, et cetera. So we're well up the curve. We're a technology leader in the space. We've been making significant investments. We've been building talent for many years to get to where we are, and we don't plan on slowing down. Stephen Dorwart: Yes. This is Steve. Just to build on what Jason has said there, our recent experience with 1.6T is that we've had demonstrated very strong performance here in delivering solutions from the initial receipt of silicon to complete functional power on the systems. We've done it in days. And I think Broadcom knows would acknowledge that typically with some of our OEM and ODM competitors, they measure that achievement in terms of weeks. And so I think that what we've talked about, the carryover from one iteration to the next is just proven to be true for us as we support our customers. Operator: Your next question comes from the line of Paul Treiber with RBC Capital Markets. Paul Treiber: Just a question on the long-term visibility that you're getting from customers at this point. Are you seeing it reflected in the program wins? Are there either explicit volume commitments? Or are there other commitments or the nature of the contracts that allow you to have that longer-term visibility that maybe you didn't have several years ago? Stephen Dorwart: This is Steve. Yes, I think it's a good question. I think that we'd like to have as much visibility as we can to the future of these programs. But we do have some comfort in that we continue to see awards come to us for the duration of the program and the follow-on next generation of those programs tend to be awarded to us as well. So -- so we do have longer-term visibility of the programs we currently have and what's coming next down the funnel. So overall, very good. Mandeep Chawla: Yes. Just maybe as an example on the compute program that we have right now, which is going to be very healthy in 2026, and it's ramping very nicely right now. That is already in -- we've already won the follow-on programs for that program to the point where the silicon hasn't even been finalized yet because it's going to be on the next-generation silicon. And so we see those ramping into 2027. And then we've talked about the digital native win as well, which is a program award that will be ramping in '27. And then our R&D efforts continue to be working on the next generation of products as well, which we know will get adopted eventually by the market. We're already working on 3.2T. And while we don't expect it to be mass production until maybe 2028, we would anticipate that when that migration happens from 1.6 to 3.2, that we're going to be in a full position to win that share. Unknown Executive: Yes. And Paul, I would just add to that. Steve mentioned forecast visibility between 12 and 15 months and in some cases, beyond. I mean there are certain programs that have very specific capability requirements where we're talking even beyond that. So as we look at the power requirements, the capacity that will be required beyond what I'd call an extended forecast outlook, we're in deep conversations with capacity planning, power planning well beyond, I'd say, the '26, '27 time frame that we're accounting for as we make our investments and our expansion plans. Paul Treiber: And a follow-up question. The -- to what degree are you shaping -- proactively shaping the portfolio, either disengaging on less strategic programs? And then on the strategic programs. Are there any metrics you can share in terms of like win rates or success on rebidding the next generation of those contracts? Todd Cooper: Paul, thanks for the question. This is Todd within ATS. Yes, I would say we are just conducting a comprehensive review really on an ongoing basis of our portfolio doubling down, as I said in my comments, on the larger Tier 1 customers and then using this opportunity really to take out or exit reshape, if you will, margin-dilutive customers. That's why you're seeing the improvement in margin in ATS this year. And then we've had a number of smaller customers where candidly, the climb is not worth the view in terms of just the effort to support their businesses. They're nonstrategic. In some cases, they're tied to our smart energy portfolio, which given the one big beautiful bill and the loss of tax incentives and the change in dynamics around clean energy are impacting their end demand. So we're using this opportunity then to disengage and exit from those smaller customers, nonstrategic customers, margin-dilutive customers really to strengthen the ATS portfolio and to improve our overall margin profile as well as our growth going forward. Unknown Executive: Paul. From a CCS perspective, we are, from a hyperscaler digital native perspective in a great spot strategically. We feel very good about that. And then enterprise, largely the same. There is a smaller customer where we are no longer strategically aligned, but it's not material to the overall business. And I'd say overall, from a CCS perspective, we feel great about where the portfolio is. Operator: Your next question comes from the line of Todd Coupland with CIBC. Thomas Ingham: Great. I had a question on the switching business. I'm wondering with your largest customers, are you single sourced or are there dual source suppliers in any of those? Stephen Dorwart: This is Steve. With the majority of our largest customers, we tend to be the preferred supplier when it comes to new technology. And so we're often exclusive for some period of time through the development of the product through NPI and then to ramp. As Jason mentioned earlier, we do have excursions from time to time where our customers will look at dual sourcing or multi-sourcing maybe for business continuity purposes or maybe to chase a lower price for some period of time. But we tend to see a lot of those come back to us. While we maintain the preferred position on new products, we see some of the next-generation products come back to us as well for an exclusive period again through the development and through NPI and RAN. So that's been a pattern that we've seen repeat with most of our hyperscale customers over the various product transitions. Thomas Ingham: And I just wanted to circle back to the 1.6. You were quoting some market share stats earlier in the presentation. Can you just remind us what that win rate implies for ports, I guess, through '26 and '27 on the 1.6? Unknown Executive: Yes. What I would say, Todd, is, as I mentioned earlier, where we've had our engagements in 800-gig, we're on track to have those engagements in 1.6T, and there's incremental opportunity beyond that in the scale-ups market in particular. And as I noted, we have a healthy funnel. We're excited about it, and we believe it's going to be a big growth driver for us. Mandeep Chawla: Yes. I mean, Todd, we're winning our disproportionate amount of share as the technologies become more advanced. And so some of the materials in the slide we were highlighting when you look at the Ethernet switch market share, we're above 50% this year. And last year, it was 40%. As there is further deployment of 800G switches and as 1.6 starts to get delivered, we would anticipate that, that will continue to be positive for us. But we are -- we do continue to win the funnel of programs, which is what we're [indiscernible]. Stephen Dorwart: This is Steve. I can't give you 4 counts, but I can tell you, we have 10 programs currently underway and 1.6T. And we've had a significant share win with a number of customers on 1.6T. Operator: Your final question comes from the line of Jesse Pytlak with Cormark Securities. Jesse Pytlak: Just on your optical programs, can you speak to the breadth of customers that you're engaged with on these? And are these programs commonly becoming bundled with switching programs at all? Jason Phillips: Yes, Jesse, so we have a few primary optical customers where we have deep engagements and we're making POCs and investments in that space. And there is a strong correlation between optical and networking. And we think when you look at things like CPO technology as an example, we think we'll start to see some deployments in 1.6T, and we really think we'll start to see more CPO ramp in 3.2T as an example. Stephen Dorwart: Yes. This is Steve. I would just add, as Jason mentioned, the co-package optic outlook. We still -- we do see that it's going to be a dual existence for some period of time. So pluggables won't go away, but there will be a hybrid deployment of different strategies around co-packaged optics. And many of the optical capabilities that we're developing today will be very applicable when it comes to embedded or co-packaged optics in the future, which designs. Operator: And there are no further questions at this time. I will turn the call back over to Rob Mionis, CEO, for closing remarks. Robert Mionis: Thank you, and thank you all for your continued support. We're pleased with the results to date and our continued momentum into Q4 and into 2026 and beyond. We're also looking forward to seeing you later on this afternoon at our events luncheon. Thank you again, and have a wonderful day. Operator: And that does conclude today's call. Thank you all for attending. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Celestica Q3 2025 Financial Results Conference Call and 2025 Investor and Analyst Day. [Operator Instructions]. I will now hand the conference over to Matthew Pallotta, Head of Investor Relations. Please go ahead. Matthew P.: Good morning, and thank you for joining us on Celestica's Q3 2025 financial results and investor and analyst day conference call. On the agenda for today's call, we will begin with our third quarter financial results, followed by our 2025 Investor and Analyst Day. At the conclusion of the prepared remarks, we will open up the lines for Q&A. Joining us on today's call to provide prepared remarks will be Rob Mionis, President and Chief Executive Officer; Mandeep Chawla, Chief Financial Officer; Jason Phillips, President of our Connectivity and Cloud Solutions segment; and Todd Cooper, President of our Advanced Technology Solutions segment. They will also be joined by Steve Dorwart, Senior Vice President and General Manager of Hyperscalers for the Q&A portion of our call. Please note that during the course of this call, we will make forward-looking statements, including statements relating to the future performance of Celestica, business outlook and anticipated trends in our industry and their anticipated impact on our business, which are based on management's current expectations, forecasts and assumptions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. For identification and discussion of these material assumptions, risks and uncertainties, please refer to our public filings with the SEC on SEDAR+ as well as the Investor Relations section on our website. We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. In addition, during this call, we will refer to various non-GAAP financial measures. We have included in our earnings release found in the Investor Relations section of our website, a discussion of those non-GAAP financial measures and a reconciliation to the most comparable GAAP measures. Unless otherwise specified, all references to dollars on this call are to U.S. dollars. All per share information is based on diluted shares outstanding and all references to comparative figures are a year-over-year comparison. Let me now turn the call over to Rob. Robert Mionis: Thank you, Matt, and good morning, everyone, and thank you for joining us on today's call. We are pleased to have the opportunity to speak with you today and to share some of the exciting developments in our business and our plans for the future. Before diving into the Investor and Analyst Day portion of our call, Mandeep will begin with a review of our third quarter results and provide our guidance for the fourth quarter. Mandeep, over to you. Mandeep Chawla: Thank you, Rob, and good morning, everyone. In the third quarter, we once again saw exceptionally strong demand in our CCS segment, which drove very strong overall performance across our key financial metrics. Revenue of $3.19 billion was up 28% and above the high end of our guidance range, driven by a very strong demand in our communications end market. Our non-GAAP operating margin was 7.6%, up 80 basis points, driven by higher margins across both of our segments. This once again represented the highest quarterly non-GAAP operating margin in the company's history. Our adjusted earnings per share for the quarter was $1.58, exceeding the high end of our guidance range and an increase of $0.54 or 52%. Moving on to some additional metrics. Adjusted gross margin was 11.7%, up 100 basis points, driven by higher volumes and improved mix in both segments. Our adjusted effective tax rate for the quarter was 20%. And finally, strong profitability and disciplined working capital management resulted in adjusted ROIC of 37.5%, up 850 basis points versus the prior year period. Moving on to our segment performance. Revenue in our ATS segment for the quarter was $781 million, down 4%, slightly lower than our guidance of a low single-digit percentage decline. The lower performance year-over-year was primarily driven by portfolio reshaping in our A&D business as discussed in past quarters. Our ATS segment accounted for 24% of total company revenue in the third quarter. Revenue in our CCS segment was $2.41 billion, up 43%, driven by very strong growth in our communications end market. The CCS segment accounted for 76% of total company revenue in the quarter. Our communications end market revenues increased by 82%, above our guidance of low 60s percentage growth. The growth was driven by very strong demand in data center networking, primarily for ramping 800G switch programs across our largest hyperscaler customers, complemented by solid demand in our optical programs. Revenue in our enterprise end market was lower by 24%, which was in line with our guidance of a mid-20s percentage decline due to a technology transition in an AI/ML compute program with a hyperscaler customer. Our HPS business generated revenues of $1.4 billion in the third quarter, representing growth of 79% and accounted for 44% of total company revenue. The very strong growth was driven by accelerating volumes in our ramping 800G switch programs. Moving on to segment margins. ATS segment margin in the quarter was 5.5%, up 60 basis points, primarily driven by improved profitability in our A&D business. CCS segment margin in the third quarter was 8.3%, an improvement of 70 basis points, driven by a higher mix of HPS revenues and benefits from operating leverage. During the quarter, we had 3 customers that each accounted for at least 10% of total revenue, representing 30%, 15% and 14% of revenue, respectively. Moving on to working capital. At the end of the third quarter, our inventory balance was $2.05 billion, a sequential increase of $129 million and a year-over-year increase of $226 million. Cash cycle days during the third quarter were 65, an improvement of 1 day versus the prior year and sequentially. Turning to cash flows. We generated $89 million of free cash flow in the third quarter, bringing our year-to-date free cash flow to $302 million. Capital expenditures for the third quarter were $37 million or 1.2% of revenue, while capital expenditures year-to-date were $107 million and also 1.2% of revenue. We anticipate capital expenditures to increase in the fourth quarter and for total annual CapEx to be approximately 1.5% of revenue. Turning to our balance sheet and capital allocation. At the end of the quarter, our cash balance was $306 million, while our gross debt was $728 million for a net debt position of $422 million. We had no draw outstanding on our revolver, leaving us with approximately $1.1 billion in available liquidity. Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.8 turns, an improvement of 0.1 turns sequentially and 0.3 turns versus the prior year period. As of September 30, we were in compliance with all financial covenants under our credit agreement. During the quarter, we did not repurchase any shares under our normal course issuer bid, and our year-to-date repurchases stand at $115 million. Looking forward, we will continue to be opportunistic towards share repurchases. And as such, we are in the process of renewing our NCIB program, which is set to expire on October 31. We expect to receive the necessary regulatory approval and to commence the new program in November. Now moving on to our guidance for the fourth quarter. Similar to last quarter, we highlight that our guidance figures assume no material changes in tariff or trade restrictions compared to what is in effect as of October 27, as any changes to these policies and their potential impact on our results cannot be reliably predicted at this time. Fourth quarter revenue is projected to be between $3.325 billion and $3.575 billion, representing growth of 36% at the midpoint. Adjusted earnings per share are anticipated to be between $1.65 and $1.81, representing an increase of $0.62 at the midpoint or 56%. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-GAAP operating margin would be 7.6%, an increase of 80 basis points year-over-year. We expect our adjusted effective tax rate for the fourth quarter to be approximately 20%. Finally, let's review our end market outlook for the fourth quarter. In our ATS segment, we anticipate revenue to be down in the low single-digit percentage range as growth in our Industrial and HealthTech businesses are being offset by lower volumes due to portfolio reshaping in our A&D business and market-related softness in our capital equipment business. In our CCS segment, we anticipate revenue in our communications end market to grow in the high 60s percentage range, supported by continued strong demand for our data center networking switches, including ongoing ramps in multiple 800G programs. In our enterprise end market, we expect to resume growth in the fourth quarter with a low 20s percentage increase in revenue, driven by the ramping of a next-generation program for hyperscaler application in AI/ML compute. Based on our guidance for the fourth quarter and strong year-to-date performance, our latest 2025 financial outlook now calls for revenue of $12.2 billion, up from $11.55 billion previously, reflecting year-over-year growth of 26%. Our adjusted EPS outlook has increased from $5.50 per share previously to $5.90 per share, implying growth of 52%. Our non-GAAP operating margin of 7.4% remains unchanged. We are also increasing our free cash flow outlook for 2025 from $400 million to $425 million. And with that, I'll turn the call back over to Rob to begin our 2025 Investor and Analyst Day. Rob, over to you. Robert Mionis: Thank you, Mandeep. In the rest of our time this morning, we would like to provide you with a view of where our business stands today and the strategy that got us here. Importantly, we'll then share our view on where we are headed as a company, including our significant market opportunities and the investments we are making in our operations and technology road maps. Celestica is our global technology platform solutions company. As our fundamental value proposition, we leverage vertically integrated capabilities and provide customized solutions enabling our customers to deploy leading technologies at scale, achieving rapid speed to market. Our goal is clear: to lead and accelerate market advancements in our focused technologies. We achieved this by proactively investing in next-generation technology road maps and the advanced capabilities required to deliver those technologies to market. Celestica leverages our comprehensive vertically integrated capabilities to deliver leading technology platform solutions. We offer complete end-to-end capabilities, starting with design and engineering through manufacturing and supply chain management to software and aftermarket services. The depth of our system-level capabilities and expertise is best reflected in our technology solutions for the data center across networking and AI/ML compute. However, we leverage a set of competencies and strengths across a range of markets and technologies. Customers have the flexibility to leverage all or any combination of our capabilities to build tailored platform solutions for their entire product life cycle. So let's look at where we stand today. As Mandeep shared, we are currently delivering the strongest financial performance in the company's history. We will dive deeper into both of our segments shortly to discuss the fundamental factors driving our performance and our plans for the years ahead. However, first, I would like to take a brief look back at how we arrived here. When I took the CEO role in late 2015, my first action was to solidify the core leadership team. However, the real inflection came in 2018 when we began executing a comprehensive transformation to reshape our business. This was a fundamental shift. We aggressively ramped our investment in design engineering and technology road maps for the data center, while we deliberately disengaged from low-margin, low complexity programs that offered limited opportunity for differentiation and value add. By 2020, we introduced our 400G switch, marking a pivotal moment in our HPS business, establishing our presence in the high-performance Ethernet switch market. Since then, we have rapidly grown our hyperscaler portfolio, reshaped the margin profile of our business and entrenched our position as a technology leader and key enabler of AI infrastructure solutions for the world's largest data center customers. Yet the changes made to date may seem modest in comparison to the opportunities that lie ahead. We are currently navigating the most rapid period of change in our company's history, and the pace of that change continues to accelerate, driven by the massive investments in AI infrastructure by our customers. Celestica's culture is rooted in the pursuit of progress, and we are incredibly excited and motivated by the opportunities in front of us. During this period, we have seen accelerating momentum in the growth of our business, and we are capitalizing on this strength. Based on our 2025 outlook, we are on track to deliver our strongest performance on record. There are a number of key drivers supporting the sustained improvement in our performance. The first driver is capturing share in high-growth markets with the cornerstone being our presence in AI data centers. Next, demand for our HPS product offerings are rapidly shifting our entire portfolio toward higher complexity engagements, where our design collaboration and value add are critical to our customers' success. In addition, growing volumes are fueling improved operating leverage, and we relentlessly drive productivity and efficiency across our global network with a strong focus on operational excellence. Our global network operating across 16 countries is essential part of our value proposition. Our customer-centric network strategy provides a reliable and consistent supply chain solution, allowing our partners to derisk their geographic exposure, a capability that's essential in the current climate of geopolitical and trade uncertainty. We have been and continue to make significant expansions and upgrades to our network funded by operational cash flow to support the growing demand and program ramps with our AI data center customers. Demand for North American capacity remains strong, especially within the United States. To accommodate this, we are continuing to deepen our footprint in Texas. We're expanding square footage and increasing our power envelope at our Richardson site with capabilities to support the production of thousands of additional advanced AI racks annually. We are adding to our global design engineering network with a new hub in Austin for closer customer collaboration. We are also in the process of finalizing plans for an additional large-scale manufacturing site in the state to support continuing growth with one of our largest customers. We are equally committed to supporting our customers by investing for growth in Asia, where we continue to make significant additions to our largest campus in Thailand. We are seeing incredibly strong demand from hyperscaler and digital native customers for tight capacity with significant production ramps planned to commence through 2027 and into 2028 across networking and compute. This proactive and regionalized investment strategy ensures we retain a flexible and reliable network positioned to meet our customers' evolving needs and accommodate the significant growth in demand from our customers. Operational excellence is ingrained in our company's DNA and an integral pillar of our competitive differentiation and value proposition. The Celestica operating system is our standardized framework that ensures unmatched consistency in quality, reliability and on-time delivery across every one of our global sites as we deliver hundreds of highly complex programs simultaneously. One of the core components is our culture of accountability, emphasizing execution and safety. This is reflected by our performance in these areas, tracking well above industry benchmarks, including 0 critical excursions to customers. We pride ourselves on our customer-first mindset, evidenced by our history of deeply entrenched collaboration in design and engineering, where we have positioned ourselves to act as an extension of our customers' teams. Another operational priority is our continuous investment in our advanced manufacturing capabilities, including automation and testing, which are critical to enabling product road map development and speed to market in deploying new technologies. Next, I want to briefly detail a case study that will help bring to life our competitive differentiation enabled by our core success drivers. In this instance, a hyperscaler customer approached us to collaborate on the design of our first of its kind rack-scale liquid cool 1.6T networking solution needed in order to accommodate the increased density and power requirements of the latest generation AI networking platforms. This highly customized design was intended to be integrated into the new state-of-the-art data center architecture. The customer required an accelerated road map to allow the solution to be early to market, leveraging Broadcom's Tomahawk 6 SC silicon, making speed to market a key consideration. In addition, the customer required multi-node manufacturing capabilities in Asia and the U.S. to support the delivery of the program. As with many of our key engagements, managing complexity was a defining factor. Celestica was awarded the program earlier this year based on a strong working relationship with the customer and their confidence in our industry-leading design engineering. They also valued our advanced manufacturing capabilities, specifically our ability to operationalize highly complex production lines for liquid cooled racks at scale and to do this faster and more seamlessly than other potential partners. After receiving initial Tomahawk 6 samples earlier this year, we quickly stood up an operational prototype for the 1.6T switch and believe we were the first team anywhere to have done so. The program is scheduled to begin mass production next year. As this example and our discussions today will illustrate, Celestica's success is driven by the unique combination of 3 core factors. First, we occupy industry-leading positions in markets with strong structural tailwinds and higher barriers to entry, supporting multiyear runways for growth. Our largest and fastest-growing market presence is within AI data centers, supporting high-performance networking and custom ASIC AI/ML compute platforms. Second, with these focused markets, we seek to accelerate market advancements through technology leadership. Our early-stage investments in R&D and next-generation product road maps support our ability to remain at the leading edge of technology transitions and enable our customers' speed to market in deploying new technologies. We separate ourselves by helping our customers address complexity and by solving the hardest challenges effectively. Third, we are steadfastly focused on maintaining best-in-class operational execution. Our global footprint, combined with the rigorous processes of the Celestica Operating System, ensures we can manufacture and deliver the highest complexity products without compromising quality and reliability. Fundamentally, these 3 factors serve as a foundation of our success and our unwavering confidence in the opportunities ahead. I'd like to now turn the call over to Jason to walk us through our CCS segment. Jason, over to you. Jason Phillips: Thank you, Rob. It's great to be here with you this morning. The past several years have seen our business on an incredible growth trajectory. In the midst of what is potentially the most significant secular investment cycle in a generation, we are in the incredible position of supporting the world's largest data center customers in their massive infrastructure buildouts to enable the growth in applications of artificial intelligence. This year, we are tracking towards $9 billion of revenue, more than doubling the size of our business from just 3 years ago. Alongside this growth, our business mix has shifted towards higher complexity customized programs within our HPS portfolio, helping drive strong profitability. Double-clicking on our HPS portfolio, we are expecting to deliver approximately $5 billion in revenue for 2025, an incredible 80% growth, which speaks to the tremendous uptake from customers for our offerings. We take a long-term view towards our investments and product road maps, investing early to help customers accelerate deployment of leading technologies. We have consistently grown our investments in R&D over the years. We increased our spend more than 50% this year, and we expect at least a 50% increase in 2026 in support of new program wins that will ramp beginning over the next 2 years. Our design engineering talent is an important differentiator for our business. We have scaled our team today to more than 1,100 dedicated design engineers, supporting both hardware and software solutions across 7 global design sites and growing, and we expect to add several hundred additional resources in the immediate future. Our recognized leadership in design has been critical to winning the many new programs, which are driving our growth. Next, we'll take a look at some of the key technology developments and design challenges we are seeing in the data center and where our team is making investments to address those opportunities. Importantly, as a platform solutions company, we are aiming to address these challenges at the systems level. In AI/ML compute, we are making investments in our rack-scale capabilities to support applications for both training and inferencing workloads, which we will touch on more shortly. To stay ahead of the latest advances in liquid cooling, Celestica is building proof of concepts for our next generation of solutions, which includes innovations in single-phase, dual phase and emerging liquid metal technologies. The rapid advances in switching silicon bring with it increasing complexity in designing the latest networking platforms, particularly challenges in addressing power density and signal integrity. Celestica is addressing these by driving innovations in our switch designs for 200-gig SerDes solutions to support 1.6T platforms and are planning early-stage investments for 400-gig SerDes to support 3.2T platforms. We're also staying close to the advances in optical technologies that will increasingly be utilized in high-performance networking such as linear pluggable optics, co-packaged optics alongside other interconnect technologies such as co-packaged copper. As an example, our latest 800-gig and 1.6T switch designs support LPO for optimized power efficiency. And we are in the early stages of our product road maps for our future generations of switching solutions that will accommodate CPO technology. We also see scale-up networking, which supports high-speed direct connectivity between accelerators as an emerging multibillion-dollar new market opportunity that is being unlocked in large part by the move towards open standards, supported by industry initiatives like UALink and Ethernet for scale-up networking. We are already on the path through recent program wins towards productizing our first solutions for scale-up Ethernet, which will leverage Broadcom's Tomahawk 6 silicon. We look ahead at emerging technologies by proactively investing and collaborating with our ecosystem partners to define future product road maps. This enables speed to market and establishes Celestica as an essential partner for our customers' next-generation deployments. As noted, Celestica looks to address technology leads at the system level. And accordingly, we have invested in developing capabilities to support full platform solutions. Our customers engage with us to support a wide array of programs and technologies and leverage the depth of our capabilities to varying degrees. However, we have increasingly observed our hyperscaler and digital native customers seeking bespoke solutions for rack-scale systems, making our full suite of capabilities across multiple technologies increasingly essential. Critically, we are seeing this demand in both networking and AI/ML compute, where customers are seeking solutions for both custom ASIC and emerging merchant silicon platforms. Beyond designing the hardware for base technologies in networking, compute and storage, our engineering teams are supporting customers in orchestrating, testing and optimizing their rack-scale solutions, including the customization of software platforms as well as aftermarket services. Our ability to deliver system-level solutions of this kind requires our breadth and depth of capabilities in all of these areas with the ability to integrate them into a seamless solution for the customer. Software is an increasingly critical component of our comprehensive solutions. To support this, we are making focused investments in our capabilities, having grown our global team to nearly 400 dedicated software engineers. We believe that open-source network operating systems, namely SONiC, are positioned for continued market adoption driven by the desire for vendor diversity, cost effectiveness and sustained improvement and innovation. We have a long history of working with SONiC and our proficiency with this platform is well respected in the industry. Our Celestica solutions for SONiC customizes and hardens SONiC features, providing customers bespoke solutions with an open-source base as well as related support services. But our software capabilities go beyond SONiC too, as we offer customers the optionality to leverage third-party solutions. And for hyperscalers using a proprietary network operating system, our software knowledge allows us to provide critical support with switch abstraction interfaces, ensuring silicon interoperability across the fabric and to assist with network operating system debugging and testing of customized hardware. Our ability to deliver a diverse range of leading solutions is significantly enhanced by our ecosystem of partners across both silicon and software. Leveraging these relationships, we work closely and proactively with our technology partners, aligning years ahead of time on next-generation product roadmaps, enabling us to be early to market and deploying leading-edge solutions for our customers. And our technology partners attest to the critical part we play in productizing and delivering these leading-edge solutions to the market. Broadcom's President and CEO, Hock Tan, highlights the significance of our capabilities and execution by recognizing Celestica as their preferred provider for the most technically demanding data center platform solutions. The strategic relationships between Celestica and industry leaders like Broadcom are a powerful testament to the importance of our role in enabling these critical technologies. Now let's take a deeper dive into our market opportunities. As mentioned, we are witnessing a generational secular investment cycle in data center infrastructure, driven by artificial intelligence and cloud adoption. Many of the indicators from the companies leading this investment across silicon designers, hyperscalers and the emerging leaders in large language models point towards a multiyear runway of continued growth in data center CapEx. Annual data center CapEx is forecasted to surpass $1 trillion by 2028, with commentary from leading voices in the industry suggesting this could prove to be conservative. These companies regularly highlight constraints in compute capacity driven by the increasing demands from both training and inference. All of these companies have signaled their commitments to continue to grow their investments in AI infrastructure, which aligns with the forecasts and planning discussions we are having with our customers. Within our portfolio, hyperscaler customers have continued to be the primary driver of our revenue growth over the past several years. Demand remains incredibly strong and is supported by solid visibility based on program awards that are expected to begin ramping over the next 2 years. Furthermore, we're unlocking the next wave of expansion with our digital native customer portfolio, which is poised to ramp meaningfully starting in 2027 with the delivery of our first HPS rack-scale custom AI system, which we initially announced in January. Our broad portfolio exposure to AI-driven investments from the largest and most established players in the sector ensures our business is exceptionally well positioned to capitalize on this opportunity. Moving on, we'll discuss the opportunities across our markets. Our communications portfolio is anticipated to generate $7 billion in revenue in 2025, an exceptional 78% growth. Our portfolio is anchored by our networking solutions with our 800-gig switch programs comprising the largest share and our most significant growth driver in 2025. We anticipate that continued growth in 800-gig and multiple ramps in 1.6T beginning in 2026, including strong engagement in scale-up Ethernet, support a robust multiyear growth outlook for our networking business with our existing customer base alone. In addition, we also have a growing funnel of opportunities for both scale-up and scale-out applications across a diverse set of new and existing customers. We believe that our technical expertise and recognition as a market leader in networking places us in a solid position to continue to grow our portfolio. At the Open Compute Project Global Summit earlier this month, we announced the latest additions to our growing family of high-performance Ethernet switches as part of our HPS portfolio, the DS6000 and DS6001. The DS6000 series utilize Broadcom's Tomahawk 6 silicon and are designed to support port speeds of up to 1.6T with routing optimized for AI/ML workloads across both scale-up and scale-out networking. Notably, the DS6001 incorporates direct-to-chip liquid cooling technology. We anticipate availability later in 2026. These latest designs are a testament to our continuous innovation and our commitment to accelerating market advancements through technology leadership. We believe our optimism regarding our networking business is well founded. Our market share leading portfolio is supported by a number of company-specific and market-level tailwinds, which position us to continue to succeed in this fast-growing market. The latest forecast suggest that the TAM for high-bandwidth Ethernet networking is projected to reach $50 billion by 2029. Within this market, the 800-gig and higher segments are projected to grow even faster than the overall market at an impressive 54% CAGR driven by upgrade cycles led by hyperscalers and leading large language models' providers to keep pace with the demands of the latest AI workloads. Based on the engagement we've seen already, we think that the adoption of scale-up Ethernet is going to be a really meaningful opportunity and additive to the growing overall Ethernet TAM. In our case study earlier, we highlighted the increasing technical challenges with each successive new generation of networking technology, which we have proven highly capable of navigating. However, there are a number of additional highly favorable dynamics that we believe make this market an incredibly important opportunity. We'll touch on a couple of those now. One of the core challenges in building AI data centers is scaling of the infrastructure. While the increasing computational power of accelerators or nodes is driving requirements for greater bandwidth, a critical compounding dynamic is the nonlinear growth in connectivity required as the number of accelerators within a cluster scales. The largest fully operational cluster today is believed to consist of roughly 200,000 accelerators. However, commentary from leading silicon companies suggests that multiple hyperscalers plan to deploy clusters consisting of up to 1 million accelerators within the next couple of years. This rapid scaling in compute capacity required to support leading AI models requires huge increases in networking infrastructure, including high-bandwidth Ethernet switches, which comprise the majority of our communications portfolio. The build-out of AI data centers is fundamentally shifting the share of spend towards back-end networking, which is expected to grow more than twice as fast as front-end spending. Back-end networking connects the compute clusters used for training models, while front-end connects the network to the external world, primarily for inference traffic. The unique demands of back end align with our competitive strengths, in particular, more intense performance requirements where factors like high bandwidth, low latency and sustained high utilization are an absolute necessity. The back end also necessitates shorter refresh cycles required for the network to keep pace with the increases in computational power. Since our switch revenues are predominantly comprised of back-end shipments, we have meaningful exposure to the highest growth segment of the market. Our customers tend to be early adopters, and we help them accelerate their deployments of the newest switching platforms early on in upgrade cycles. This is reflected in our leading market share on the highest bandwidth and Ethernet switching for the data center across each of 200-gig, 400-gig and 800-gig platforms. Today, our cumulative market share across all of these speeds as measured by total ports shipped is 41%, more than double the next largest competitor's volume. As the technical complexity rises with each generation of the technology, designing high-performance switches becomes increasingly challenging and fewer and fewer competitors can do it effectively. Managing this complexity and helping customers achieve speed to market with new technologies are what we really excel at, allowing us to secure the strongest share in the earliest stages of every new upgrade cycle. We see custom solutions for high-performance AI networking platforms being widely adopted by our leading hyperscaler customers. This model offers the benefits of vendor diversity, cost effectiveness and highly tailored solutions, which become more pronounced as their infrastructure deployments scale. Consequently, we believe hyperscalers and increasingly large digital native customers will continue to leverage these solutions. In this segment of the overall market, Celestica's share leadership is even more pronounced as we account for the majority of the total spend, 55%, having grown our share meaningfully over the last couple of years. Securing mandates and consistently executing on high complexity customized solutions for the largest customers in the industry reflects our competitive advantage and continues to validate our market strategy. Moving on to our enterprise market, which includes our AI/ML compute and storage businesses. Our portfolio revenue is projected to be about $2 billion in 2025, and we expect to see meaningful growth in 2026, significantly exceeding our previous peak revenues from 2024, as we ramp the next-generation AI/ML compute program. Looking further ahead, 2027 is expected to be another transformative year as we plan to ramp production for the rack-scale custom AI system with a digital native customer. The design work for this program is well underway, and we expect to receive initial XPU deliveries in the second half of 2026 to support early test deployments with full-scale production expected to commence in 2027. The scale and scope of the custom solution, including design, manufacturing, orchestration and deployment for a leading-edge system of this nature is incredibly complex. But as we've highlighted, these are the kinds of challenging engagements where Celestica truly thrives. We anticipate this program will serve as a landmark proof point, showcasing our full suite of system-level capabilities. Shifting to the market outlook, the TAM for accelerated compute is expected to grow to nearly $500 billion by 2029. Some of the tailwinds driving this growth are particularly favorable for our business. Given that our compute business is focused almost exclusively on solutions supporting custom ASIC platforms, we are positioned to benefit from the highest growth segment of the AI server market. Overall, the constraints on capacity we spoke about earlier, currently being experienced at the largest hyperscaler and digital native customers continue to highlight the clear requirement for more compute infrastructure and the strong demand in this market. As mentioned, Celestica's market strategy is focused almost exclusively on the custom ASIC segment, which is forecasted to grow roughly sixfold over the next several years. An increasing number of the largest data center players in the market continue to pursue development of custom ASIC platforms, and we are seeing this trend within our own customer base. The architectures of these chips are designed to be optimized to support a customer's specific workloads with the intention to deliver lower hardware cost, power savings and overall better price to performance than a general-purpose GPU. As AI models become more highly specialized, custom silicon architectures will also be an increasingly important means to enable differentiation and performance between models. And as compute infrastructures grow and scale, the benefits to deploying a custom ASIC platform successfully are magnified. Because custom ASICs also require highly tailored bespoke systems to be designed around the silicon, customers often require greater support from solutions providers, presenting us with better opportunities for value-added engagement on engineering and design. We believe this fast-growing segment of the market better lends itself to our competitive strengths in customization and managing complexity and that there are fewer players that have our track record in supporting these kinds of platforms at scale. We are exceptionally optimistic about the future of our CCS business. We have confidence in our outlook, supported by visibility to upgrade cycles, strong customer demand forecasts and a robust pipeline of potential new opportunities. And we feel that we are in a prime position to capture the incredible market opportunities in front of us. With that, I would now like to hand the call over to Todd, who will take you through the latest in our ATS segment. Todd Cooper: Thank you, Jason. It is great to be with all of you this morning. Since we spoke last year, we've been focused on strategically remodeling the ATS portfolio for higher sustained profitability and higher mid- to long-term growth. Specifically, our previously discussed reshaping activities in A&D are offsetting otherwise solid base demand across the segment, leading us to expect revenues in 2025 to be approximately flat year-over-year. We have already seen the significant benefits of these actions on our profitability. After exiting 2024 with a segment margin of 4.6%, we have already improved to 5.5% in the third quarter of 2025 and expect to achieve 70 basis points of full year margin expansion. Looking ahead to 2026, we anticipate revenue to be approximately flat to mid-single-digit percentage growth. We are seeing strong growth in our Industrial and HealthTech businesses. However, this demand will be partially offset by further selective reshaping across some of our markets. Over the medium to long term, our objective is to grow our portfolio at or above the growth rates of our underlying markets on a consistent basis, while balancing growth with sustainably higher profitability. Our target financial framework for this segment is supported by our engineering-led strategy and our focus on deepening our long-standing relationships with the leading customers in our markets. Over the past number of years, our ATS business has made investments to deepen our engineering base by developing market-focused teams with specialized expertise in their respective industries technologies. Today, our team constitutes a global network of highly talented engineers along with labs and advanced manufacturing sites to support our customers across regions and markets. Engaging customers early in the product life cycle strengthens our relationships by allowing us to offer a more holistic vertically integrated solution. This approach more fully leverages our core competency as an organization, helping our customers navigate complexity and solve hard problems, while having the added benefit of reinforcing our value as a highly capable partner and driving higher margins for the portfolio. Today, about 1/3 of our more than 100 customers engage with our teams on engineering services, relying on us for support in testing, design as well as in accelerating their time to market on new product development. We believe this presents an excellent opportunity to deepen our engagements within our existing customer base. And lastly, as discussed earlier, we are also continuously assessing and actively managing our customer portfolio. Our commercial strategy is focused on deepening our long-standing relationships with the leading Tier 1 OEMs in our markets. In pursuit of growth, we are intensely focused on maintaining the quality of our customer base and having a strong margin profile for our portfolio. Now I'd like to briefly walk through each of our businesses, starting with Industrial and Smart Energy. In our industrial and smart energy portfolio, we anticipate growth in 2026, driven by demand recovery in our macro-sensitive end markets. Longer term, we are engaged on exciting new opportunities in robotics and automation as well as in on-vehicle technologies such as telematics and battery energy storage for heavy industries. We are also pursuing programs in the growing data center power infrastructure market, including power distribution, conversion and control equipment, leveraging some of our hyperscaler relationships. While it is still early days, we are encouraged by the traction we are seeing. Next, let's move to Aerospace and Defense, which as a U.S. military veteran is near and dear to me. Our 2026 outlook sees base demand remaining healthy, supported by the ramping of new program wins, although we expect that growth will be offset by tougher comps from the first half of this year, driven by our reshaping activities. Longer term, we project healthy demand from U.S. and European defense spending, which we expect will become a greater share of the portfolio. And in our commercial aerospace business, we expect to see growth aided by program ramps with new and existing customers. Moving on now to semiconductor capital equipment. In semiconductor capital equipment, we saw strong growth in the first half of 2025, although we are seeing a moderation of demand in the second half, consistent with the broader sector. We expect this to continue into at least the first half of next year as our customer conversations indicate foundries are holding off on adding more capacity until there is greater clarity on tariffs and trade restrictions. To obtain greater efficiencies in our network, we are taking this opportunity to consolidate demand across some of our sites. At the same time, we are continuing to ramp new high-complexity programs in lithography and advanced semiconductor packaging. Long term, we believe the significant push for the near shoring of wafer fab capabilities in the U.S., Europe and China, driven by geopolitical factors is expected to support healthy demand for new capacity. We have exceptional capabilities and proof points in the semiconductor capital equipment market and anticipate this demand to serve as a tailwind for our business starting in the second half of 2026. Finally, in our HealthTech business, overall demand remains robust, and we continue to make a concentrated effort towards driving higher portfolio exposure to this market. Last year, we discussed our investments in advanced manufacturing, automation and testing capabilities to support new wins in diabetes care, which are expected to ramp in 2026. Now as we approach the beginning of those ramps, we are anticipating more than $100 million of growth in our HealthTech business in the coming year. In closing, our focus remains on driving high-quality, sustainable growth. We are successfully executing strategic commercial decisions to reshape our portfolio, which is already yielding significant improvements in profitability. Our portfolio is supported by healthy underlying near-term demand, along with solid long-term fundamentals. We remain confident that our thoughtful approach in each of our markets will position us to drive sustainable and profitable growth for the ATS segment. With that, I would now like to turn the floor back over to Mandeep, who will discuss our financial outlook and capital allocation priorities. Mandeep Chawla: Thank you, Todd. The outlook for the financial performance of the business in 2026 continues to be very strong. We anticipate revenue of $16.0 billion, representing 31% growth compared to our 2025 outlook. At the segment level, CCS revenue is expected to grow by approximately 40%, driven by strong market tailwinds and program ramps in both our enterprise and communications end markets. Our outlook assumes continued strength in networking, supported by 800G demand growth and the ramps of our earliest 1.6T programs in the second half of the year. In AI/ML compute, we anticipate very strong growth as we reach full volume production of our next-generation custom ASIC program for hyperscaler applications. In ATS, as noted, revenue is projected to be flat to up in the mid-single-digit percentage range, as healthy base demand and new program ramps are partially offset by our reshaping activities to drive higher profitability. We expect non-GAAP operating margin to expand by 40 basis points to 7.8%, driven by favorable mix and productivity improvements. Our non-GAAP adjusted EPS is projected to be $8.20, which would represent a 39% increase year-over-year. We are targeting non-GAAP free cash flow of $500 million. This model represents our preliminary high confidence outlook for the coming year, and we will continue to update you on our forecast as the year progresses. Importantly, our confidence extends beyond 2026. First, AI-related demand for data center technologies in our CCS business remains very healthy, and we are seeing many signals that suggest these secular dynamics have a multiyear runway ahead. Second, we have solid visibility to the ramping of significant new programs with start dates out to 2027. Our view for 2027 assumes multiple ramps with hyperscaler customers with new programs supporting the 1.6T upgrade cycle, including scale-up solutions and a next-generation custom ASIC compute platform. We also anticipate the commencement of mass production of our rack-scale custom AI system program with the digital native customer. As a result, we expect these strong growth dynamics to persist. And in support of this, we are aligning our capacity with our customers, assuming that this trajectory continues into 2027. As we continue to manage our financial priorities through this period of high growth, we intend to maintain a steadfast focus on maximizing shareholder value. We aim to achieve this by compounding our adjusted earnings per share in a sustainable manner over the long-term. This requires us to remain thoughtful and measured in our approach to pursuing earnings growth by assessing current and potential new business through the lenses of margin sustainability, alignment with our long-term strategy, our competitive advantages and return on invested capital. These guideposts help us to maintain discipline in managing our growth and evaluating our commercial opportunities. Our consistent execution and disciplined approach to financial management has delivered improvements in each successive year across each of our key metrics. Based on our 2026 outlook, we expect revenues to more than double relative to 2022 and to lead to a more than fourfold growth in adjusted EPS over the same period, driven by the sustained expansion of our non-GAAP operating margin. We believe there is still room for additional operating leverage in our business beyond 2026. We anticipate maintaining our solid trajectory and compounding our adjusted earnings per share, which we believe will continue to translate into strong return for shareholders. Taking a closer look at free cash flow. We have managed to consistently generate free cash flow on a quarterly basis going back many years, enabled by our strong working capital management and operational discipline. We also continue to grow our free cash flow, while simultaneously funding the rapid expansion of our business. Next year, capital expenditures are expected to rise to between 2.0% and 2.5% of revenue, funded by operational cash flow as we invest in our network to support the growth we anticipate over the coming years. We will maintain a disciplined approach to CapEx and working capital management as we ramp these investments. While the primary aim of our investments is towards driving compounding of our adjusted EPS over the long-term, adjusted ROIC remains an important measure that we use to assess the quality of our investments. This has been reflected in our strong earnings growth directly translating into meaningfully higher returns on capital, which now sits at 35% year-to-date in 2025, having nearly doubled since 2022. This rigorous focus on capital efficiency seeks to ensure that our growth is high quality and that we continue to direct our resources towards its best and highest return use. Our capital allocation strategy is built on 2 core principles: discipline to ensure we pursue the highest returns and best use of capital and strategic flexibility to maintain optionality to execute on new opportunities as they arise. Today, our highest priority for capital is to reinvest in the business to support long-term growth and the significant organic opportunities we see over the next several years. We also continue to assess M&A opportunities in a disciplined and selective manner, where acquisitions can serve as a complement to our organic growth and help accelerate our strategic road maps. Our CCS funnel is primarily focused on adding or enhancing our capabilities in areas such as services and design engineering. And in ATS, we are looking to balance our portfolio by adding exposure to or scale in desirable markets that possess strong fundamentals. And finally, we will continue to return capital through share buybacks on an opportunistic basis. Over the past 3 years, our share price performance has significantly outpaced the broader indices and the majority of our peer group. Our stock price reflects the very strong trajectory of adjusted earnings growth we've delivered over the last few years. We are confident that this strong earnings compounding will continue as demonstrated by the 39% adjusted earnings per share growth implied by our 2026 financial outlook. We believe that our valuation is supported by this strong track record and our anticipation of future growth. With that, I'll now turn the call back over to Rob for his closing remarks. Robert Mionis: Thank you, Mandeep. Before we close out, let me briefly reiterate the 3 key drivers that are the foundation for our confidence in our continued success. We are very optimistic about the future of our business. As I stated earlier, we are navigating a period of rapid but positive changes and the pace of those changes only continues to accelerate. We believe the next several years present a truly remarkable opportunity for our company. We hope that all of you leave our call today with a richer understanding of our unique combination of capabilities and the strategic approach that enables our success. We provided perspective on our long-term vision, highlighted by the proactive investments we're making today to capture the opportunities we've discussed. We have the utmost confidence in our organization's talent, our commitment to excellence in delivering for our customers and our ability to execute on our strategy. Thank you for your time and continued support. I will now turn the call back over to the operator to begin our Q&A period. Operator: [Operator Instructions] And your first question comes from the line of Mike Ng with Goldman Sachs. Michael Ng: I guess, first, just on the investments that you're making in R&D, the 50% growth next year and the capacity expansions through 2028. I was just wondering if you could talk a little bit more about some of the key products that are supporting your visibility into these investments and are most of the investments grounded by expansions in customers that are new or existing? And then just as a quick follow-up, I noticed you talked about the new storage platform win with the hyperscaler in 2026. Is that with your current hyperscale AI/ML compute customer, or is that somebody else? How would you size the opportunity in hyperscale storage? Jason Phillips: Mike, this is Jason, and welcome, and we're glad you're covering us. So as we look at our R&D spend and investments year-over-year, we've been making significant increases now for quite some time, and they are directed at where we are focusing our strategy and our opportunities largely around networking, AI/ML, and I would say, storage, rack level solutions and then everything you need to bring that total rack level, fully orchestrated rack level solution together, inclusive of software, liquid cooling, power, et cetera. So that's where we've been focusing our R&D spend. And we've also been making significant, I'd say, advancements and investments in our engineering network. We've now moved up to over 1,100 engineers, 400 of those are in software. We've moved to 7 design centers of excellence. And we're also looking at increasing that in places like Taiwan as well. Stephen Dorwart: Yes. And with regard to the specific customer that you inquired about, it is an existing customer. We have a long-standing relationship with this company, and we've continued to evolve the relationship from providing single system level solutions up to fully integrated rack solutions, of which this engagement is. And that's part of our normal process to go and evolve with our customers. With regard to storage, we have a few different opportunities where we're engaged in storage. It's less prominent than we would see in networking or our ability to extend some of our networking capabilities into the AI/ML compute space. Operator: Your next question comes from the line of Karl Ackerman with BNP Paribas. Karl Ackerman: You noted that Thailand and Texas could see a doubling of capacity from 2024 to 2027, yet CapEx will only be 2% to 2.5% of sales. Could you speak to what assurances your largest customers are giving you to support this capacity growth, whether that is in the form of multiyear volume commitments and/or combined investment in tool CapEx? Mandeep Chawla: Yes. Karl, it's Mandeep here. Thanks for the question. So we've been very disciplined on our capital expenditures for many, many years. We're tracking towards 1.5% right now for this year. And as the revenue continues to grow, the dollars obviously are growing as well. So we're on track on just under $200 million of CapEx this year. We're anticipating right now somewhere between $300 million and $400 million of CapEx next year. And these are investments that are tied to customer programs. We don't have a built-in and they will come approach. It's always tied back to customer engagement. And so we have very good visibility on the demand profile going out multiple years. So it gives us confidence to be able to invest in these types of areas. The only other thing I'll mention, and then I can have Steve ask a little bit or comment a little bit on the customer engagement on our expansion. But I just want to make a note that only about 40 basis points of our CapEx spend is maintenance. And so if we're going to spend 2% next year, then that means 1.6% is all on growth, and that gives us a tremendous amount of discretion on where we put those dollars. And so we think that right now, that's sufficient. Stephen Dorwart: This is Steve again. With regard to visibility to forecast and customer demand, we currently have about 12 to 15 months of real solid forecast inputs and demand inputs from our customers, largely around their 2026 budgeting and spend commit processes. But in many cases, we have visibility beyond that. In some cases, for specific customers, specific programs. There's a certain amount of ASICs, for example, that they may have committed to, and it gives us some assurance as to the longevity and the size of the overall program. So we do get extended visibility through being similar to that. Karl Ackerman: Understood. And if I could for a follow-up quickly. Your growth in CCS is notable, which appears driven by your networking switch opportunity in HPS. Could you speak to the relative mix you have today on 800-gig switch ports? And I suppose as you think about the trajectory of 1.6 next year, could you speak to the opportunity you have in liquid-cooled-based switches, which appear to be a growing opportunity for you, both in '26 and '27? Stephen Dorwart: Yes. Karl, from a number perspective, why don't we start, we've been seeing tremendous growth in 800G this year to the point where we'll end 2025 with roughly a 50% split between 800G and 400G in terms of the products that we're delivering. As we look into 2026, we're seeing the 800G demand, in particular, accelerating. There are going to be projects where 400G continues to be used. We've been given some examples by our customers where 400G is expected to be used for many years still. But the growth is primarily going to come from 800G. On the 1.6T program, we won a number of them. And we have one customer right now where we have visibility to that ramping towards the back end of next year. And so one of our customers will be really taking up their 1.6T awards, but then we anticipate further 1.6T ramps as we go into 2027. And so the portfolio is shifting to the higher-end technologies as we would have expected. Jason can add on that. Jason Phillips: Karl, I would say when you look at where we carved out this industry-leading position in networking, it started in 400-gig, and we were able to translate all of those engagements into 800-gig. And those engagements have been expanding incrementally to new opportunities, and we fully plan to translate all of our 800-gig engagements into 1.6T as well, and we're on track to do that. And liquid cooling plays a key role in those solutions, particularly on 800-gig and 1.6T. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: And maybe if I can start with the digital native customer that you're expecting to ramp in 2027. And we've seen multiple sort of announcements from some of your partners around sort of the sizing here. But trying to sort of think about how should we think about the magnitude of the implications for you starting in 2027. Maybe if you can give us something to point us in the right direction of sizing relative to your enterprise business today? And do you have -- what are you thinking in terms of capacity to then sort of cater to that magnitude of the digital native customer ramp? And I have a quick follow-up. Mandeep Chawla: Yes. Samik, it's Mandeep here. Thanks for the question. So we're very excited still about the engagement we have with this digital native customer. We are very actively engaged with them on the design cycle and that's going to continue as we go through next year. Our plan of record right now is that we would not see mass production begin in 2027. And so when we've given an outlook of $16 billion for next year, that does not include any meaningful level of revenue coming from this digital native opportunities. The gate to that is really in terms of timing is really going to be around silicon availability. And so if silicon is available sooner for mass production, then we may be able to produce sooner. Right now, our assumption is that we will receive samples in the middle of '26 and then again, go towards mass production in '27. From a capacity perspective, we are working with the customer very closely on where -- how we can support them both in Asia as well as in North America. When we are talking about 2% to 2.5% of CapEx for next year, that's inclusive of the capacity that we're going to need to deliver what we're already seeing in 2027. Jason can add a little bit more. Jason Phillips: Yes, Samik, I would say, with all the growth we're seeing across the portfolio, we're also excited about what I call a healthy competition on who will be our largest customer in the next 2 to 3 years. Stephen Dorwart: So the way to think about it right now, Samik, is going to be that we believe it will be at least a few billion dollars in the first year, multiple billions of dollars, I'll say. One of the areas, of course, that we still need to line up on is the treatment of the silicon isn't included or not included and we're still having those conversations with our customer and our providers. Samik Chatterjee: Okay. Got it. And a quick sort of follow-up on 2027 outlook. I know you're saying the growth momentum continues into 2027. And I didn't hear you explicitly say that -- so just wanted to confirm from everything you're telling us in terms of new program ramps in 2027, the growth acceleration in 2027 should be higher [ rated ] to the growth that you're forecasting for 2026, just with the digital native customer, the 1.6T ramps. Is that a fair statement? Stephen Dorwart: Yes, of course. So I'll give you a framework on how to think about 2027. Obviously, we're not going to be giving numbers at this point. It's just too far out. But we are very confident right now on the demand profile that we're seeing and the awards that we've been receiving over the last 12 months or so, in many cases, don't have programs that even ramp until 2027. That being said, it's probably 12 months too early to talk to you about what 2027 really is going to look like. The way I would just think about it right now is our CCS business grew by about 40% in 2024. It's on track to grow about 40% right now in 2025. And our outlook or guidance for next year is essentially implying about 40% growth again in CCS in 2026. And so at this point, I think it's fair to continue to extrapolate that as you bring it forward. We do have many opportunities that could be -- that could accelerate that and could go above. So to your point, it could be through the digital native win that we're ramping as well as other really strong programs that we've won with some of our largest hyperscalers. But right now, we think at least 40% into 2027 is what we're -- we have visibility to. And then just on the ATS side, ATS this year is going to be approximately flat or we said going into 2026, it's going to be low single digits. The growth should resume at a higher level as you go into 2027. And I think the way to think about that right now is high single digit. Operator: Your next question comes from the line of Ruben Roy with Stifel. Ruben Roy: Sorry about that I was on mute. Mandeep, maybe to follow-up on that just last topic. You talked about potential additional operating leverage beyond '26. I'm just wondering, how you're measuring the potential for operating leverage relative to this really strong revenue growth that you guys are seeing, especially as we went through some of the new design activity, kind of increasing design activity with your customers, rack levels, designs, et cetera. Just do you have some thoughts on longer-term operating leverage? Mandeep Chawla: Yes. Thanks for the question. So we continue to see the benefits of both operating leverage as well as positive mix in our numbers, on track for about 7.4% operating margin at the company level for 2025, and we're guiding that, that can expand now going into 2026. We do continue to believe that there's opportunities for even more margin expansion. But again, I'm not giving formal numbers for '27 at this point. When you look at our ATS business, the business has done very well on doing some selective pruning in order to really focus on the highest value engagement. And so we're really happy with the margin expansion that we've seen in ATS already. And we think that there's opportunities to continue to expand and get it above 6%, hopefully in the near to medium term. On the CCS side, which is operating in the low 8s right now, what's working to our favor is the fact that we will continue to be seeing growth in networking, which are primarily our HPS products. And our HPS products are accretive to the company and accretive to CCS. And so as we see growth in that area, we will continue to see some margin upside. That being said, we do continue to evaluate how we can support our customers on multiple areas such as doing complex rack integration work. And so sometimes that will be margin dilutive. And so we're always managing mix, but we think that there's a lot of opportunities for expansion. Ruben Roy: Thanks for that detail, Mandeep. And if I could ask a question -- a follow-up question for Jason. A lot of discussion around scale up networking just in recent weeks, with a new standard announced, et cetera. You talked about a multibillion-dollar new market opportunity for Celestica, specific to scale up. And I'm wondering if you can maybe hash out a little bit around that opportunity relative to scale out. Do you have some sort of advantage as you discuss scale up with your customers, given how well you're doing on the scale-out switch side? And maybe just a little bit around the competitive environment, how you see that playing out over the next several years as you think about your scale-up opportunity. Jason Phillips: Yes. Ruben, yes, I would say we're well positioned for the scale of opportunity, and that comes from incumbency, and I would say, capability. When you look at, as you mentioned, a lot of where we carved out this industry-leading position in 400G, it started largely and I would say, scale out. And now it's starting that capability, and that value proposition is very much applicable to scale up. We've talked about a large digital native where we provided a fully orchestrated rack and solution. I mean that's a great example of a great -- a significant scale-up opportunity. So I would say that we have a large and growing funnel of opportunities, and we're going to be very mindful about where we have our most strategic engagements as we continue to grow and look at taking share. Operator: Your next question comes from the line of Tim Long from Barclays. Timothy Long: Yes, Two, if I could as well. First one on kind of HPS. I think this digital native is a good AI/ML win for digital native. So curious about the pipeline that you're talking about for other kind of compute-related opportunities. Could you just talk about that funnel and how we should think about new opportunities being HPS or not, number one? And then number two, just back to that -- the networking piece. As you look at new customers outside your large [indiscernible], should we assume those are mostly SONiC related? Or do you see opportunities for other Neo clouds or others to maybe develop their own switching stack where -- and what are the competitive differentiations for you with SONiC versus other proprietary NOS? Jason Phillips: Tim, Jason here. So on AI/ML compute, I mean you commented on it, I think digital native win that we've talked about would be a great example of where we've deployed our entire value proposition into a fully orchestrated solution, driving an AI/ML solution. We talked last year a bit about POCs that we're doing with silicon providers, and we talked about the AMD MI355 example, and that POC has garnered a lot of attention, I would say, in the industry. And so we have a large and growing funnel of opportunities in AI/ML. But we're going to be very, I'd say, very focused on where we have the strongest strategic alignment and where we believe the program will be successful in the AI architecture and ecosystem. So growing funnel of opportunities, but we're going to be careful about where we engage and where we believe the adoption rates will be higher. Unknown Executive: Yes. With regard to these opportunities, I think one of the things to consider is just the strong position that we have in networking and its applicability to these AI compute kind of opportunities. So there's a lot of things that transfer over the network connectivity, the signal performance, power, density, design, all those things are also very applicable and relevant in the AI space. So we continue to leverage our networking strength to win in new opportunities in the compute space. With regards to software, most of our hyperscale customers drive their own NOS, but they rely on us to provide the key layers in the stack and have full testing and qualification capabilities of their software on our system. There's also more comprehensive choices that are emerging now, and our customers are evaluating those. We still have a full -- fully capable and broad software engineering team, and we're working to support many of our customers with these new software technologies. And we continue to support them at the firmware level in most of the networking and compute systems that we do today. Operator: Your next question comes from the line of David Vogt with UBS. David Vogt: So maybe for Rob or Mandeep, I want to unpack the CCS business for a second. Obviously, switching has been sort of the driver of the business the last 2 to 3 years. And you kind of talked about over the next several years, switching growth or maybe data center CapEx growth being kind of in the mid-20s. Are you sort of inferring that ultimately, the bigger driver over the next 3 years plus will be sort of the compute opportunity along with ancillary opportunities like optical as we think about '27 and '28? Just trying to get a sense for how you're thinking about the composition of product within broadly defined CCS going forward. And then I have a follow-up. Unknown Executive: David, I'll start, and I'll ask Jason to chime in. We have a very strong position with the hyperscalers on networking across the board, given that position, we're looking to grow our share of wallet into other areas. And one of them, in particular, we do AI/ML compute. And with others, we're in several advanced conversations to expand our solutions to them, especially on the HPS front where we're not just build it, but we actually have some engineering and design content in supporting them. Jason elaborated on a couple of those opportunities, and I'll turn it over to him for additional color. Jason Phillips: David, so thinking about the CCS business overall, I mean, we've got a lot of strength in our hyperscaler digital native portfolio in networking, AI/ML, specifically on the custom side, there's incremental opportunities we've talked about at scale up as well as merchant AI/ML solutions. So there's a lot of growth, a lot of potential, a lot of funnel of opportunity there. When you look at the value proposition that got us where we are, there's a lot of opportunity to take that and pivot into the very large enterprise space. And we're going to do that in a very disciplined way. I've talked about that in the past. We have a portfolio solutions business today where we have branded product. We have SONiC, we have Celestica SONiC offering that's enabling that. We have a growing services capability that's rounding out the capability that will allow us to play more effectively in enterprise as well as hyperscaler. So we're effectively doubling down on our enterprise efforts. I recently just brought in Ganesha Rasiah. He's our Senior Vice President and General Manager of our Enterprise line of business, and he will be leading the charge as we chart our course on where and how we're going to double down in enterprise. And it's going to be underpinned by all of this value, the scale, this capability that we've established in our hyperscaler space and applying it to specific markets within enterprise to be successful. Thomas Ingham: Great. No, that's helpful. And maybe just maybe one more for Jason then. On the enterprise portfolio since you're talking about expanding capabilities and bringing in new talent looking for new opportunities, you did reference, I think, in the deck an opportunity for a new hyperscaler application in storage for '26. Can you kind of expand upon that, kind of what that actually is and maybe share what the customer is looking for and what you're bringing to that solution going forward? Jason Phillips: Yes. Maybe I'll start, David, and then I'll ask Steve to weigh in as well. I mean we do think storage is -- it's going to be an opportunity with AI. There's more and more data that is out there. And we're seeing it specifically, we've got some traction in the hyperscaler space on a specific program where there's a specific use case, I would say, that's being adopted, but we also think there's more opportunity for storage and enterprise as well. We've had a solid high-end storage business in enterprise for a long time. We're well positioned with the market leaders there. And I think storage is an opportunity as AI continues to deploy. Stephen Dorwart: Yes. And this is Steve. I will just add to that, that we have had some success, as noted here with hyperscalers and providing custom storage solutions to them. We're being very selective about where we engage and finding areas where we think we can differentiate and bring value to our customers. And so it's a narrower scope today for us, but there are opportunities, and we intend to continue to build on the success that we've had there. Operator: Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Thanos Moschopoulos: Can you provide some color with respect to the growth that you're expecting in CCS outside of hyperscalers and digital natives, so like OEMs and other types of customers, what would your outlook be for that in '26 and beyond? Mandeep Chawla: Yes, in terms of the incremental growth opportunities, we've talked about scale up is a very large market where we're getting a lot of traction. I would say, while our AI/ML business has been largely underpinned by the custom level solutions, there is a growing set of opportunities. We're getting a lot of traction in merchant-based AI/ML systems that represents a number of opportunities for us. And then I'd say fully orchestrated rack level solutions continues to be an opportunity as well as the services that we were wrapping around our solutions as well. Thanos Moschopoulos: Specifically in terms of, I guess, OEM type customers and maybe enterprise campus type opportunities or other beyond hyperscalers, digital natives. Is that forecast to grow meaningfully in '26, or is the growth in '26 primarily driven by your core hyperscalers? Unknown Executive: The growth is underpinned by our hyperscalers. They are leaning heavily into both switching as well as compute. But the rest of the portfolio is still growing as well. We have a large optical program that goes beyond the hyperscalers. We're seeing very nice growth in that area, and that product be used directly into data centers. We've announced that we are building a 1.6T switch with an OEM on their behalf. And so that's going to see some growth. But we do -- there is a very high level of growth coming from hyperscalers versus the others. Operator: Your next question comes from the line of Steven Fox with Fox Advisors. Steven Fox: Just one question on the HPS business. I know you don't give margin -- specific margins on the business. But I was wondering, given all the programs you see in the future and how you may be vertically integrating more, sometimes, I guess, additive, sometimes dilutive to margins. How do you see the direction of HPS -- just the HPS business going and why? And of course, that would be excluding any kind of changes in your consignment activities like with the new program. Mandeep Chawla: Yes. So we're very excited about what's happening in the HPS portfolio. We're on track this year to spend probably about $120 million on R&D. Next year, we're going to be increasing that by at least 50%. It could be as high as $200 million. And that's just reflective of the engagement that we're tied to. Today, this year is probably going to be about a $5 billion portfolio. That $5 billion is the vast majority of it is switching. And in the switching scenario, it actually does include the silicon, as you know, so it's turnkey. And yet, we still make very good margins in this area, margins that are accretive to ATS right now, which is 8.3%. I know the question sometimes comes what's the exact number, but what we just say is it's accretive. As we look at the portfolio going forward, we continue to see very strong growth on the networking side, but now we're starting to see compute come in as well. And so as compute comes in, especially as you think about this large digital native win, we've got to think through still on how sort of things can be provided. But today, our compute programs [indiscernible] to us. But overall, we are getting paid for the value that we're bringing forward on the engineering side. Operator: Your next question comes from the line of Paul Treiber with RBC Capital Markets. Paul has actually lowered his hand. So we will move on -- and your next question comes from the line of Robert Young with Canaccord Genuity. Robert Young: The 40 basis points of margin expansion -- operating margin expansion in the 2026 guidance, just against all of the big jump in scale and some of the shift to higher-end networking technology and the software mix. It just seems a little bit conservative. And so relative to some of your networking peers, margins are lower. And so I was wondering, is pricing a strategic advantage for you? Or are there any headwinds to note? I think you already mentioned the fact that the full rack solution isn't ramping until 2027. But are there any other headwinds there to note to better put that 40 basis points expansion in the context? Mandeep Chawla: Yes. So I'll start and then I'll let Jason or Steve talk about the commercial environment and our ability to capture share with price. But essentially, what's happening right now is that when you look at the 7.8% next year, and again, you're putting 40% growth on the CCS business, maintaining the margins that CCS has and maintaining the margin that ATS has will yield that 40 basis points improvement. We are working towards expanding margins in both businesses, and we do believe that, that is an opportunity. It's early on in the year, and so this isn't that different than the approach that we've taken in previous years, which is we will guide margins in terms of where we are today, knowing that we are working on various levers to expand that. But I would say more to come as we go through 2026. Jason Phillips: Rob, and I would just comment on where we're seeing the values where we're driving the differentiation from our competitors. It's largely a technology leadership, customization for optimization and then our advanced manufacturing processes and execution. I mean we've pivoted now that we're into platform solutions, we pivoted from a technology partner to a technology leader. We believe we were the first with a fully functioning 800-gig switch. We believe the same on 1.6T. Those are examples of technology leadership that our customers are relying on. Secondly, the ability to optimize -- to customize these solutions for our customers' specific architectures for optimization in those workloads in those large language models, that continues to be a strong area of differentiation for us. And then the last piece would be the advanced manufacturing processes and capabilities, which I believe is often underestimated and undervalued. It's very difficult to take these very complex designs and put them through the new product development process and then ramp at scale into production, it's not easy to do. And those continue to be areas that our customers value. Stephen Dorwart: This is Steve. I would just build on what Jason had said there. When we deliver this differentiated value, and we do it reliably and consistently over several different platforms or iterations of -- new iterations of same platforms, there's a lot of strengthening of our incumbency and our customers start to recognize the value of our solutions and we're less compelled to compete on price. And so that's a key part of sustaining and maintaining the margin trajectory that we have. And it's also a function of the opportunities that we choose to pursue. So we have a tremendous amount of opportunities in front of us. We're moving away from the more transactional engagements and focusing on those operations -- those opportunities where we can really differentiate, as Jason said. Unknown Executive: And Rob, I would just add to that. There's -- in the -- every now and then, we'll see a competitor will -- I mean the competition is stiff and there's a lot of competitors coming in and we'll lead with price. And every now and then we'll see someone will chase a program on price only that 3 to 6 months later haven't come back due to challenges with execution and delivery. Robert Young: That sounds great. Second question for me would be just on the shorter refresh cycle you noted in networking and maybe the quicker move to 1.6 to 3.2. Does that make it harder for new entrants? I would assume that in existing data center deployments, it's very hard to dislodge Celestica. But maybe if you could talk about that as it relates to greenfield and new build, and I'll pass. Jason Phillips: Yes. Maybe, Rob, I'll start, and then I'll hand it over to Steve. So as you -- first of all, technology, the generations are getting quicker and it's getting faster. So if you're behind, they're going to have a harder time keeping up. So we saw a lot of folks struggle in 400 as we went into 800. As you go in from 800 to 1.6, it's getting faster and it's getting harder. So if you weren't optimized around 800, you're going to really struggle to get into 1.6T and the same applies to 3.2, et cetera, et cetera. So we're well up the curve. We're a technology leader in the space. We've been making significant investments. We've been building talent for many years to get to where we are, and we don't plan on slowing down. Stephen Dorwart: Yes. This is Steve. Just to build on what Jason has said there, our recent experience with 1.6T is that we've had demonstrated very strong performance here in delivering solutions from the initial receipt of silicon to complete functional power on the systems. We've done it in days. And I think Broadcom knows would acknowledge that typically with some of our OEM and ODM competitors, they measure that achievement in terms of weeks. And so I think that what we've talked about, the carryover from one iteration to the next is just proven to be true for us as we support our customers. Operator: Your next question comes from the line of Paul Treiber with RBC Capital Markets. Paul Treiber: Just a question on the long-term visibility that you're getting from customers at this point. Are you seeing it reflected in the program wins? Are there either explicit volume commitments? Or are there other commitments or the nature of the contracts that allow you to have that longer-term visibility that maybe you didn't have several years ago? Stephen Dorwart: This is Steve. Yes, I think it's a good question. I think that we'd like to have as much visibility as we can to the future of these programs. But we do have some comfort in that we continue to see awards come to us for the duration of the program and the follow-on next generation of those programs tend to be awarded to us as well. So -- so we do have longer-term visibility of the programs we currently have and what's coming next down the funnel. So overall, very good. Mandeep Chawla: Yes. Just maybe as an example on the compute program that we have right now, which is going to be very healthy in 2026, and it's ramping very nicely right now. That is already in -- we've already won the follow-on programs for that program to the point where the silicon hasn't even been finalized yet because it's going to be on the next-generation silicon. And so we see those ramping into 2027. And then we've talked about the digital native win as well, which is a program award that will be ramping in '27. And then our R&D efforts continue to be working on the next generation of products as well, which we know will get adopted eventually by the market. We're already working on 3.2T. And while we don't expect it to be mass production until maybe 2028, we would anticipate that when that migration happens from 1.6 to 3.2, that we're going to be in a full position to win that share. Unknown Executive: Yes. And Paul, I would just add to that. Steve mentioned forecast visibility between 12 and 15 months and in some cases, beyond. I mean there are certain programs that have very specific capability requirements where we're talking even beyond that. So as we look at the power requirements, the capacity that will be required beyond what I'd call an extended forecast outlook, we're in deep conversations with capacity planning, power planning well beyond, I'd say, the '26, '27 time frame that we're accounting for as we make our investments and our expansion plans. Paul Treiber: And a follow-up question. The -- to what degree are you shaping -- proactively shaping the portfolio, either disengaging on less strategic programs? And then on the strategic programs. Are there any metrics you can share in terms of like win rates or success on rebidding the next generation of those contracts? Todd Cooper: Paul, thanks for the question. This is Todd within ATS. Yes, I would say we are just conducting a comprehensive review really on an ongoing basis of our portfolio doubling down, as I said in my comments, on the larger Tier 1 customers and then using this opportunity really to take out or exit reshape, if you will, margin-dilutive customers. That's why you're seeing the improvement in margin in ATS this year. And then we've had a number of smaller customers where candidly, the climb is not worth the view in terms of just the effort to support their businesses. They're nonstrategic. In some cases, they're tied to our smart energy portfolio, which given the one big beautiful bill and the loss of tax incentives and the change in dynamics around clean energy are impacting their end demand. So we're using this opportunity then to disengage and exit from those smaller customers, nonstrategic customers, margin-dilutive customers really to strengthen the ATS portfolio and to improve our overall margin profile as well as our growth going forward. Unknown Executive: Paul. From a CCS perspective, we are, from a hyperscaler digital native perspective in a great spot strategically. We feel very good about that. And then enterprise, largely the same. There is a smaller customer where we are no longer strategically aligned, but it's not material to the overall business. And I'd say overall, from a CCS perspective, we feel great about where the portfolio is. Operator: Your next question comes from the line of Todd Coupland with CIBC. Thomas Ingham: Great. I had a question on the switching business. I'm wondering with your largest customers, are you single sourced or are there dual source suppliers in any of those? Stephen Dorwart: This is Steve. With the majority of our largest customers, we tend to be the preferred supplier when it comes to new technology. And so we're often exclusive for some period of time through the development of the product through NPI and then to ramp. As Jason mentioned earlier, we do have excursions from time to time where our customers will look at dual sourcing or multi-sourcing maybe for business continuity purposes or maybe to chase a lower price for some period of time. But we tend to see a lot of those come back to us. While we maintain the preferred position on new products, we see some of the next-generation products come back to us as well for an exclusive period again through the development and through NPI and RAN. So that's been a pattern that we've seen repeat with most of our hyperscale customers over the various product transitions. Thomas Ingham: And I just wanted to circle back to the 1.6. You were quoting some market share stats earlier in the presentation. Can you just remind us what that win rate implies for ports, I guess, through '26 and '27 on the 1.6? Unknown Executive: Yes. What I would say, Todd, is, as I mentioned earlier, where we've had our engagements in 800-gig, we're on track to have those engagements in 1.6T, and there's incremental opportunity beyond that in the scale-ups market in particular. And as I noted, we have a healthy funnel. We're excited about it, and we believe it's going to be a big growth driver for us. Mandeep Chawla: Yes. I mean, Todd, we're winning our disproportionate amount of share as the technologies become more advanced. And so some of the materials in the slide we were highlighting when you look at the Ethernet switch market share, we're above 50% this year. And last year, it was 40%. As there is further deployment of 800G switches and as 1.6 starts to get delivered, we would anticipate that, that will continue to be positive for us. But we are -- we do continue to win the funnel of programs, which is what we're [indiscernible]. Stephen Dorwart: This is Steve. I can't give you 4 counts, but I can tell you, we have 10 programs currently underway and 1.6T. And we've had a significant share win with a number of customers on 1.6T. Operator: Your final question comes from the line of Jesse Pytlak with Cormark Securities. Jesse Pytlak: Just on your optical programs, can you speak to the breadth of customers that you're engaged with on these? And are these programs commonly becoming bundled with switching programs at all? Jason Phillips: Yes, Jesse, so we have a few primary optical customers where we have deep engagements and we're making POCs and investments in that space. And there is a strong correlation between optical and networking. And we think when you look at things like CPO technology as an example, we think we'll start to see some deployments in 1.6T, and we really think we'll start to see more CPO ramp in 3.2T as an example. Stephen Dorwart: Yes. This is Steve. I would just add, as Jason mentioned, the co-package optic outlook. We still -- we do see that it's going to be a dual existence for some period of time. So pluggables won't go away, but there will be a hybrid deployment of different strategies around co-packaged optics. And many of the optical capabilities that we're developing today will be very applicable when it comes to embedded or co-packaged optics in the future, which designs. Operator: And there are no further questions at this time. I will turn the call back over to Rob Mionis, CEO, for closing remarks. Robert Mionis: Thank you, and thank you all for your continued support. We're pleased with the results to date and our continued momentum into Q4 and into 2026 and beyond. We're also looking forward to seeing you later on this afternoon at our events luncheon. Thank you again, and have a wonderful day. Operator: And that does conclude today's call. Thank you all for attending. You may now disconnect.
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, ladies and gentlemen, and welcome to the Airtel Africa Half Year Results for the year ended March 2026. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Chief Executive Officer, Sunil Taldar. Please go ahead, sir. Sunil Taldar: Thank you. Hello, everyone, and a very good evening, good morning to you all, and thank you once again for joining us today. I have with me Kamal, our CFO; and Alastair, who is Head of our Investor Relations. Let me give you some brief highlights over the last 6 months before running through our strategic and operational achievements and how this has translated into a strong set of results we have reported today. After that, I will hand over to Kamal to run through the financials. We have seen our performance over the last 6 months supported by a much more stable macroeconomic and currency backdrop. This has been a very welcome development, and I believe enables us to clearly showcase the scale of growth that is available to us across the region and the ability of our team to execute against the opportunity. Not only is it positive for us and our business, but the most stable environment is really encouraging for our customer base as well as given the significant volatility that they have faced in the last few years. While this most stable environment is supportive, it is also extremely important that we really double down on our strategic focus to ensure that we can capture the opportunity that is available to us. We have seen strong growth momentum in both our operational and financial performance, and this has left our constant currency revenue growth to 24.5% for the first half of the year with reported currency growth of almost 26% as currencies appreciated in many markets. This strong growth combined with continued cost efficiency measures have helped drive EBITDA margins to 48.5%. Importantly, we have seen another sequential increase in EBITDA margin to 49% in quarter 2, reflecting the sustained momentum we have seen across the business. Importantly, the overall performance we have reported today would not have been possible without a continued focus on CapEx investment, which is the foundation of our ability to sustain the revenue performance. The strong backdrop and strong operating performance gives us increased confidence in the outlook, and it is this that has driven our decision to increase our CapEx guidance for this year, which Kamal will talk through later in the presentation. The strong performance has driven free cash flow generation, which has further enhanced the capital structure of the group, enabling the Board to declare another 9.2% growth in the dividend. Our purpose is to transform lives across Africa by bridging the digital divide and drive financial inclusion through the continued rollout of our mobile money services. This slide serves to highlight the key components of our performance over the last year, which is facilitating our purpose across Africa. Over the year, we have seen a continued increase in smartphone penetration and an accelerating growth in our mobile money customer base to approximately $50 million. We will unpack this a little later on in the presentation, but we have been consistently expanding the ecosystem by offering more services, which have contributed to over 35% growth in TPV or transaction value to over $193 billion annualized. The constant currency revenue growth of 24.5% for the group, again, reflects that we are a business that continues to see one of the industry-leading levels of growth in the global telecom industries, and we will continue to drive growth through the consistent deployment of our strategy. The revenue growth and cost efficiency measures have contributed to a further uptick in EBITDA margins, as I mentioned earlier, and we remain optimistic on our ability to realize further efficiencies. In addition, our capital structure remains attractive, which gives us the flexibility to continue investing across our network. With lease adjusted leverage down to 0.8x and 95% of debt in local currency, we are in a strong position to accelerate network investment while also enabling shareholder returns. This slide serves as a snapshot of our financial performance over the last 6 months. Revenues of almost $3 billion for the last 6 months, growing at almost 25% is certainly a very strong performance. The EBITDA growth of almost 32% is once again a strong performance with improving margins, which has significantly contributed to the 10x increase in basic EPS. Importantly, FCF generation was very strong in this period as well. It's worth reminding you that it is not only this period's performance, which has been strong, even on a 5-year CAGR, revenue and EBITDA have increased by 20.6% and 24.8%, respectively, showing that this performance is not a one-off. It is a reflection of a sustained performance over the last 5 years. Let me now spend a few minutes explaining the significant opportunities across our markets and how our strategy will enable us to continue executing on this opportunity. Many of you will recognize this slide, which summarizes the key components of our strategy. Our business strategy is designed to ensure we continue to address the huge opportunities in our 14 markets and deliver sustainable, profitable growth that creates value for all our stakeholders. The 6 pillars of our strategy focus on our investment and the expertise of our talented people on the core business activities that will unlock the significant opportunity. It is underpinned by a continuous drive to keep optimizing cost, meeting our sustainability objectives and sustained investments in our talent. At the heart of the strategy are our customers. Our success is driven by enhancing their experience, and this is why everything is designed around the customer. Now let me briefly touch upon a few initiatives, which showcase how our strategy is being embedded across the business, and how it is driving practical benefits for our customers to increase customer loyalty and drive an improved offering. Let me address a few of them very brief. The first is the Airtel AI SPAM alert, which was really designed to protect our customers and provide a solution -- and provides a solution to tackle our customers concerned about the high level of spam messages and calls they receive. We are receiving very positive feedback from our customers as the technology really provides a differentiated customer experience and increase loyalty. Developing partnerships across our markets is key to strengthen our customer proposition and promoting digital inclusion by expanding access to reliable connectivity across our markets. We have partnered with Starlink to enhance our offerings and our network sharing agreements with Vodacom and MTN will also contribute to the accelerated rollout of services across our key markets. We're also seeing very pleasing progress as we scale HBB and enterprise with the continued growth in HBB customers and the recent launch of East Africa's largest data center. This is just a brief snapshot of key strategic initiatives across the business. Let me now briefly reflect on the opportunity and the recent performance of our business. The scale of the opportunity across Africa remains substantial despite the strong operating performance we have reported of late. From a high level, we have a population of over 660 million people. But importantly, the demographics are very attractive with the median age of under 20 years, which compares to over 42 years of age in developed markets. This shows the scale of the population that will be the customers of the future, supporting the outlook for our customer base. This, combined with relatively low levels of smartphone penetration will continue to support data customer growth but also data usage as new and existing customers increasingly use more data services often for the first time. Home broadband is an area which we are very focused on. And the chart on the bottom left reflects why we are encouraged by the potential. We have very low home broadband penetration across our markets, will inevitably increase as rollout of these services to a wider segment of the homes across the region. And then for our mobile money segment, many of you will be aware of the levels of financial inclusion across our markets. With only 35% to 40% of adults owning a bank account compared to over 90% in more developed markets, this is a key opportunity for us, and you will be able to see how we are executing against this opportunity. Before running through the individual segments, this chart aims to show that our growth of almost 25% in constant currency at the group level is not only down to one segment, instead it is broad-based growth across both businesses with the Mobile Services segment growing by over 23% and Mobile Money by 30.2%. We continue to see this as a differentiating factor for us with both business segments delivering on growth opportunities. Now let me first focus on the Mobile Services segment. We continue to see the onboarding of customers as a key priority. The focus remains on strengthening our go-to-market to ensure we remain accessible to our customers, a key strategic objective. But it is not all about our distribution. It is also maintaining network investments to ensure increased capacity and coverage and embedding digital services across our footprint to simplify the customer journey. The results speak for themselves with customer-based growth accelerating to 11% in the period and voice remains a key driver of our mobile services segment with ARPU continuing to expand as usage on the network continues to expand, translating into a 13.2% constant currency growth for voice services. As many of you are aware, data remains a substantial opportunity for us given the scale of the demand across our footprint. With population coverage of over 81% and almost 99% of our sites being 4G enabled, we continue to prioritize investment into the network to facilitate this demand, providing enhanced coverage and capacity is all fundamental to being able to provide a customer experience that will not only maintain loyalty but also attract new customers to our network. This was all supported by the initiatives we have spoken about around digital innovation and simplifying the customer journeys, driving accelerated data customer growth. We've also seen smartphone data customers continue to grow faster than the data customer growth as more customers migrate to smartphones, ultimately driving increased usage. During the period, we saw data traffic increase over 45% as usage per customer continues to rise to 8.2 GB per month. The sustained data demand story has contributed to 37% growth in data revenues and has now become the biggest component of revenue for the group, which we see as another support for our top line growth outlook. Now turning to our mobile money business. The chart on the left and the chart shared earlier confirms our views that our mobile money business operates in a vast underpenetrated markets. We operate in one of the world's largest untapped financial services market, supported by powerful demographic tailwinds, rapid urbanization, rising smartphone adoption and surging demand for digital financial inclusions and solutions. While the outlook for mobile money looks attractive, it is important to highlight our structural competitive advantage with a captive customer base with only 29% of our telecom customer base currently using the service. This, combined with our extensive on-the-ground infrastructure provides us with a unique opportunity for increased market reach and low-cost scalability providing a substantial differentiation versus our competitors. What I mentioned in the previous slide, is clearly playing out in terms of our operating and financial performance. The opportunity, the distribution reach and the scalable customer-centric platform gives us the ability to offer a range of different services, which is ably supported by deep-rooted partnerships, which can unlock new growth opportunities and drive the business to new levels. This, combined with continued innovation and the rollout of digital offerings has seen an accelerating uptake in customers and we are now approaching $200 billion of annualized transaction value with ARPUs up 11% in constant currency terms. The result has been a strong 30% growth in revenues which has once again been sustained over a number of years, indicative of the opportunity this business holds. The strong performance of the top line should also put into context of the overall financial performance with EBITDA margins of almost 52% profit after tax for the period of $188 million and strong operating free cash flows. Let me briefly touch on how our mobile money business has evolved and is likely to continue evolving in future years. The business mix has transformed as we have innovative products, which have been rapidly adopted by highly engaged user base. This is particularly evident within payments and transfers, which has grown to 42% of our revenues from 33% 5 years back. These revenues have been growing at a 5-year CAGR of 36% and continues to see strong growth. In addition, we are particularly excited about our financial services product segment, which captures our most recent innovation in the bank to wallet, lending savings, wealth and insurance sectors. Over the last 5 years, these products have been growing at a CAGR of 61% with the last 12 months having seen the growth of 73% in constant currency. Overall, this mix shift reflects our maturing customer cohorts, adopting a richer set of use cases and illustrates our trajectory towards a diversified resilient ecosystem with high monetization per user. Let me now briefly call out the key conclusions from our recent performance in each of the regions, starting with Nigeria. We have continued to see strong operating momentum in Nigeria with customers increasing around 10% and ARPU is growing almost 40% in constant currency. We are very encouraged by the macro stability that has returned to Nigerian markets, which has enabled us to report these strong trends. While the tariff adjustments made by the regulators have certainly benefited our performance, we have seen sustained usage growth, particularly in data driving a strong revenue growth performance of almost 15% in the period. EBITDA margins have increased by over 7 percentage points as a strong revenues improved macro and stable diesel prices and execution of our cost efficiency measures have taken hold. In East Africa, trend remains strong with constant currency revenue growth of around 40% despite the high base. What we've also witnessed in the region is some appreciating currencies, which resulted in reported currency growth of almost 23% for the region. Once again, the strong subscriber base growth and increased usage of our services, which has driven rising ARPUs has been foundation of the strong growth with EBITDA margins rising to over 53% in the period. The performance in the Francophone region has also been very encouraging. We've been seeing a clear turnaround in the performance in the region driven by consistent focus on driving base level growth through the relentless focus on our strategy. This combined with increased adoption of services has contributed to an ARPU increase resulting in strong revenue growth of 16.1% in constant currency. Currencies have also benefited from appreciation resulting in reported currency revenue growth of 19.2%. This improved revenue growth -- revenue performance supported by a continued improvement in EBITDA margins over the year with EBITDA margins up 122 basis points over the year to 44%. Before handing over to Kamal, let me briefly touch upon the opportunity in enterprise and home broadband and what we are doing to capture this. We are in a unique position to really drive the home broadband opportunity, utilizing our extensive 4G and 5G network. Home broadband services can capture a higher share of wallet by bundling premium connectivity with entertainment, smart home and mobile offerings that deepens customer engagement and drives increased ARPU. We are already seeing a strong performance, and we look forward to reporting further successes. The growth of the enterprise segments and the scale of the SME sector also provides a real opportunity for us to capture the evolving needs of the enterprise and public sector, in particular, we announced recently the commencement of construction for a 44-megawatt data center in Kenya, which will run alongside the ongoing construction in Lagos of our Nigeria data center. In conclusion, hopefully, this clearly summarizes our position across the market and reflects the performance we have achieved over the period. Importantly, we believe in our strategy and the execution of this strategy is integral to capturing these opportunities. Let me now hand over to Kamal to run through the financials. Kamal Dua: Thank you, Sunil. A very good morning and good afternoon to all of you. Let me start with the key financial highlights. Overall, this was a very good quarter and the first half of the year for us with a strong set of financial results, which was also helped by stable to positive macroeconomic environment in most of our geographies. Revenues for the first half at almost $3 billion, grew by 25.8% in reported currency and 24.5% growth in the constant currency. The reported currency growth was higher compared to constant currency growth due to the appreciation of currencies in few markets. For the quarter ended September, the reported currency revenue growth was at 29.1% against constant currency revenue growth of 24.2%. The acceleration in revenue growth was also supported by tariff adjustment in Nigeria, which we did it in quarter 4 of the last year. EBITDA at $1.45 billion in reported currency grew by 33.2% in the half year. The EBITDA margin at 48.5% improved by 268 basis points in reported currency and 258 basis points in the constant currency. This expansion in margin is a result of our operating momentum, sustained benefit from our continued cost efficiency programs and stable macroeconomic environment. Quarter 2 EBITDA margin reached at 49%, up from 46.4% in the prior period. The CapEx investment for the half year was at $318 million, which was similar to the prior period spend. Given the revenue growth momentum and stable macroeconomic environment during the period, we have revised our CapEx guidance upwards to $875 million to $900 million for the current year as compared to the previous guidance given of $725 million to $750 million. Resultant operating free cash flow at $1.1 billion in reported currency is up by 46.5%, primarily driven by the growth in EBITDA. Lease adjusted leverage at 0.8x improved from 1x again due to higher EBITDA. Similarly, our leverage at 2.1x improved from 2.3x. Earning per share before the exceptional item at $0.083 in half year was up 70% as compared to prior period EPS of $0.049. Prior period also had an exceptional ForEx losses as a result of significant naira devaluation, and basic EPS for prior period was only $0.008 as compared to $0.083 in the current period. The EPS for the first half of this year is also helped by the derivative and foreign exchange given on account of appreciating currencies, the positive impact of which is $0.014. The Board has declared an interim dividend of $0.0284 per share, up 9.2% versus last year, in line with our current dividend policies. Coming to the next slide. The overall revenue growth was at 24.5% in constant currency, while in reported currency, the growth was 25.8%. The reported currency revenue growth was also supported by the currency appreciations mainly in the Central African franc, Ugandan shilling and Zambian kwacha. In constant currency, our All Service segment grew double digit with voice revenue 13%, data up by 37% and mobile money revenue up by plus 30% on a year-on-year basis. With this, the absolute data revenue is now higher than the voice revenue in our GSM business. The consolidated EBITDA at $1.45 billion is up by 33.2% in reported currency, while the constant currency EBITDA grew by 31.5%. The group EBITDA margin improved by 268 basis points in reported currency to reach 48.5% for the period. In constant currency, the margin improved by 258 basis points. As discussed earlier, the margin improvement was driven by flow-through from our accelerated revenue growth, continued benefits from our ongoing cost efficiency programs and further supported by the stable to positive macroeconomic environment in most of our markets. Coming to the next slide. This slide reflects the key component of finance cost movement from last year. In prior period, we have derivative and foreign exchange losses of $260 million, of which losses on account of naira devaluation was $231 million, which was categorized as exceptional. However, the current period was supported by a derivative and foreign exchange gain of $90 million, especially on account of appreciation in Nigerian dollar, Central African franc and Uganda and Tanzanian shilling. Excluding the impact of derivative and foreign exchange fluctuations, finance cost increased by $126 million, largely driven by higher lease interest of $108 million, which was primarily related to the renewals of our tower contracts. As communicated in the earlier periods, the increase in finance costs due to tower contract renewal is an outcome of application of IFRS accounting standard. However, the renewals have neutral to positive impact on the cash flows of the company. Higher interest on the market net was on account of our dedollarization program. As you all are aware that we have moved a significant portion of OpCo debt from low interest foreign currency debt to high interest local currency debt, which has shielded us from exchange rate volatility by reducing our foreign exchange exposure. Coming to the EPS. EPS before the exceptional item was up 70% to $0.083 in the current period as compared to $0.049 in the prior period. Excluding the impact of derivative and foreign exchange fluctuations, EPS before exceptional items improved from $0.054 in the prior period to $0.069 in the current period. This increase was driven by higher operating profits during the current period which partly got offsetted by the higher finance charges, which was primarily due to higher lease interest on account of the renewal of the contract, which has been discussed in the last slides. Coming to the normalized free cash flow. The business generated a free cash flow of $368 million in the current period as compared to a loss of $79 million in the prior period. This slide gives us a bridge between EBITDA and normalized free cash flow for the current period. The difference between the 2 other cash payments from the EBITDA in the current period will primarily include the CapEx payment of $356 million, income tax payment of $203 million, which also includes the dividend tax, the cash interest of $388 million and the other cash payments, such as lease repayments and the dividend distribution to the minorities. We continue to focus on strengthening our balance sheet by reducing our foreign currency debt exposure across OpCos. OpCos foreign currency debt is now at 5% as compared to 11% last year, while HoldCo continue to be debt free. Our group leverage at 2.1x has improved from 2.3x compared to last year as a result of increasing EBITDA. The lease adjusted leverage has also improved from 1x to 0.8x. Our strong operational and financial performance has translated to a substantial return that we have given to our shareholders in the last few years. We have returned $1.3 billion in the last 5.5 years by way of dividends and the buyback of the shares. On our capital allocation, our allocation policy remains the same and consistent as was in the last period. Our key priority remains to continuously invest in our business. strengthen our balance sheet and return cash to the shareholders. Our CapEx remained stable compared to the previous year with a notable increase in spending during the second quarter. With the stability in the macroeconomic environment and sustained industry growth, we believe this is a time for us to accelerate some of our CapEx investment to support and accelerate our business growth. Consequently, we have revised our CapEx guidance from the previous range of $725 million to $750 million to $875 million to $900 million. This additional CapEx will primarily be allocated towards network investment in expansion of 4G, 5G data capacity and the coverage expansions. The second pillar of our capital allocation policy is to ensure a sustainable capital structure with leverage having fallen by 0.2x and a low level of dollar debt on our balance sheet. I'm very pleased with the current state of our capital structure. Finally, the third pillar is all about returning cash to shareholders through our progressive dividend policy. This policy has been very consistent and is again reflected in the Board decision to pay an interim dividend of $0.0284, a growth of 9.2%, which is almost consistent over the last few years now. With this, let me now hand over the call to Sunil for his concluding remarks. Sunil Taldar: Thanks, Kamal. Finally, on Slide 30, just a few words on summary and outlook. As you've seen from our results, our strategic focus has consistently driven positive momentum across the businesses and reflects our strong track result in execution. Key to delivering value to our stakeholders is to drive continued growth across our base. Our focus will remain on investing in our network and on further expanding our distribution to be closer to our customers, while at the same time, looking at new opportunities for growth. Mobile money remains a fantastic business, and we look forward to the upcoming IPO in the first half of calendar 2026. The recent macro backdrop has been supportive for our business of late, which has been very welcome. But this does not change our relentless focus on executing our strategy to maximize our value creation for all our stakeholders. We are exposed to a region which offers a fantastic growth opportunity. We have shown a very strong track record of execution, and we have a capital structure that will allow us to continue executing on our strategy. This puts us in a very strong position to drive significant value for our shareholders. and we look forward to reporting on these successes in the future. And with that, I would like to thank you all for your attention today, and we would now like to open the floor for questions. Operator: [Operator Instructions] The first question we have comes from Ganesh Rao of Barclays. Ganesha Nagesha: So a couple of questions from my side. The first one on the CapEx guidance. So could you provide some color on the factors that are driving the increase in the CapEx for the year. So how much of this is one-off project versus the structural hike? And do you believe like this represents the peak in spending? Or how should we about CapEx trajectory heading into, let's say, FY '26, '27. My second question is on the Nigeria market. So while the data consumption remained strong in the region, so the voice usage has seen like double-digit decline during the quarter. So how do you see the trends evolving in the market? And when do you expect overall growth to return to normalized level for the voice usage? Sunil Taldar: All right. Thank you for the question. Let me just respond to the first on the CapEx guidance first. See if you look at, there's been a significant improvement in the overall macroeconomic environment across most of our markets. And this is supported by a reduction in inflation and currencies are stable. The opportunity in Africa across our footprint remains very, very compelling and additional spend will only allow us to create a platform to capture further growth. With the stability in the macroeconomic environment and sustained industry growth outlook, we believe this is the right bank for us to accelerate some of our CapEx investments to support and accelerate our business growth. Now the step -- what this does, this increase in CapEx, it actually demonstrates our confidence in the market and the opportunity that exist in the market. And as we execute our plans, we are very hopeful and confident that our customers will continue to support us and reward us. The additional CapEx that we are deploying is predominantly going into 3 areas. The first is you've seen the numbers. There is a significant increase in our data consumption, overall data usage. The first is increase in data capacity across regions, which will further future-proof our growth initiatives and unlock additional revenues for our avenues for growth. This includes a particular focus on 5G services to enhance our network quality and speed across key areas in our larger markets. So that's the first area where the additional CapEx investments are going. The other is, there remains an opportunity in Africa on expanding our coverage as we are seeing response to our investments. What we're trying to do now is to accelerate our network coverage and drive digital and financial inclusion across our markets. And this is the reason why we are significantly scaling up our capital investments in the second half. And as I said, what it does is it actually -- it reflects increased confidence that we have in the market, given the recent stable macro environment and the sustained demand that we've seen, which has also been reflected in our results. The acceleration in spend will enable us to further capture the share of the market. That's the reason why we are accelerating spends on CapEx. Coming to your question -- second question on Nigeria. See if you look at Nigeria, the overall performance remains very strong. We have seen a significant improvement in our overall revenue growth, as you pointed out. There is -- the voice revenue growth has -- from our last quarter of 36% has come down to circa 33% -- 32%, 33% this quarter. There is predominantly 2 reasons that we ascribe to this. First is, there is some amount of seasonality that we see in the business, which is what has kicked in. The second thing that has happened is voice is very closely associated with the base growth. We've seen that in Nigeria because of changes in NIMC platform, the entire industry acquisition got impacted in back half of June and some part of July. And this is something that is also getting reflected in our overall -- the voice volume that -- or revenue that you are alluding to. Lastly, there are certain -- they've also done tight rating on certain payments that we had in the business, which is getting reflected. Overall, the health of the business, underlying metrics, they remain strong. So that's how I would say is what's happening in the Nigeria business from a voice revenue point of view. Can we have the next question, please? Operator: The next question we have comes from Maddy Singh of HSBC. Madhvendra Singh: Congrats for a great set of results. Just a couple of questions from my side. The first is a follow-up on the CapEx part. If you were to give some indication on the split of the incremental CapEx. Is the more of the new CapEx going into backhaul or radios? And what about the data center part? Because it seems like your data center ambitions are also going to cost decent money. So how much of the CapEx increment or overall CapEx for this year is going into data centers? So if you could talk about that. And then secondly, on the -- your home broadband strategy, that is very interesting to see that you are talking about that in such -- I would say, increased passion. So I wonder, why do you think 4G is the right way to do that? Wouldn't 5G be a better fixed broadband, home broadband -- fixed wireless home broadband strategy from that perspective, 5G would be better? Or is that also part of the CapEx plan that you want to do more of that using this incremental CapEx. So if you could talk about that. And just on the same topic, if you could also give some indication on which countries is the CapEx actually going into? Is it Nigeria? Because second quarter in Nigeria was apparently quite low on CapEx. So I wonder which countries the CapEx is also going? Sunil Taldar: Sure. Thank you very much for your questions and your comments. Let me just quickly try and address the 3 questions that you asked. On the CapEx, as I said, most of our CapEx are going into network, and this is predominantly in driving data capacity and coverage. We don't provide split between data capacity, transmission or the size, which is going into coverage. But net-net, this entire investment is going into making sure that we are delivering the best experience to our customers in the market as we see a significant increase in our usage or consumption of our services across both voice and data. The second thing is with the improvement in the macroeconomic environment, we also felt that there is a need for us to accelerate our coverage expansion, and this is something that we are doing. And that's where the investment predominantly is going. When we look at addressing need for creating capacity for higher data consumption, it would actually mean addressing both radio as well as backhaul or transmission. So to answer your question very simply, it is radio transmission both and also capacity and coverage. That's how we're looking at our overall CapEx investments going. On your question on data center, this increase doesn't capture any investment on the new data centers that we've announced, whether the investments that we announced for our data center in Nigeria or in Kenya that we recently announced. Most of those investments will come in the future. So these are all long gestation projects. Moving on to the question that you asked on home broadband. See, home broadband, we see as a very, very attractive opportunity for Africa because the current penetration in home broadband in this category is very, very low. And that is the reason we said that this category needs a lot of attention and for us to make right investments, at the same time, build our capabilities within the business to be able to go and capture this opportunity. The approach that we are taking is to first leverage our 5G investments in spectrum through the FWA rollout because that's where we are able to -- with respect to speed to market and also the current consumption in the market for the customers is relatively low, and we believe that we will be able to meet the customers' expectations, meet their consumption requirements and offer very good experience through the FWA. So it serves both the purposes for us to be able to leverage our 5G spectrum investments or the radio investments. At the same time, also deliver the right experience to our customers. Having said that, we are also, at the same time, looking at selectively wherever we need to deploy fiber home buses in select geographies within our markets. So that's the work which is separately happening. But this is an evolving space. We have started this work. We're building a lot of capabilities, as I said, both in terms of our ability to serve our customers, our go to market and our ability to manage and deliver experience to our customers, and we'll continue to give you more updates on this front as we progress. The third question was with respect to which countries that we are looking at from a home broadband point of view. This home broadband, we're looking at across our footprint. In most cases, the opportunity actually is in the urban markets. On the CapEx, the question that you asked, which countries? We don't provide country-level breakup. The breakup at the market segment is available in the results that we have declared. In Nigeria, there is also -- overall, if you look at in the first half, our CapEx is very similar to what we had last year at an overall level. Quarter 4 of last year saw significant CapEx deployment in two of our market segments. And therefore, this is the highest EBIT, which saw some impact in the first half of this year, but we are seeing investments going across markets wherever we feel that there is a need. Because we have a very strong framework for determining our entire capital allocation and CapEx investments. And we are guided by that, and that's something that will decide, and this is something that is guiding our decisions. So as I said, Nigeria, East Africa saw a significant quarter 3, quarter 4 investments, and you will see the rest happen across markets in the balance part of the year. Operator: The next question we have comes from Rohit Modi of Citi. Rohit Modi: [indiscernible] some of them has been answered. I have 2 follow-up on 1 question on margin. A follow-up again for CapEx part. Can you confirm like this is now the base CapEx level for future years? And given you said this doesn't include the data center CapEx that you allocated for Nigeria and that has been postponed a couple of times. That doesn't include so the CapEx should -- could I believe increase from these levels if we go ahead and build those centers as well. That's my first question. Second, again, a follow-up on the Nigeria Voice [indiscernible]. I mean, again, you can just confirm like [indiscernible] normal way of voice continue to low [indiscernible] given you have seen all the [indiscernible] have now have gone in and you will see more growth from here kind of any color there. And thirdly, on the margins, your commentary around improvements in margins. Just any color in which country [indiscernible] anything or margin improvement? And just particularly especially from Nigeria because you have [indiscernible] margins in Nigeria right now, which kind of [indiscernible]. Do you see more improvement in Nigerian margins? And what will be driving that? Is this the operational leverage or [indiscernible] margin? Sunil Taldar: Yes. So let me just try and address the questions that you asked. You were not very clear on your second question that you asked on voice -- Nigeria Voice. If you can just repeat that, that will be helpful. Rohit Modi: Sure. On Nigeria Voice, [indiscernible] you mentioned last quarter that a bit of a last year such an impact that you see [indiscernible] on voice and that grew something in last quarter, but you have seen more decline. So I'm just trying to understand, is this a bottom in terms of voice you say when you go from here? Or is [indiscernible] where you see voice is declining and data is growing and there's a bit of [indiscernible]? Sunil Taldar: So -- okay, Let me just try and address the 3 questions that you asked. The first is on the CapEx for future. We don't give future guidance for CapEx. Right now, what we have done is given the, as I said, a very strong macroeconomic development and certain need that we felt and the response that we're getting to our investments is where we've increased our CapEx for this year. We will talk about our -- the CapEx for next year, when we -- at the end of this financial year. Data center, as I called out, is not part of, say, for example, this increase in CapEx that we have. That data center investment is we will see over the course of next 2 to 3 years, because as I said, it's a long gestation, and the 10-year data center we've just announced, and it will flow over a period of time. But we'll provide details for FY '27 when we meet at the end of this year. On the voice revenue, the question that we asked -- that you asked, as I said, these are -- there are 2 reasons which is predominantly, as we said. The first is with respect to -- there is a base growth sequentially that we have seen -- there was an impact because of -- there was a NIMC correction. We expect the voice revenue to recover. At the same time, there is a little bit of seasonality that we've seen. And to separate what has been the real impact of these 2? And is there any drop in voice revenue that we see, very difficult to say at this point in time. As we start to pick up on our customer acquisition and our base growth accelerates, we should see uptake on the revenue. Having said that, because we've also done some titrating of the minutes, and which is where we are seeing some amount of consumption change as well. So voice revenue on -- we remain confident that overall revenue growth for Nigeria looks very, very solid right now. But -- and there are 2 reasons, as I said, for the impact on voice revenue. Will it continue to hold? We should see because it's very difficult for us to split as to how much of this is being caused by removal of the minutes and how much is the base growth. Coming on to your question on EBITDA margins that have reached almost 56.5%. See, on Nigeria specifically, which is where you were pointing to, the margin expansion is an outcome of first and foremost is a very stable macroeconomic environment. Because in Nigeria, in the past, we were seeing significant challenges because of inflation. The second was fuel prices. The fuel prices have -- are stable in Nigeria. The second is inflation is coming down. And the third is we remain very, very focused on our cost efficiency programs, which has also significantly helped us to improve margins in Nigeria. And in macroeconomic environments remaining stable -- and we continue -- we remain focused to make sure that we continue to push for opportunities of cost saving and cost-saving initiatives in further opportunities for saving costs in Nigeria and across all our markets. Kamal Dua: Yes. And just to build on Sunil's point, this is Kamal. We have recovered our margin from the last year of 45% to 49% now. With the stable macroeconomic conditions yes, and like this continued cost efficiency program and flow-through operating momentum, we are pretty hopeful that we will keep on working on the expansion of the margin. Subject to the stability in the macroeconomic environment, we will see the improvement in the margin, but the rate of increase in the margin may not be in line with what we have seen in the last 3 quarters. Operator: [Operator Instructions] The next question we have comes from Cesar Tiron of Bank of America. Cesar Tiron: I have 2, if that's okay. They're both on Nigeria. The first one, I'd like to understand a little bit better why your service revenue growth rate is below that, which was reported by the market leader in the past quarter. We don't -- we're not sure for this quarter, right, because we've not reported yet. But what do you attribute this to when you look at the data? Is it a difference of pricing and how you increase prices a couple of months ago? Or do you think that actually relates to network availability, which actually explains why you had to increase the CapEx so much? That's the first question. Second question, I wanted to ask about the potential for price increases in Nigeria in 2026. Do you have any opinion on it? Sunil Taldar: All right. So if you look at our overall growth in Nigeria, which is approximately 50%. So we are very happy with the growth, which has benefited following the adjustments of our tariffs, which is in line with the approvals that we received from the regulator. While I will not comment on the performance of the competition, the way we look at it is, we had 75% of our total portfolio, which is where we have applied our pricing. Was it similar or different for the competitor, we will not be able to comment on that. But the way we look at, Nigeria still continues to offer significant opportunities for us for growth. We have seen strong execution of our strategy in Nigeria. We've also seen the overall pricing has settled down well with significant growth across all the revenue segment that we have. So that's where we are, and we continue to stay focused on -- and we are making significant investments in making sure that we have enough capacities in our network and our go-to-market to be able to accelerate our growth in Nigeria. So that's for So that's on your first question. The second thing that you asked about our pricing for the future, which is for next year. There is no minimum period before which we can increase pricing in Nigeria. So we will assess when is the right time. Once -- we are right now seeing that the price -- the overall price adjustment of circa 50% has been kind of well accepted. The markets have settled. We will decide at the right time to approach the regulator and go for another price increase. Whether the extent of that is something that we will have to assess, but there is no minimum time or period before which we can take another price increase. Those options are absolutely available to the operators. Cesar Tiron: I just wanted to follow up. I just wanted to understand if the price increase that was implemented this year, was it part of a multiyear framework where we agreed with the regulator to pass on back to the customers some of the inflationary impact on the business? Or was it just a one-off? Did you agree on the framework? Or did you -- just on the one-off in 2025? Sunil Taldar: This was -- because given the inflationary conditions that were during the time when we reached the regulator for a price increase, that is a time that when -- there were 2 or 3 pressures in Nigerian economy at this point in time. This was a significant devaluation of currency, very high inflation, high fuel prices. To offset all of that, this was the price adjustment that the authorities have agreed to give to the industry. This, I don't think serves as the precedent or neither was there a time period, as I said. So we have the option to go back to the regulator and ask for another price increase at the right time. And this is something that we will surely assess. Yes. Thank you. Operator: The next question we have comes from David Lopez of New Street Research. David Lopez: I have 2. The first one is on mobile money in Nigeria. If you could give us an update on how long do you think you need -- how much time to fully build the base? And when should we see a step up in revenue there? And the second question is just on the spectrum auctions, if you could tell us what are the upcoming spectrum auctions across the group, please? Sunil Taldar: All right. So let me first address the Nigeria money opportunity. So if you look at Nigeria offers a very large opportunity for the mobile money business. At the same time, it is also relatively as compared to what we see on the other parts of our footprint, it's an evolved relatively more mature markets with significantly a large fintech operators as well as banks well entrenched in the ecosystem. Having said that, we have a very clear opportunity because we currently enjoy an existing relationship with our customers. and with high smartphone adoption, this market offers significant opportunities for growth for us. So where are we focused right now is -- and I say this, I think almost I've said this even in the past quarters, that this market is going to take some time as long as we are doing the right things and building the right capabilities to be able to win with our customers. So I'll tell you what we are doing right now, and we are seeing early green shoots of some of the work that we're doing. In terms of our key focus areas, we first is acquiring quality customers. In terms of our base growth, we now have about 2 million active customers in Nigeria. And most of these customers, a very large portion of these customers is engaged in our mobile money app, which allows us to engage with them very, very actively. The second thing that we are doing is we're building capabilities to be able to meet all the asks and demands of our customers and match up to the functionalities that they get from other fintech. Whether it is a virtual card or a saving bank account, these are capabilities that we are rolling out in Nigeria. The way I see it, it's a big opportunity. Our teams are doing a fantastic job in building capabilities and acquiring customers. And the only thing that I will say is, this is relatively a difficult market because it's a well entrenched market. It's going to take us some time, but this is one area where we are -- we have a massive focus and there is -- we're not leaving any stone unturned, neither are we saying no to investments to accelerate our business in Nigeria. As I said, we are already seeing some early green shoots, which make us hopeful that we'll be able to turn around this business in Nigeria. Coming to -- Kamal, do you want to just talk about the spectrum auction business? Kamal Dua: Yes. In 2027, I think Nigeria 10 megahertz of 900 is coming for renewals and Kenya, license for 2G, 3G will start coming for renewal. So these are the 2 large renewals, which is due in 2027. Thank you. Operator: [Operator Instructions] I would now like to hand over to Alastair for any webcast questions. Please go ahead, sir. Alastair Jones: Yes. Thank you. Just a couple of buckets of questions coming in from the website. I was hoping that Sunil and Kamal address. Firstly, just in terms of the mobile money, the intragroup agreements, there were some amendments made -- and just some clarity on what those renewed agreements would impact, how they impact revenues and sort of what is the retention revenue? What you sort of define as retention revenue? So that's on one point. And then the second point, just coming back to cost efficiencies. Can you elaborate on any specific cost efficiency initiatives that you are looking at the moment? Could you just give some sort of color as to how -- what efficiencies we're looking at? And secondly, just associated with that, has there been any margin benefit from a drop in fuel prices or diesel prices in our numbers for this quarter? Sunil Taldar: Sure. So let me address your first question, which is on the IGA changes. See if you look at our GSM business and mobile money business, they are interdependent businesses. And in ordinary course of business, there are various services exchange between them such as Airtel Money providing services for -- to the GSM business like recharge collections and disbursements. Similarly, GSM providing services to Airtel Money like SMS, USSD and go-to-market, et cetera. So these -- all these agreements that we have, all these services are governed by long-term agreements that we have. And these agreements are very established, and they are also as per -- they're fully compliant with the regulation for both the businesses. As these long-term agreements came up for -- as I said, they were agreed upon some time ago, and this was time for us to -- as they come up for renewal and in line with the market benchmarks, so we've kind of revisited these agreements and renegotiated the terms of intragroup agreements in line with the changing market dynamics between the mobile services and the mobile money businesses during the second quarter, while ensuring that they continue to be on arm's length. These agreements are also discussed and aligned and agreed with the minority shareholders. So that's where we are. And the full impact -- and I must also add here, the full impact of these agreements or of these changes will come in phases over the next 8 to 10 quarters based on the current volumes. The current year impact will be circa about in terms of percentage EBITDA because Airtel Money is also a very high-growth business. In percentage terms, the impact would not be maybe more than 1 or 2 percentage points of EBITDA as we go forward. It will be in low single digits is the way I would put it, overall impact of the IGA changes on the Airtel Money EBITDA. And coming to your second question on cost efficiencies. There are 3 or 4 areas that we look at from a cost efficiency point of view. The first is if you look at where our big cost components are? Our big cost is actually in network. The way we are looking at is, first is a big -- within network, a big cost component is our tower running expenses, which is energy. So what we're doing is we're working with tower companies to invest in more energy-efficient solutions, whether it is batteries or solar, invest in lithium-ion batteries or solar equipment, and this is one area that we're working on. The second area that we are working on is, as we look at our new sites which are coming in either in rural or these are the infill sites in urban areas. So instead of having a full macro sites, do we have lean sites, which are relatively lower in terms of cost -- running cost is lower. The third area is moving sites from off-grid to grid. So these are 2 or 3 areas where we are working very closely to be able to generate certain efficiencies. And as we said that the stable oil prices is one of the reasons for us not to see margin kind of deterioration we've seen some benefit because our oil prices have, by and large, been stable. We've not seen oil prices go down. We have seen oil prices remaining stable. So we're not adding to increase in costs, but at the same time, there is -- we're not seeing a significant cost reduction because of oil prices. Alastair Jones: Thank you. Go back to the Q&A. Operator: The next question we have comes from John Karidis of Deutsche Bank. John Karidis: Is it possible, please, to explain the reasons for the nearly sort of 200 basis points reduction in mobile money EBITDA margin in the second quarter, I'm trying to figure out whether it's exceptional or not. And then secondly, regarding the CapEx, I'm sorry to come back to that. I know you don't give guidance for next year, I'm just sort of trying to figure out whether we should all go back to our spreadsheets and assume $150 million more CapEx per year going forward, from what you say in terms of coverage, once you get the coverage, you don't need to keep expanding. But for data capacity, you might need to keep adding capacity. So if I were to look at your CapEx envelope over more than 1 year, are you bringing forward capital expenditure? Or are you sort of increasing capital expenditure consistently over that period of time, just so that we know what to put in our estimates, please. Kamal Dua: Okay. Thank you for your question. I'll take your first question first on the mobile money EBITDA margins. As Sunil had just spoken about our renegotiation of the intragroup agreement, the impact of those renegotiations is roughly $11 million on EBITDA of Airtel Money, and which has an impact of roughly 2.3%, 2.4% on Airtel Money. So if we normalize for that, intrinsically, the EBITDA margin of Airtel Money is flat to slightly positive. So there is no one-off exception which has been sitting in the EBITDA margin of Airtel Money. I'll hand it over to Sunil to take the second part of the question, please. Sunil Taldar: Yes. Your second question was the future guidance of CapEx, right? Essentially, I'll be repeating myself... John Karidis: I'm sorry, I'm just trying to figure out whether this is a sort of permanent increase in yearly CapEx or not? Because if I read what you're saying, if you're going just for coverage, you only spend it once. But for data capacity, you spend it yearly. So just sort of a steer would be good. And by the way, I'm sorry, I asked the same question about the margins. The line is not good. So I'm sorry about that. Sunil Taldar: Okay. Let Kamal repeat the response of the margin. Kamal, the line wasn't clear. So... Kamal Dua: No worries. So this margin drop is on account of the new intergroup agreements, which came into effect effective first of July this year. The impact of that is the margin for mobile money is coming down. The impact on the mobile money absolute EBITDA is roughly around $11 million. And on year-on-year margin is roughly around 1.5%, 1.3%, 1.4% for the first half and 2.3%, 2.4% for the quarter, if you compare the same quarter of the prior period. So if you adjust for the impact of the renegotiation of the intragroup agreement between the group, intrinsically, the margin for mobile money is flat to slightly positive. So that was an answer on intragroup agreement. If you don't have any further question on mobile money margin, I'll hand it over to Sunil to answer the CapEx part of the question, please. Sunil Taldar: So I'm assuming that your mobile money margin question is answered. I'll respond to your question on CapEx investments. See, I'll be kind of repeating myself, but it is very -- we don't give future guidance on CapEx investment. Having said that, when we -- CapEx has -- when we did this exercise with the recent increases in data consumption and also a need for us to accelerate given the response that we are getting in the market. It's a very detailed exercise that happens to determine what's the real CapEx requirement for the businesses. Now our next year client cycle actually has just about started and we will conclude this by December, and that's when we go to the Board because there are many moving pieces. With this investment that will go in how much of the population that we are wanting to cover that gets covered, how much capacity have we added? There is also some amount of changes, which is what I was alluding to the other question on margin, which is I spoke about, which is a mix of lean sites versus macro sites. So there are a few -- and plus there are a few moving parts that we have, and therefore, it is very difficult for us to give any guidance to say whether this is a new normal or that we will go -- or this is a one-off. For this year, definitely, what it actually talks about is our confidence in the overall macroeconomic environment remaining what it is. And we felt that this is the right time for us to make investments, create capacities, deliver great experience, accelerate our growth and take higher share of the growth opportunity that Africa offers across our footprint, which is something that we've done. We'll have a little more clarity once we have done our own workings to say whether this is going to be -- which is probably that you're trying to understand, same as next year or probably a new normal. But we are not in a position to help you to plug this in your worksheets, so to speak, which is something that you're trying to solve here. Alastair Jones: Just to clarify quickly just on the commentary around the intragroup agreements amendments, just what Sunil was saying, the impact over the sort of medium term as a result of those agreements, given volume flows, et cetera, is going to be low single-digit impact on EBITDA margins. Just to clarify that. Sunil Taldar: Yes. The impact of these intergroup agreements on mobile money margins will be in low single digit. Operator: Ladies and gentlemen, unfortunately, we have reached the end of our allotted time for today's question-and-answer session. Sir, would you like to make any closing comments? Sunil Taldar: Yes, I want to thank everyone for joining the call today and for all their questions, and we look forward to our continued engagement with you all. Thank you. Thank you very much. Kamal Dua: Thank you. Operator: Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Operator: Good morning, and welcome to Banco del Bajio's Third Quarter 2025 Results Conference Call. My name is Leonard, and I will be your coordinator today. [Operator Instructions] Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. Please note that this video conference is being recorded. Joining us today from BanBajio are Mr. Carlos De la Cerda, Executive Vice Chairman of the Board of Directors; Mr. Edgardo del Rincon, Chief Executive Officer; Mr. Joaquin Dominguez, Chief Financial Officer; and Mr. Rodrigo Marimon, Investor Relations Officer. They will be available to answer your questions during the Q&A session. For opening remarks and introductions, I would now like to turn the call over to Mr. Rodrigo Marimon. Mr. Marimon, you may now begin. Rodrigo Marimon Bernales: Good morning, everyone, and welcome to Banco del Bajio's conference call to discuss our third quarter 2025 results. Today, we will review our quarterly performance and discuss the strategic evolution of our key financial trends. The industry information cited throughout this presentation is based on CNBV's data as of August, representing the most recent publicly available information. Without any further ado, let's start with the presentation. Let's start on Slide 3 with a brief look at our key financial highlights for the quarter. Our total loan portfolio expanded 5.4% year-over-year, fueled by the 7.7% growth in our company loan portfolio. This growth was supported by total deposits, which grew 13.7% year-over-year, showing a sequential growth of 4.3% in the quarter. Regarding asset quality, our nonperforming loan ratio stood at 1.97% with our coverage ratio at 1.16x. Our cost of risk stood at 109 basis points. Turning to profitability. We reported a quarterly net income of MXN 2.3 billion to an ROE of 19.7%. Our net interest margin was 5.9% and the efficiency ratio stood at 39.5%. Looking at the 9-month period in 2025, the ROE was 19.9%. The net interest margin was 6.1% and the efficiency ratio at 38.6%. Our capital position remains strong. The preliminary capitalization ratio reached 15.9%, an increase of 136 basis points from the second quarter 2025. This increase was partially the result of our decision to no longer apply our internal methodologies for portfolio reserves and capital requirements for the SME and company portfolio. This decision increased our capital ratio by 82 basis points. Moving to Slide 4. We highlight the success of our digital transformation strategy and the evolution of the number of transactions processed through BanBajio's channels. The charts on this slide illustrate the structural shift we have executed in client transactions. Today, digital channels are by far our most important transactional channel, leading to a decrease in absolute branch transactions compared to 5 years ago when they were still dominant. The chart below shows a similar evolution for the transacted amounts at these channels. We have achieved a compound growth rate of 24% in transacted amounts over the last 5 years. Within that period, volumes processed through BajioNet have increased by a multiple of 3.7x, while branch volumes grew only 1.5x. Transacted amounts through BajioNet now accounts for 82% of all transacted amounts, up significantly from 64% in the third quarter of 2020. The increase in volume and transacted value processed through our digital channels demonstrate an effective strategy that has led to higher client engagement in BanBajio. This is evident when you consider that transaction volume growth has outpaced the 6% CAGR in our active clients over the last 5 years. This evolution is a supportive driver of our sustained growth in our deposit base and the structural growth of our noninterest income. Our digital channels related income grew at a sound 18.2% CAGR over the past 5 years. Moving to Slide 5. We continue to observe good growth trends for our company and consumer loan portfolios. Company loans grew 7.7% and consumer loans 13.1% year-over-year. Overall, the total loan portfolio reached MXN 268 billion, a 5.4% increase compared to the third quarter of 2024. Our total loan growth was achieved despite the contractions observed in government, financial institutions and mortgage portfolio. It is worth mentioning that during this quarter, we have successfully continued our strategic reallocation of our portfolio, supporting higher-yielding loan classes with better margins. Simultaneously, our total deposits reached MXN 274 billion, which represents a 13.7% increase year-over-year. We will detail these growth trends in our funding structure section on Slide 8. On Slide 6, we detail the evolution of our consumer portfolio, excluding auto loans. This portfolio reached MXN 7.2 billion, with growth rising to 13.6% year-over-year compared to the third quarter of 2024. As we have emphasized in previous quarters, we view this segment of consumer loans as a strategic high-yield asset that is critical to our efforts to diversify our income generation and our overall business. We have managed to achieve this expansion with asset quality that outperformed the industry standards. As shown in the charts, this is reflected in our NPLs ratio across the board with payroll loans at 2.26%, credit cards at 2.98% and personal loans at 2.31%. Turning now to Slide 7. We will examine our asset quality trends. Our headline NPL stands at 1.97%, while the NPL adjusted ratio stood at 2.51%. Most importantly, both ratio continues to compare favorably against the industry average. As shown in the bottom right chart, our cost of risk was 109 basis points for the quarter. We expect the cost of risk will converge to more normalized levels over the next 2 to 3 quarters. Our coverage ratio remains strong at 1.16x. Furthermore, we will continue to hold MXN 681 million in additional reserves on our balance sheet, mostly created during the pandemic. In line with our decision to cease applying our internal methodology for additional reserves and to fully transition to the standard regulatory methodology, we plan to absorb these reserves over the next 9 months. Moving on to Slide 8. Our total funding reached MXN 324 billion, reporting a 10.6% increase year-over-year. Within the funding mix, our demand deposit base reported an increase of 20.5% year-over-year, and our overall client deposit base remains stable relative to the institutional funding. Within our funding structure, we have observed a trend over the last 2 years with clients that are gradually migrating to interest-bearing demand deposits away from zero-cost accounts, a shift that has gained relevance in the mix. The funding mix now comprises zero-cost demand deposits at 17%, interest-bearing demand deposits at 26%, time deposits at 41% and institutional funding at 14%. On Slide 9, we observed the evolution of interest margins. The net interest margin for the third quarter was 5.9%, a year-over-year decrease of 110 basis points. This reduction was primarily due to the sensitivity to rates, which accounted for 62 basis points of the reduction, while 48 basis points were driven by the negative impact on the asset liability mix. Our current ex-ante sensitivity to rates, considering the current mix of assets and liabilities stands at around 20.4 basis points of net interest margin per every 100 basis point change in the benchmark rate. We estimate this would represent a full year impact of around MXN 730 million on revenues and MXN 460 million on net income. You will see the performance of BanBajio's revenues on Slide 10. Please note that we are excluding nonstrategic asset sales from the third quarter and the 9-month period of 2024 to provide a clear pro forma comparison. Total adjusted revenues decreased by 2.8% compared to the third quarter of 2024, which reflects an aforementioned impact of the reduction in interest rates. Consequently, our financial margin contracted 9.0%. However, our strategy is paying off in noninterest income, which grew strongly by 50% pro forma year-over-year. Our adjusted net fees plus commission and trading income grew a robust 22.7% in the third quarter. We continue to make important progress in key fee-generating businesses. Bancassurance grew 36.9% Interexchange fees grew 5.9%. POS fees grew 13.4%, while BajioNet related fees grew 37.3%. The reported total noninterest income growth was boosted by MXN 156 million sale of our written-off portfolio in the quarter. We can see the evolution of our efficiency ratio on Slide 11. It came in at 39.5% for the third quarter of 2025. BanBajio's efficiency ratio stands strong against the industry levels. In this third quarter, expenses grew 9.6% year-over-year, consistent with a 9.1% year-over-year growth in September year-to-date and in line with our guidance. We continue to prioritize our efforts to bring down expense growth, and it is one of our priorities for this year. However, the bank continues to invest strategically in key initiatives such as branch openings and some upgrades to our infrastructure. Slide 12 presents the evolution of the profitability metrics of BanBajio. As shown in the charts, the quarterly ROE was 19.7% and the quarterly ROA stood at 2.4%. On a per share basis, the third quarter earnings per share stood at MXN 1.91, which represents an annualized earnings yield of 17.1% computed with the average stock price for the third quarter. Moving to Slide 13. The preliminary capitalization ratio as of September 2025 was 15.89% entirely composed of core equity Tier 1 capital. Around 60% of the 136 basis points increase in our capitalization ratio from the previous quarter was attributed to the aforementioned methodological adjustments applied to our portfolios, and the remaining 40% was a result of our sound earnings generation capacity. Finally, on Slide 14, we are pleased to announce that the Board of Directors has approved a proposal to the Ordinary General Shareholders Meeting for an extraordinary cash dividend payment equal to 10% of 2024 net income, which is equivalent to MXN 0.9 per share. This distribution, combined with the previous payouts throughout the year would result in a total payout ratio for 2025 of 60% of last year's net income with a proposed payment date set for December 3, 2025. The total of the 3 dividend payments will represent MXN 5.39 per share, equivalent to a dividend yield of approximately 12.2% calculated using the most recent share price. We will continue to closely monitor the evolution of the drivers for the fourth quarter, and we feel comfortable in our ability to deliver on the guidance that we have provided to the market. With this, I conclude my presentation, and we can open the call to the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Ernesto Gabilondo. Ernesto María Gabilondo Márquez: Ernesto Gabilondo from Bank of America. My first question will be on your net income guidance. When looking to the accumulated earnings as of the third quarter, it's around MXN 6.9 billion. If we analyze it, it's around MXN 9.2 billion and the growth is of minus 14%, which is above the company's guidance range of minus 18% to minus 20%. So just wondering if it will be reasonable to expect at least the high end of your guidance? And what will be your assumptions on that? My second question will be on your expectations for dividends. As you mentioned in your last slide, you're expecting a special dividend for December 3. and you have an ordinary dividend payout ratio of 50% this year. So just wondering how should we think about the dividend payout ratio next year? And this is especially in a context in which you will no longer have a high reserve coverage ratio. As you mentioned, you are expecting it to be trending to 103% and actually is at 116%. So just wanted to know your thoughts on the dividend payout ratio? And also, how should we think about the cost of risk during the next quarters while you are transitioning into this lower reserve coverage ratio? Edgardo del Rincón Gutiérrez: Thank you, Ernesto, and good morning, everyone. This is Edgardo del Rincon. Several questions, Ernesto. So about net income, I agree with you. We believe we can be in the high end of the guidance that is MXN 8.8 billion, and we feel comfortable in general with all the guidance. Regarding the coverage ratio, there are only 2 banks in the Mexican financial system with additional reserves. The complexity of the regulatory rules that we need to comply with the CNBV and additional rules that are coming in the following months take us -- I mean, we decided to abandon, let's say, the methodology for additional reserves and go only to regulatory reserves. That's why based in the mix of our assets, the level of collaterals and guarantees that we have, we feel comfortable with the regulatory reserves. So we still have MXN 680 million that will be -- I mean, those will be absorbed in the following 6 to 9 months, mostly at the beginning of 2026. And regarding your last question before the dividend, about the cost of risk, we are very glad with the behavior of the cost of risk in the third quarter. Actually, it came 14 basis points better than the second quarter. But for us, the good news is that it's very concentrated in few names, very well-known clients. And a few of them is very possible that they will transition to current during the fourth quarter. So we feel that in the following several quarters, maybe 2, 3 quarters, maybe 4 quarters, we should transition in cost of risk to a more normalized level, let's say, between 0.9% and 1%. And now I pass the microphone to Carlos about the dividend. Carlos De la Cerda Serrano: Hello, Ernesto. Hello, everybody. Regarding your question, we usually feel comfortable with a 50% payout ratio that we believe allow us to maintain a capitalization rate that we feel comfortable with between 14% and 15% capitalization rate. This year, the capitalization rate went up since the loan growth has not been as strong as we expected, the economy is -- and all the uncertainties related to the tariffs and many things, we have seen a weak demand for loans. So that and the change in methodology took our capitalization rate well above 15%. So we decided to propose to the shareholders' meeting an additional 10%, considering that in a few months, we will be evaluating the payout -- the dividend that we will be paying out for the 2025 net earnings. So that will be an important amount again. So we feel comfortable with a 50% ratio that we would have to adjust depending on how the year looks. And that's why we added a 10% additional dividend. Ernesto María Gabilondo Márquez: Excellent. And just if may I, a last question on your ROE expectations. How do you see it in the long term under normalized rates? Where do you see the interest rates ending by the end of 2026? Edgardo del Rincón Gutiérrez: Sure. This quarter, Ernesto, we delivered an excellent ROE of 19.7%. We believe it was a strong recovery and also confirming the bank's ability to maintain solid profitability even in a more challenging environment. As we have been mentioning in the previous quarters, our view is that the sustainable ROE remains in the high teens range. During the year, interest rates declined faster than we initially expected and also that put some pressures on margins. And at the same time, we have been experiencing a higher cost of risk than originally planned. So it is already trending down and should normalize, as I said, in the following quarters. But we really believe that the strong fee income growth, the discipline in expense control and the solid capital levels all of which support a very healthy profitability. So even in a low rate environment that we feel the trend in rates will continue to go down maybe to 6.5%, 6.25% at the end of '26, we feel confident that we can deliver high teens in ROE even under that environment. Operator: Our next question comes from the line of Brian Flores. Brian Flores: This is Brian Flores from Citi. I have 2 questions. My first question is on asset quality. Just wanted to understand the perspective on the coverage that is already below the 120% you guided. So is the fourth quarter expected to have some reversals or improvements? I think that would be great to know. And also wanted to -- on my second question, see how that is related to asset -- sorry, to loan growth. Because as you mentioned previously, Edgardo, loan growth is probably running well below historical rates, right? It's 5% year-over-year. I wanted to ask you maybe the same question in 2 different aspects. The first one is what is happening in mortgages? Is there some anticipation on the -- I don't know, the write-off policy changes that we could see from CNBV. Is it just demand? Is it pricing? If you could share with us what is happening in mortgages that is the portfolio that is shrinking the strongest, that would be great. And also, if you could share your expectations of loan growth for 2026, I think that will be also very, very helpful. Edgardo del Rincón Gutiérrez: Thank you, Brian. Let me start with loan growth. As you know, came in 5.4% year-over-year. That is below previous periods, mainly because we have been very selective on where we want to grow. Corporate lending continue performing well, up around 7%. And within corporate loans, SMEs, I mean, we are having very good momentum. On the other hand, we have been intentionally reducing exposure on government loans in mortgages, but also in financial institutions segments that we either carry lower margins or higher risk. So it's a decision based in profitability. In the case of financial institutions, you know very well what has been happening in the market with several financial institutions not related with banks that have been having problems. So we are also seeing good growth in consumer loans, and that will continue in the future, mainly in credit cards, payroll and personal loans, a little bit growing 13%, a little bit more than that. Overall, as Carlos was saying, credit demand has been somewhat softer than we were expecting. And it's a reflection of what is happening in the economy, the uncertainty locally and globally and all the geopolitical factors that you know very well. So looking ahead, the fourth quarter typically is our strongest period, and we expect to meet the full guidance without any problem for this fourth quarter. For 2026, we believe it will depend in having more clarity about the economy, how it's going to perform the economy, the expectation today is a little bit more than 1%. So we will continue with economy, let's say, growing at a very slow speed. And also what is going to happen with the trade negotiations. I believe that will provide clarity and more certainty in the scenario and then we can have a more robust loan demand. Regarding asset quality that you mentioned, we have several quarters with several isolated cases. For example, in this third quarter, we have 3 particular corporate exposures that moved to Stage 3 during this quarter. As I have been saying, very well-known clients of BanBajio of many years. And we expect at least the most important one in an amount to return to performing status in the fourth quarter. So yes, we believe we will continue this normalization of the cost of risk going forward. Regarding cost of risk, I mean, I already mentioned it came at 1.09%. But we believe that during the first semester of 2026, we will get to a normalized level that we should be between 0.9% and 1%. Sorry for the long answer. I don't know if I covered everything, Brian. Brian Flores: No, you did, Edgardo. Maybe a quick follow-up. So with the 1%, maybe the base case assumption for next year, do you think the base case for now, obviously not official, but that is very similar to loan growth for 2026, which is between 5% and 6%, I don't know, 5% to 7%, would that be, in your view, reasonable to assume? And then I don't know if you could expand a bit on mortgages, if there is some impact of the regulation, particularly the changes in write-offs that you're anticipating here also for that category of the loan book? Edgardo del Rincón Gutiérrez: Actually, the decision in mortgages has, I mean, more time than the regulation that is changing today. So our decision is based totally in profitability, and we'd rather use the capital in other portfolios with better profitability than mortgages. That is the decision. Regarding 2026, and this is not, of course, any guidance for 2026. But we feel that we will continue with softer demand during the first months of 2026. And then as we have more clarity in what is going to happen with the trade agreement with the U.S. and locally and the performance of the economy in Mexico, then maybe at the end of the first semester, beginning of the second semester, we can have a better environment to grow. Operator: Our next question comes from the line of Ricardo Buchpiguel. Ricardo Buchpiguel: This is Ricardo Buchpiguel from BTG Pactual. The bank has been focusing a lot on growing more in SMEs. So I want to get a little bit more color on this portfolio. Can you comment what is the share of the SME portfolio today? And what is feasible to expect in the next 3 years? And also, what are the key difference between the SME and the large corporate lending in terms of overall risk-adjusted NIM and overall profitability? And you mentioned also for my second question, you mentioned in the call that you plan to absorb the additional reserves over the next 9 months, like helping mainly 2026. But you also mentioned that the first half year of 2026, we expect cost of risk to be between 0.9% and 1%, which is a little bit below your -- sorry, a little bit above your historical levels. So I wanted to understand if it makes sense that these additional reserves will be used to absorb -- to offset a higher NPL formation over the next following quarters. Edgardo del Rincón Gutiérrez: Thank you, Ricardo. The SME portfolio accounts for a little bit more than MXN 70 billion, actually MXN 72 billion. So it's an important part of the portfolio. And it's a portfolio with very good profitability with a cross-sell ratio of more than 5 products and services. So it's not only loans, but also cash management, electronic banking, FX, acquiring business, et cetera. So it's very profitable and it's the part of the portfolio that is growing more. So is what we have. The second part of your question was about additional reserves. The idea is not to take the additional reserves and just pass through the P&L. The additional is to use those additional reserves gradually to cover the need of reserves that the bank is having in the following 9 months. That is the idea. So that is going to be a very gradual use of those reserves. Ricardo Buchpiguel: Perfect. And so it makes sense for us to expect the cost of risk around like 0.9% and 1% in 2026, right? Edgardo del Rincón Gutiérrez: That's right. Operator: Our next question comes from the line of Eric Ito. Eric Ito: Carlos, Edgardo, this is Eric from Bradesco BBI. My first question here is regarding OpEx. I just want to get a sense of -- I think you guys have a pipeline of [ 50 ] new branches over the next years, if I'm not wrong, you have been deploying some over the past quarters as well. So I just want to get a bit on the opportunity here to see efficiency gains improvements in 2026? Or maybe as more deployment should happen, we could see more efficiency gains in 2027. This is my first one, and then I can ask my second later. Edgardo del Rincón Gutiérrez: Sure. Thank you, Eric. Expenses continue to perform better than planned, growing, as you saw, 9.1% year-over-year for the 9 months. The idea is to keep the expense growth below 10%. That was the original guidance. So we have maintained a very strong discipline even while we continue to expand our branch network that today we have 331 branches. During the last 12 months, we have opened 10 branches. That is -- those branches are adding close to 1% to the expense growth. So it is important. The good news is that these new branches are ramping up profitability quickly. So we feel comfortable with this investment. And the idea is to continue with this expansion between 10 to 15 branches every year. On the technology side, investment remains focused on security, cybersecurity and system stability rather than new projects. The big investment, for example, in digital banking, et cetera, was done previously. Of course, we need to continue investing in that, but the big investment is coming in cybersecurity and providing the right stability. Our priority has been to strengthen the resilience of the IT ecosystem and ensure reliable operations across the bank. Overall, expense control remains a strategic priority, and we expect to end the year below 10% growth while keeping operating efficiency under 42%, that is the guidance that we have today. That is, as you know, one of the best levels for the financial system today. Eric Ito: Okay. Very clear. And then my second question, real quick on the written-off portfolio sale that you guys did this quarter. Just want to get a size -- I just want to get a sense of what's the size of the portfolio that you guys sold? And if this was just an opportunistic approach or maybe we could see further sales going forward? Edgardo del Rincón Gutiérrez: Yes. It was an impact of MXN 156 billion. It was a sale of an asset as the money came not from the customer, actually come from a third party that made the acquisition of the asset -- that's why we didn't record this as a recovery that in that case, we would have a very positive impact in cost of risk. Based on the accounting rules, we -- I mean, this was an additional revenue, and that's why you saw that impact in the revenue growth. So -- but even with that, nonfinancial income, as you saw, we have a very good quarter with 50% growth. But without considering this one-timer, the growth is 27%. That is still very strong. So for us, that is very good news. We are very glad with this. And we feel that in the following quarters, we can continue at least with high teens growth in nonfinancial income. That is a very good level and much higher than the growth in active clients, that is 6% or the growth in the drivers in the loan growth portfolio, et cetera. So we are very glad with the performance this quarter in nonfinancial income, and we feel that we should continue with very good levels in the following quarters. Operator: Our next question comes from the line of Pablo Ordonez. Pablo Ordóñez Peniche: Congrats on results. This is Pablo Ordonez from GBM. My question is, could you comment on your funding dynamics? Deposits have been growing way faster than the loan portfolio at 13% year-over-year. In addition to this, as you mentioned in your remarks, the mix is not improving. So why taking the additional deposits and also for next year, what level of funding cost as a percentage of the interest rate would you expect? Should we expect some improvement because we have seen some deterioration in the past year? So any color here would be very helpful. Joaquín Domínguez Cuenca: Thank you for the question. This is Joaquin Dominguez. Yes. We took these deposits because that generates marginal income for the bank. We pay a lower rate than the rate we invested those deposits. So it is still a good business for the bank and it's not -- it prepares the banks for a further growth in loans, so we can change the liquidity in investment in assets, in securities for loans. So it provides the banks good enough liquidity to be prepared for the loan expansion. And at the same time, it is a positive business. Pablo Ordóñez Peniche: Perfect. And second question is regarding the fiscal package, Joaquin, could you comment on what should we expect? I mean, I think that the change for the IPAB fee is very straightforward. But any color that you have on the potential impact for Banco del Bajio at the P&L level and the financial impact from the changes in how the write-offs will be reduced going forward with this proposal from the [indiscernible]? Joaquín Domínguez Cuenca: Yes. What we have calculated is that -- the impact will be an increase in 2 basis points -- 200 basis points in the effective tax rate. It means it's around 3% of the net income for the next year. In terms of the write-offs, it will have no impact in the P&L, but in the -- it will increase the deferred taxes. Operator: Our next question comes from the line of Yuri Fernandes. Yuri Fernandes: Yuri Fernandes from JPMorgan. I have a follow-up on asset quality and the written-off portfolio sale you had, and it was clear like the directional. What is not clear for me is that given the outlook for asset quality is a little bit more challenging, right, like several [ cases ] here and there, and I know they are like kind of one-timers, but still becoming somewhat frequent. Why not you use this case to increase your coverage, given you have like a coverage ratio guidance, you are slightly below. So just checking the box, why not increase like this quarter doing more provisions and take the opportunity of this kind of one-timer on the positive side? And then I have a follow-up on your Stage 2 and Stage 3. When we try to look to the coverage of those stages, so trying to look to the amount of allowances divided by the portfolio by stages, we have been seeing an increase on the amount of reserves for Stage 2, Stage 3. So basically, Stage 2 used to be 10%, 11% allowances to loans. Now this number is going to 15%. And the same is happening for Stage 3. So Stage 3, now you are doing some 47%, 48% allowances to loans on your Stage 3. This number used to be closer to 40%. So just checking if we are going to see this to increase like basically the amount of required provisions for stages being somewhat higher in each of those buckets. Edgardo del Rincón Gutiérrez: Thank you, for your question. Let me go back to the pandemia. Before the pandemia, the level of reserves that we have was very close to the regulatory methodology. So the methodology coming from the CNBV. Because of the pandemia, we decided to increase the coverage ratio because we were expecting in a stress scenario, very high losses that at the end with the measures that we take together with the CNBV didn't happen, and we have been carrying for a long period, several years, those additional reserves. We have been using those reserves in the last maybe 4, 5 quarters for those isolated cases that we have been mentioning. During this period, we realized that we -- in the financial system, there are only 2 banks. One of those is a big, big bank. And BanBajio, we are the only ones with additional reserves. Since the pandemia, the CNBV has been very close to us reviewing constantly the methodology we are using and the calculations we use every month. But during that the last, let's say, 2 years, the regulation and the complexity to comply with that methodology has been harder and harder. The level of coverage ratio is based on the mix of the portfolio as we have 86% of the portfolio in corporates that is very different from the G7, for example, but they carry a lot of consumer business that normally, the level of coverage ratio of those portfolio is close to 2x. So based on that mix, you can see the coverage ratio of those big banks really high, but it's not really comparable with the portfolio we have in BanBajio. We have 86% in companies with a very high level of collaterals, and we are very active using guarantees from FIRA, from Bancomext and from Nafinsa. So because of the mix and the level of collaterals we have, the coverage ratio that we have based in regulation is very close to 1x. If you see other banks, for example, that has a lot of mortgages and auto loans, you can -- you will see that the coverage ratio is even below 1x in other cases. So we feel comfortable with that level that this is coming from the pandemia. The complexity is really high. If we don't comply with the methodology and the rules of the CNBV, we can have sanctions. So that's why we decided to abandon this methodology and have in the future, in the following months on the reserves we need based in the regulations as all the rest of the banks. Yuri Fernandes: No, no. It's totally clear that part. My only question on that is that some portfolios, I don't know, mortgage, historically, they have much lower coverage, right, and you are reducing your mortgage portfolio. So in period by mix, maybe your coverage should be higher, right, because you're not growing in mortgage, you are decreasing. Government loans, I think it's tricky because you don't have a lot of allowances, but you also have a lot of [indiscernible]. But part of your portfolio is decreasing in products that should have like lower reserves also, right? Edgardo del Rincón Gutiérrez: Yes. In the case of mortgages, it's not [indiscernible] reserves that are required. The decision of not growing, of course, we can cross-sell if a customer that is already with the bank ask for a mortgage, of course, we provide that mortgage that there is not a decision to grow faster the mortgage portfolio that is based on the best use of capital and profitability. Yuri Fernandes: Great. And regarding the Stage 2 and Stage 3, like when we do reserves by loans, this increase that we observed, like should we continue to see? Or is this kind of a more quarterly specific trend? Edgardo del Rincón Gutiérrez: Yes. We feel that we will continue improving the Stage 3 portfolio. Actually, we are expecting a few recovers during this fourth quarter. And the idea is to continue improving the performance during the following quarters. Of course, there is some mathematical -- I mean, as we have been growing a very low speed 5% this quarter, that has an impact, of course, in the NPL. But we feel that we will continue trending down in the following quarters. And we are working in recovering those Stage 3 cases. Even by a legal action, as we have a lot of collaterals, there is always a big possibility of recovering those loans. Operator: Our next question comes from the line of Tejkiran Kannaluri Magesh. Tejkiran Magesh: This is Tej from WhiteOak. I just want to understand with the change in methodology of capitalization that you're calculating, does the range of CET1 you're comfortable with change? Or does it remain 14% to 15%? Edgardo del Rincón Gutiérrez: Yes. Thank you. The change that we have during this third quarter actually was in August. But that was something that we decided last year. And it's also a methodology that we used to have for several years, to make the calculation -- I mean, to calculate the reserves for SMEs and for the corporate portfolio as well as it's the same case that additional reserves. We decided that, that didn't provide the flexibility that we needed and any benefit and the complexity as well of the rules are every year is higher and higher and higher. So it was very difficult to comply with all the rules. So we decided to abandon -- it's a process that took one year with the CNBV, so we have been in that process during the last 12 months. So the last month in which we saw that change, it was a couple of months ago in August. And that has an important impact in the capital levels of 82 basis points. That's why we still saw the capitalization rate going to 15.9% together with the accumulation of earnings during the last few months. Tejkiran Magesh: Okay. Understood. There's no 2 methodology changes. It's just one, the reserves, which also affected the capital. Understood. Operator: Our next question comes from the line of [ Andrew Geraghty. ] Unknown Analyst: I just wanted to double-click a bit on noninterest income and then also the NIM. On noninterest income, you guys have communicated a pretty bullish outlook for going forward of continued high teens growth, faster than the client base growth, faster than loan book growth. Can you just expand a bit on what gives you confidence in this? And is it coming specifically more from the fees and commission side? Or can trading income continue to deliver the pro forma year-over-year growth was 35%. So just a little bit more detail on the noninterest income side. And then in terms of NIM, if the benchmark rate goes to, I believe you said 6.5% is your expectation for the end of next year, considering lower rates and maybe changes in mix, what is your thought process on the direction of the NIM for 2026? Edgardo del Rincón Gutiérrez: Thank you, Andrew. Yes, we -- what we have been doing is, as we said in previous calls, the concentration of the bank is really providing the best digital functionality to our customers. So that is working very well. You saw the metrics, but we are very glad with the compound growth that we are seeing both in transactions and also amounts transacted. That 24% growth in amounts transacted is really, really high and it is the growth of the last 5 years. So we are very glad with that. So the use of digital transactions, digital channels from our customers is really evolving very well. And that is coming with more, what I call operational dependency of the customer with the bank. You are really the bank of the customer when you have the loans, of course, but it's very important also to manage their payroll, their sales through the acquiring business, the FX, et cetera, all the different services that we can provide. So just the BajioNet fees that our customers are paying are growing 37% year-over-year. So that is a fantastic growth. But also all the transactions made through digital channels. That includes, for example, of course, transfers, but also for example, FX that is growing very well. Those -- all those transactions that are in that digital platform, the compound growth of that income is 18.2%. That is also let's say, much more than the growth we are having in active customers that is 6%. So we are very glad with that, and we feel that we can continue with a very good growth. Of course, we have a one-timer this quarter. But even without that one-timer, the growth was 27%. So having high teens, I think, is a very realistic expectation in nonfinancial income. I pass to Joaquin to talk about the NIM. Joaquín Domínguez Cuenca: Yes. The NIM that we recorded at the end of the third quarter was 5.9%. For the next year, you can guide with the sensitivity we have provided; however, there is an important impact depending of the loan growth and the mix of the deposits. Right now, we have a strong liquidity. We have investment in securities. If we get success with the loan growth expectation, we will change those assets with lower return to the SMEs or corporate loans with higher return. So it could be an improvement in the net interest margin in case of we success with the loan growth expectation. For the next year, it's very similar what could happen. It will depend on the loan growth expansion and the mix of deposits, how big can be the change of the NIM. But if you consider the ceteris paribus structure of the balance sheet, the sensitivity we have provided could give you a good approach of the NIM for the next year. Operator: Our next question comes from the line of Andres Soto. Andres Soto: This is Andres Soto from Santander. Just a follow-up on NIM. Based on your comments, Joaquin, it sounds like you guys are not expecting to see NIM to go under 5.5% even if policy rate normalizes in Mexico. I would like to understand how this compares to your historical NIM and what makes you optimistic on delivering this type of NIM, which is superior to what BanBajio had in the past at similar levels of interest rates. What has changed in the story of BanBajio in terms of loan mix, funding mix or any other factors that could sustain this type of NIM? Joaquín Domínguez Cuenca: Thank you, Andres. And what your perception is correct. If you compare the NIM when the interest rate in the past few years was pretty close to the actual level, we had -- we used to have a lower NIM. So we have improved as well the mix and assets as in deposits. So based on that and that we are expecting to maintain this improvement in the mix in assets and deposits that we will be able to maintain a higher, of course, that 5% NIM the next year with a reference rate around 6.25% for sure. Operator: Our next question comes from the line of Neha Agarwala. Neha Agarwala: Quick question on the trade negotiations with the U.S. What part of your loan portfolio could be directly or indirectly impacted by the upcoming trade negotiations? Edgardo del Rincón Gutiérrez: Thank you, Neha. We have about 10% of the portfolio in customers that do exports, I mean, to different countries, to the U.S. mainly. But I believe the trade agreement has a broader impact, not only in those customers, but also in what we should expect for the economy. As you know, the transformation of Mexico in the last 30 years with -- at the beginning of the NAFTA, you compare the structure of the economy at that moment compared with today is completely different. So that has an impact not only with the base of customers that they do export, but also in the whole economy. So that's why it's so important. Neha Agarwala: Any other part of the loan book that you would be concerned that could be maybe directly impacted by these negotiations? Edgardo del Rincón Gutiérrez: Not really. As you know, our presence in the agro business is very important. It's very difficult to replace those products with production in the U.S. because of the weather and the geography of the U.S. So -- and it's very difficult even to replace Mexico as a supplier of those products to the U.S. economy. And the investment that we have in Mexico in manufacturers, we have a lot of investment coming from the U.S. that I believe is very difficult to move again to other geography or to go back to the U.S. that is going to take a while. So not really, we don't see -- we believe our best scenario, but really what we expect is the trade agreement will come to a good end, maybe different from the one we have today. But I believe the best scenario for these 3 countries, Canada, U.S. and Mexico is to continue together with the trade agreement. And we believe it has been very positive even for the U.S. economy as well. Operator: We have not received any further questions at this point. So that -- I would now like to hand the call back over for some closing remarks. Rodrigo Marimon Bernales: Thank you all very much for joining us today. We remain available to address any follow-up questions via e-mail and meeting request. We look forward to speaking to you again in January 2026 when we release our full year and fourth quarter 2025 results. Thank you very much, and have a nice day. Operator: That concludes today's call. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Temenos Q3 2025 Results Conference Call and Live Webcast. I am Matilda, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Takis Spiliopoulos, Interim CEO and CFO. Please go ahead. Panagiotis Spiliopoulos: Thank you, Matilda. Good evening, good afternoon. Thank you all for joining us for our Q3 '25 results call. I will talk you through our key performance and operational highlights for the quarter before updating you on our operational and financial performance. So starting with Slide 6. We delivered a strong performance in Q3 '25, benefiting from a stable sales environment throughout the quarter. There was no impact from the U.S. bank credit concerns in Q3, and we have not seen any impact so far in the current quarter. Demand in Q3 was broad-based, and we signed a number of deals across new logos and the installed base. I would note that there were no large deals in the quarter, though we do have several we expect to sign in Q4. We announced a number of AI-powered products this year, in particular, our AI agent for financial crime mitigation and Money Movement and Management, and we have seen good traction on both of these. From an investment perspective, we have continued executing our strategic road map, investing across the business. Sales headcount, in particular, is on track to increase by around 50% by year-end. When we launched our new strategic plan in November last year, we indicated we expected around $20 million to $25 million of cost savings in 2025, and these efficiency gains are largely funding the investments we are making this year. The operating leverage in our business model is evident. Our profitability has therefore benefited from the sales momentum and the cost efficiency programs, which are funding our investments. We remain prudent in our outlook given there are a number of large deals expected in Q4. However, based on our Q3 performance and the stable sales environment, we are raising our guidance for 2025 for subscription and SaaS, EBIT and EPS and are reconfirming our 2028 targets. Turning to Slide 7. We signed a number of deals with new and existing clients this quarter, and we have highlighted 4 of these on this slide. A couple of the highlighted deals are in the Middle East with clients either expanding into new geographies or launching new digital banks on our platform. We also have a client in the ASEAN region upgrading and moving to the cloud and a client in LatAm moving on to Temenos core banking in the cloud. The key things across all of these clients are the reliability and scalability of our platform, the uniqueness of our country model banks that clients can leverage to rapidly expand into new geographies and the flexibility to deploy in the cloud or on-premise, and we will continue to expand our offering in all of these areas through our R&D road map. Moving to customer success on Slide 8. This quarter, we went live on a major U.S. SaaS expansion with FundBank a global bank offering banking and custodial solutions to the asset management industry. FundBank selected Temenos to support their U.S. expansion due to our comprehensive SaaS banking capabilities tailored specifically to the U.S. market. We deployed a full suite of services, including digital and core banking, payments and data analytics on Temenos SaaS allowing FundBank to launch new products faster, elevate the digital experience and scale efficiently. Notably, FundBank can now offer a fully digitized corporate onboarding experience allowing clients to complete the process quickly and securely. This go-live continued the extension of our leadership in best of suite in the U.S., in line with our 2028 strategy around 3 core levers. On Slide 9, we have our latest payments innovation that we launched at SIBOS in September. Money Movement and Management is a single pre-integrated AI-powered platform that enables our clients to replace fragmented, siloed legacy platforms or to rapidly launch new lines of business. It is deployable on-prem, in the cloud or as SaaS depending on the clients' needs. We have already seen good traction on this and other AI-powered products such as FCM AI agent, and we will continue investing in specific AI use cases to meet the needs of our customers. Moving to the next slide. I am proud of the industry recognition Temenos continues to receive. It is a great achievement whether that is for the strength of our core banking platform, specific aspects of our offerings such as deposits or from our employees where we have been recognized as a Great Place to Work in 15 countries. This last recognition is particularly important to me and a testimony to our values and culture. People are the key to our success. Finally, on Slide 11, I would like to give an update on the execution of our strategic road map. We have been hiring talent across the R&D organization globally, in particular in India and the U.S. Our innovation hub in Orlando is having a visible impact on our U.S. expansion strategy with the first prospective clients leveraging the hub to co-innovate with our teams in the quarter. And we are on track to increase sales headcount across the regions by 50% by end of December. We have also been making investments in our sales training and governance process to maximize the quality of our pipeline. Lastly, we are looking to improve the efficiency of our operating model rolling out AI initiatives across the business, including in software, legal, marketing and finance, in addition to R&D, where the focus is on leveraging AI for development, testing and support. Moving to Slide 13. We delivered 11% total revenue growth this quarter, driven by broad-based wins with both new and existing customers. We had another strong quarter for subscription in SaaS, which grew 10% in Q3 as well as maintenance, which was largely driven by premium maintenance signings. Services revenue also grew for the second quarter in a row. Moving to Slide 14. Our EBIT grew 36% in the quarter, driven by the strong revenue growth and operating leverage. Our ongoing investments in product and tech and go-to market were largely offset by our cost savings program, in line with our self-funded investment strategy that we announced at last year's CMD with an expected $20 million to $25 million of cost savings in 2025, funding the majority of our investments. There is also some impact from cost phasing with some catch-up expected in Q4 '25. EPS grew 41% in Q3, largely driven by EBIT growth and benefiting from the lower share count. Moving to ARR. It has once again benefited from the growth in subscription in SaaS and maintenance. As a percentage of last 12 months revenue, ARR equaled 88%, up from 87% in Q3 '24. This gives us excellent visibility on future recurring revenue as well as our future cash flows helping underpin our 2028 targets as well. On Slide 16, I would like to highlight a few items. Maintenance grew nicely in Q3, up 14% and we now expect maintenance to grow around 11% constant currency for the full year. I would also flag that subscription and SaaS has grown 12% year-to-date, total revenue 10% and EBIT 24%, which supports the increase in full year guidance we announced today. Given the continued strength in EBIT growth in Q3, we now expect our EBIT margin to be up at least 170 basis points for the full year. On Slide 17, net profit was up 35% in the quarter, in line with EBIT with higher tax charges, offset by lower financing costs. The tax rate in Q3 was around 21%, and we maintained guidance of our 2025 reported tax rate of 15% to 17%, benefiting from a one-off tax benefit from prior years, which will materialize in Q4 '25. The normalized underlying tax rate, excluding this one-off benefit, remains at 19% to 21%. EPS grew by 42%, ahead of net profit growth as it did last quarter, once again supported by the lower share count. Moving to free cash flow. We delivered significant growth of 30% in Q3 '25. As expected, we are showing an acceleration in H2 '25 driven by the growth in deferred revenue and lower restructuring costs than in H1 '25. We have now absorbed $30 million of restructuring headwind in the first 9 months of the year. Free cash flow has now grown 13% year-to-date. So we are confident that we will deliver on our full year guidance of at least 12%. Next, on Slide 19, we show the changes to group liquidity in the quarter on a reported basis. We generated $61 million of operating cash and bought back $148 million worth of shares, completing our CHF 250 million buyback program in August. We ended Q3 '25 with $184 million of cash on the balance sheet. Our leverage stood at 1.4x at the end of the quarter, and we also expect to end 2025 within our target leverage range retaining flexibility for either further share buybacks or bolt-on M&A. Now moving to Slide 20, a couple of items to highlight on our balance sheet. We completed our CHF 250 million share buyback program in August at an average price of CHF 63.25 per share, representing 5.5% of registered share capital. These shares will be proposed for cancellation at the 2026 AGM. In July, we closed a $500 million revolving credit facility signed in Q2. As previously mentioned, we have no further refinancing requirements until 2028. The bond maturing in November of this year has already been refinanced by the bond issued in March of this year. Our reported net debt stood at $702 million at quarter end. Turning to Slide 21. I would first like to note that we remain prudent in our 2025 outlook, given there are several large deals in the Q4 pipeline. However, given the good performance in the first 9 months of the year, we are increasing our subscription and SaaS guidance to at least 7% to reflect the sales momentum. As a result of our operating leverage, premium maintenance signings uplift to Q3 EBIT and the self-funding of our investments, we are raising our EBIT growth guidance from at least 9% to at least 14%. Correspondingly, we are also upgrading our EPS growth guidance from 10% to 12% to 15% to 17%. We are keeping ARR guidance of at least 12%, given the delayed benefit to ARR from stronger subscription and SaaS growth, and we're also keeping free cash flow guidance of at least 12% growth unchanged. As a reminder, our guidance is non-IFRS in constant currency, except for EPS and free cash flow, which are on a reported basis. Both the 2025 guidance and the 2024 pro forma numbers exclude any contribution from multifunds. And free cash flow is, of course, under our standard definition, including IFRS 16 leases and interest costs. And lastly, we have reconfirmed our 2028 target. Before we head to Q&A, I'm sure you will have seen the statement from our Chairman in the press release that the CEO search conducted by the Board is currently ongoing. As you can appreciate, this is not something I can comment on any further. With that, operator, can we please open the call for questions. Operator: [Operator Instructions] The first question comes from the line of Sven Merkt from Barclays. Sven Merkt: Maybe one on the pipeline. Can you just comment on the quality of the pipeline and the visibility you have into Q4? You called out that there are a number of large deals in the pipeline. I guess this is the case usually in the fourth quarter. So is there anything unusual here to point out? And what sort of pipeline conversion do you assume for these large deals compared to prior years? Panagiotis Spiliopoulos: So on the pipeline, there is nothing that has changed from the previous 3 months. Clearly, we have the large deals in the pipeline as we commented back in July. And we also do not assume any change in conversion rates. The way we look at this is always as a weighted average at the start of the year when we provide guidance, clearly, we take an assumption on conversion rate of large deals, which is lower than we use for, let's say, the average deal. So nothing has changed in terms of the pipeline. What we have clearly seen is no impact from any macro uncertainty. I think that's good to highlight, given we're 3 months more into the year. We have seen in Q3 good execution and good conversion rates across the regions. So also nothing to highlight. But clearly, we want to remain prudent on how we assess the pipeline. Clearly, the pipeline is growing quite nicely, as you would expect with a substantial increase in the number of salespeople working to build the pipeline. But again, let's remain prudent. There is still some macro uncertainty out there, but we have seen no change in bank's behavior in terms of spending plans. Clearly, they still want to invest. They prioritize digital transformation. So this is, I would say, what we call a stable sales environment, and we expect this to remain for the remainder of the year. Operator: The next question comes from the line of Laurent Daure from Kepler Cheuvreux. Laurent Daure: I have one and a follow-up. First is on the support revenue. I mean you had another great quarter. Where do you stand in terms of the mix between the premium maintenance and classic maintenance, in order to help us to see what could be the growth rate in maintenance a bit normalized 1 or 2 years out? And my follow-up is on the U.S., if you could give us an update on a penetration of some Tier 2, Tier 3 banks that were part of your long-term plan. Panagiotis Spiliopoulos: Laurent, let me address the maintenance question first. Clearly, 14% was a good number. Discontinued the trend from what we have seen last year and also the first half, clearly benefiting from premium maintenance, but it's not just premium maintenance. Also, keep in mind, we get uplift from renewals, and we also have the CPI indexation, which over the years, obviously falls into the number. We have seen clearly clients taking up our premium maintenance offering on the one hand, but on the other hand, we have also seen clients not churning on this. So they maintain those premium maintenance offerings for a much longer period than in the past, and clearly, that helps. If you don't have churn, that helps a lot. And this is what we also see in terms of visibility going forward. Now we said 11% for the full year. So that's about the number in Q4 as well. For the next years, I think it's too early to provide specific guidance, and we're not disclosing the split other than we're growing on all the maintenance streams. For the next years, I think what we had implied in our original CMD plan was somewhere 5%, 6% as a base rate because clearly, we have seen some catch-up, so some normalization is probably what we would model in, in that case. On the U.S., as you would expect, clearly, we're seeing a very nice buildup in our pipeline for the U.S. I think also in terms of the signed deals, we will see even more of the impact materializing in 2026, in line with our strategy. The sales team is now fully in place. And I think this is clearly shown in the pipeline generation. We see -- we get with more people and a better understanding of our offering. Clearly, we get into more RFPs and also our win rate is improving from the data we have. And clearly, you need to keep in mind we are tackling a huge market with a real need and a long runway for banks to modernize. I think we have a much better value proposition in terms also of strategic road map versus where we were 1 year ago. The investments we have done, both on the product side but also on the go-to-market side. And some of that road map, some of the products in the road map that are very specific to the U.S. market. And we need to be -- as we said, we wanted to be closer to the customers, and clearly, they see our investment in go-to-market in the product as well. So yes, the innovation hub clearly has helped a lot also for awareness building. As you know, pipeline is 12 to 18 months to develop. This gives us a good level of confidence that the conversion of this pipeline in to signed deals will clearly will accelerate next year. Operator: We now have a question from the line of Frederic Boulan from Bank of America. Frederic Boulan: If I may, a question around Q4. So if I look at your guidance, weighted guidance still implies much less growth in Q4 versus what you've done year-to-date and the same on EBIT, you're guiding for 170 bps margin expansion. I think you've done 4 points in the first 9 months. So any specific moving parts you want to call out for Q4? And then anything you can share on your free cash flow conversion? You've grown EBIT $22 million year-on-year in Q3; net profit, $16 million, but the cash flow growth is about $6 million. So if you can talk about some of the drivers for free cash flow conversion? Anything specific you want to call out for the rest of the year, DSOs or else? And any specific elements you want to call out into next year? Panagiotis Spiliopoulos: Okay. A lot of questions, Fred, let me take them one by one. I think on -- if we start with subscription and SaaS and keep in mind that we want to remain prudent as we started the year, there is still macroeconomic uncertainty. And what we did, given we have not changed the outlook for the sales environment, the -- if you want the upside, we were going for around 6% in Q3, delivered 10%. So the upside of, let's say, $5 million, we let it flow through the -- into the guidance. So this is where the upside for subscription and SaaS is coming from. We are not flagging any explicit risks other than we have large deals in there. No change to visibility. Again, it's at least 7%, and we want to remain prudent for this time. Also keep in mind, we have -- and this shows maybe the underlying very robust growth that we still have the impact from this BNPL customer in every quarter. So if you exclude the impact from that, we would show -- this really shows the underlying growth, which is very healthy. So nothing specific to flag here other than large deals, and we want to remain prudent. On EBIT, yes, the guidance implies some deceleration. We have seen year-to-date EBIT growth of 24%, clearly has benefited from a strong growth in subscription and SaaS of 12%, strong maintenance growth. And clearly, there also been the full impact of the cost savings initiatives, but clearly not yet the visibility on the investments, which are tracking somewhat slower. But if I look at the Q3 exit cost in September and October trend that clearly is the right number to target. Also keep in mind, we have the majority of our variable costs, bonus accruals, commissions always in H2 versus H1, even more loaded towards Q4. So clearly, that is driving some of the cost increase. And it's very similar to last year. If I look at the cost we added H2 versus H1 last year, H2 versus H1 this year, this is very similar, maybe even some higher costs there. And ultimately, it's at least 14% is the guidance. So that's where we would go. Finally, on free cash flow. Yes, 30% in Q3 was clearly materially ahead of our full year guidance. But keep in mind, we had the bulk of restructuring costs of $30 million out of the $35 million in the year-to-date number and substantial outflows linked to that. And then it was really in line with our expectations, the 30%, which gives us 13% for year-to-date growth, so well on track. And there's clearly nothing special to there. If you were to exclude -- if you take the EBIT to free cash conversion, if you were to exclude restructuring costs, we will be at a very high conversion. But even with that, let's say, EBIT of 14% or at least 14% and free cash flow at least 12%, so there is not such a big delta. We have a bit of catch-up to do on investments in Q4, so we feel comfortable with the at least 12% free cash flow guidance. Nothing special to flag on cash. Operator: The next question comes from the line of Josh Levin from Autonomous Research. Josh Levin: Two questions for me. Just to be clear on the new guidance, you've talked about large deals. To what extent does the new guidance bake in the new deals? Are they fully baked in or partially baked in? And then second question, I read how Morgan Stanley is using AI to rewrite old outdated code written in COBOL to more modern programming languages. Is that a good thing or a bad thing for Temenos? Panagiotis Spiliopoulos: I think there has not much change in terms of how we assess large deals. Clearly, number one, we clearly want to remain prudent. What we -- what I said before is at the start of the year, we have a view on large deals evolution and for any specific quarter and the full year we always take a risk-weighted approach to large deals, i.e., we assume -- for the same dollar value of large deals, we assume a lower conversion rate than for a standard deal size. So this is how it's reflected in Q4 and the full year guidance. There is no excessive dependency on large deals. We had this in Q2, given Q2 was a much smaller quarter than Q4. This is why we had flagged this in Q2. On AI, we are -- I mean, we are using AI ourselves quite a lot. And clearly, AI is a big opportunity. I think on both sides, we are clearly investing on AI use cases on the client side. We showed some of the AI-enabled products. But clearly, we have rolled out a substantial double-digit number of AI initiatives internally as well. So we are product and tech organization, we are having some pilots with some clients. It doesn't -- it's not that straightforward to take COBOL code and just use AI and make it modern. It sounds nice and there is a lot of challenge given there is no documentation and anything. What we can -- what AI can help with is in the documentation of old code and then trying to map this into new functionality. A Tier 1 bank like Morgan Stanley, they will always have the capacity of internal development. So they have done it before. So it's unlikely they would change that. But what we see is helping banks reduce implementation effort helps them move faster to a newer release, move faster in upgrades. This is where we see the AI opportunity. And I think this is tracking well with the pilots we're doing. Operator: We now have a question from the line of Charles Brennan from Jefferies. Charles Brennan: It sounds like 2025 is in good shape. I was wondering if you can just lift horizons to 2026. And specifically, you think about the subscription revenues. You started to shift to subscription in [ anger ] in 2022. And if those deals run to the natural 5-year duration, I guess that's a 2027 renewal cycle. Do you think that's how it will play out? Or do you think it's inevitable that those deals renew slightly earlier than the contract termination date? And we start to get a renewal cycle start in 2026. And is that going to start to help the visibility and the predictability of the business? Panagiotis Spiliopoulos: It's an interesting point you raise. And we had the start. And if you go back and look at the numbers in 2022, clearly, we started with the subscription transition, but we still had quite considerable term license business there as well, so not all the license business in '22 was subscription. It's correct that those will come up for renewal in 2027. It's also correct that you're going to see the 10-year renewals from 2017, which was a strong year for Temenos, renewing in 2027. Let's not get into the debate about when these contracts will renew. In general, as you know, clients never wait until last minute to renew because that's not a good starting point from their side. So do we have the visibility on 2026 subscription? I think we have good visibility stemming especially from the pipeline build we have seen over the last 12 and 18 months. The renewal cycle is something you take as it is planned. It's not -- we don't have a specific renewal strategy. So let's see, we have good visibility on '26. Let's not speculate on the renewals. Operator: Next question comes from the line of Justin Forsythe from UBS. Justin Forsythe: I've got my one question here and follow-up. So Takis, I guess, from the outside looking in, it would seem like the year has gone quite well to start under the guidance and shepherding of Jean-Pierre. So maybe you could talk a little bit about your initial conversations with the Board, what they expect you to do? Are you continuing to execute on the strategy that he laid out? I would imagine that, and I caught this from the commentary on the management call that there are some things that the Board would expect to change going forward. So are you then, therefore, beginning to implement some of those changes? And maybe you could just outline a little bit on the strategy going forward. And then I just wanted to hone in a little bit on the big contract loss. So maybe you could just remind us when you expect to lap the impact of that and the magnitude of it. And just circle back on what exactly happened there? If the provider, I think it was PayPal, decided to go with just a different provider or if that was something that they decided to in-source? Panagiotis Spiliopoulos: First, on strategy. Keep in mind, our strategy is not created by 1 person. So the strategy which was presented last year at the CMD and validated before by the Board was created by the entire management team and actually the leadership team. So this is how we came up with a bottom-up strategy looking at what we need to do on the product, what we want to do on product and go to market and aligning this with the market perception. So it was not Jean-Pierre creating a strategy, it was really the leadership which was then validated by the Board. So the strategy, as our Chairman mentioned early September, remains unchanged, and this is also why my primary focus is on executing the strategy. We've done this in Q3, we'll continue to do this also in Q4 and beyond. We have the people in place, and it's actually great to see that everyone is delivering. And the team is very motivated and standing behind the strategy. So it's really a focus we all have. And if you look at the progress we have seen across the different elements, we said we're going to substantially expand our sales force across the regions, they have done that. We will increase the headcount 50% by year-end. On the product side, Barb has brought in some great talent. And we're also hiring both in the U.S. and in India complementing our road map. So it's really executing this and then on top of all the operating model changes. On the BNPL, we -- I think there is no new information to give on BNPL on the reasons we can't comment on individual customers. And whether the name you mentioned is correct or not. Clearly, there is a headwind this year, which we communicated already at the start of the year. It's equal numbers in every quarter and the guidance is fully reflecting this. Justin Forsythe: Okay. Got it. No, that's fair. Maybe I'll just ask then since you can't answer that one, a quick follow-up, which is on the sales force that you expect to increase quite drastically. Could you just give us a little bit of a lean on what types of customers you expect them to serve. So is that Tier 1, Tier 2, Tier 3 or down in the credit union space and what geographies you expect them to come in or if that's more balanced? Panagiotis Spiliopoulos: So again, back to the strategy. We're growing in all regions. So the sales force is expanding in all regions across -- really across the world. It was a scale-up, which we needed and wanted to do also to support our 2028 targets. We emphasize the U.S. where we started first, but Will and his MDs have expanded the sales force across the world. And it's -- nothing has changed in terms of the strategy. In the U.S., we go Tier 2, Tier 3, the three growth levers we have defined best of suite, the modular approach and adjacent solutions. So the growth levers are valid and still applied globally. So no change to tiering or regional focus or anything. It's just really adding capacity and capabilities to deliver the 2028 targets. As we said, it's an investment year. The good thing is we do a lot of self-funding for those investments, but no change to that. Operator: [Operator Instructions] We now have a question from the line of Toby Ogg from JPMorgan. Toby Ogg: Maybe just one quick one and then a follow-up. First one, just on the guidance. EBIT and EPS upgraded, but no change to the free cash flow guidance. What are the factors driving that? And then just on AI. You mentioned in the release a number of AI product launches gaining traction. So FCM, AI agent and the money movement and management piece. Can you just give us a sense for how you're monetizing this? Is this through higher pricing or is there incremental modules being cross sold? And then can you just give us a sense for the size of these AI product revenue streams today and then when you'd expect them to start becoming a more meaningful revenue driver for you? Panagiotis Spiliopoulos: Toby, let me get back to the free cash flow question first. Clearly, as we said, if you look at the pure numbers, there is not that much change in terms of the EBIT growth and the free cash flow growth expected for this year, if you want to go back to the conversion question. But ultimately, there is always a lag. It's similar to ARR. We can't translate a positive subscription and SaaS impact to free cash flow immediately given there is a time difference. And as we said, there is still some catch-up in terms of investments to do. And finally, there is -- we still have a large Q4 ahead of us. This is always the most important quarter for us in terms of free cash flow. So yes, we're quite happy with our 12% free cash flow guidance. Now on the AI products. So clearly, we had some product launches at the flagship event TCF, FCM AI agent and also the other product. Now clearly, we're not going to go into that level of detail, although that we have seen a number of deals signed for -- or especially the FCM agent already in the last few months. Usually, this comes as an add-on to existing core installations, so clearly, there is a good market demand there. We have also seen a very large Tier 1 bank using this, so that's a testimony to the real use case we're providing here. And it's a very interesting product, substantially reducing the number of false positives in screening, which is driving a lot of manual work at banks. So there is clearly a business need for that. So the numbers are still small, especially in the context of our of overall business. But this is what we are seeing together with banks, developing use cases. And referring to our development partner program, we're not just going out there and inventing something in the lab and then see whether this sticks. We're really codeveloping use cases, which we know banks are interested in and are willing to pay for this. Yes, but no further financial details we can provide on AI products. Operator: Ladies and gentlemen, that was the last question. The conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Mike Bishop: Hello, everyone, and welcome to Atomera's Third Quarter 2025 Update Call. I'd like to remind everyone that this call and webinar are being recorded, and a replay will be available on Atomera's IR website for 1 year. I'm Mike Bishop with the company's Investor Relations. As in prior quarters, we are using Zoom, and we will follow a similar presentation format with participants in a listen-only mode. We will open with prepared remarks from Scott Bibaud, Atomera's President and CEO; and Frank Laurencio, Atomera's CFO. Then we will open the call to questions. If you are joining by telephone, you may follow a slide presentation to accompany our remarks on the Events and Presentations section of our Investor Relations page on our website. Before we begin, I would like to remind everyone that during today's call, we will make forward-looking statements. These forward-looking statements, whether in prepared remarks or during the Q&A session, are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the Risk Factors section of our filings with the Securities and Exchange Commission, specifically in the company's annual report on Form 10-K filed with the SEC on March 4, 2025. Except as otherwise required by federal securities laws, Atomera disclaims any obligation to update or make revisions to such forward-looking statements contained herein or elsewhere to reflect changes in expectations with regards to those events, conditions and circumstances. Also, please note that during this call, we will be discussing non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release, which is posted on our website. Now I'd like to turn the call over to our President and CEO, Scott Bibaud. Go ahead, Scott. Scott Bibaud: Thanks a lot, Mike, and good afternoon, all. This has been a quarter of both challenge and validation, one that underscores the reality of bringing a new material technology to market and the opportunities that come when you solve fundamental problems for the semiconductor industry. I'll start by addressing our update with STMicroelectronics and depart from our regular format to review the broader picture, the momentum we're building with new customers and the different market opportunities that Atomera's technology is being used to address. As many of you have seen in our announcement, our work with STMicroelectronics on their smart power platform reached an inflection point this quarter. During this program, we were tackling a very difficult performance trade-off for their 200-millimeter platform. We achieved what we set out to do, significant performance improvements in key device metrics. However, that higher performance came with a corresponding reduction in device lifetime, often referred to as reliability, which failed to meet all of ST's specifications. Over many months, our 2 teams worked closely to resolve this trade-off. Then ST, as part of a reshaping of its manufacturing footprint, announced they would discontinue development on 200-millimeter wafers to focus exclusively on 300-millimeter for the next-generation BCD110 platform. At about the same time, Atomera discovered a new MST implementation validated through our TCAD simulations that doubled our performance improvement without the associated reduction in device lifetime. In other words, we found a way around the trade-off, and improvement only made possible by using MST. Over the last few months, ST validated our findings for the new implementation. However, because this new version required a device architecture change that would take multiple learning cycles to validate, they determined that they could not incorporate it and still meet their aggressive BCD110 launch schedule. Therefore, ST informed us that they will take BCD110 to market without MST, and currently, they have no plan for a future variant that includes it. That means we no longer have a line of sight to royalty revenue at ST for this particular program. While that outcome is certainly disappointing, there are several important positives I want to emphasize. First, at STMicro, we demonstrated significant performance gains and proved MST's integration capability inside a Tier 1 production fab. Second, we've now developed a very high-performance solution that eliminates the performance reliability trade-off, which is a significant new differentiator for us going forward, one that we are already actively discussing with other players in this market. And third, ST has reiterated their intent to continue working with us in other technology areas where MST could add value. Under their license with us, they continue to run experiments across several different businesses. This chapter with ST underscores that moving a new material into mass production is rarely linear. But the learning from this effort makes us a stronger -- gives us a stronger foundation as we engage with others in the same power market segment, including with a very large existing customer and even a new engagement that began this past quarter. Customers are now evaluating MST for power devices between 5 volts and 48 volts. It's important to keep in perspective that ST is only one of many large customers we are working with today to take MST into production in the power area. We also have 3 other very active technology focus areas. In the Gate-All-Around space, there are 3 large competitors and one that's still emerging. We're working with or in discussions with all 3 of them. I mean, all 4 of them. In the DRAM space, there are 3 large manufacturers, and we are engaged with 2 of them right now and have good relationship with the third. In the RF-SOI area, we're doing integration work with 4 different fabs and a fabless player right now with many of them running wafers. So you can see that we have no lack of opportunities across several different segments. Indeed, during the last 3 months, we processed a record number of wafers for our customers. When we look at all these opportunities, it's helpful to understand how we prioritize our business in terms of revenue potential. The first being the fastest time to market, second being the highest return on investment and the third being breakthrough long-term growth. One of the fastest ways to get Atomera's technology to market is through applications which use MST deposited on top of the starting wafer rather than inserted into the middle of the manufacturing line. There are many reasons why this can accelerate revenue. First, customers can simply acquire an MST starting wafer and run it through their standard production flow with very few process modifications for an easy experiment. They don't have to install MST, deal with the complications of wafers being transferred in and out of their fab, make major changes to their process to integrate it or complete a license agreement. The price of MST can be built into the cost of the starting wafer, which gives Atomera the same revenue, but the customer will not view the cost as a royalty. And it's certainly faster to get MST starting wafers qualified than something integrated into the middle of the process. Today, we use MST starting wafers in our work in RF-SOI, in GaN and possibly soon in next-generation DRAM. We actively seek out these implementations because of the relatively easier integration and shorter path to revenue. The second set of applications have enormous revenue potential, but the development process can be more demanding because MST is inserted into the middle of a complex set of production steps. It is worth it, though, because the upside represents a massive return on investment, including in the areas of Gate-All-Around logic, DRAM, power devices and other memory products. One design win here will ensure the future success of the company. And as I mentioned earlier, we have at least 6 or 7 of those efforts underway today. In Gate-All-Around and advanced memory, our partnership with a leading capital equipment company announced earlier this year is showcasing our competence at advanced nodes. Using their test infrastructure, we've been able to validate MST's ability to reduce contact resistance, improve channel reliability and be deposited in the tiny structures of nanosheet transistors. We are very excited by the deep cooperation and customer interest generated through this partnership. This quarter, we'll be hitting the road on joint visits with our customers to persuade them that issues in their manufacturing process can be solved using MST. The weight of our partners' endorsement cannot be overstated. Finally, we have an abundance of new breakthrough materials enabled by MST under development in the background through commercial partnerships and university collaborations. For many of them, we've already filed fundamental patents, and we're now in the process of making prototypes and understanding their capabilities. This is the type of program, for instance, which launched our GaN work. We have a dozen similar initiatives in early investigation, several of which might become near-term disruptive technology announcements in areas like quantum computing, AI server power, high-bandwidth memory architectures, piezoelectric devices, optical networking and a variety of other areas, which have the potential to enable entirely new applications. Farming out the early R&D whenever possible, allows Atomera's core team to keep a laser focus on the nearer-term revenue opportunities and apply more resources only when we see the potential of these innovations coming to fruition. Our gallium nitride initiative continues to deliver exciting progress. In collaboration with Sandia National Labs, we're in the process of completing device fabrication to highlight our improved electrical performance. Prior results have confirmed MST's ability to enhance GaN growth on silicon substrates, a major barrier for high-volume production and have garnered interest from our first commercial customers. We hope to release a complete data set publicly later this year, which will be the precursor to a full-scale rollout. As we continue our GaN work with Sandia, they are now seeking to expand the areas of R&D engagement on a range of Atomera technologies corresponding to their highest priority development areas. The semiconductor industry is clearly entering a new materials innovation cycle. Across logic, memory, power and RF, engineers are hitting the limits of conventional scaling. They're searching for material solutions that can boost performance, improve reliability and reduce variability, exactly where MST delivers value. This is particularly true in AI infrastructure and data centers, where the demand for power efficiency and thermal management is driving renewed focus on device-level innovation, which MST can deliver. One of our principal challenges is to ensure that potential customers know about MST -- and that is why I'm so excited to welcome Wei Na as our new VP of Sales. Wei has had experience growing a semiconductor technology licensing business very much like Atomera from scratch, selling to the exact same customers we are addressing, and we believe his leadership will help us both grow sales and convert existing opportunities into licenses. Our priorities remain clear: emphasize MSD starting wafer products like RF-SOI and existing engagements to get to production and revenue as quickly as possible; 2, leverage our strategic OEM partnership to advance active engagements in Gate-All-Around logic, memory and power through our comprehensive silicon test results and early licenses; 3, bring MST for GaN technology to a customer-ready stage with shareable electrical data; and 4, maintain fiscal discipline as we transition from R&D validation and integration to revenue-generating licenses. Our mission hasn't changed. It's to enable better, faster and more efficient semiconductors through advanced materials engineering. That mission remains as relevant as ever. I want to thank our employees, our customers and our shareholders for their continued confidence and support. Every quarter, we move closer to the point where MST's impact will be felt across multiple product lines and foundries worldwide. With that, I'll turn the call over to our CFO, Frank Laurencio, to review our financials. Francis Laurencio: Thanks, Scott. At the close of the market today, we issued a press release announcing our results for the third quarter of 2025. Our summary financials are shown on this slide. Our GAAP net loss for the third quarter of 2025 was $5.6 million or $0.17 per share compared to a net loss of $4.6 million, which was also $0.17 per share in Q3 of last year. GAAP operating expenses in the third quarter of this year were $5.7 million, an increase of $857,000 from $4.8 million in Q3 of 2024. This was due to a $544,000 increase in R&D expenses, reflecting both higher outsourced device fabrication work and increased compensation expenses and the $353,000 increase in G&A expenses, primarily consisting of higher stock compensation expense. Sales and marketing expenses were basically flat. Non-GAAP net loss in Q3 2025 was $4.4 million compared to a loss of $3.9 million in Q3 of last year due to a $423,000 increase in non-GAAP operating expense, primarily reflecting the higher R&D expenses I just discussed. Stock compensation expense, which is the main difference between GAAP and non-GAAP operating expenses was $1.3 million in Q3 of 2025 and $907,000 in Q3 2024. The increase in stock compensation expense, which is noncash, reflects the adoption of performance-based RSUs or PSUs for executive equity-based compensation in March of last year. PSUs vest over 3 years rather than 4 years as is the case for time-based RSUs. However, PSUs will only vest if we deliver shareholder returns that meet minimum targets relative to the Russell 2000 Index. Sequentially, Q3 2025 non-GAAP net loss of $4.4 million compares to a $4 million net loss in Q2, primarily due to higher R&D expenses. Our balance of cash and cash equivalents as of September 30, 2025, was $20.3 million compared to $22 million as of June 30, 2025. We used $3.4 million of cash in operating activities during Q3 compared to $3.5 million in the second quarter of this year. During Q2 -- sorry, during Q3, we raised approximately $2 million under our ATM facility, net of commissions and expenses by selling approximately 393,000 shares at an average price of $5.23. Since the end of the quarter, we've raised an additional $836,000 from sales of approximately 171,000 shares at an average price of $5.03. As of today's date, we have 31.7 million shares outstanding. In Q4, we expect to recognize between $75,000 and $125,000 of NRE revenue from wafer shipments to customers running the demos that Scott mentioned in his remarks. Those shipments and the associated revenue recognition will happen in Q4 as well as into next year. Gross margin was negative this quarter because a portion of the cost for MST deposition on those wafers was incurred during this quarter, but the revenue will be recognized as we ship the wafers going forward. Moving to expenses. I expect our non-GAAP operating expense for the full year 2025 to be in the range of $17.25 million to $17.50 million. Sales and marketing expenses ticked up last quarter in connection with recruiting for both sales and marketing leadership roles. The compensation expenses associated with those roles are built into our plan. Our recruiting efforts have started to pay off with the hiring of Wei Na as our VP of Sales. With that, I'll turn the call back over to Scott for a few summary remarks before we open the call up to questions. Scott? Scott Bibaud: Sorry, a little trouble with the Zoom controls here. Thanks, Frank. Across all of our technology focus areas, we have strong developments underway with the leaders of the industry. I hope today, we've given you a sense of our wide and deep potential to deliver important material solutions that will ultimately make Atomera a financially successful technology provider across many different semiconductor segments. I appreciate you taking the journey with us. Mike, we will now take questions. Mike Bishop: All right. Thank you, Scott. [Operator Instructions] Right now, our first question comes from Richard Shannon of Craig-Hallum. Richard Shannon: All right. Great. Hopefully, I'm unmuted here, Mike. Mike Bishop: You got it. Richard Shannon: All right. Excellent. Thanks Scott and Frank, let me ask a few questions here. Scott, maybe let's do a redux on STMicro. So I guess my first question here is, so it sounds like you did a new design on 300 millimeters that you validated in your simulations, but there would have been multiple cycles of learning to validate for ST. So is that trying to match your simulation to the real world to their simulations to make sure that it worked, and that cycle time was just too much to fit within their time frame getting to 300-millimeter. Is that the kind of the dynamic here that led them to their decision? Scott Bibaud: Yes. So first of all, the work -- the new implementation we came up with would have worked on 200-millimeter or 300-millimeter. And actually, if you let me digress one second here, Richard, because we've gotten a number of questions that have come in where people were asking, when did you know about this trade-off between the reliability and performance. Every time you do a development, it's about trade-offs. You're doing a trade-off on one thing -- I mean, you get -- that's why we always talk about cycles of learning. You get some big improvement in one area, it breaks something else. And then you have to go in and you have to work to fix the other thing and try to get to a point where it's all balanced out. So this trade-off work that we were doing is not at all unusual. It's what we do with every customer all the time. What is unusual is that because they made the transition from 200 to 300, (sic) [ 200-millimeter to 300-millimeter ] we lost the ability to bring in that ultimate solution and get it done for them in time because the 300-millimeter delayed their development efforts and then they needed to get into production fast, and so they just didn't have time to run the validation runs to get our new thing proven out. I'm not sure that answered your whole question. Let me know. Richard Shannon: I guess the point here is that it sounded like they were confident that this solves not only the performance, but the reliability issue that you discovered in 200-millimeter, and it was just the time frame that was too tight for them to want to continue right now? Scott Bibaud: Yes, that's right. Originally, you asked about the simulation work. So we do simulation based on what we believe a customer's process -- manufacturing process is, but that's usually very secretive. They don't give anybody that information exactly. We can make our best approximation. And so we made a TCAD simulation that showed, yes, we really got this great improvement. And we gave it to them in this summer. And then they spent the next 2 months running their own simulations. Their simulations are very exact to their own manufacturing process. And so what they did was they put in all the improvements we saw -- we proposed. And they came back and they said, "You know what, when we run our simulation, it also brings that level of improvement." So ultimately, I mean, the good news here is that they confirmed it. It makes us feel very confident to bring it out into the market as a new product. And it also makes us confident that at some point in time, we're hopeful we can reengage with ST on that particular product and have them take it forward and make it -- put it into their process. Richard Shannon: Okay. All right. Fair enough. Let me follow up on one other comments you made related to STMicro and then we'll move on to some other topics here. So what seems obvious and you just commented on is the ability to take some of the learnings from the process with ST and take it to other customers in the power space here. What have you been able to do so far? Can you use similar kind of structures that you've built with ST and use those with other power customers? Maybe just kind of give us a sense of the benefits you can see from the situation. Scott Bibaud: Yes. Exactly. So what we did with ST, there's a technique and architecture that the industry has known about for some time, but it hasn't been implementable. When someone builds it, it causes too many things to break and nobody has ever been able to get it to work. But because of the way MST works, because of the way it prevents dopants from diffusing uncontrollably, we believed that we could get that process to work. So this is not like something no one's ever heard of. It's something that -- one of those theoretical things that no one has been able to get working well and now we can get it to work well. And so yes, it's -- we're not taking anything from -- any proprietary ST information. This is like a standard design technique that we can suddenly make work because of MST. And so yes, we can take that out to other customers, and they kind of understand the concept immediately. Richard Shannon: Okay. All right. Fair enough. Let's move on here. In the last number of quarters, you've talked about transformative customers here. And unless I missed something, you didn't necessarily use that phrase here today in your prepared remarks. But I think you did mention a large demo run, which I think refers to one of them. And I think is also contributing to some of the revenues this year. I will ask a question to Frank on the revenue side here in a second here. But maybe just kind of detail where we're sitting with the transformative customers. And I do want to hit on one specific point that I had a question on. I actually asked Mike Bishop offline earlier today, and he said to ask this question of you, which is you've talked about 2 or maybe 3 of these customers. I want to make sure how many we're talking about and which ones are still ongoing versus any ones that may be stalled. So if you can enumerate that first and then discuss what's going on with this large demonstration you talked about last quarter, and I think you briefly mentioned today, that would be great. Scott Bibaud: Okay. Yes. I know everybody is frustrated with the code words, and I am too. But we -- so in January or February, we unfortunately had to announce that one customer that we had called transformative had discontinued our -- we were negotiating a deal and they had backed out of the deal. And that customer, we continue to have good relations with them. We talk with them regularly, but we are not on an active engagement with that customer right now. In that same call, which I think was early -- was in February. We mentioned 2 new transformative customers that were getting underway. And yes, we are working very actively with them. When we talked about a record number of wafers that we're processing, it includes those 2 customers that we call transformative back then. And so now today, I mentioned these 4 different segments and how we're working with a lot of customers. And then I broke it down by revenue potential and the folks in the middle, folks that are doing Gate-All-Around, folks that are doing DRAM, there are really big players who are doing power and other memory architectures. They are all massive and they're all customers that I would call transformative and so we are -- we're working with more than just those 2 that I mentioned on the call. Richard Shannon: More than just the 2 that you would refer to as transformative. Is that what you're saying, Scott? Scott Bibaud: Yes, yes. Richard Shannon: Okay. Scott Bibaud: I mean I -- just discontinue the term transformative. [ We're good. ] These 2 customers I spoke about as transformative in February are just very, very large revenue potential customers with very big processes that we hope to get going on. But we're also working with other customers who are also very large and have the potential to be transformative. Richard Shannon: Okay. Well, let's talk about the specific transformative customer you talked about last quarter that you're doing a large demo run here. What's the update on what's going there? And is that leading to at least some contribution to the revenues you're guiding to this quarter? Scott Bibaud: Yes. Maybe I'll let Frank answer that. But -- so one of the -- there's some trickiness about when we book revenues. And so we have a lot of customers. The revenue that we're putting out this quarter is based on several customers. I can't answer whether that specific one is in Q3 or it will be in the guidance that Frank gave for Q4, but it's -- yes, we're getting revenue from wafer runs with that customer. Francis Laurencio: Yes, that's right. I mean, the revenue guidance actually covers multiple customers, 3 different customers. And it's spaced out over time. And while I don't like to show negative gross margin, the timing issue gives a little bit more visibility in the sense that we do a bunch of the deposition work, which is when we incur the cost of our tools, the metrology and the labor associated with it. And oftentimes, these are -- these can get matched up pretty quickly with the revenue because it's a small number of wafer runs, and that's been true in the past. But we've been talking now for a couple of calls that we've been working with a very large customer on one of the largest wafer -- on the largest wafer run that we've ever done. And we also have other customers. So now what you're seeing is, we do a lot of that work we don't ship all of those wafers out, but we don't necessarily do all the deposition because the nature of these engagements is it can be iterative. You may do some wafers for setup, you run a series of tests, the customer validates those, you get some feedback. You then do another run with slightly different conditions, either on the MST or how the customer processes it with implants and things of that nature. So you can get a lot of activity in 1 quarter and then the wafers will ship out over time. And one of the challenges in sort of giving guidance is, it isn't set in a schedule of we're going to ship 25 wafers this month and 25 wafers 2 months after that. Sometimes it really depends on what the customer learns in the process of evaluating that, setting up a new set of experiments and then we ship out more. So yes, there's multiple customers here, and these are important engagements in different application areas. Richard Shannon: Okay. All right. That's helpful, Frank. I'll probably follow up with you a little later on that one. Maybe 2 more questions. I will jump out of line here. First of all, Scott, in your prepared remarks here, and I'm sure we'll review these in detail when the transcript comes out here, but you talked about kind of segmenting your opportunity based on where in the stack your MST is applied here and you talked about on top of the wafer versus somewhere in the middle. Certainly, layers in the middle or -- I think it's fairly understood, especially for me who is not a device guy per se that that's very complicated. But vice versa, if you can apply just on the top, that seems to be a much simpler process, which also implies it might be an area where by which you might expect to see or hope to see your first license here just from a time-to-market perspective. So 2 questions for you is, I think I missed the applications areas that, that specifically applied for. And b, would you agree that, that's a very -- a somewhat likely or very likely situation by which you first reach first manufacturing license and commercial production? Scott Bibaud: Yes. So first of all, yes, you're right about being deposited on top of the wafer makes it much easier. The applications that we specifically spoke about that do that is RF-SOI and gallium nitride; and also in the future, we have some ideas on next-generation DRAM that could use it. So one thing to understand very briefly is when we deposit MST in the bottom layer, it has to be on a process that doesn't use incredibly high heat for long periods of time. So if we deposited -- if it was on an MST starting wafer and then someone put the wafer into an annealing step that was 1,100 degrees for an hour, then that would really damage the MST itself and it wouldn't work. So the only time we use MST on the starting -- on the start of a wafer is on -- manufacturing processes are going to be lower temperature. And there's a lot of those. Like RF-SOI is running at very low temperatures. The new Gate-All-Around processes, they're trying to run them at very low temperatures. So in theory, MST could be on the base -- on the starting wafer for those. Gallium nitride, we put MST on bottom before it grows the gallium -- yes, the gallium nitride on top of it. That one isn't quite as low temperature, but it doesn't matter. The MST still works as a starting wafer. So I think a layman might say, well, why don't you just do every process as a starting wafer if it's much easier and faster time to revenue. Well, it has to fit a certain dynamic, which has to do with this temperature range. You had a second half to your question, and I've talked those [ I might have ] forgotten it. Richard Shannon: You hit the applications. I think you've answered most of it. So I think that's very helpful. Last question for me, I'll jump out of line. You talked about this large capital equipment partner. And I think today, you mentioned about going on a roadshow here. Maybe just kind of give us a sense of how broad the engagements are with this company. I think in the past, you mentioned 2. I don't know if that was the limit or there were more you just didn't mention, but -- well, how do we understand the scope and breadth of your interaction with customers through or with them? Scott Bibaud: Okay. So the stated aim of our partnership is in the Gate-All-Around market. And that was what we announced in our press release. However, I have to say that -- there's great value in this partner working with us in everything. And there's value in us working with them in everything. So we have talked to them a lot and done some work on DRAM as well. So basically, yes, I would say our primary focus right now is Gate-All-Around and DRAM. And when we go out on the road, that's who we'll be really targeting most closely. Mike Bishop: Okay. Thank you, Richard. A number of questions have come in on the Q&A line, and I will aggregate them and ask some of the more common ones. So first one is about the Gate-All-Around projects and when the -- there's a number of current projects underway that are expected to launch soon. And how many years do you expect the target process you are currently collaborating on to enter production? Scott Bibaud: Yes. So first of all, working with a few different customers, so there might be a different answer for each customer. In general, the guys working on Gate-All-Around, the great news is it's amazing working with them because they have armies of people working on this stuff, lots and lots of resources to test out your material. And the bad news on that is that they come back with a ton of requests for more information and more testing. But they're almost always working towards some kind of a launch that you would be built into. Some of them, I would say the majority are looking at a launch that's still a few years out. There is some of them that are actually looking at using MST to improve yield on processes that are in production today. I can't exactly say, well, if or how long it would take to get into production on those processes. But my guess is if they integrated MST, they would have to do some qualification work on it. But if it did indeed improve their yield, which I think is what the majority of them are looking at for the current timing processes, they would try to move it into production very quickly. As long as it didn't break anything in the specifications of their production wafers, they would have every incentive to get it into production as soon as possible to improve yield. Mike Bishop: All right. In the past, you've talked about JDA1 and the fabless RF licensee. Have you been doing wafer runs for those? And what do those results look like? Scott Bibaud: Yes. So the answer is yes, we are doing wafer runs with them. Unfortunately, we don't have the results yet. I can't really commit that I'll be able to give you results from each customer. But generally, what happens is when the results come out, that's the timing when we'll be able to start driving towards licenses and transitions to production. Generally speaking, we have a number of different customers with wafers underway right now. None of them are coming out in the next few months. I would say we might have some coming out at the end of the year, but more likely into the first quarter before we start seeing a lot of results from those runs. Mike Bishop: Okay. And one for Frank. So the Incize partnership for GaN testing, can you talk about the economics there of who's paying for the runs and -- or for the testing, if you could shed a little light on that? Francis Laurencio: Yes. I mean at this stage, this is a -- an arrangement with [ RF ] Incize, where we're each bearing our own costs and we'll hopefully achieve a result that would lead us to some further activity. But right now, it's -- we're not paying them to run testing nor are they paying us for wafers. So it's early stage. And I think our hope right now would be to generate good RF data because that's something notoriously difficult. RF testing is complex. It's not something that we can typically do ourselves. So a lot of the work on RF-SOI that we can do is kind of physical characteristics of our film. But when you get into some of the testing of actual devices on kind of different figures of merit, then those are more specialized tests. And so getting more insight into that is very helpful from a marketing standpoint. And our view is there was some question on work with Soitec and wafer-based products. The more information that we have to market to the ultimate customers of RF-SOI devices, the better it is in terms of building a relationship with Soitec, who's a wafer manufacturer. So the more end demand that they see, the closer the collaboration is with us. So I kind of see it as a means to an end there. Mike Bishop: Okay. And then Scott, going back to a topic we've touched on in the past, but is there an update on JDA2? Scott Bibaud: JDA2 is running wafers with us. And they're one of the ones that I talked about that we'd hope to get some results at the beginning of the year; and hopefully, see if we can turn that into a license and then plan to go to production. Mike Bishop: Okay. And then with regard to the STM news, we had a number of questions on disclosure channel. And can you talk about why you chose to put the news out on a blog post? Scott Bibaud: Yes. Yes. And we went back and forth on that. So I just want to be clear, we were in discussions with ST all through August, September and into October about implementing this new version -- a new architecture we had and moving forward on 300-millimeter, and we were waiting to find out from them what the plan was, when that work would start, when they had planned that it would be trying to take it to production. And it was really just 1.5 weeks ago that we had a call with them, and that's when they told us that they did not have a plan in place to use MST to do that new architecture. So immediately after that call, we got off the phone and we started talking about, okay, we have an earnings call in 1.5 weeks. but it seems too long to wait for 1.5 weeks before we notify investors. And so on the following Monday, we actually started speaking with ST to make sure that when we disclose this, we would be following their internal guidelines on what we could say and couldn't say. And then on Tuesday, we put out the blog post. We could have put out a press release, but press releases tend to be, at least in our opinion, much more black and white about news that you're giving. In this case, we see it as a much more nuanced message. ST was telling us we're not -- we don't have a plan to use you guys on this next run. Yes, very bad news because I know all the investors want to know when the royalties will start flowing, and so do we. But they didn't say they'll never use us. And they also reassured us again and again that they are continuing work using our technology on other process areas. So we felt that using a blog would allow us to give a little more nuance than a press release. And we know that the channels of communication that we have with the blog, we push it immediately out to all of our investors, so -- that are at least registered with us. And so we felt it was a good channel of communication in this particular case. And the most important thing to us was to get it out there as soon as we can within the restrictions of making sure we were working everything out with ST and so forth. Mike Bishop: All right. And one more question here. Is there any chance of government funding now that Atomera has been working with Sandia for a while? Scott Bibaud: I talked a little bit on this call, which I've never done much about in the past about all of the different R&D efforts that we have underway. And many of them are, as I mentioned, through Academia, through outside commercial partners so that we don't have to burden our internal team with too much of it. But Sandia is very interested in many of those technologies, and they have government programs that are interested in implementing things that would use those. So yes, there's a lot of interest through Sandia. And we also continue to work with the government and with the CHIPS Act infrastructure such as it is to see what we can do to kind of deliver some of our technology in through that channel and get some near-term revenue that way as well. Mike Bishop: Okay. Thank you, Scott. At this time, we'll turn the call to Scott for closing comments. Scott Bibaud: Okay. Thanks, Mike. Okay. Yes, thanks for joining us and listening to our progress that we've been making here at Atomera. Next month, we'll be attending the Craig-Hallum Alpha Select Conference in New York, and we look forward to seeing some of you there, if you'll also be attending. Please continue to look for our news articles and blog posts, which are available along with investor alerts on our website, atomera.com. Should you have additional questions, please contact Mike Bishop, who will be happy to follow up. Thanks again for your support, and we look forward to our next update call. Mike Bishop: Thank you. This concludes the conference call.
Operator: Good afternoon, and welcome to the Edison International Third Quarter 2025 Financial Teleconference. My name is Denise, and I will be your operator today. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. Mr. Ramraj, you may begin your conference. Sam Ramraj: Thank you, Denise, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also on the call are other members of the management team. Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-Q, prepared remarks from Pedro and Maria and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation. During this call, we'll make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to 1 question and 1 follow-up. I will now turn the call over to Pedro. Pedro Pizarro: Thanks a lot, Sam. Good afternoon, everybody. Today, Edison International reported third quarter core earnings per share of $2.34 compared to $1.51 a year ago. This comparison is not meaningful because during the quarter, SCE recorded a true-up for the 2025 General Rate Case final decision, which is retroactive to January 1. Reflecting the year-to-date performance and our outlook for the remainder of the year, including the costs for potential early refinancing activities later this year, we are narrowing our 2025 core EPS guidance range to $5.95 to $6.20. We have also refreshed our projections through 2028 and are reaffirming our 5% to 7% core EPS growth target. Maria will discuss our guidance and financial performance in more detail. California's legislative session concluded with the passage of SB 254, a constructive and important step to support IOU customers, address wildfire risk and boost the financial stability of the state's investor-owned utilities. The bill passed with near unanimous support, and that's a clear signal that policymakers understand the urgency of the issue and the need for durable solutions. SB 254 creates an up to $18 billion continuation account jointly funded by IOUs and customers to provide a backstop for wildfires ignited after September 19, 2025. Importantly, it enhances the existing framework by basing the liability cap on the year of ignition rather than the year of disallowance, providing certainty for stakeholders. It also allows for the securitization of wildfire claims payments for 2025 wildfires ignited between January 1 and September 19, if the initial wildfire fund is exhausted, which would apply to the Eaton Fire if needed. These provisions are constructive for potential cost recovery and help utilities like SCE continue to invest in safety and reliability while maintaining affordability for customers. We have provided a summary of SB 254 on Page 3. SB 254 calls for an important second phase, a comprehensive report due in April 2026 that will evaluate long-term reforms to equitably socialize the risks and costs of climate-driven natural disasters. The law recognizes that customers and shareholders continuing to bear the burden of these events is unsustainable. This second phase is important to evaluate the broad scope of potential reforms that are necessary for a sustainable model. As you will see on Page 4, the 10 points outlined in SB 254 can be grouped into 3 categories: first, reducing the risk of ignitions and harm from wildfires; second, affording fair compensation for people affected by wildfires, including avoiding disparate treatment of communities. Third, allocating the risk and costs of natural catastrophes across stakeholders equitably. We are encouraged by this direction and by the executive order that Governor Newsom signed on September 30 to expedite the state's all-in response. We look forward to continuing to work with legislators and stakeholders to shape a more sustainable and equitable framework. We are confident that we will see meaningful legislative action next year. Turning to the Eaton Fire. The investigations remain ongoing. As we have said before, SCE is not aware of evidence pointing to another possible source of ignition. Absent additional evidence, SCE believes that it is likely that its equipment could be found to have been associated with the ignition. During the third quarter, SCE entered into a settlement with an insurance claimant agreeing to pay $0.52 for each dollar paid to its policyholders. Note that this is a single data point and does not provide sufficient information to develop an estimate of the total potential losses associated with the Eaton Fire. The Wildfire Fund administrator has confirmed that Eaton is a covered wildfire for the purposes of accessing the fund. Based on the information we have reviewed thus far, we remain confident that SCE would make a good faith showing that its conduct with respect to its transmission facilities in the Eaton Canyon area was consistent with actions of a reasonable utility. That said, we continue to take proactive steps to support community members. Shortly, SCE will launch the wildfire recovery compensation program for the Eaton Fire. This voluntary program is designed to provide eligible individuals and businesses impacted by the fire, direct payments to resolve claims quickly. This allows communities to focus on recovery earlier while minimizing the overall cost and outflows from the Wildfire Fund by reducing escalation, interest expense and legal fees. Moving to the regulatory front. The key message is that we've made significant progress across multiple proceedings this year, further derisking our financial outlook and bolstering our ability to deliver for customers and investors. Earlier this year, the CPUC approved the TKM Settlement, authorizing recovery of approximately $1.6 billion in wildfire-related costs. More recently, SCE reached a settlement agreement with intervenors in the Woolsey fire proceeding as highlighted on Page 5. This marks a significant milestone and puts the company one step closer toward fully resolving the 2017 and 2018 legacy events. The agreement with authorized recovery of approximately $2 billion of the $5.6 billion requested subject to CPUC approval. This structure supports long-term affordability for customers by reducing excess financing costs and improving credit metrics, specifically up to a 90 basis point benefit to FFO to debt and an annualized interest expense benefit of approximately $0.18 per share. Combined with the TKM Settlement, this will result in recovery of 43% or about $3.6 billion of the total cost above insurance and FERC recovery. We anticipate a final decision from the CPUC toward the end of this year or early next year. And assuming CPUC approval, we expect to receive proceeds from securitization mid-2026. Details of both proceedings can be found on Page 6. SCE also received a final decision on its 2025 General Rate Case in September, as highlighted on Page 7. The decision authorizes 2025 base revenue of $9.7 billion and support significant investments in wildfire mitigation, safety and reliability and upgrades for increased load growth while incorporating affordability considerations for customers. It also authorizes average revenue increases of about $500 million per year for 2026 to 2028, subject to adjustment based on inflation. On capital expenditures, the final decision authorizes 91% of SCE's request. Importantly, the commissioners highlighted that these investments in the grid provide long-lasting value to customers, especially given the need to protect against wildfires, advance electrification and ensure a ready, reliable grid for the clean energy future. On wildfire mitigation, SCE has now deployed more than 6,800 miles of covered conductor. I'm pleased to share that by the end of the year, SCE will have hardened nearly 90% or more than 14,000 miles of its total distribution lines in high fire risk areas. The GRC authorizes installing another 1,650 miles of covered conductor for wildfire mitigation as well as 212 miles of targeted undergrounding. Similar to covered conductor, which continues to be an important risk mitigation tool, SCE believes that its targeted undergrounding program will also provide substantial benefits to further safeguard its customers and communities. Public safety power shutoffs remain a critical tool in wildfire prevention. This year's updates include revised criteria and wind speed thresholds, expanded circuit coverage and broader boundaries around high fire risk areas. Additionally, SCE has now enabled fast curve settings on approximately 93% of its 1,100 distribution circuits in high fire risk areas, further reducing ignition risk and improving system safety. As we've shared before, SCE's system average rate continues to be the lowest among the major IOUs in the state. Importantly, the utility expects this will grow at an inflation-like level on average through 2028. Incorporating the GRC approval, TKM Settlement and pending Woolsey settlement, we continue to expect that CAGR to be in the range of 2% to 3%. In closing, I want to thank our team members for their continued dedication and resilience. And I also want to thank our investors for your support and our customers for the opportunity to serve them. This has been a year of meaningful progress on the legislative front, in the regulatory arena and in our operational execution. We've taken important steps to resolve legacy wildfire liabilities, strengthen our financial position and advance the utility's mission to safely deliver reliable, affordable and clean energy. But we also recognize that this has been a challenging time for so many of the communities we serve, particularly those impacted by wildfires. We remain deeply committed to learning from our experiences and supporting recovery and resilience to rebuild stronger. We are grateful for the opportunity to partner with customers, local leaders and other stakeholders to build a safer and more sustainable energy future. Well, we look forward to continuing our dialogue with many of you at the EEI Financial Conference in November. We'll see you there. And with that, Maria, let me turn it over to you for your financial report. Maria Rigatti: Good afternoon, and thanks, Pedro. I will echo your comments that we have made significant progress across multiple proceedings this year, further derisking our financial outlook and bolstering our ability to deliver for customers and investors. With the GRC final decision in hand, we now have increased certainty and visibility into the work SCE will do to meet customers' needs and have refreshed our projections through 2028. Consequently, we are reaffirming our 5% to 7% core EPS growth target, which I will discuss in detail. Starting with third quarter 2025 results, EIX delivered core EPS of $2.34, up from $1.51 a year ago. The year-over-year variance analysis is on Page 8. As Pedro noted, this comparison is not meaningful because SCE recorded a true-up of approximately $0.55 for the 2025 GRC final decision, which is retroactive to January 1. Based on strong year-to-date performance and our outlook for the rest of the year, we are narrowing our 2025 core EPS guidance to $5.95 to $6.20, as you will see on Page 9. This range now includes the potential for $0.10 per share of costs associated with refinancings tied to the TKM and Woolsey cost recoveries. As previously mentioned, our 2025 guidance does not include the potential earnings associated with the Woolsey settlement. SCE is awaiting a proposed decision on the settlement and a final decision could be issued later this year or early next. We want to be clear that for measuring our core EPS growth through 2028, the 2025 baseline of $5.84 is unchanged from prior disclosure. Now I would like to discuss our refreshed projections, which we have summarized on Page 10. Additionally, on Pages 14 through 17, we put together a comprehensive list of frequently asked questions on guidance-related topics for background and easy reference, which we hope you will find helpful. Please turn to Page 11, which lays out our 4-year capital plan of $28 billion to $29 billion. This compares to our previous forecast for the same period of $27 billion to $32 billion. The plan incorporates substantial investments in infrastructure replacement, electrification and system resiliency approved in SCE's GRC. Additionally, the plan now incorporates the utility's next-gen ERP project and other updates across the business, including Wildfire Mitigation capital that SCE will securitize under SB 254. We also continue to see the need for substantial grid investments beyond our forecast period. We've highlighted on the right side of the page 2 examples of this, with much of that spending occurring beyond 2028. Driven by the capital plan, we project rate base growth of 7% to 8%, as shown on Page 12. This growth is after incorporating the expected Wildfire Mitigation capital expenditures that will not earn an equity return under SB 254. Moving on to our long-term core EPS growth target, as shown on Page 13, we continue to expect 2028 core EPS of $6.74 to $7.14. You will find additional information on this topic on Pages 14 and 15. Our confidence in delivering on our commitments is underpinned by the clarity we have from the GRC and our ability to manage our operations for the benefit of all stakeholders. Let me now turn to our financing strategy and balance sheet strength. Over the last several years, we have executed efficient financing to support our target 15% to 17% FFO to debt framework. We have used hybrid securities to generate equity content when needed, avoiding substantial common equity issuance to prefund our capital plans. By year-end, SCE expects to receive approximately $1.6 billion in securitization proceeds from the TKM settlement. Following Woolsey settlement approval, the utility plans to request a financing order to securitize an additional $2 billion. These actions further strengthen our credit metrics and financing flexibility for funding future rate base and dividend growth. Altogether, this leaves us very well placed among our peers on 2 key credit metrics. EIX has one of the strongest consolidated FFO to debt ratios projected by S&P. Also, we have one of the lowest levels of parent company debt as a percentage of total debt. Page 13 details our 2025 through 2028 financing plan. Let me highlight that this plan does not require any equity issuance. This expectation is supported by the TKM and Woolsey recoveries. Further, as you know, the Wildfire Fund provides reimbursement for claims paid above an IOU's $1 billion of insurance. Additionally, for buyers between January 1 and September 19, 2025, the recently passed SB 254 allows the utility to issue securitized bonds prior to a reasonableness review to fund claims payments should the initial fund be exhausted. While we currently cannot estimate the probable losses associated with the Eaton Fire, the constructive California liquidity and prudency framework means neither equity nor debt would need to be issued in connection with that event. Following the passage of SB 254, the rating agencies issued updates on the company. Moody's affirmed its ratings for both EIX and SCE with a stable outlook. Fitch removed its rating watch negative from both companies, citing SB 254 as a meaningful policy shift. While S&P downgraded EIX and SCE by 1 notch, we believe this view does not fully recognize the legislative intent or commentary from the Governor's office. Importantly, S&P still expects our credit metrics to remain within our target with upside potential from a constructive Woolsey outcome. At the parent company, we are working on how to best address the preferred equity issuances that have upcoming rate resets. We are looking at cost-efficient options for early refinancing, which will bring forward both the costs and the benefits of the transaction. The core benefit is the optimization and clarity of financing costs before the rate reset, which further derisks our financial outlook. We have considered the potential cost of this optimization in our narrowed 2025 core EPS guidance and see the long-term benefits outweighing the near-term costs. I would like to update you on another positive trend we are seeing, load growth. As we have laid out on Page 18, SCE remains well positioned to meet the diverse and accelerating demand across its service area. Our team continues to anticipate significant investments in infrastructure upgrades to meet this growing demand, many of which were included in SCE's recent GRC approval. Importantly, our demand forecast is not reliant on a single sector. For one, SCE is at the heart of California's EV adoption, helping the state maintain its national leadership in transportation electrification. In fact, the state recently announced a record 29% of new cars purchased in Q3 2025 for zero-emission vehicles. We're also expecting growth in new housing developments and increases in commercial and industrial consumption. To sum up, we are expecting a near-term load growth CAGR of up to 3%. In the long-term, we project electricity sales will nearly double over the next 2 decades. I will conclude by saying that the company has made significant progress achieving certainty across numerous regulatory proceedings this year, allowing us to confidently reaffirm our long-term guidance. It underscores our ability to execute on our commitments and deliver for the customers and communities SCE serves and for our investors. That concludes my remarks, and I'll turn it back to Sam. Sam Ramraj: Denise, please open the call for questions. As a reminder, we request you to limit yourself to one question and one follow-up. So everyone in line has the opportunity to ask questions. Operator: [Operator Instructions] The first question is coming from Nicholas Campanella with Barclays. Nicholas Campanella: I just wanted to ask, you brought up the $0.10 for the equity preferred as it relates to the '25 guide. So can you just kind of confirm, is this -- is the $0.10 just a charge for both the '26 and '27 maturities? Or is that still kind of up for debate? And then maybe just expand on what some of your options are for addressing that? Obviously, there's no equity coming to replace this, if I'm reading it correctly. Maria Rigatti: Sure. Right. So just to recap what you said, we have 2 preferred equity series with a rate reset in March of '26 and then again in March of '27. We issued those back in 2021, and that was to address sort of the claims that we were paying related to TKM and Woolsey. And now that we have the TKM settlement approved and the securitization coming later this year as well as the Woolsey settlement pending approval, which will also be securitized, we're taking a look at all of our options at the holding company. So we are still evaluating the options, but we think that maybe taking some steps earlier rather than waiting for those March '26, March '27 reset dates would be beneficial overall for the company. Any time we do a refinancing, there will be a write-off of deferred transaction costs, et cetera. And so that's what the $0.10 represents. That would happen regardless of whether we do it early or whether we did it at the actual reset date. But the options that we're looking at are pretty broad, and we'll have more to come on that. Nicholas Campanella: Okay. Okay. I appreciate that. And then I guess as it relates to Eaton, you've launched this kind of recovery compensation program. maybe you can kind of just discuss what the participation level has been in that? And does that allow you to have kind of a view on claims in more of an expedited manner? Is that something that we can maybe expect with the 10-K? And I understand that there's very clear new protections in place from SB 254, which are helpful. But just when do you think that we'll have a low-range estimate for what the liability against the fund would be? Pedro Pizarro: Yes. Nick, let me jump in here. So we're not quite where you -- I think we are yet. We haven't launched the program yet. We've announced that it's coming. We went through a process of releasing a draft protocol in September and then opening it up to feedback from the community. And so as I said in my remarks, we expect to be able to finalize the program and launch it shortly. And so regarding though, when that might lead or if it might lead to an estimate on losses, first, as you point out, we'll need to see what the participation rate is. I think that there's -- we're doing everything we can, and we have engaged really the world's best outside experts on this, Ken Feinberg and Camille Biros who were, among other things, the architects of the 9/11 fund. So they've been providing great advice on this. We've gotten good input from the community. We're considering a number of potential changes beyond what we had released in draft form. But I do want to make sure I temper expectations. This is -- this will be a long process. And it's only one of the components of potential losses in a complex event like Eaton. So you saw that, I mentioned in my remarks already that we did the 1 SoBro settlement. It was meaningful, but it's only one. And so we're not able to estimate even SoBro losses just from that one data point. And so similarly, we'll have to see what kind of participation rate we get. And at some point, does it become material enough that it maybe allows to start getting our hands around that portion of losses. But of course, there are other kinds of losses in this. So a very long way of saying that we're still kind of where we were last quarter. We don't yet have an estimate of when we'll have an estimate, Nick. Maria Rigatti: And Nick, maybe just picking up on a couple of the other things you raised. The direct claims program is, of course, a good way to be good stewards of the fund. But you pointed directly to SB 254 protections that were introduced. So building on the protections of AB 1054, there are a couple of things that we think can apply to Eaton and do that in a constructive manner. First, the date at which the liability cap is calculated is the point of ignition. So we know with clarity what the cap is for Eaton, which is approximately $4 billion based on our current rate base. The second piece relates to the securitization that I mentioned earlier for fires that occur between January 1 and the effective date of the legislation to the extent there is a need to go above the fund. And again, we don't know what the estimate is for Eaton. The company can securitize those claims before going in for a reasonableness review with the CPUC. That outcome is good for customers because it minimizes costs and interest expense. It's also good for the utility because it wouldn't need to issue any debt at that point or equity to fund the claims payments. Operator: The next question comes from Gregg Orrill with UBS. Gregg Orrill: Thank you for the update on guidance. Just a clarification. Is it -- is there a part within the growth rate range that you feel you're trending toward now, the upper half or the lower half or whatever or maybe things that -- I know you provided some disclosure on what would take you within that range, but any other thoughts on that would be helpful. Maria Rigatti: So Greg, we are very comfortable and confident in the 5% to 7% EPS growth. Obviously, we run a lot of scenarios when we take a look at that, and there are many variables that can change either because it's a 4-year period or because this is a complex business. I would just say that we did incorporate a lot of new information into our outlook. We have the GRC in hand. We had multiple regulatory proceedings over the past year around recovery of memo accounts that also contribute to capital. We had the TKM settlement. We have the securitization that's coming up. The Woolsey settlement that's pending approval. With all of that, we put that together in the mix. And I think the 3 key takeaways for me are not just reaffirming the 5% to 7% EPS CAGR, but also that we have significantly more clarity around that forecast and we have a stronger balance sheet. So we're still 5% to 7% is where we are, but I think there's a lot more behind that, that is very positive. Operator: The next question comes from Shahriar Pourreza with Wells Fargo. Shahriar Pourreza: Pedro, I know there's -- obviously, there's clearly some improvement in the wildfire constructs from Phase 1, even though they kind of kicked the can down the road and some of the key items there. I guess in terms of Phase 2 process, what do you see as viable for limiting EIX's liability? And what will be the data points that you anticipate going into the legislative session? Like is this going to be a public process? Is this going to be a private process? How do we track it? Pedro Pizarro: Yes. Thanks, Shahriar. Good set of questions. And as I mentioned in my remarks, we are very encouraged by the legislature not only having taken the steps that Maria recapped just now on Phase 1, but setting up this Phase 2 process. It's still being shaped, but the California Earthquake Authority as the lead entity here has been pretty articulated already in some key parts of the process. They've given the time line, right, for submission of abstracts across the various topics, that's November 3, is the deadline for those abstracts. And then they have a deadline of December 12 for the full papers that parties can submit. They have said already that they plan to make all of those submissions, both the abstracts and the papers public as they come in. So I think that's really helpful because it will give really nice transparency to everybody in terms of what various stakeholders are submitting and how they're thinking about things. For our part, we continue to work very closely with our colleagues at the other investor-owned utilities, and we'll also be looking to engage with a broader set of stakeholders as we develop our ideas or compare notes with their ideas. We also understand that CEA will have perhaps still being defined a little bit, but some process for open discussions, meetings, et cetera, between the submission of papers and the April 1 deadline for the final report. It was also encouraging, I touched on this very briefly in my remarks, but it's very encouraging to see Governor Newsom turn to the various agencies with this executive order and essentially give out homework assignments for the expectations on how each agency would be contributing to specific items within the 10 areas that were outlined by SB 254 that I covered in my remarks as well. So it's really nice to see not only the CEA putting out their process, but the Governor then turning to the agencies. And for some of the agencies that he can direct, actually gave them direction for the agencies that are more constitutional where he can only provide advice or suggestions, he suggested focus areas for each of those. We'll see what comes out in the report, although we're encouraged, frankly, by this responsibility, the leadership of it, having placed by SB 254 in the hands of the California Earthquake Authority, very professional entity. They have a solid understanding of broad natural catastrophes and risks, starting with their original mission around earthquake. But as you know, they've been the Wildfire Fund administrator since the inception of the fund through AB 1054 in 2019. So they also have deep experience now in terms of the wildfire topic that gives us a lot of comfort that there's good professional management, and they have the ability and we understand that they're in the process of engaging outside help as well. And then I go a little long-winded here. Hopefully, I won't quite go into 18 innings like the Dodgers. Go Dodgers. But maybe I'll give you one more point on this. As Maria is laughing right now. I wish we had video so you could see her. As we turn to the legislation and the outcome of the report itself, we expect that there's a potential here for taking action across the economy. This is not just about utility connections to wildfire, right? And so everything from reducing the exposure that the state has by -- we would hope to see -- seeing strengthening building codes and standards and frankly, strengthening of the implementation of building codes and standards because today's codes and standards are actually rather strong. But reviewing those and then making sure those are being implemented effectively statewide, reduction in the overall exposure to losses, right, by looking at what are potentially some fair caps and specific kinds of claims or fees involved in the process. And then, of course, looking at how does California equitably allocate the ultimate cost of natural catastrophes like wildfires. It was very encouraging to see the legislature acknowledge right upfront in the preamble of SB 254 that the current process of essentially making utility customers and utility shareholders, the insurers of a catastrophe is simply not sustainable. When you take a horrible heartbreaking fire like Eaton, and we still haven't concluded what happened here, but you heard me say it's likely that the equipment could be found and have been associated. But even if the spark did come indeed from our SCE equipment, the catastrophe was about so much more. The extreme weather, the 100-mile an hour winds, the grounding of firefighting aircraft, the homes that unfortunately were beautiful, great neighborhoods, but we're not ready for this high fire risk, the lack of evacuation notices in areas that covered all but one of the fatalities. So you add all of that up, and we simply can't have utility customer shareholders continue to be the insurers of this catastrophic risk, and we're encouraged that the legislature seems to recognize it and setting up 254. Sorry for the PhD dissertation there, but you hit on such an important topic, Shahriar. Shahriar Pourreza: No, no, it's helpful. And then just, Pedro, really lastly for me quickly. I mean, obviously, '26 seems to be a pretty big inflection year for the California utilities. And I know one of your peers in the state is talking a little bit more on capital allocation depending on what could be the outcome of Phase 2, i.e., buybacks, dividends, returning more to shareholders, looking at how they're deploying capital in the state. I guess, how do you -- where do you stand around that, given how binary '26 could be? Pedro Pizarro: Yes. I'll turn to Maria in a second here, but let me just start by saying, above all, and this is really an important part of the messaging for Edison and I think for our peers as well. This is ultimately much more about customer cost than anything else, right? The weakening of financial health, which you mentioned some options here, one of our peers has mentioned here. But ultimately, this is really about how do we maintain healthy balance sheets and importantly, healthy credit ratings because the cost of debt is borne by customers. And so as we engage with legislators, we are laser-focused on that customer impact as being the reason or one of the key reasons in addition, obviously, to public safety to reforming how the state addresses its catastrophic risk. Maria, do you want to talk? Maria Rigatti: Sure. So I think, first, I would say, Shahriar, we've always taken a very measured and efficient approach to how we capitalize the business. You've seen that over the course of the last 5 or 6 years where we went down the path of using hybrid securities as opposed to issuing common equity at times when it would have been more value destructive perhaps to do the latter. I think the other thing to say is we find ourselves in a somewhat different position. We have no equity issuances in our forecast at this point. We are looking at cost-efficient opportunities to take care of the holding company hybrids. So we'll be going down that path. And also, frankly, we have been returning capital to shareholders for the past several decades with an increasing dividend. We're still targeting our 45% to 55% payout ratio. We have a lot of confidence in our forecast, and so we have a lot of confidence in that. So I think you'd find our company in a slightly different position. Operator: The next question comes from Anthony Crowdell with Mizuho. Anthony Crowdell: I just wanted to follow up on Nick's question earlier on the $0.10 related to the preferred equity. It seems that it's -- I don't know if you're calling it earlier or expected earlier financing. Was it not contemplated in like the '26 and '27, '28 forecast when you previously issued that a financing on their maturity, meaning that if they -- if you waited until when they actually matured, it was getting absorbed into the 2026 and '27 guidance, whereas now by pulling it forward, it's hurting '25, but yet '26 and '27 are not going up. Maria Rigatti: Frankly, Anthony, we were taking a look at a lot of options before as well. The fact is that with the TKM settlement earlier this year and the securitization and the Woolsey settlement pending and a subsequent securitization there as well, we find ourselves maybe with more options. Some of those options introduced potentially having to write-off the deferred financing costs. Yes, if we were going to go down the path of refinancing in any event, you would get them in the year in which the event occurred. But if we were just going to continue them on, then there wouldn't have been anything there to write-off. So it does very much tie to the success we've had around some of the regulatory proceedings this year, the certainty that we've gotten from them and the ability to introduce these additional options when we consider the preferred as a holding company. Operator: The next question comes from Paul Zimbardo with Jefferies. Paul Zimbardo: The first one I was going to ask, I know you had one of the comments, and I appreciate the frequently asked questions. How would you describe the linearity beyond 2025 of the EPS trajectory? I know it's been a little bit lumpy in the past, but thinking without rate cases in between, it would be a little bit more linear. So if you could give some color on that, it would be appreciated. Maria Rigatti: Sure. So we will be giving our 2026 guidance on the Q4 call. That's our typical practice. But I can share a little bit more with you about the process that we have and really what's underscoring our very strong confidence in the 5% to 7% growth rate. So I think about the GRC as the frame for the entire 4-year process. And now that we have that final decision in hand, we know the total amount of work that we have to accomplish over that 4-year period. But frankly, annually, we always go through a very detailed planning process to develop the work plan and how we will execute on each piece of the process. And we have to consider a lot of different things. We have to consider resources. We have to consider operational priorities, timing of the work. All of those can introduce some amount of input and structure around our guidance on a go-forward basis. So we are looking at that right now. We have the GRC in hand, but our detailed planning process has not started or it's just recently started underway in -- now that we have the GRC decision in hand. And so we will be providing more of that detail in response to your question on the Q4 call, but it certainly underscores our confidence in the overall 5% to 7% EPS CAGR. Paul Zimbardo: Great. And the other one I had was just on the credit profile. I think the commentary was solidly within that FFO to debt range. But just with the benefit of the enhanced recovery you're getting on the legacy fires, is it fair to think you're trending towards the upper half of that range over time? Maria Rigatti: So we're certainly comfortable in our range, and we're looking at our various financing options, and we'll come back to you once we decide on those. And we can -- we will still, though, always be comfortably in our 15% to 17% range. Operator: The next question comes from Carly Davenport with Goldman Sachs. Carly Davenport: Pedro, maybe going back to some of your comments earlier on customer costs. Just wanted to ask on the cost of capital filing in that context of customer affordability and the rhetoric in California. Just curious your latest temperature on the outcome there relative to what you have baked into the financial plan that you've laid out here. Pedro Pizarro: Yes. I'll start, Maria, you have more there. We're still in that process. You've seen our filings, the range that we provided, which is higher than the current 10.33% -- 10.75% to 11.75%. That's based on our outside experts testimony of looking at the overall risks that SCE is encountered with right now and trying to have fair compensation on that. We will let the process finish its way through. And hopefully, we'll have a decision by the end of the year as has been typical with cost of capital proceedings. Maria, anything you would add there, though? Maria Rigatti: Yes. So Carly, I completely agree with Pedro. We made a very strong showing. The proposed decision based on the schedule is due in November. So we are watching for it. All of the procedural aspects of the proceeding are completed. In terms of your question about -- so how does it roll into our forecast, like many other variables, we run a range of scenarios around the current ROE. So we have a number of things baked in, and we test a wide range of outcomes. So I think that's how it really fits into the range of 5% to 7% EPS CAGR through 2028. Carly Davenport: Got it. Okay. Very clear. And then maybe just one on the updated capital plan here. It looks like the FERC piece come down a little bit on the margin. Just curious what's driving that? And then your current views on the upside opportunities for FERC investment as you manage some of the moving pieces at the state level? Maria Rigatti: Sure. So the FERC piece came down very slightly over the 4-year period. A lot of that just has to do with timing of when the work will be done. So nothing really to read into that. And then on your second question, could you just please repeat that one more time? Carly Davenport: Yes. Just kind of as you think about managing the broader capital plan in the context of maybe the supportiveness of California, some of these investments at a CPUC level, to what degree FERC could sort of be a lever to lean into a little bit more there on the upside? Pedro Pizarro: Carly, one way to think about it is, it's a pretty good delineation between which investments are CPUC jurisdictional and which ones are FERC jurisdictional. And so the CPUC jurisdictional are the ones that we just got approval for in the SCE GRC. In addition, we have other proceedings underway like the next-gen proceeding or the next-gen ERP or the smart meter proceeding, AMI 2.0. But maybe I'll help Steve Powell, the CEO of SCE, just touch us a bit on just a broad transmission plan at CAISO and how that feeds the potential for FERC level investment over the next few years. Steven Powell: Yes. So the Independent System Operator, CAISO has put out -- or puts out 20-year plans to show the long-term opportunities for transmission investment in the state. The most recent one pointed to $45 billion to upwards of $55 billion of potential investment in projects over a 20-year period. They then translate that down to 10-year plans that get rolled out each year. And so you've seen over the last number of years, us get quite a number of incumbent projects as well as bid and win a competitive project. And so as I look forward, kind of the load growth that we're seeing, especially in the 10- to 20-year period is going to continue to drive the CAISO process to create more transmission opportunities. And so we want to continue to position ourselves to be the right incumbent provider to build on the existing network, which is oftentimes the most effective way to get the reliability projects as well as the policy projects built, but also continue to position ourselves for those competitive projects where there's new lines that are needed to be established. And we've shown our ability to go in and win projects, and we expect to continue to participate in competitive opportunities in the CAISO portfolio going forward. Operator: The next question comes from David Paz with Wolfe. David Paz: This is somewhat related regarding the SB 254 CapEx that's ineligible for an equity return, do you anticipate backfilling that roughly? I think it's $2 billion -- $2.3 billion of CapEx that's not in your '25 to '28 plan with other programs. Is that with the next-gen and with the other things? Or should we anticipate there being something else? Maria Rigatti: So maybe let's clarify a little bit what's in the CapEx plan that's in the investor materials today as well as what's in the rate base. So if you recall, under SB 254, the CapEx that we're talking about is Wildfire Mitigation that is approved post 1/1/26, so this next upcoming year. In our capital plan, we have included some of the -- we have included all the CapEx that we expect to spend through 2028 that is going to be subject to that. And we have about $500 million to $700 million of CapEx on the CapEx slide that are related to the SB 254 capital. When you move over to our rate base slides, we are not including that when we convert CapEx into rate base. So you can use the rate base slides as sort of the foundation for your modeling in terms of the amounts on which we can earn equity return. The balance of what is under SB 254. So the rest of that CapEx would be spent then after this rate case cycle. So as we go into the 2029 rate case cycle, we'll be taking a look at how that all factors in. But the numbers that we provided in the materials today should be pretty clean in terms of how you would use them to look at our growth rate. David Paz: Okay. That makes sense. But just to understand for modeling purposes, that remainder, so not what's in your slides today, but the rest should we anticipate that being spread out over the '29 to '32 GRC or upfront just based on the language or your interpretation of SB 254. Maria Rigatti: So we would expect that CapEx to be spent after 2029. We don't have those -- that GRC filed yet. So we'll be working on that as we go through it. And whenever we do have that available in terms of that piece of the forecast, certainly, we would make it clear as to what pieces are in rate base and what pieces are not. Operator: The next question comes from Aidan Kelly with JPMorgan. Aidan Kelly: Yes. Just one question on my end. Could you just touch a little bit more on the near-term annual 1% to 3% sales growth a bit more? Just curious to hear any detail around the breakdown between the electrification, residential growth and C&I customers? Pedro Pizarro: I'll turn it over to Steve again from an SCE perspective. Steven Powell: Yes. So in the near-term, in terms of the customer demand growth that we're seeing, it really is a mix across those ones that you mentioned. So we certainly point to electrification and primarily around vehicles and the continued kind of strong growth in vehicle -- new vehicle purchases that are 0 emissions is really bolstering that transportation electrification load growth. It's probably about 1/3 of it is the driver in there. We continue to see residential new home starts and new residential development happening across our territory. And so that's another key piece. And then the commercial industrial load growth, and that's a breadth of different types of industries, whether it's defense, manufacturing, down to logistics are all ones that we're seeing -- getting a lot of requests. I know there's a lot of conversations around data centers and that load growth. For us, it's not a big driver like many other places, but we see a moderate amount of requests coming through there as well that kind of just blends in with the rest of our commercial industrial growth. So it's a pretty balanced set of load that we would see over the next 5 years where kind of we project that 1% to 3%. Pedro Pizarro: And we really like the durability of having that kind of diverse profile as opposed to relying just on data centers. Operator: Thank you. That was our last question. I will now turn the call back over to Mr. Sam Ramraj. Sam Ramraj: Thank you for joining us. This concludes the conference call, and have a good rest of the day. You may now disconnect.
Operator: Good afternoon, and welcome to Landstar Inc.'s Third Quarter Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Frank Lonegro, President and CEO; Jim Applegate, Vice President and Chief Corporate Sales, Strategy and Specialized Freight Officer; Jim Todd, the Vice President and CFO; Matt Dannegger, Vice President and Chief Field Sales Officer; and Matt Miller, Vice President and Chief Safety and Operations Officer. Now I'd like to turn the call over to Mr. Jim Todd. Sir, you may begin. James Todd: Thank you, Elmer. Good afternoon, and welcome to Landstar's 2025 Third Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following is a safe harbor statement of the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relate to Landstar's business objectives, plans, strategies and expectations. Such information is, by nature, subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2024 fiscal year described in the section Risk Factors, Landstar's Form 10-Q for the 2025 first quarter and our other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to publicly update or revise any forward-looking information. I'll now pass it to Landstar's CEO, Frank Lonegro, for his opening remarks. Frank Lonegro: Thanks, JT, and good afternoon, everyone. I'd like to thank our BCOs and agents and all of the Landstar employees who support them every day. It was great to spend time with our BCO independent contractors at our annual appreciation days in Bossier City, Louisiana recently and to celebrate their incredible achievements. We were extremely pleased with the turnout. And it was my honor to preside over Landstar's 52nd Truck Giveaway, awarding Christian Sanchez Cantù from Laredo, Texas with a new 2026 Freightliner Cascadian. The capability, resiliency and level of commitment exhibited day in and day out by our network of independent business owners is unique in the freight transportation industry. Their adaptability and dedication to safety, security and service for our customers is truly impressive. They are exceptional business leaders and key to driving the continued success of Landstar's business model. The challenging conditions experienced in the truckload freight environment over the past 10 quarters continued during the 2025 third quarter. Volatile federal trade policy and lingering inflation concerns continue to generate supply chain uncertainty. However, even as overall company revenue decreased approximately 1% year-over-year, the 2025 third quarter included important positive signs for Landstar, which I'll cover shortly. As JT and I will discuss in greater depth later in our prepared remarks and as disclosed in our earnings release, the 2025 third quarter financial results were impacted by three discrete noncash, nonrecurring items. As we disclosed via the 8-K we filed with the SEC on August 13, the largest of these items related to the decision to actively market for sale Landstar Metro, our wholly owned Mexican logistics subsidiary that is principally engaged in intra-Mexico truck transportation services. We are working towards a late 2025 or early 2026 sale of Landstar Metro and have thus far experienced a good deal of interest in that company. Excluding the revenue contribution from Landstar Metro from both the 2025 and 2024 third quarters, as well as approximately $15 million in reported revenue during the 2024 third quarter that was associated with the previously disclosed agent fraud matter, the total revenue increased approximately 1% year-over-year in the 2025 third quarter. This is a positive marker for our business. Encouraging signs in our overall performance were highlighted by strength in the unsided/platform equipment business. This service type posted another strong quarter with a 4% year-over-year revenue increase driven by the performance of Landstar's heavy haul service offering. We generated approximately $147 million of heavy haul revenue during the 2025 third quarter, or a 17% increase over the 2024 third quarter. This achievement reflected a 9% increase in heavy haul revenue per load and an 8% increase in heavy haul volume. And as noted in our earnings release and representing the collective efforts of many people at Landstar, Matt Miller and I are very pleased to report that the number of trucks provided by BCO independent contractors increased during the 2025 third quarter, representing the first sequential growth quarter since the 2022 first quarter. Our focus continues to be on accelerating our business model and executing on our strategic growth initiatives. We are continuing to invest in the foundational work that will put Landstar in a great position to leverage the freight environment when it eventually turns our way. We are also focused on our commitment to continuous improvement in the level of service and support we provide to our customers, agents, BCOs and carriers each and every day. As I previously noted, in addition to the decision to sell Landstar Metro, our third quarter financial results reflected two other noncash, nonrecurring charges disclosed in our recent 8-K. These three discrete items, in the aggregate, resulted in impairment charges in the quarter of approximately $30.1 million or $0.66 per share. As a result, GAAP earnings per share were $0.56. Excluding the impact of these three items, adjusted earnings per share was $1.22. JT will cover these three impairment charges in greater detail during his prepared remarks. Turning to Slide 5. The freight environment in the 2025 third quarter was characterized by relatively soft demand from a seasonal perspective. The impact of accumulated inflation remains a drag on the amount of truckload freight generated in relation to consumer spending. Truck capacity continued to be readily available with small pockets of supply/demand equilibrium, and market conditions continue to favor the shipper amidst choppy conditions in the industrial economy, as evidenced by an ISM index below 50 for the entire 2025 third quarter. Considering that backdrop, Landstar's revenue performance was admirable in the 2025 third quarter, with both truck revenue per load and the number of loads hauled via truck essentially equal to the 2024 third quarter. Our balance sheet continues to be very strong, and our capital allocation priorities are unchanged. We will continue to patiently and opportunistically execute on our existing buyback authority to benefit our long-term stockholders. As noted in the slide deck, during the first 9 months of 2025, we deployed approximately $143 million of capital toward buybacks and repurchased approximately 995,000 shares of common stock. And yesterday afternoon, our Board declared a $0.40 dividend payable on December 9 to shareholders of record as of the close of business on November 18. We continue to invest through the cycle in leading technology solutions for the benefit of our network of independent business owners and have allocated a significant amount of capital this year towards refreshing our fleet of trailing equipment, with a particular focus on investment in unsided/platform equipment. Turning to Slide 6 and looking at our network. The scale, systems and support inherent in the Landstar model helped to drive the operating results generated during the 2025 third quarter. JT will get into the details on revenue, loadings and rate per load in a few moments. As noted during previous earnings calls, Landstar's safety first culture is a crucial component of our continued success. Our safety performance is a direct result of the professionalism of the thousands of Landstar BCOs operating safely every day and the agents and employees who work to reinforce the critical importance of safety at Landstar. I'm proud to report an accident frequency rate of 0.60 DOT reportable accidents per million miles during the first 9 months of 2025, well below the last available national average DOT reportable frequency released from the FMCSA for 2021 and slightly better than the company's trailing 5-year average of 0.61. This long run average is an impressive operating metric that speaks to the strength, skill, talent and dedication of our BCOs and provides a point of differentiation our agents are able to highlight in discussions with our freight customers. I'd also like to take a moment to recognize Landstar's nearly 500 million-dollar agents based on our 2024 fiscal year results. Importantly, retention within the million-dollar agent network continues to be extremely high. Turning to Slide 7 on the capacity side. On a year-over-year basis, BCO truck count decreased approximately 5% compared to the end of the 2024 third quarter. Importantly, as noted earlier in my remarks, BCO count increased by 7 trucks on a sequential basis, representing the first increase in sequential quarterly truck count since the 2022 first quarter. BCO turnover continues to be influenced by a persistent relatively low rate per load environment, combined with the significant increase in the cost to maintain and operate a truck today compared to before the pandemic. Directionally, we are pleased to see our trailing 12-month truck turnover rate drop from 34.5% as of the fiscal year-end 2024 to 31.5% at the end of the 2025 third quarter. Through the first 4 weeks of the 2025 fourth fiscal quarter, the number of trucks provided by BCO independent contractors is down fractionally versus the ending truck count of Q3. We were encouraged, however, by a recent visit we had with U.S. Secretary of Transportation Sean Duffy. During our meeting, Matt Miller and I discussed several federal regulatory initiatives and administrative -- administration priorities with the Secretary, with a real focus on issues facing truck drivers and the truck capacity marketplace. We were proud to confirm to Secretary Duffy that Landstar BCOs have had 0 violations of the English language proficiency regulation and no reported issues with nondomiciled CDLs. We do not believe we have thus far experienced significant impact to our business from the federal regulatory agenda, but believe there is a potential longer-term positive impact for our BCO business, in particular. I will now pass the call back to JT to walk you through the 2025 third quarter financials in more detail. James Todd: Thanks, Frank. Turning to Slide 9. As Frank mentioned earlier, overall truck revenue per load was essentially flat in the 2025 third quarter compared to the 2024 third quarter, primarily attributable to a 0.1% increase in revenue per load on both loads hauled by van equipment and unsided/platform equipment, offset by a 5% decrease in LTL revenue per load and a 2.2% decrease in revenue per load on other truck transportation loadings. On a sequential basis, truck revenue per load increased 0.5% in the 2025 third quarter versus the 2025 second quarter, slightly softer than the typical pre-pandemic normal seasonality increase of approximately 1.5%. In comparison to overall truck revenue per load, we consider revenue per mile on loads hauled by BCO trucks a pure reflection of market pricing as it excludes fuel surcharges billed to customers that are paid 100% to the BCO. In the 2025 third quarter, revenue per mile on unsided/platform equipment hauled by BCOs was 6% above the 2024 third quarter, and revenue per mile on van equipment hauled by BCOs was 2% above 2024 third quarter. Delving deeper into seasonal trends, revenue per mile on loads hauled by BCOs on unsided/platform equipment declined 3% from June to July, declined 2% from July to August and increased 3% from August to September. The June to July decline and the July to August decline both underperformed pre-pandemic seasonal trends, while the August to September increase outperformed pre-pandemic historical trends. With respect to loads hauled by BCOs on van equipment, revenue per mile was more stable. Revenue per mile on van equipment hauled by BCOs increased 1% from June to July, underperforming these trends; decreased 1% from July to August, outperforming these trends; and was flat from August to September, underperforming pre-pandemic August to September historical trends. It should be noted that month-to-month seasonal trends on unsided/platform equipment are generally more volatile compared to that of van equipment. This relative volatility is often due to the mix between heavy specialized loads and standard flatbed volume. As Frank alluded to, we've been pleased with the recent performance in our heavy haul service offering. Heavy haul revenue was up an impressive 17% year-over-year in the third quarter, significantly outperforming core truckload revenue. Heavy haul loadings were up approximately 8% year-over-year, and revenue per heavy haul load increased 9% year-over-year. This represented a mixed tailwind to our unsided/platform revenue per load as heavy haul revenue as a percentage of the category increased from approximately 34% during the 2024 third quarter to approximately 38% in the 2025 third quarter. Non-truck transportation service revenue in the 2025 third quarter was 1% or $1 million below the 2024 third quarter. Excluding approximately $15 million in revenue reported during the 2024 third quarter that was associated with the previously disclosed agent fraud matter, non-truck transportation service revenue in the 2025 third quarter increased by approximately $13 million or 16% compared to the 2024 third quarter. Turning to Slide 10. We've provided revenue share by commodity and year-over-year change in revenue by commodity. Transportation Logistics segment revenue was down 0.6% year-over-year on a slight decrease in both loadings and revenue per load compared to the 2024 third quarter. Within our largest commodity category, consumer durables revenue decreased approximately 4% year-over-year on a 3% decrease in volume and a 1% decrease in revenue per load. Aggregate revenue across our top 5 commodity categories, which collectively make up about 69% of our transportation revenue, increased approximately 1% compared to the 2024 third quarter. While Slide 10 displays revenue share by commodity, we thought it would also be helpful to include some color on volume performance within our top 5 commodity categories. From the 2024 third quarter to the 2025 third quarter, total loadings of machinery increased 4%, automotive equipment and parts decreased 4%, building products decreased 10% and electrical increased 23%. Additionally, Substitute Line Haul loadings, one of the strongest performers for us during the pandemic and one which varies significantly based on consumer demand, increased 12% from the 2024 third quarter. We experienced strong demand related to AI infrastructure projects, which is reflected in part in both our electrical and machinery commodity categories, while strong demand for our services and support of wind energy projects drove the strength in our energy commodity grouping. As we've mentioned many times before, Landstar is a truck capacity provider to other trucking companies, 3PLs and truck brokers. During periods of tight truck capacity, those other freight transportation providers reach out to Landstar to provide truck capacity more often than during times of more readily available truck capacity. The amount of freight hauled by Landstar on behalf of other truck transportation companies is reflected in almost all of our commodity groupings, including our Substitute Line Haul service offering. Overall, revenue hauled on behalf of other truck transportation companies in the 2025 third quarter was 17% below the 2024 third quarter, a clear indicator that capacity is readily accessible in the marketplace. Revenue hauled on behalf of other truck transportation companies was 10% and 12% of transportation revenue in the 2025 and 2024 third quarters, respectively. Even with the ups and downs in various customer categories, our business remains highly diversified with over 23,000 customers, none of which contributed over 8% of our revenue in the first 9 months of 2025. Turning to Slide 11. In the 2025 third quarter, gross profit was $111.1 million compared to gross profit of $112.7 million in the 2024 third quarter. Gross profit margin was 9.2% of revenue in the 2025 third quarter as compared to gross profit margin of 9.3% in the corresponding period of 2024. In the 2025 third quarter, variable contribution was $170.2 million compared to $171.4 million in the 2024 third quarter. Variable contribution margin was 14.1% of revenue in both the 2025 and 2024 third quarters. Turning to Slide 12. Operating income declined as a percentage of both gross profit and variable contribution, primarily due to the impact of the noncash, nonrecurring impairment charges included in the 2025 third quarter and the impact of the company's fixed cost infrastructure, principally certain components of selling, general and administrative costs in comparison to slightly smaller gross profit and variable contribution basis. The decline in adjusted operating income as a percentage of both gross profit and variable contribution was significantly less pronounced given the size of the noncash impairment charges and was attributable to the impact of increased costs negatively impacting operating income, while both gross profit and variable contribution were approximately 1% below the 2024 period. Other operating costs were $15.6 million in the 2025 third quarter compared to $15.1 million in 2024. This increase was primarily due to increased trailing equipment maintenance costs, partially offset by the favorable resolution of a value-added sales tax matter and a decreased provision for contractor bad debt. Insurance and claims costs were $33 million in the 2025 third quarter compared to $30.4 million in 2024. Total insurance and claims costs were 7.2% of BCO revenue in the 2025 third quarter as compared to 6.7% in the 2024 third quarter. The increase in insurance and claims cost as compared to 2024 was primarily attributable to net unfavorable development of prior year claim estimates and increased severity of both current period auto and cargo claims, partially offset by a decreased frequency of both auto and cargo claims during the 2025 period. During the 2025 and 2024 third quarters, insurance and claims costs included $9.2 million and $4.6 million of net unfavorable adjustment to prior year claim estimates, respectively. Selling, general and administrative costs were $57 million in the 2025 third quarter compared to $51.3 million in the 2024 third quarter. The increase in selling, general and administrative costs were primarily attributable to increased stock-based compensation expense, increased information technology costs and increased employee benefit costs. Stock-based compensation expense was approximately $1.6 million during the 2025 third quarter as compared to a $43,000 reversal of previously recorded stock-based compensation costs during the 2024 third quarter. We continue to manage SG&A in part by closely managing headcount at Landstar. Our total number of employees based in the U.S. and Canada is down approximately 40 since the beginning of 2025 and down approximately 80 since peak headcount. We also continue to focus on driving efficiencies and productivity gains throughout our network. Landstar is actively engaged in rolling out an AI-enabled customer service solution throughout the corporate organization. We also continue to invest in and develop multiple in-flight AI-enabled products within our portfolio of digital tools in support of our network of agents, capacity providers and employees. Depreciation and amortization was $11.5 million in the 2025 third quarter compared to $15.4 million in 2024. This decrease was primarily due to decreased depreciation on software applications. As Frank referenced earlier during this call and as previously disclosed in the current report on Form 8-K filed with the U.S. Securities and Exchange Commission on August 13, 2025, the company conducted a strategic review of our operations during the 2025 third quarter focused on efforts to streamline our core operations and position the company for future growth. In connection with that strategic review, the company recorded noncash, nonrecurring charges in the aggregate for 3 discrete items of approximately $30.1 million or $0.66 per basic and diluted share. First, in connection with the decision to actively market Landstar Metro for sale, the company recorded noncash impairment charges of approximately $16.1 million or $0.35 per basic and diluted share on the company's 2025 third quarter balance sheet based on the estimated fair value less cost to sell this business. The second charge noted in the earnings release related to the decision to select the Landstar TMS as the company's primary system for truckload brokerage services. And in conjunction with that decision, wind down the Blue TMS, an alternative transportation management system in use by one of the company's operating subsidiaries focused on the truckload brokerage contract services business. The resulting impairment charge representing the remaining net book value of the Blue TMS was $9 million or $0.20 per basic and diluted share. Third and finally, the company recorded a $5 million impairment charge relating to a noncontrolling equity investment in a privately held technology startup company. This charge represented the total carrying value of this investment on the company's second quarter 2025 balance sheet date. The effective income tax rate was 25.8% in the 2025 third quarter compared to an effective income tax rate of 22.2% in the 2024 third quarter. The increase in the effective income tax rate was primarily due to: one, the favorable impact of certain federal tax credits during the 2024 period; and two, the deleveraging effect of lower pretax profits, mostly due to the just discussed 3 noncash impairment items during the 2025 period with a similar population of permanent items in both the 2025 and 2024 periods. Turning to Slide 13 and looking at our balance sheet. We ended the quarter with cash and short-term investments of $434 million. Cash flow from operations for the first 9 months of 2025 was $152 million, and cash capital expenditures were $8 million. The company continues to return significant amounts of capital back to stockholders, with $111 million of dividends paid and approximately $143 million of share repurchases during the first 9 months of 2025. The strength of our balance sheet is a testament to the cash-generating capabilities of the Landstar model. Back to you, Frank. Frank Lonegro: Thanks, JT. Given the highly fluid freight transportation backdrop and an uncertain political and macroeconomic environment, as well as challenging industry trends with respect to insurance and claims costs, the company will be providing fourth quarter revenue commentary rather than formal guidance. Turning to Slide 15. The number of loads hauled via truck in October was approximately 3% below October 2024 on a dispatch basis, and revenue per load in October was approximately equal to 2024 on a process basis. As a result, we view October's truck volumes as modestly below normal seasonality and truck revenue per load as lagging slightly behind normal seasonality. Looking at historical seasonality from Q3 to Q4, pre-pandemic patterns would normally yield both a 1% increase in the number of loads hauled via truck and truck revenue per load yielding a slightly higher top line sequentially. As noted above, both fiscal October truck volumes and revenue per truck trended slightly below normal seasonality. With respect to variable contribution margin, the company typically experiences a 20 to 30 basis point compression in variable contribution margin from the third quarter to the fourth quarter, typically driven by a combination of decreased BCO utilization and compressing net revenue spreads on our truck brokerage business associated with peak season. As noted in our 10-Q, which we'll file a little later this afternoon, a BCO independent contractor with a subsidiary of the company was involved in a tragic vehicular accident earlier this month during the 2025 fourth quarter. Importantly, Landstar was not involved in the initial collision of this multistage incident. This incident is still in the process of being investigated, but could have a material adverse impact on insurance and claims cost in the 2025 fourth quarter. With that, operator, we'd like to open the line for questions. Operator: [Operator Instructions] Our first question is from Reed Seay from Stephens Incorporated. Reed Seay: I want to start off with what you're seeing in the broader truckload market. There's been a lot of noise on some of the temporary tightening we've seen and maybe some subsequent softening. So any commentary you have on the broader market would be greatly appreciated on the capacity exits in particular, if you have any insights there? Frank Lonegro: Yes. I mean, I think we're pleased with what we're seeing on the BCO side. Again, given the first sequential increase in our BCO count since the beginning of 2022, that feels pretty good. We've been trending relatively flat there, pretty close to even keel, but actually seeing a positive sign there was really, really helpful for us, if for nothing else other than just morale, I mean just getting 7 additional trucks. I know Matt and his team are fighting every day to keep the folks that we have and to continue to look for ways to onboard high-quality drivers. I think there is a fair amount of conversation that's happening about the regulatory landscape. And obviously, you're seeing headlines of upwards of 200,000 nondomiciled CDL holders out there. We're seeing ELP getting enforced from time to time in various states. So I would tell you that the impact on the capacity has got to be more than 0, but I also think it's going to come out over a little bit longer period of time than just a matter of weeks or months. Reed Seay: Got it. Makes a lot of sense. And touching on kind of the BCO count decline slowing here in 3Q. It is encouraging to see kind of the truck count increase a little bit, but do you have any visibility to when you can return to BCO count growth here maybe in the fourth quarter or in 2026? Frank Lonegro: Yes. So again, on the third quarter relative to the end of the second quarter, we actually did increase the count ever so slightly at 7 BCOs positive, so we were happy to see that. We're down just a little bit here in the October to date in the fourth quarter. I'll let Matt give you some commentary around what we normally experience this time of the year. But what I can tell you is that the things that Matt and his team are working on are 100% geared toward making structural changes within what we're doing every day to both maintain the existing BCOs that we have and to onboard new folks. Matt? Matt Dannegger: Thanks, Frank, and thanks for the question. So given the rate backdrop, we're pleased with having the best gross truck adds [ over ] in 8 quarters. During the third quarter, we saw gross truck adds up more than 15% compared to the third quarter of 2024. And one of those things -- we can't control rate, but the team is focused on what we can control, which is how we recruit, how we qualify, how we onboard, driving efficiencies and improving that conversion rate of those expressing interest in coming on to Landstar. Likewise, there's two sides of the coin on the retention side. We saw the seventh consecutive quarter of turnover improvement. High watermark was 41%, that was the fourth quarter of 2023. And we just got down to 31.5% as of the end of the third quarter, really approaching our long-term average of 29%. All that being said, this really hinges on rate, right? If we saw an inflection in rate and rate ticking higher, I could see us finishing the fourth quarter higher than where we finished the third quarter, but that's going to be rate dependent. Reed Seay: Got it. And then if I could squeeze in just a real quick one here. The approved and active carriers that declined from 2Q to 3Q, is that -- could that impact your ability to affect -- to more favorably buy freight, just as you have a smaller pool to choose from? Matt Dannegger: No. We don't really see that impacting our ability to source and satisfy demand. We're really being selective here. And we talked about that a little bit in the second quarter comments. We're choosing to be a little bit more selective on who we choose to partner with, a pretty big backdrop as it relates to fraud out there in the space. And so throughout the course of the year, those numbers have been coming down. Frank Lonegro: And it was a -- Reed, if we're all skeptical around the capacity provider or there's something in the background that we can't verify, we're erring on the side of caution given the fraud backdrop. James Todd: And Reed, I would just only add on to that, some of the pruning that took place in the third quarter around that carrier base during that -- during the third quarter, we saw our net revenue margin on brokerage business actually widen out 78 basis points. So nothing from a capacity procurement side that gives us any concern where we sit today. Operator: Thank you. Next one is from Jonathan Chappell from Evercore. Jonathan Chappell: Thank you. Good afternoon, everyone. So Jim or Frank, you guys can handle this. So I want to go back to the first question. Jim said in his prepared remarks, revenue hauled for other transportation companies down 17%, a clear indicator of spare capacity. Then your revenue per load, October flat year-over-year, slightly below typical seasonal trends. Can you help us align both of those comments with some of the sources out there that have been talking about truckload spot rates spiking basically throughout the month of October? And are you just not seeing that in your particular routes? Or is maybe that a narrative that's kind of more broadly off base? James Todd: Jon, so I'll tell you the observations in the third quarter, and all three kind of move the same way. So we talked about how our revenue per load increased 50 basis points and typically goes up 150 basis points. So we saw sub-seasonal pricing. We saw our net revenue margin on brokerage business widen out sequentially, and we saw tender rejections actually dropped down a little bit in the third quarter when we saw an uptick, 1Q to 2Q. As we sit here today, it's day 2 of October close, I anticipate our October pricing is going to be about flat to September. And if you go back 15 years, historically, we get about a 60 basis point uptick, September to October. So it's not that it's significantly lagging, but we are not seeing -- if you're seeing public board data flash that spot rates are ticking up in October, we are not seeing that in our data thus far. Perhaps a bit of a Landstar lag that we've talked about in the past with agent behavior, not wanting to be the first one into their customers with the rate increase, but nothing we see in the numbers so far. Jonathan Chappell: Okay. And then also just -- anything you'd call out? I know you're not giving guidance, but just anything for the fourth quarter that would be important to note on the expense side? And also, how do we think about the bridge to incentive comp in '26 versus '25? James Todd: Yes, Jon. So on the expense side, insurance is always noisy and a difficult line to predict in a 90-day period. You heard Frank's prepared remarks about an early accident in October. We just went through an actuary review on the third quarter balance sheet date and had to true-up some prior year reserve estimates. So that one is a little noisy. On the other operating cost line, we held a BCO appreciation event. It's a little over $1 million. That will be a tailwind, 3Q to 4Q. And then finally, on the incentive comp and stock comp, we're accruing to about a $10 million charge, full fiscal year 2025. And if that kind of resets in a onetime number, Jon, in '26, that'd be about $11 million headwind. Operator: Next one is from Scott Group with Wolfe Research. Scott Group: So I want to understand maybe some of the October volume trends. Do you have any way of isolating sort of what -- how government-related volumes are doing? I guess, what I'm trying to figure out is, I think everyone is talking about sort of sub-seasonal volume in October. Is this a government shutdown phenomenon that you can see it pronounced in this one part of your business? Or is it broader? Frank Lonegro: It's a little bit of both, Scott. So I'll start and let Jim Applegate chime in. I mean, it's a combination of the government shutdown, which, as you know, we're a fairly significant hauler for various federal agencies. So we're certain that there's some there. The automotive business continues to be in a tough spot. Interest rates aren't helping the housing business either. You heard Matt Dannegger on the prior call talk about our peak expectations, and he can certainly chime in as well. So I mean, I think we're seeing what we have been seeing in the past couple of quarters. Perhaps adding to that is the government shutdown. James Applegate: Yes. And just around the government shutdown, we're not seeing it in our actual numbers yet just because billings are kind of catching up, but we are noticing in the dispatch loads, we are down over 30% so far within October from a dispatch standpoint as it relates to government loads, and we expect that to continue to trend down. However, it's temporary. You'll see it trend down. When the government does pop back up, you'll see a bump back up, and we'll gain a lot of that back. And actually, from a disruption standpoint, we probably stand long term to make out a little bit better than some of the other traditional asset-based providers just based on the flexibility of our network. So we're watching it closely. We do see it as something that's going to be a temporary blip, but we do see opportunity on the back end to catch up. Frank Lonegro: Matt, do you want to comment at all on the peak season? Matthew Miller: Sure. Thanks, Frank. JT talked a little bit ago about our Substitute Line Haul numbers being down this quarter. When we talk at peak at Landstar, we're really talking about a handful of customers in that Sub Line Haul sector. And then going back the last couple of years, we've just not seen that, coming off of those post-pandemic highs. So the last couple of years has been a little bit muted. A lot of the transition and people going back to the stores has made a change. Retailers and these e-commerce finding different ways to manage their transportation. You got the tariffs this year, which -- maybe there's a little pull forward there, maybe some disruption on the back end here. So just not seeing the amount of volume that we saw from our traditional partners in the past, just because they're not getting the same amount of volumes that they've had in the past. So again, I expect a muted peak season this year, probably similar to what we saw last year and maybe even down a little bit from that. Frank Lonegro: Yes, Scott, you saw UPS' print. So that will give you some indication of where they are on their peak business anyway to the quarter. And then I look at our numbers in October relative to the backdrop, and I'd say we've performed pretty well in the grand scheme of things. Scott Group: Yes. Okay. And then on the driver side with all these regulations -- so I get what you're saying, you don't have any BCO exposure here. But how about on the brokerage side of your business? Do you have a sense of what percentage of the broker carriers you're working with have exposure here? Frank Lonegro: It's hard to get a precise type of exposure. I do know -- and Matt can chime in here in a second. I do know that our vetting criteria are pretty significant. So we also have agents that are always directly conversing with those carriers. So they have to be able to do business with us. So we have a, I'd say, kind of a high probability that there's not going to be significant impact there. What's interesting is the BCO population should stay relatively stable and increase in that type of an environment and could actually see some improved utilization there as loads present themselves that maybe in the past, were handled by third-party broker carriers who might get impacted by either ELP or nondomiciled CDL. Matt Dannegger: Yes. And I appreciate the question. The FMCSA on the nondomiciled, they're probably the best place to go for data at this point because it's so recent. That emergency action just happened in September. So we're a little bit more than a month beyond, but they put out 200,000 as the potential estimated number of those impacted on the nondomiciled. And then since June 25, when ELP enforcement started to ramp, it started slow. We've seen more states adopt, even 2 in the past 2 weeks have begun training law enforcement on it. So far since June, 5,900 unique out-of-service violations. So a ramp is still taking place there, but I don't expect a pop. Frank Lonegro: And Scott, I have not heard -- and I think I would. I have not heard any agents say I had to either give a load back or I got a load that was stopped because I had a third-party broker carrier that was taken out of service. So it's an anecdotal sample size, but we haven't heard anything certainly around this table of that. Scott Group: And then ultimately, what I'm trying to get at is like, you guys tend to be pretty straight shooters and not like overly promotional. Like, do you think this is a big deal or not? Like, is this going to be -- is this like the big sort of catalyst for the cycle we've been waiting for? Or ultimately, do we just need demand, and that's going to be the key? Like, what are you -- how are you thinking about just the catalyst to get us going? Frank Lonegro: So the point that I would make here is, if -- and I'll put a big if on it -- if DOT is correct, and we're talking about 194,000 owner operators over the next year or 2, that would be a pretty big deal relative to that population. And I'd like to think that our BCO population is going to be stable and grow in the backdrop of a tighter supply side environment there. So I can certainly paint you a nice picture there, but a lot of that's just going to depend on the enforcement. And the enforcement doesn't really happen at the federal level. It happens at the state level, and you can see the politics around there and some of the banter back and forth between, for example, DOT in the State of California. So like a lot of that's got to happen on the ground in the states. It's not federal law enforcement that's involved in it. It's all the states. Operator: Next one is with Ravi Shanker from Morgan Stanley. Unknown Analyst: This is Madison on for Ravi. Just one quick one on the back of Scott's question. I know you mentioned some impact on the dispatch loads for the government shutdown. I was just wondering if you could talk a bit about how quickly that business can ramp back up once the government reopens? And if -- I know you talked about a catch-up coming there if that comes probably within fourth quarter or if it gets pushed out more into 2026? James Applegate: Yes. No, good question. Really, it's about timing and how long this goes on for. And it's just a matter of the government is getting the money to go ahead and ship. And it's going to be very quickly after the government reopens where you see that pipeline open back up again as well, too. So again, we're not looking at it as something that's kind of detrimental to what we're going to see from a volume standpoint. Long term, we're seeing it as something that's kind of a short-term blip that we're going to get through, and I think there will be some opportunity on the back end. Frank Lonegro: I think it's going to be measured in days and weeks, not months or quarters. Unknown Analyst: Got it. Okay. That's helpful. And then a little bit more of a bigger picture one. I know there's been a lot of talk in the market about AI usage and brokerage. I was just wondering if you guys can give a little bit of color about what Landstar is doing there and how you kind of think you differentiate versus peers? Frank Lonegro: Yes. So the model is obviously a differentiator in and of itself. We've got three different areas that we're focused on. We're focused on AI to assist our agents. So in the agency office, suggested pricing would be an example of that. We're also working on BCO retention. So how do we make sure that we know when a BCO might be sort of sending us the quiet signals that they're maybe not long for the company. So it could be reduced number of loads. It could be a change in the type of freight. It should be the agents that they're dealing with, et cetera. So we're looking at things in that space. And then we're obviously looking at it inside the building. We are a service provider in many respects, where our corporate support people are designed to serve the BCOs in the agent community. And if they're able to do that more effectively and more efficiently in how they are able to acquire knowledge in a particular question set. So we're working on a whole call center technology and suite of AI tools there that are going to help us be more efficient and effective when we deal with both BCOs and agents. Operator: Thank you. Next question is from Bruce Chan with Stifel. J. Bruce Chan: Yes. Thanks, operator, and good afternoon, gents. Maybe just a follow-up question on the technology side. You mentioned synthesizing the TMS onto 1 platform. Wondering if there are any identifiable cost savings that come out of that project or program? And then similarly, on the AI side, any margin impact that you expect or that you're targeting internally from the rollout of these tools? Frank Lonegro: Yes. I think on the first one -- and I'll let sort of JT chime in on the exact. But obviously, we're not going to have 2 TMSs that we're continuing to develop either under capital or operating expense, and he can walk you through the depreciation impacts on that one. But really just getting onto 1 platform was the important thing there. It will also give our folks within -- which is a very small area, but within our Blue organization to be working off of the exact same TMS that our agents are working off of, which I think is going to be helpful on both sides of that equation. On AI, we have not discussed any or disclosed any specific targets. But the increase in service levels is going to be our first area of focus, and then we'll look for opportunities on the efficiency side. JT? James Todd: Yes. Thanks, Frank. Bruce, on the Blue TMS, it was about a $750,000 depreciation tailwind already captured in the third quarter. So 3Q to 4Q, I expect no impact. Operator: Next question is from Brandon Oglenski with Barclays. Brandon Oglenski: I'll keep this a little bit longer term. And I know you don't really want to provide guidance here, but net income margins here -- sorry, net operating margins pretty much near the low, and I think that's very understandable, just given where the market is. But how do you think about the ability to get back to maybe the pre-pandemic range, where you were pretty consistently, 40% to 50% on net operating margin? Frank Lonegro: Yes, Brandon, good to hear your voice. Haven't spoken to you in a while. But look, I think the combination of increased revenue, which allows us to spread our fixed cost, the more that we can get in rate, obviously, that's going to be our friend on OM. We've certainly got to turn the corner on insurance and claims and things of that nature. And then we've got to get the efficiencies out of the technology. Whether those happen inside our building or they happen in the agency offices and therefore translate into higher sales productivity within the agent community, that's the right outcome. And then from a BCO perspective, the more loads that are hauled via BCOs is better from a BC perspective for us as well. So we're looking forward to touching all of those things through the tools and the AI that we're putting out there. James Todd: Yes. Thanks, Frank. And Brandon, I would certainly piggyback to Frank's comment on insurance. I would point you in 2019, we had about 10,500 BCOs leased on with this, and we had an $80 million insurance line that fiscal year. You take a look at where we were in the first 9 months of 2025 and run rate, and we've got about 8,600 BCOs in the fleet. We are safer today or as safe today as we were in 2019. It's this persistent claim cost inflation that's not only impacting Landstar, it's impacting all the truckers. I think you're starting to see some chunkier exits in the trucking space. And eventually, the folks are going to have to recapture that in the top line in the form of higher rates. We are clearly doing what we can, as I referenced in the prepared remarks around our headcount is down 80 from the peak. It's down 40 since the beginning of the year. We were talking about a company that's got less than 1,300 heads supporting 8,600 owner operators and 1,000 agents and taking care of 23,000-plus customers. So we'll continue to work on the controllables. Operator: Next one is from Jason Seidl from TD Cowen. Elliot Alper: This is Elliot Alper on for Jason Seidl. How are you guys thinking about capacity planning over the next, call it, a year as these nondomiciled CDLs continue to roll off? Or is it just too early to plan for? And then on the same note, are there conversations with your insurers or underwriting partners taking place on any changes to risk or risk premiums associated with any of these nondomiciled regulations? Frank Lonegro: Yes. Good question. In terms of the nondomiciled, as I mentioned to you a moment ago, we don't have it. Our business model where we -- or has not certified across our entire BCO fleet. Or Jim Applegate talked about the government business that we have. I mean, there certainly are lots of gates or rigor that we put people through to make sure that we're able to support the customers that we have in the way that they need to be supported. So our insurers are going to ask us those questions, as they should. And our answer is going to be we don't have any exposure there. In terms of capacity planning, I mean, our job is to qualify and onboard as many BCOs as possible and to try to retain all of the BCOs that are currently leased on to us. So you're going to see us continue to focus really, really hard on growing the BCO fleet. In terms of capacity itself, we have a lot of different ways that we go about recruiting and retaining appropriate third-party capacity providers. Again, as I mentioned earlier, it's really important that they can support our customers with the appropriate level of safety, security and service that our BCOs do. And so we're going to err on the side of caution when it comes to those three things. And so if we have any thought that they're not going to be able to converse in English or they're holding a nondomiciled CDL, then we're going to -- honestly, we're going to vet those out. The quality is what we is what we sell here. We don't transact in price. You can see that just based on our rate relative to where the DAT board rates are. We're at a different premium level, and we want to maintain that quality. Elliot Alper: Okay. Great. And then just following up. So I understand October is trending below seasonality, and helpful commentary around peak expectations. But can you discuss how the load and revenue per load comparisons stack up as we move through the quarter? Just trying to gauge if comps get tougher off October. James Todd: Yes. From my recollection, I don't have 4Qs last year. Bear with me 1 second. So it looks like last year, fourth quarter volumes dropped off 190 basis points sequentially, and it looks like rate was up 100 basis points sequential. So rate was basically right in line with normal seasonality. It looks like we're starting out of the gate here in October flattish, and October rates typically gap up about 60 basis points. So I would tell you, we're -- achieving that 100 will take a strong lift here in fiscal November and fiscal December. From an October standpoint, you heard Applegate talk about government and Frank talked about some of the parcel carriers and some of the automotive. We're running, I think, down 4.5% loads per workday in October, and we typically drop off about 2% loads per workday, October versus September. So we'll need a little catch-up baseball there as well. Operator: Our last question is from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: Maybe circling back to the part of Scott's question on the supply and demand environment, but focusing on the demand environment. Clearly, it's been very weak for some time, and we can all look at the data, including PMIs and the likes. What -- but I guess overall, still a relatively healthy macro depending on what you look at it. So what do you believe we need to see in terms of the demand environment ultimately improving? Are you hearing any early optimism about this in 2026? And then maybe also, anything you can call out from an end market exposure where you're seeing maybe some underlying strength or maybe weaknesses too? Frank Lonegro: Stephanie, so let me try to take a stab at it. What would we need to see in order for the demand environment to improve? I think first and foremost, you need to have stable trade policy and have some of the relations between U.S., China, U.S., Canada, U.S., Mexico. The more normalization we can see there, I think the better for people deploying capital, which is ultimately what it comes down to. I also think the consumer, if they were to shift a little bit more back to goods rather than services, that would certainly be helpful. I think the Big Beautiful Bill and the unlocked potential there, which is certainly going to create the possibility of additional cash flow in companies so they're certainly going to have the capital to deploy. But again, I think you need normalization of trade relations to get to a better spot to allow people to do that. In terms of interest rates and Fed policy, we'll all be ears open tomorrow to see what the Fed is going to do. And ultimately, what's the impact on medium- and longer-term rates because that would help out on the automotive side and on the housing side. In terms of bright spots, we clearly have seen a significant uptick in our unsided business and in our heavy haul business. And so continuing to see that play out over time would certainly be helpful from a Landstar perspective. The AI data center, commercial AC associated with that, the power gen, like all of the things that are in that AI ecosystem, we have seen the benefit of. And then I think we've seen a little bit of an uptick in the quarter relative to prior quarters in the U.S./Mexico cross-border business, which has been down for us for several quarters, and we're actually seeing it improve. So that feels pretty good. So I can paint you a good picture for next year, but we just haven't seen it. Right now, it's on paper. I haven't been able to see anything that would tell you that those are actually what's going to transpire when we flip the calendar to January 1. Operator: Thank you. At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks. Frank Lonegro: Thank you, Elmer. In closing, while the freight environment remains challenging, we believe we have seen some positive signals. We were encouraged by the modest sequential pricing improvement we experienced during the third quarter. And with a choppy industrial economic backdrop, we were extremely pleased with the 17% year-over-year revenue increase in our heavy haul service offering. We also believe the potential impact of various federal regulatory developments could provide some positive lift for our BCO business, in particular. And regardless of the economic environment, the resiliency of the Landstar variable cost business model continues to generate significant free cash flow. Landstar has always been a cyclical growth company, and we are well positioned to navigate the coming months as we continue to look forward to higher highs when the freight market turns our way. Thank you for joining us this afternoon. We look forward to speaking with you again on our 2025 fourth quarter earnings conference call in late January. Thank you. Operator: Thank you for joining the conference call today. Have a good evening. Please disconnect your lines at this time. Thank you very much.
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to Cody McAlester of ICR. Cody McAlester: Thank you, and thanks to everyone joining us today. Before we begin, please note that today's session, including the Q&A period, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of the risks and uncertainties, please refer to today's press release and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31, 2024. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason Brooks: Thank you, Cody. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks, we'll take your questions. Overall, we are pleased with our third quarter results in light of what remains a difficult and dynamic operating environment. Sales for the quarter increased 7%. Gross margins were up 210 basis points, and we delivered adjusted diluted EPS of $1.03, a 34% increases versus our Q3 last year. Our teams have done a great job at navigating higher tariffs imposed by the U.S. on most trade partners, especially countries that account for the majority of global footwear production. We've moved quickly to diversify our sourcing base, including adding new Asian-based manufacturing partners outside of China and Vietnam as well as leveraging our own facilities in the Dominican Republic and Puerto Rico. These actions, along with price increases and strong demand for our brands should help mitigate the impact of the higher tariffs as they start to hit our P&L more meaningfully in the fourth quarter and next year. We are still ramping up production with our new partners, which has resulted in some delayed shipments. However, we are confident that we'll start 2026 with our supply chain in a position of full capture demand. Tom will share more about our sourcing structure later in the call, but at first, I'll review the drivers of our third quarter performance by brand. Starting with XTRATUF. The brand continued its exceptional momentum, delivering strong growth that significantly outpaced last year. U.S. wholesale stood out in the quarter, increasing double digits, while xtratuf.com also posted double-digit growth compared with Q3 last year. From a product standpoint, our legacy 6-inch ankle deck boot, particularly the duck camo version was once again the top performer and within the category, ADB Sports was the best-performing collection. Camo continues to be in high demand across our men's, women's and kids offerings, demonstrating strong consumer performance for these designs. We were encouraged that the strong sell-through was broad-based with notable gains coming from big box sporting goods stores, traditional coastal retailers, pure-play e-commerce retailers and online marketplace. We are excited about the XTRATUF prospects for the fourth quarter and with the launch of our cold weather collection, a Sesame Street collaboration for holiday at retail and online, plus several exciting xtratuf.com exclusives. Turning to Muck. Coming off one of the strongest Q2 in years, the brand continued its positive trajectory in Q3 despite less favorable weather compared with the year ago period. Improved inventory positions, particularly in best-selling chore styles, combined with initial deliveries of our successful Bone Collector collaboration in the hunting channel fueled double-digit growth in our U.S. wholesale business and meaningfully higher in our marketplace volumes. Also adding Mucks performance and brand awareness was a highly successful feature on Good Morning America's Deals & Steals event over Labor Day weekend. Our women's business continues to be strong performance, led by the Muckster II Chicken Print series, while men's also had notable success in several regions. In terms of the channels, new product expansion fueled growth in the hardware stores, while our Farm and Ranch segment saw solid growth with multiple key retailers. As we anticipated, Durango sales were down year-over-year in Q3 as some key accounts pulled forward orders into Q2 ahead of the planned price increase we took to help offset higher tariffs. This was particularly offset by the consistent and steady growth Durango has experienced throughout this year in our Farm and Ranch accounts. Product highlights include Durango Shyloh series, which continues to gain traction with consumers, thanks to the great styling, great quality and attractive price points. Our Legacy [indiscernible] series continue to sell through well at retail and our on-trend women fashion collection have proven extremely popular leading into increased placement for these series. Georgia Boot delivered solid growth in the quarter, led by double-digit gains with major accounts and strong results in our field account business. This strength was driven by our largest Farm and Ranch accounts and e-commerce-only partners, supporting by successful new product launches and legacy bestsellers. New product launches were led by our Carbon Flex Wedge, a technology wedge with improved flexibility that books so successfully, we are launching a version in November featuring the BOA lace and closure system. Field business followed similar patterns with new products, driving increases across most regions, compensation for mixed retail conditions in some areas. Rocky Work, Outdoor and Western in total was up versus last year, led by gains in the work and outdoor categories. Work was driven by new or expanding distribution across the country, including a new work program with a large Farm and Ranch retailer across the mountain and Northwest region, led by several styles with the BOA lacing and closure system. Rocky Work also continued to sell well in key national safety footwear distributors plus multiple digital platforms. In Outdoor, it was improved distribution nationwide with new and larger programs at key Farm and Ranch retailers and sporting good partners that fueled the year-over-year improvement. Within these channels, our new Wildcat series of hunting outdoor boots delivered great value at core price points, while premium BearClaw outdoor boots reinforced Rocky's leadership in performance footwear. While Rocky Western sales declined year-over-year, our heightened focus on Work Western products, particularly our Iron Skull Safety Toe Western pull-on is driving gains with several regional and national brick-and-mortars and online. Rocky commercial military and duty posted its second consecutive quarter of improved results. Commercial military sales were up versus last year and exceeded plan as our strategic inventory management enabled us to maintain higher fill rates throughout the quarter. Duty also outperformed expectations, driven by strong gains with our largest U.S. Postal Service customer and continued double-digit growth in our Fire Boot program. In retail, our BI B2B business grew high single digits versus Q3 last year. We continue making operational improvements to our custom fit website and launched our new partnership with [indiscernible] Eyewear for prescription safety eyewear through our managed PPE program. Customer spending remained consistent with good subsidy utilization and new customer acquisition remains strong, more than offsetting impacts from supply chain and tariff uncertainty. Looking ahead, our view in the remainder of the year is based on the momentum we are currently experiencing with our brands, especially XTRATUF, balanced with the operate level of cautious about the broader consumer environment and the anticipated impact on the fourth quarter gross margins from the higher tariffs. While there is still uncertainty with respect to the outcome of certain trade negotiations, we feel good about the changes we've made to our supply chain, in particular, the increased flexibility we have to shift sourcing and production if needed. And therefore, we are anticipating that the headwinds from higher tariffs implemented this year will abate midway through 2026. With that, I will turn the call over to Tom. Tom? Thomas Robertson: Thank you, Jason. We are pleased with the improvement in results we delivered year-over-year, especially given the changes in our sourcing structure we've undertaken recently to help mitigate the impact of higher tariffs combined with what continues to be a choppy consumer environment. For the third quarter, reported net sales increased 7% to $122.5 million. By segment, wholesale net sales increased 6.1% to $89.1 million. Retail net sales increased 10.3% to $29.5 million and contract manufacturing net sales increased 4.1% to $3.9 million. Turning to gross profit. For the third quarter, gross profit was $49.3 million or 40.2% of net sales compared to $43.6 million or 38.1% of net sales in the same period last year. The 210 basis point improvement in gross margin was driven by higher wholesale and retail margins, which were fueled by brand mix and select price increases and higher percentage of retail sales, which carry higher gross margins than the wholesale and contract manufacturing segments. These gains were partially offset by 160 basis points of pressure from higher tariffs as product brought into the U.S. post Liberation Day in April has begun flowing through the P&L. Reported gross margins by segment were as follows: wholesale, up 200 basis points to 39.5%. Retail, up 320 basis points to 46.8% and contract manufacturing margins were 6.9%. Operating expenses were $37.6 million or 30.6% of net sales compared to $33.6 million or 29.3% of net sales last year. Excluding $700,000 of acquisition-related amortization in both periods, adjusted operating expenses were $36.8 million and $32.9 million for the third quarter of 2025 and 2024, respectively. As a percentage of net sales, adjusted operating expenses were 30.1% in the third quarter of 2025 compared with 28.7% in the year ago period. The increase in operating expenses was driven primarily by higher outbound logistics costs and selling costs associated with the increase in our direct-to-consumer business as well as an increase in our marketing investments compared with the year ago period. Income from operations increased 16.5% to $11.7 million or 9.6% of net sales compared to 10.1% [Technical Difficulty] of sales last year. On an adjusted basis, income from operations was $12.4 million or 10.1% of net sales compared to $10.8 million or 9.4% of net sales a year ago. For the third quarter of this year, interest expense was $2.6 million compared with $3.3 million last year. The decrease in interest expense was driven by lower debt levels as well as lower interest rates. On a GAAP basis, net income was $7.2 million or $0.96 per diluted share compared to net income of $5.3 million or $0.70 per diluted share in the third quarter of 2024. Adjusted net income was $7.8 million or $1.03 per diluted share compared with $5.8 million or $0.77 per diluted share a year ago. Turning to our balance sheet. At the end of the third quarter, cash and cash equivalents were $3.3 million and our total debt net of unamortized debt issuance costs totaled $139 million, a decrease of 7.5% since September 30 of last year. Inventories at the end of the third quarter were $193.6 million, up $21.8 million or 12.7% compared to $171.8 million a year ago. Of the approximate $22 million increase in inventories year-over-year, about $17 million or nearly 80% is attributable to higher tariffs, a small increase in pairs on hand and the remainder in raw materials as we are now producing more footwear in-house. Of the approximate $17 million from incremental tariffs on our balance sheet, roughly $10 million will flow through our P&L in the fourth quarter with the rest hitting in the first half of 2026. As we've touched on, we have taken actions this year to mitigate the impact of higher tariffs that started to pressure margins in Q3 and will intensify for the next few quarters, offset by price increases. We are also -- we also made significant changes to our sourcing model. These include shifting more production to our own facilities in the Dominican Republic and Puerto Rico and diversifying the geographic footprint of our third-party manufacturing to reduce our exposure in China. For 2026, we project that we'll manufacture approximately 50% of our inventory needs in-house, up from approximately 30% in 2025. Approximately 20% will be produced in China. However, only half of that or 10% of the total will be imported into the United States. The other 30% will be split between partners in Vietnam, Cambodia, Dominican Republic and India. We anticipate our actions will allow us to return gross margins to the recent run rate in the high-30s, low-40s percent range in the second half of next year as we move through the incremental tariffs currently on the balance sheet. With respect to our outlook, based on the third quarter performance and current view of the remainder of this year, we are reiterating our prior guidance for 2025. We still expect revenue to increase between 4% to 5% compared to 2024 levels with full year gross margins down approximately 70 basis points to between 38% and 39%, consistent with our previous outlook. SG&A is still expected to be up in dollars from an increase in our marketing spend to support growth, especially during the key holiday season and higher logistics costs from the projected increase in retail sales with modest expense leverage versus last year on higher sales. Finally, we still expect 2025 EPS to increase approximately 10% over last year's $2.54. That concludes the prepared remarks. Operator, we are now ready for questions. Operator: [Operator Instructions] Our first question is from Janine Stichter with BTIG. Janine Hoffman Stichter: I just want to start out with the consumer. You continue to mention a challenging environment and a dynamic environment. I'm just wondering if you could just offer your thoughts on how you're thinking about the consumer now maybe versus 3 months ago and what that -- how that's embedded into your forecast? Jason Brooks: Yes. Thanks, Janine. Great question. This has been probably one of the most dynamic years in my career with trying to understand the consumer. We get reports back from many of our retail partners and our products are still selling well. But I think there is still some cautious -- people being cautious about when and where they're going to spend those dollars and what they're going to spend those dollars on. So I think we are just trying to navigate it the best we can, try to provide the best inventory positions we can without being too crazy to support our retail partners and our own websites. But I think there's just -- it's just a little unsettling out there. And if we could have a consistent consumer report, I think it would be better, but it just -- it kind of goes up and down right now. So we're just being a little bit cautious. Janine Hoffman Stichter: Totally fair. All right. And then a couple more for me. Just you mentioned some delayed sales due to supply chain. Is there any way to quantify how much that was? And then as you think about tariffs and offsetting, it sounds like all of it from a gross margin rate perspective in the back half of next year. Maybe just walk us through what that embeds. Is there any additional pricing that you feel like you need to take to get there? Or is that all just diversification of sourcing? Thomas Robertson: Yes. I'll take this one, Janine. I think, look, at the end of every quarter, we always have a little bit of missing inventory and a little bit we left on the table, as we're chasing certain styles. This quarter, with all the sourcing changes, particularly with moving products to India, Cambodia and Vietnam, we saw anywhere from a 3-week to 30-day delay getting those products. And so that number was a little bit larger than usual, probably a few million dollars being transparent. And then I think as we look to next year, I think the second part of the question from a margin perspective, diversifying is certainly going to help. But I think the biggest driver in helping margins next year is going to be us bringing more and more product in-house. And so that will help leverage our margins as we go into 2026. Operator: Our next question is from Jonathan Komp with Baird. Jonathan Komp: Can I just ask when you look at the third quarter results, how things played out generally versus what you expected since I know you don't guide quarterly, necessarily. And when you look at the indicators you watch for your business, could you maybe remind us what visibility you have on sell-throughs in the marketplace, either your or your partners' business? And just what you've observed more recently in terms of some of the trends you've seen? Thomas Robertson: Yes, I can start here, and then Jason can certainly weigh in. I mean we have visibility into some of our larger national accounts. And there's been nothing that's been real concerning from a sell-through and retail perspective. I think Jason was touching on a little bit of just retailer behavior maybe earlier. But to that point, our marketplace business continues to be very strong compared to last year, up strong double digits. Our e-commerce business, which I kind of use as our closest pulse, was a little sluggish in the end of July and early August when we were transitioning over to our new platform. But we saw that recover nicely at the end of August and then September was the strongest month for the quarter from an e-commerce perspective. So we're not seeing anything too troubling out there from a consumer standpoint. Jason Brooks: Jon, I would just add, I think at the beginning of the question, you asked about our expectations about how Q3 came in. And I think we are pretty pleased with where we're at. I obviously would have loved to hit that top line number, but I think because of the transitions of the factories and what we had to do there, it made things a little bit more complicated for us. But I think we're really pleased with what Q3 was, and we're looking forward to Q4 and think it can be a good quarter as well. But just want to be cautious about it. Like I said, it seems to be an ever-ending story. One week, it's really positive in the consumers' mind and then the next week, it seems to change. So we're just trying to take it kind of one week at a time and navigate that. Jonathan Komp: Understood. And maybe as a follow-up, are there any pockets of weakness that you're seeing that you're paying close attention to across your business? And when we think about the fourth quarter, you're reiterating the guidance for the year. It implies a wider range for the fourth quarter by nature. So any color on what might cause you to be closer to the high end or the low end as you think about the implied fourth quarter? Jason Brooks: Yes. So from a branding standpoint, the only brand that is kind of funky right now is Durango. But as I said in the script, we had quite a few key accounts pull some business ahead there before the price increase. So our fill-in business wasn't quite as good in Q3. So I would say Western Durango is maybe the only brand that we're just maybe watching a little bit closer. Muck and XTRATUF, like I said, are doing really well. I was really pleased to see Rocky in a better place in Q3 and then also Georgia really had a nice quarter. So I think that's kind of where we're at. And then obviously, Lehigh is still doing very well for us. Thomas Robertson: Yes. Just to touch on the Durango piece a little bit. I think in the middle of the summer and dragging into a little bit of fall here, we've seen a little bit of softness in kind of our independent Hispanic retail accounts. And so we've been keeping an eye on that. That appears to have recovered a little bit here in September. So we'll continue to monitor that. And then to the sourcing comment and the missing inventory from a minute ago, Durango was detrimented the most here as the vast majority of that product historically was made in China. And so that's where you've seen a lot of the sourcing changes, particularly in Cambodia and India. And so there was a couple of million dollars there that just didn't get here as we had originally hoped. Jonathan Komp: Great. One follow-up then, if I could, Tom, on the implied profit guidance in the fourth quarter. I know you still are expecting earnings growth around 10% for the year after a good third quarter, that implies a pretty steep decline in the fourth quarter and some pretty steep falloff in gross margins. So I guess, are you assuming that pricing doesn't offset the tariff impact as it looks like it has started to? Or just any further color on what you're embedding there? Thomas Robertson: Yes. So the pricing certainly will be an effect. And every month that's gone by since the price increase, we've realized more and more of that. And so we'll continue to recognize that. The reason the margins will be more depressed in the fourth quarter is, one, because of the $10 million that I noted before. But if you think about how the timing of all this played out, when the tariffs came out, they were initially really higher, particularly out of China. And so as inventory was still flowing to us, we're paying kind of larger than -- higher reciprocal tariffs than we're currently paying today. And we weren't able to make all those sourcing changes that we've been able to execute on. Those will continue -- those sourcing changes are getting better every day, but that will -- the results of those changes will lag into the P&L. And so Q4, in my opinion, Q4 of '25 will be the worst quarter from a tariff perspective and will only start improving from there. It certainly will be a headwind in Q1 and in Q2 of 2026. Jonathan Komp: Okay. Great. And then last one for me, just bigger picture as we look forward into 2026. Any thoughts that you have just knowing your business and your brands whether or not stimulus could be something you can take advantage of or that might benefit? Any thoughts there? And then when you think of the momentum for XTRATUF, could you maybe just frame up what you're planning for that business? And any updated thoughts on what the potential might be as we look forward? Jason Brooks: Jon, can you elaborate more on the stimulus? I'm not sure what the question is. Jonathan Komp: Yes. I just -- I wonder if early 2026 stimulus to the consumer from the tax bill is something you're looking forward to as a potential driver or not for the consumer or for businesses on the tax side, if that's something that you've considered for your business? Jason Brooks: Got you. Yes, I'm sorry. Yes, I think any time the consumer is going to get any kind of stimulus, I think we all saw this during COVID. And then obviously, this is a very different tax bill and stuff. But I think any time our consumer gets a little kick, they are willing to spend some more. So I think we will be prepared if it happens, we'll have the inventory, and we'll be able to take advantage of it. But it's not something that is a huge focus of ours, but we'll be prepared if it does come for sure. Thomas Robertson: Yes. And then as we look to 2026, Jon, we can look at our order book and our bookings are up year-over-year, which is positive. It's up in dollars and in pairs, which shows you it's not just the price increase. And if you look at our spring 2026 product, it is -- it looks exceptionally well and very -- kudos to our product development team for everything they've done there. As it relates to the XTRATUF comment, it feels like XTRATUF is starting to accelerate a little bit. It's been running up low mid-double digits throughout the year, and it's accelerated a little bit in the third quarter here. We're very, very interested to see how this new cold weather line that we've really invested in, how that plays out as inventory is starting to arrive every day now here at the warehouse. And so we'll see how that plays out in 2026 as well. Jason Brooks: And we're continuing to see that product come more inland, Jon. So obviously, the coastlines, the fishing, the boating was really where that product was killing it, and we're starting to see that come a little bit more inland rather -- not real fast, but we're definitely seeing it happen. So we're pretty excited about that. I would tell you that 2026 is going to be a fun ride with XTRATUF. Operator: There are no further questions at this time. I'd like to hand the floor back over to Jason Brooks for any closing comments. Jason Brooks: Great. Thank you. I'd like to thank the entire Rocky team for all their efforts this year. It has been a real challenge, particularly in our sourcing department, and that team has just done an amazing job to try to navigate what we've had to do. So thank you, Rocky team, and thank you to our investors, and thank you to the Board. We look forward to finishing 2025 and kicking some b*** in 2026. Thank you. Operator: This concludes today's conference. We thank you again for your participation. You may disconnect your lines at this time.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 CoStar Group Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Rich Simonelli, Head of Investor Relations. Richard Simonelli: Thank you very much, operator, and hello, and thank you all for joining us to discuss the third quarter 2025 results of CoStar Group. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Chris Lown, our Chief Financial Officer, I'd like to review our safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including the company's outlook and expectations for the fourth quarter and the rest of 2025 based on current beliefs and assumptions. Forward-looking statements involve many risk, uncertainties, assumptions, estimates and other factors that can cause actual results to differ materially from such statements. Important factors that could cause actual results to differ include, but are not limited to, those stated in CoStar Group's press release issued earlier today and in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q included under the heading Risk Factors in these filings as well as other filings with the SEC available on the SEC's website. All forward-looking statements are based on the information available to CoStar on the date of this call. CoStar assumes no obligation to update these statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Reconciliation to the most directly comparable GAAP measure of any non-GAAP financial measure discussed on this call are shown in detail in our press release issued today, along with the definitions for these terms. Press release is available on our website located at costargroup.com under Press Room. So please refer to today's press release on how to access the replay of this call. And remember one question during the Q&A session, so make it a good one. And with that, I'd like to turn the call over to our Founder and CEO, Andy Florance. Andy? Andrew Florance: Thank you for joining CoStar Group's Third Quarter 2025 Earnings Call. We achieved another excellent quarter for CoStar Group with third quarter 2025 revenue reaching $834 million, a 20% year-over-year increase. This is our 58th consecutive quarter of double-digit revenue growth and we're 1 quarter closer to potentially 100 sequential quarters of revenue, double-digit revenue growth. Stay tuned. Adjusted EBITDA in the third quarter rose to $115 million, up 51% over Q3 '24. Profit margin in our Commercial Information and Marketplace businesses increased to 47% for Q3 2025. Net new bookings totaled $84 million, up 92% year-over-year. CoStar Group's residential real estate portals include Apartments.com, Homes.com, OnTheMarket and Domain. These are all sites that help people find or market a residence. Assuming we own Domain for the full third quarter, the revenue for the residential portals would now be $411 million in the quarter or $1.644 billion annualized. Our residential portals revenues grew 22.7% quarter-over-quarter and 31.3% year-over-year. We expect synergies across these residential portals will continue to drive improvement in our margin profile and believe that long-term margins can operate at more than 40% adjusted EBITDA margins. Apartments.com delivered another strong quarter, surpassing $1.2 billion in annual run rate revenue and generating $303 million in Q3 revenue, an 11% increase year-over-year. Apartments.com remains the preferred source for property managers and owners as reflected by a 99% monthly renewal rate, 99% monthly renewal rate and a 93 NPS score. Our high-quality proprietary content remains central to attracting consumers. Net new bookings rose 37% year-over-year in Q3. We added 4,200 new apartment communities in Q3. Our sales force has now grown to over 500 representatives, achieving our 2025 sales hiring target ahead of schedule. In Q3, the team conducted 200,000 client and prospect interactions, with nearly half of them occurring in-person, a 66% year-over-year increase in Q3. Our total multifamily property count now exceeds 87,000, an increase of 12,000 in 2025. Apartments.com network site visits totaled 223 million for the quarter, leads for specific models and units increased 64%, and our highest converting apply now leads rose 70% year-over-year in Q3. In the single-family rental segment, we had 1.4 million availabilities and 260,000 paid rentals, up 51% year-over-year. Homes.com rental traffic grew 55%, underscoring the synergy between Apartments.com and Homes.com. Advertisers benefit from increased exposure across both platforms at no additional cost. Turning to Homes.com. Homes.com is showing steadily accelerating revenue growth from an increasing number of revenue streams. Annualized net new bookings of Homes.com subscriptions rose to $16 million in the third quarter, up 53% year-over-year from $10 million in the second quarter of '25. That's actually quarter-over-quarter, up 53% quarter-over-quarter from $10 million in the second quarter of 2025, not year-over-year. Much more impressive when it's Q-over-Q. The net new annualized bookings in the third quarter represent 1,225% year-over-year increase. Revenue in Q3 increased 20% year-over-year. The number of net new subscribers added in the third quarter was 7,035, up 12% over the 6,280 net new subscribers added in the second quarter. In Q3, net new subscriber growth was 1,000% year-over-year. We now have over 26,000 subscribing agents. Just one of the many ways in which our business model is superior to competing portals is our ability to provide service to a much larger number of agents than they can. Competing portals in the United States business models of lead diversion limits them to selling to about roughly 5% of agents because they need to take leads from the other 95% of agents who are not clients so that they have something to sell to the 5% that are clients. In contrast, we can sell to well more than 50% of agents because we're not taking away leads from any agent. With LoopNet, CoStar and Apartments, we have shown that in many markets we're selling to well more than half of the players in that market. This is the advantage of creating a bigger TAM, but also creating more goodwill among agents. In competing portal models, 95% of the agents are losing business because of the portal and 5% are gaining business. In our model, almost every agent can gain business because of our portal and that creates goodwill. Alignment with your clients build stronger and more durable brands. Sales of our Homes.com Boost product rose 136% quarter-over-quarter to $617,000 in the third quarter. Homeowners are the primary buyers of Boost, paying on average $386 on a onetime basis to give their home for sale more exposure. At this point -- at this price point, the U.S. TAM for Boost sold to homeowners alone is already approximately $2 billion. When agents do buy a Boost for one of their listings, we see 25% of those agents convert to full Homes.com membership subscriptions. We began selling enhanced exposure on Homes.com to new homebuilders on August 25. In the month of September alone, we sold net new annualized bookings for new homes of 498,000. In total, we've already sold 743,000 annualized buildings since August 25. As Homes.com approaches our seventh quarter since launch, it is now the fastest-growing revenue product we've ever launched. So Apartments.com and CoStar now have more than $1 billion in revenue. They grew revenue at a much slower pace than Homes has in their first 7 quarters. Homes.com has now grown 50% more incremental revenue in its first 7 quarters than did Apartments.com in the same time period. We're continuing to increase the size of our Homes.com sales team. We now have 500 sales reps in production with another 150 in preproduction. We've now added field sales, new home sales specialists and major accounts reps. We believe the highest and best function of a portal is to market real estate and that, that is the future of the industry. I do not believe that future revenue models for successful real estate portals will be based on either iBuying or lead diversion to buyer agents. Currently, as I mentioned, we have 26,000 subscribing agents and Boost clients, promoting 130,000 active listings on Homes.com, representing 6% of the active 2.2 million properties for sale in the U.S. A recent analyst report from Citi say that they believe that a core product for Zillow going forward will be its showcase listing product and estimated in September '25 that Zillow had only 24,500 listings or approximately 1.1% of the active market. So we have 5x the number of listings marketed or boosted on our site. Citi further estimated that Zillow will have $13 million of revenue in the third quarter for showcase listings. So Homes.com is well ahead of Zillow in both revenue and listing count, in what we believe is the primary sustainable revenue driver for successful residential real estate portals around the world. Our strategy is to grow the share of real estate agents and homeowners relying on us to bring more exposure to their homes for sale, and these numbers show that we're on the way to achieving that goal. Our marketing campaign continues to build out audience and brand awareness. In August, unaided awareness was 42% and unaided intent was 28% that unaided awareness is up from about 4% we started. And as we -- and we are showing continued long-term upward trend in both categories. In the third quarter, the Homes.com network achieved 115 million unique monthly visitors. This led to 560 million total visits to the Homes.com network in Q3, up 7% compared to Q2. According to comScore, unique visitor traffic to Homes.com rose 8.3% compared to a 6.5% decline at Zillow and a 0.7% decline at Realtor.com. I'll just call that last part flat. comScore continues to rank the unique monthly visitors to the Homes.com network above either Realtor or Redfin. Our organic traffic in Q3 climbed 87% year-over-year. We continue to improve the quality and engagement of traffic to Homes.com achieving a low 24% bounce rate in Q3, which is a 64% year-over-year reduction in bounce rate. Our average session duration increased to 4 minutes and 29 seconds in Q3, which is a 93% year-over-year increase. I believe that our efforts to put more than 70,000 Matterports on the sites is driving this deeper home, shopper engagement on our site. We are optimizing for quality of traffic from our SEM generating $112 million listing detailed page views from SEM in Q3 for a 374% year-over-year improvement. We achieved this improvement with essentially the same but a more efficient SEM spend. I believe we are about to see our products hyper accelerated by some of the most exciting facilitating AI technologies I could have ever imagined. While we're already using AI throughout our organization, I am excited about the launch of AI Smart Search on Homes.com and the future innovations it foreshadows. Consumers can ask Homes.com precisely what they're looking for in their own words. This allows for reasonably complex queries such as long conversational phrases with multiple geographies such as show me waterfront properties with a pool, with a balcony and a great view in Miami Beach and Fort Lauderdale starting at $1 million. This does away with having to deal with traditional filters and forms that are limiting. If you're a coder, this is like giving people with no coding skills access to the power of full deep [boolean nested] queries against 10x the number of fields with just simple plain English questions. As a result, Smart Search is highly customizable, intuitive, fun and easy and more powerful. This is our own artificial intelligence capability we're engineering in, and we're doing it in partnership with Microsoft. In the third quarter, AI Smart Search has produced improved user engagement. So this new AI Smart Search is producing significant improvement in user engagement. Users of AI Smart Search use 69% more search filters, viewed 37% more listing pages per session, were 5x more likely return to the site within the following week. That's amazing and submitted 51% more leads after viewing a listing page. It's a more effective way to look -- find what you're looking for. We are now investing 50% of our Homes.com software development efforts in the fourth quarter and beyond towards building a range of AI-empowered features into Homes.com. This is our single biggest commitment by far to any software development effort. This is an incredibly exciting time for Homes.com. All of our products have boundless new opportunities opened up by the enormous potential of Generative AI. In the 4 decades that I've led CoStar product vision, a core principle of our success is leaning into new facilitating technologies to unlock their value for real estate. We were among the first to digitize real estate information, put real estate on a digital map, present digital real estate photos. We're the first to incorporate digital twins in a scale. And we were actually the first to leverage the Internet for real estate. In fact, we actually bought CBRE, Cushman & Wakefield, JLL, their first Internet accounts before there was even a Netscape or a Google around. AI offers transformative opportunities to unlock tremendous value in real estate. I believe few products are better positioned to cohesively capitalize on this opportunity than is Homes.com, Apartments.com, LoopNet and CoStar. We have massive and proprietary real estate data resources. We have unmatched expertise in organizing and quality control in that information. We have leading expertise in how to make that information useful and relevant to real estate industry participants. We believe that it will bring tremendous dislocation generally and open up huge new value opportunities, which we plan to exploit. While Homes.com is our initial priority for AI enhancement, we will apply the lessons learned to Apartments.com and all of our other products as quickly as possible. AI will impact top-of-funnel traffic acquisition. Real estate portals built on SEO foundations need to build strategies to acquire traffic from AEO, answer engine optimization and GEO generative engine optimization. SEO remains the foundation of AEO and GEO, though, a portal's brand content context remain the key building blocks for success. Today, GEO is sub-1% of top-of-funnel acquisition. For example, one large U.S. real estate portal in the U.S. only draws 0.45% of its top-of-funnel traffic from ChatGPT. And another large portal in Australia only captures 0.15% of its top of funnel from ChatGPT. So brand traffic -- brand, direct traffic, SEM display, social, e-mail, SEO and AEO remain 99.5% of top-of-funnel source. These traffic sources remain important in Generative AI future for sure and likely the majority, but GEO will become much bigger top of funnel traffic feed, and we will position our portals to capture that traffic. Many believe that traffic from GEO may be monetized the way Google monetized SEO with SEM. There's some huge AI GPU and energy bills to pay out there. I just spent a few days at the online marketplace conference in Madrid with dozens of real estate portal CEOs and digital real estate experts. All felt the competitive urgency to integrate the range of capabilities of Generative AI into their portals. But I did not find one person who thought that Generative AI solutions would effectively meet the specialized needs of the real estate world. To be successful, there's a need to build specialized AI models around buyer personalization and profiles, data capture listing evaluation, computer vision, digital twin, searching, area valuation, lead management, advertising optimization, valuation and many other algorithms. That is exactly the exciting work we are leaning into and embracing. There was a time when AOL, Yahoo! or eBay were ascendant and uniquely dominant and Microsoft and Google are still dominant though, perhaps, passed their zenith of dominance. All of these impressive general-purpose transformative technology innovations enthusiastically built real estate portals and tried to dominate digital real estate, all failed. All failed. They've now exited the space. Only eBay has anything left, and it's not much, which is a very [visible] thing. Specialized solutions often leveraging these companies' capabilities repeatedly ultimately dominate the real estate vertical. I believe the past is prologue here. There are a number of incredible Generative AI companies that are building invaluable tools. Those tools will be leveraged by specialized digital real estate companies to create specialized value. A specialized digital real estate company that does it best among them will unlock huge value for its investors. CoStar Group is the largest digital real estate company in the world by market cap is well positioned to win in an AI future. It's just a brief comment on AI. The Homes.com subscriber Net Promoter Score rose to 36 in the third quarter, rising 84% over Q2 '25. October to date, that NPS score continues to rise and is now at an outstanding 43. We're not done there. We'd like to get it up to Apartments 93, but the progress is amazing. It took less than 2 years for Homes.com to reach an NPS level that took CoStar about a decade or so to reach. As our NPS increases, so does our subscriber retention rate. In Q3 '25, our retention rate of subscribers we sold 6 months prior from Q1 to 2025 rose to 86%. The Q3 retention rate rose 7.5% from 81% retention in Q2 '25 and rose 39% year-over-year from 62% retention in Q3 '24. We are offering Homes.com subscribers the benefits of Matterports for their listings and agents tell us some focused groups that they really value that benefit. Member listings with Matterports captured nearly 40x listing detailed views of nonmember listings without Matterports. That should be the objective of any real estate agent selling a home, get 40x as many people to inspect that home. In the quarter, subscribers who had a Matterport on a listing had a 37% higher renewal rate than those that did not. It's working. We are enhancing our Matterport benefit to subscribers by offering a photorealistic 3D view of the exterior of the house to complement the digital twin of the interior. This exciting new technology is called Gaussian Splatt and we capture it with a short drone flight around the house where legal. I would encourage you to view one live by looking up a home for sale at 5471 Country Club Parkway in San Jose, California, on Homes.com and view that Matterport 3D exterior. Eventually, the house will sell, and it won't be there anymore. In recent focused groups, we are seeing success in raising real estate agent awareness that Homes.com is the only Your Listing, Your Lead portal. 51% of agents surveyed recognize "Your Listing, Your Lead" and overwhelmingly connected to the Homes.com brand. Agents dislike lead diversion expressed a strong preference for portal operating with "Your Listing, Your Lead" principle. As we continue to build that awareness, we believe that Homes.com will become the portal agents trust and most recommend to their clients. Now I need to turn to an uncomfortable but important matter. Zillow is under siege facing an unprecedented wave of lawsuits. I'm not sure that the market grasps the sheer magnitude of the risk bearing down on Zillow from all sides. These lawsuits are not isolated instance. They collectively target the heart of Zillow's operations exposing alleged antitrust violations, widespread copyright theft and blatant consumer deception. With private plaintiffs and government regulators now alert to Zillow's misconduct, I predict even more aggressive legal and regulatory action in the months ahead. There are 5 federal lawsuits filed against Zillow since June of 2025. First, Zillow threatened to permanently banning listing that was publicly marketed but not put on the MLS within 24 hours. So if you put a sign for sale -- for sale sign in front yard and didn't put it on Zillow, within 24 hours, you're banned. You have a Facebook post, and don't put it in the Zillow in 24 hours, you're banned, pretty aggressive. It appeared that Zillow was targeting Compass. Zillow followed through and banned Compass listings that were not put on Zillow in 24 hours. On June 23, 2025, Compass sued Zillow exposing Zillow's so-called 'Zillow ban' for what it truly is a ruthless scheme to strangle competition, trap home sellers inside of Zillow's walled garden. If Compass prevails and home sellers choose to -- where to list -- where and when to list their homes, Zillow could lose massive swaths of its inventory calling into question lead diversion model. I believe that Zillow's actions pushed Compass in a defensively merging with Anywhere. When the Compass-Anywhere merger is completed, the combined company will be, by far, the largest real estate brokerage in the U.S. as I understand, as many as 300,000 plus agents. I'm pretty sure that Zillow just picked a fight it cannot win. Compass will have the most important listing content in real estate, and Zillow will need them a lot more than Compass need Zillow. We filed our lawsuit against Zillow on July 30, 2025 to put an end to Zillow's brazen theft and monetization of CoStar's intellectual property. Zillow undoubtedly has used content stolen from Apartments.com to unfairly build their rental business. The scale of this infringement is staggering. For context, in 2019, Xceligent was caught with 38,489 CoStar copy-righted photographs and the Federal Court awarded $0.5 billion in damages to us. Zillow's conduct is even more egregious and we're determined to hold them fully accountable. Then in September, the Zillow was sued in a class-action suit by a group of plaintiffs who alleged that they were being deceived into overpaying hidden fees through Zillow's notorious Contact Agent button, don't push it. This case tears straight to the heart of Zillow's business model, laying bare a system built on deception. The complaint exposes Zillow's tactics saying, Zillow actually directs the buyer away from listing agent and directs the buyer to an unrelated buyer agent who lacks any specialized knowledge about the subject property. And the fallout isn't just limited to duped buyers, Zillow's lead diversion racket is bleeding home sellers by diverting their potential homebuyers to agents that may compete with their listing. Most recently -- we're not done, hang with me. Most recently, September 30, 2025, the United States Federal Trade Commission filed suit against Zillow Group and Redfin over an illegal agreement to suppress competition. They stated that the illegal deal stuns multifamily rental advertising competition harming American renters and property managers. The FTC went on to say that the Zillow partnership with Redfin was, 'nothing more than an end run around competition that insulates Zillow from head-to-head competition on the merits with Redfin for customers advertising multifamily buildings'. The FTC is seeking injunctive relief, meaning a potential unwinding of the deal. The lawsuit was followed up the next day by another lawsuit on behalf of bipartisan coalition of Attorney Generals from Virginia, Arizona, Connecticut, New York and Washington State. You might assume that CoStar Group sees deals like this when they come up like the Redfin deal. My immediate and clear reaction would have been that, obviously, the FTC would not allow such an illegal deal in any effort to end run the FTC regulatory process would necessarily bring unnecessarily excruciating pain and damage to anyone foolish enough to try it. So we never would have pursued it. If Zillow is ordered by Federal Courts, the FTC or Attorney Generals of states [disgorge] their allegedly illegally gained apartment revenue and content, I believe, will seriously damage Zillow's reputation in the apartment industry. These lawsuits will take years to resolve. The full extent of Zillow's contact as alleged in these complaints and the various remedies from these lawsuits is yet to be seen. Moving to the United Kingdom. It was a strong quarter for our, OnTheMarket, our U.K. residential marketplace, with leads up 21% year-over-year. In Q3 '25, we delivered significant ROI to our 16,000 subscribing customers there. Bringing some Homes.com inspired features to OnTheMarket has resulted in positive changes to the site that are generating more consumer engagement. We are building an audience of serious property seekers with total page views up 24% year-over-year in Q3. Average time on site per active user is up 79% year-over-year and lead to conversion -- lead to visit conversions are up 31% year-over-year. Net new bookings increased for the 17 months in a row and has delivered nearly $11 million of annualized net new bookings since its acquisition. We closed the acquisition of Domain in August. I'm excited to work with the Domain team and their customers to bring Homes.com, CoStar and LoopNet platforms to Australia. Domain's residential marketplace and commercial marketplace -- well, Domain's residential marketplace is very successful and generates more than 50% direct contribution margin. Its commercial marketplace generates a 40% direct margin. Both marketplaces have long-term growth potential under the CoStar umbrella. The Domain brand is very well known in Australia, and there's significant potential to expand market share there, where homeowners invest significantly in digital real estate advertising. Domain has an excellent management team led by Jason Pellegrino, who knows the Australian market well. He used to be the MD for Google there. And his vision for the business aligns with ours. We have made fast progress since taking ownership of the Domain business on August 20, delivering 7.4 million unique users in September on Domain's residential platforms which was the largest number of unique users on Domain's owned platforms in its history. The quality of this increased audience was retained, delivering the highest consumer reviews per listing in Domain's history. We're on track to significantly beat those records in October. We have already delivered a 24% year-over-year increase in audiences on our commercial real estate platforms in Australia. These strong audience results were driven by a mix of greater marketing investments supported by an improved mix of marketing investment across every step of the consumer journey, and rapid product improvement supported by a refocused product team and access to CoStar platforms, relationships and talent. Examples of product improvements already executed and planned within the first 60 days of ownership include improvements in platform speeds and latency, removal of all advertising interrupting the consumer experience and improvements in image quality. A key highlight was the growth achieved in our audience metrics, where we saw Domain apps average 138% increase year-over-year in downloads across iOS and Android, allowing us to successfully overtake our main competitor in App Store rankings. Domain was previously constrained under its former media company owner. It received limited management focus, limited expertise and scarce resources, limited expertise in real estate marketplaces. It was operated with short-term EBITDA strategy, keeping it from competing effectively with a market leader, REA. We believe that with CoStar Group's technology and resources, Domain will compete more effectively and will achieve stronger, long-term profitability. A dozen members of my management team and I recently spent 2 weeks in Sydney for a deep dive into the Domain business and believe there are clear opportunities to make changes that will create value for our shareholders. Most of the significant software resources and products we offer, we believe, are compatible with the Australian market, and we can integrate Domain into them to create competitive advantage and cost efficiencies. We hope to improve Domain's focus and profitability by rationalizing some of its product portfolio. Under prior ownership, Domain allocates significant resources to about 10 noncore initiatives at the expense of the highly profitable residential and commercial portals. I believe that most of the software development resources were allocated to products generating less than 20% of its revenue. We will refocus Domain's resources towards its successful scalable core and competing against its main competitor. We expect to offer LoopNet Homes and CoStar in Australia within 18 months. There's currently, we believe, no equivalent to CoStar in Australia, while Domain and REA Group offers products similar to LoopNet, I do not believe that they're on par with what LoopNet offers. This presents a significant opportunity for us to quickly establish a leading presence. The more I live with Matterport, the more impressed I am with this technology, how well it works and how useful it is to real estate. Matterport creates a strategic advantage in both our residential and commercial product portfolios. Matterport digital twins unlock value by bringing a new and important dimension of digitizing real estate in every product we offer. As part of CoStar Group, we see Matterport set on 2 pillars. On one pillar, Matterport is a stand-alone solution for industries such as insurance, construction, public safety, facilities management and similar, which we believe is by itself a multibillion-dollar revenue opportunity. In the second pillar, Matterport is brought to market as an integrated solution within our marketplaces and information solutions through our existing sales forces of 2,000-some people. We believe that in the second pillar, Matterport can help CoStar compete and achieve more than $1 billion in incremental value. Integration of Matterport and the second pillar is well underway, and you can see deeper than ever integration of Matterport within our products. I believe that prior to merging with CoStar, Matterport was a world-class transformative technology held back by lack of focus on go-to-market strategy with an underscaled sales and marketing effort. Matterport had fewer than 30 sales representatives globally, leaving many huge revenue opportunities untapped. We plan to expand the sales force by 200 by the end of '26 and drive accelerated revenue growth. Matterport's Q3 revenue was 12% higher than our expectations, $44 million versus $40 million and our Q3 '25 net bookings were up 194% over Q3 last year. We emphasize new customer acquisition, which resulted in a 94% increase year-over-year in incremental new customer logos. Our Matterport Max rollout for Apartments.com began at the NAA conference in June of this year. We've already sold over 530 Matterport Max subscriptions, which are adding upwards of $5,000 per year in annual subscription revenue per unit. We just completed a successful developer Summit and Hackathon with the Matterport team. Coming out of that, I'm very confident that we have an outstanding and innovative product road map that will delight our customers and for you all, more importantly, our shareholders. Turning to CoStar, CoStar generated $277 million in Q3 of '25 revenue, reflecting 8% year-over-year growth. Revenue growth has slightly improved in '25 as net new bookings remain strong. Per rep productivity in Q3 was at its highest since Q3 '23. Cancellation rates have declined over the past 2 quarters, and our renewal rate reached 93.3%, the highest since '23. Our subscriber count rose to 284,000 in the third quarter, up 20% year-over-year. Our lender business achieved a record quarter, closing $4.3 million annual net new bookings, with nearly almost just there $100 million in revenue and over 450 clients, including banks, credit unions, private lenders, regulators, insurers, CoStar for lenders has demonstrated strong success and has significant potential. CoStar Lender has already uploaded over $1 trillion of loans into CoStar. Clients' loan portfolios are securely uploaded to our SOC 2 compliant platform, unavailable to any AI scraper and integrated with CoStar's proprietary data analytics and credit modeling informed by our research and marketplace solutions. This comprehensive ecosystem delivers unmatched value for regulatory examines, asset examinations, asset allocation and responsible growth. In '26, we plan to launch our benchmarking product and have begun developing a loan origination system, expanding our total addressable market. One of our core goals for all of our emerging businesses is to cross that also important $100 million revenue milestone. So congratulations to John Vecchione, Xiaojing and the entire Lender team, well done and dinner is on me. LoopNet remains the world's largest and most active real estate marketplace, capturing 8.5x more searches than our nearest competitor. In the third quarter of '25, LoopNet achieved 10% revenue growth. Based on net new bookings from the last 3 quarters of '25, we expect the platform to deliver low double-digit growth next year. I firmly believe that LoopNet should and can return to 20%-plus growth -- annual growth rate soon. Our strategic focus has been on offering LoopNet advertising packages that enable clients to promote their entire property portfolios rather than just select assets. The silver ads, their portfolio comprehensive design are designed to drive higher renewal rates, deliver strong ROI for clients, expand listing coverage and enhance both the consumer and customer experience. We are also continuing to roll out asset-based pricing for renewals aligning our service pricing with the value delivered to clients. International expansion remains a key pillar of LoopNet's growth. Many of the largest multinational companies in the world are heavy users of LoopNet, and we could provide them even more value if we are carried listings in more countries. In August of '25, we integrated all French listings from BureauxLocaux into LoopNet, bringing the total number of European listings to 100,000 across France, Spain and the U.K. We could see major tenants like Amazon and many others, searching LoopNet for commercial real estate, not only in the U.S. but also in Canada, France, the U.K. and Spain. So they -- wherever we're going, they're searching. We will soon add Australia, as I mentioned, through our Domain acquisition, further growing our global reach. We believe that LoopNet can deliver more value to local advertisers if we're delivering a unique and valuable global audience with high buying power. Our data consistently shows that properties listed on LoopNet sell and lease faster. For properties listed in January '24, 30% of those on LoopNet transacted, while only 22% of those not listed on LoopNet transacted. For firms listing 90% to 100% of their listings on LoopNet, their 24-month close rate was 36%, while those not listed on LoopNet only had a 20% close rate. If a few hundred dollars invested in the LoopNet could increase your chance of transacting a commercial property by 80%, I believe that's a no-brainer. Turning to CoStar Real Estate Manager and Visual Lease now support real estate lease management accounting, project management needs for 2,000 corporate clients, including more than half of the Fortune 500. Third quarter '25 revenue climbed 63% year-over-year to $30.6 million. The business is very profitable with growing margins. We are making good progress integrating CoStar Real Estate Manager, Visual Lease and CoStar into one extremely valuable corporate real estate solution. We expect to launch lease benchmarking capabilities in mid-'26 creating a new level of transparency, helping investors, brokers, corporates and lenders gain a more accurate and timely understanding of CRE rents and potential income. We expect to release an integrated product with real estate management CoStar Suite in '26, late '26. Clients will be able to access comprehensive market data and gain visibility into previously unseen opportunities to optimize their real estate portfolios. This will allow them for detailed analysis to make the most informed decisions that we believe will significantly drive significant ROI and cost savings for these clients. We shared our new product road map in our recent customer advisory meeting with major clients, which include real estate finance and accounting leaders, and we received very extremely positive feedback on the new product direction. CoStar Group's European business continues to deliver record net new bookings reaching $5.7 million in Q3 '25 and $16.9 million year-to-date, representing a 51% year-over-year growth. The U.K. business achieved another record quarter with year-to-date net new bookings up 125% and revenue up 17% year-over-year. In France, our research team has curated over 260,000 buildings, 50,000 availabilities, 140,000 tenants and 60,000 sale and lease comps. Business Immo, now fully integrated to CoStar News reaches over 100,000 French CRE professionals monthly, and we're confident that CoStar will soon become the leading source for CRE data in France, connecting global and French investors. In closing, I believe that our results this quarter demonstrate that my colleagues here at CoStar Group are making great progress, continuing to successfully grow our existing businesses, while effectively investing into new real estate segments and new global markets. With $350 trillion of real estate in the world, we believe we are creating value digitizing it with leading marketplaces and information solutions that can result in a $1 trillion addressable market with a deep moat, and we're busy building it one brick at a time. At this point, I'll turn the call over to our CFO, Chris. Christian Lown: Thank you, Andy. Good evening. I'm happy to report that CoStar has now posted its 58th consecutive quarter of double-digit revenue growth coming in at 20%. We achieved an impressive commercial information and marketplaces brand margin of 47% in the third quarter versus 43% in 3Q '24. Net new bookings for the third quarter were $84 million representing a 92% increase year-over-year. Every major product contributed to this record as our growing dedicated sales force of over 2,000 people is delivering for CoStar. Revenue for the third quarter was $834 million, which included a $25 million contribution from the Domain acquisition. Revenue, excluding Domain of $808 million exceeded the high end of our guidance. Third quarter adjusted EBITDA came in at $115 million, also exceeding the high end of our guidance at a 14% margin. The outperformance in adjusted EBITDA was a result of continued expense discipline and better-than-expected revenue. Our CoStar products saw revenue grew 8% in the third quarter, ahead of our guidance. We are excited about this product's renewed growth, especially given continued volatility in the commercial real estate sector. Net new bookings have steadily increased throughout 2025 and are now at the highest level seen since 2022. With this increasing momentum, we expect to see the CoStar product grow between 8% and 9% in the fourth quarter with full year growth firmly in the 7% range from our original guidance of 6% to 7%. Residential revenue was $55 million in the third quarter with $23 million coming from the Domain acquisition. The $32 million in organic revenue was consistent with last quarter's guidance. With the addition of revenue from Domain, we now expect fourth quarter revenue of $100 million to $105 million with Domain contributing around $67 million. For full year 2025, we expect residential revenue to more than double to $210 million to $215 million from $101 million in 2024. Apartments.com's third quarter revenue growth came in at 11% year-over-year. Our Apartments.com sales reps are consistently the most productive of our large brands, and we have increased the size of this team by 20% year-to-date. We now have more than 500 Apartments.com sales reps for the first time in its history. These reps will take time to ramp up their productivity but this investment puts us in a great position for longer-term growth. For 4Q '25, we expect 11% to 12% revenue growth, resulting in full year 2025 revenue growth of 11% to 12%. LoopNet revenue grew 12% in the third quarter with a 2 percentage point lift from the Domain acquisition. LoopNet's organic performance was in line with last quarter's guidance. Our sales team is consistently outperforming prior productivity levels. And in conjunction with the demand contribution, we now expect 4Q revenue growth of between 15% to 17% and full year revenue growth of 10% to 11%. On an organic basis, 4Q revenue growth is expected to be 11%, its highest growth rate since 2023. This acceleration throughout 2025 sets us up nicely for 2026. Revenue from information services was $41 million in the third quarter. We expect fourth quarter revenue to be consistent with the third quarter and full year revenue growth of between 18% to 20%. We are excited about launching our new rent analytics product in the first half of 2026 and our new lease platform in the fourth quarter of 2026. Other revenue was $78 million in the third quarter with Matterport contributing $44 million. For the fourth quarter, we expect other revenue to range between $70 million and $72 million. The fourth quarter is expected to be slightly impacted by revenue recognition timing for 10x and lower camera sales at Matterport as we sunset the Pro 2 camera. As previously stated, adjusted EBITDA for the third quarter was $115 million, meaningfully above the high end of our $75 million to $85 million guidance. The favorable performance came from higher-than-projected revenue, higher-than-anticipated professional service -- I'm sorry, lower than anticipated professional service costs and greater-than-expected headcount savings as we remain laser focused on expenses. Our contract renewal rate was 89% for the third quarter, with a renewal rate for customers who have been subscribers for 5 years or longer holding steady at 94%. Subscription revenue on annual contracts was 75% for the third quarter, the acquisitions of Matterport and Domain are the driving factors for the change in our subscription revenue metric. Our September 30 balance sheet included $2 billion in cash, which earned net interest income of $26 million in the third quarter, a 4% rate of return. We repurchased 576,000 shares in the third quarter for $51 million, bringing our year-to-date total to 1.4 million shares repurchased for $115 million. We expect to purchase approximately $50 million of additional shares in the fourth quarter, bringing our 2025 total to approximately $165 million of the $500 million share repurchase authorization. We closed on the Domain Group acquisition on August 27. The total consideration was USD 1.9 billion. Domain contributed $25 million of revenue for the stub period from August 28 to September 30. For context, around 90% of Domain's revenues is residential, while the remaining 10% is split between commercial marketplaces and information services. With 9 months of 2025 in the books and with the closing of Domain, we now expect full year revenue of between $3.23 billion to $3.24 billion, broadly in line with our guidance, excluding Domain. Fourth quarter revenue is now expected to be between $885 million and $895 million. Full year adjusted EBITDA is now expected to range between $415 million and $425 million, with Domain contributing approximately $15 million. This $25 million increase in our guidance, excluding the impact from Domain is indicative of our strong third quarter performance. Fourth quarter adjusted EBITDA is expected to range between $150 million and $160 million. And with that, I will now turn the call back to our call operator to open the lines for questions. Operator: [Operator Instructions] Our first question comes from Pete Christiansen with Citi. Peter Christiansen: Nice results, guys. Good trends here. Andy, It's interesting. I was looking across the last 8 years and sequential change in bookings excluding COVID, so 2020 was roughly 15%. This quarter sequential change in bookings was 10% down. So clearly, the new sales force capacity is contributing and other things also contributing to some of that growth being above seasonality. But just curious if you could point out any seasonal behaviors that you noticed and maybe a special attention on the residential side. Are agents canceling now, planned to come back later? Are you seeing the same type of seasonality that you normally see in the apartments business? Just any deeper thoughts there would be helpful. Andrew Florance: Sure. And I guess you got the first question because we source Citi during our script. So -- but the Apartments.com does have seasonality. And as you know, the prior quarter, you have usually unusually large sales because of the NAA event where people, major property managers do their annual purchasing for the year to come. And we would expect some limited seasonality from residential agents as they get to year-end holidays and the like. Their peak season is the spring selling season. But what we're seeing right now, if I look at a line of our sales production at Homes.com, it is a very linear line and the only seasonality in that sales line is Saturday and Sunday. So it's a very smooth progression up right now, and we're not yet seeing seasonality. And maybe in the Christmas holidays that you might get something but not yet. Operator: Our next question comes from Stephen Sheldon with William Blair. Stephen Sheldon: Just wanted to follow up on that question. I guess, can you just give more detail on the sequential booking trends in the third quarter as we look at the core businesses. So looking at Suite, Apartments.com and LoopNet. And then just how are things shaping up in the seasonally important fourth quarter around bookings, especially with a bigger sales force and the ramping productivity. So yes, just what are you -- how are you thinking about the bookings trajectory into 4Q? Andrew Florance: Chris? Christian Lown: Yes. So I think as you see... Andrew Florance: Didn't like [indiscernible] Christian Lown: I think what you see is, you see our full year guidance, you see our sequential trends. We're very pleased with the bookings. And I think we're just getting started from the sales force expansion, all those sales force came in at the end of the first quarter, second quarter, et cetera. So productivity takes time to ramp. But seasonality and what we're modeling is pretty much in line with what we're expecting. And therefore, you saw the increase in our full year guidance and our expectations. And so I think we're on track from what we're expecting. Andrew Florance: Yes. And I do want to point out that from -- remind everyone that from the bookings at Homes.com from Q2 to Q3 was up 53%. So as we're going into the third quarter, we're seeing a significant uptick in bookings at Homes.com. And again, because of the number of people, a very smooth upward growth trajectory. Christian Lown: Yes. And just to expand a little further, at CoStar's trends is very positive. We're seeing reacceleration there, which we're very excited about. We talked about LoopNet, Andy talked about LoopNet and what's going on there. And on Apartments, as I said, the trends are as expected as modeled. So I think we feel really good on the underlying trends and resulting in our change in guidance. Operator: Our next question comes from Ryan Tomasello with KBW. Ryan Tomasello: At Apartments.com, in terms of bookings, can you say how those performed sequentially versus, I think, $45 million in the second quarter? And looking at the guidance for the fourth quarter, Chris, I think you're calling for 11% to 12% on multifamily, which would be pretty unchanged growth from the third -- I'm sorry, from the -- yes, from the third quarter. Just curious what's driving that despite the ramp in the sales force and just generally how you're thinking about demand trends at Apartments.com heading into the end of the year? Christian Lown: What's important is what you saw across a number of funds. One, we continue to see rooftop expansion in Apartments.com. We're expanding the sales force. We've talked historically about the seasonality or -- have the contributions on a quarterly basis as we look at back historically, with the second quarter being the largest quarter, the third and fourth quarter as being relatively similar, although there can be an uptick in the fourth quarter. So I think we feel generally good about the trends, which has resulted in our numbers and our forecast. But obviously, solid growth, increased rooftop expansion. And then that's actually across all segments, 1 to 49, obviously had a pretty significant increase year-over-year and then both 50 to 99 and 100-plus also showing growth at or higher than what we've seen over the last 4 or 5 quarters. Andrew Florance: And Ryan, did I mention that the FTC was suing our competitor? Ryan Tomasello: Yes, I think I caught that Andy. Andrew Florance: Okay. Just want to make sure. Operator: Our next question comes from Curtis Nagle with Bank of America. Curtis Nagle: I guess, Andy, I just wanted to go back to the point. So you're investing 50% of your software costs now into AI. I guess where are you redirecting those expenses from? And I guess, any thoughts you could give on how to think about total expenses for '26 for Homes.com? Andrew Florance: I thought you'd never ask. The -- those -- the 50% of our software development going into AI features in Homes.com is an allocation of the existing resources. It does not reflect an increase in total spend. So as we go into any particular quarter or season, we're always looking at what are the headline investment initiatives going to be. We are most excited about the potential of these AI features and functions, which are just remarkable and awesome. And then we look at 2026, we anticipate, I would say, same or lower spend on Homes.com investment in '26. Do you agree with that, Chris? Are you going to go... Christian Lown: You're the CEO. I agree with whatever you say, Andy. Andrew Florance: Okay. Great. Yes. But we don't see any -- other than the increased sales force size that we've already baked in that roll over to '25, the costs are not materially going up in any way I see. Operator: Our next question comes from Brett Huff with Stephens. Brett Huff: Can you detail a little bit, unpack a little bit the bookings number that you gave us for Homes.com which we appreciate. Just in terms of rep productivity, are the newer folks getting more up to speed? Do we still have more of those folks get up to speed, pricing? Sort of any of the numbers that go into that bookings number would be super helpful as we try and tweak our model. Andrew Florance: Sure. So we are in a period of remarkable headcount growth at Homes.com. We've never seen anything like it, where you have classes of 100-and-some coming in at any given point. That is difficult to manage, you would fully expect you'd see a drop off in per person productivity as you bring that many people in. But we are seeing that consistent -- we're seeing consistent growth in those bookings. And what was the second part of the question? Christian Lown: Productivity. Andrew Florance: Yes. So the productivity is still -- we're seeing a very positive ROI at each incremental salesperson added, but you are seeing the effects of so many people coming in. And we are slowing the growth or I believe sort of have capped the growth of salespeople to allow for training and onboarding to catch up. Christian Lown: Right. And you have made adjustments to pricing to improve penetration.... Andrew Florance: Slight increase in pricing in this quarter over prior quarter, but we're focusing on penetration, as you can see. Operator: Our next question comes from Faiza Alwy with Deutsche Bank. Faiza Alwy: Yes. Andy, you mentioned in your opening remarks that you think that you can get to 40% profitability or margins on the residential business. I'm curious how you think about the time frame on that? And sort of what needs to happen for you to get there? Andrew Florance: Yes. So the residential business, obviously, you have Domain in there, you have OnTheMarket, you have Homes in there, you have Apartments.com, and past is prologue. You see us adding components to it through time. But when you look at our business model, it's uniform across all 4 of those platforms. It is around marketing the real estate. If I look around the world at all of the precedent models that use marketing real estate as their core business, it will be a Rightmove, or Idealista or SeLoger or REA Group and the like. They all operate up at margins that are typically around 50%, in some cases, high as 75%. So it's really continued blocking and tackling over the next number of years. I don't have a specific date for that. But when I look at our -- when I look at the margin numbers for the combined residential businesses, I like the progression of EBITDA margin that I see in that group of companies. You can combine all these things together this way or that way. But when you look at them, I think they're making good progress towards our intermediate to long-term margin goals. Operator: I would now like to turn the call back over to Andy Florance for any closing remarks. Andrew Florance: Well, I think I think our participants on the call today have probably modeled good behavior in keeping it brief. I'll try to be brief in my next set of comments. But thank you guys for joining us. We're very excited about what's happening here at CoStar Group. And we look forward to updating you in 2026 for our next earnings call. Thank you. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to the OrthoPediatrics Corporation Third Quarter 2025 Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Trip Taylor from the Gilmartin Group for a few introductory comments. Philip Taylor: Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer; and Fred Hite, Chief Operating and Financial Officer. Before we begin today, let me remind you that the Company's remarks include forward-looking statements within the meaning of federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, and the Company's actual results may differ materially. For a discussion of risk factors, I encourage you to review the Company's most recent annual report on Form 10-K, which was filed with the SEC on March 5, 2025, and its subsequent quarterly reports on Form 10-Q. During the call today, management will also discuss certain non-GAAP financial measures, which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period-over-period. For each non-GAAP financial measure referenced on this call, the Company has included a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure in the third quarter earnings release. Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today, October 28, 2025. Except as required by law, the Company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. With that, I would like to turn the call over to David Bailey, President and Chief Executive Officer. David Bailey: Thanks, Trip. Good afternoon, everyone, and thank you for joining us today. We are proud to start this call with our typical and most meaningful performance metric. In the third quarter, we supported the treatment of more than 37,100 children, increasing our total impact to approximately 1.3 million kids health. With too few solutions designed specifically for children and the clinicians who care for them, pediatric health care has long faced critical gaps. At OP, we are committed to addressing these unmet needs, and our mission to close those gaps and reshape the future of pediatric care remains clearer than ever. We have made tremendous progress in this market, but there is still a substantial market opportunity ahead. In the third quarter, we saw strength in all areas of our business, excluding 7D capital sales and LatAm international stocking and set sales. In fact, we saw total third quarter global revenue growth, excluding 7D capital sales of 17% and domestic revenue growth, excluding 7D capital sales of 19%. Both T&D and scoliosis implant sales were strong as we saw a very normal summer selling season and OPSB growth continues to be extremely robust with growth in excess of 20%. As a reminder, OPSB sales are approximately 80% T&D and 20% scoliosis, and we saw strong growth in both areas. As we highlighted in our preliminary announcement, our revenue results fell short of our expectations, driven by 2 isolated factors: 7D capital sales that were expected in the quarter did not close prior to the quarter end; and headwinds from stocking and set sales in Latin and South America have continued longer than expected. Although these 2 areas did not produce the results we wanted, these are 2 of our lower-margin segments. And because the rest of the business remains strong, we still delivered high gross margins and profitability in line with our expectations. Looking beyond the top-line for the third quarter, we are pleased to see a significant 56% improvement in adjusted EBITDA, growing to $6.2 million. In addition, we also saw huge progress with our free cash flow usage, which was dramatically lower in the third quarter, decreasing $8.2 million. Both of these metrics have been a focal point of our strategy, and we are succeeding in delivering our goals. Touching briefly on our outlook. As announced previously, for the full year, we now expect revenue to range from $233.5 million to $234.5 million. Adjusted EBITDA is still expected to be $15 million to $17 million, and we are on track to deploy $15 million in sets and generate positive free cash flow in Q4. Even though our top-line expectations have been adjusted, we are maintaining our profitability and free cash flow outlook. As we drive toward our profitability goals, our core business, consisting of trauma and deformity and scoliosis implants, specialty bracing and our international agencies generate higher margins and better free cash flow than the capital sales and LatAm stocking and set sales. Our core businesses are positioned to remain the key engines of revenue growth, adjusted EBITDA and free cash flow, and we are confident in our forecast of generating positive free cash flow in Q4 and breakeven in 2026. Turning to our segments. In the third quarter of 2025, the T&D business grew by 17% in the quarter, driven by continued strong market share gains across several product lines. More specifically, growth was led by strong performances in trauma implants and a return to normal scheduling in the elective limb deformity business. Extremely strong exfix growth and the continued high growth of OPSB were the highlights in the quarter. Taking a closer look at Trauma, we saw particularly strong revenue gains driven by continued rapid adoption of PNP Femur, PNP Tibia, ORTHEX and the Bioretec ActivaScrew. Looking closer at the 3P platform, following the FDA approval of the 3P Pediatric Plating Platform Hip system and its first surgical cases, we are seeing consistent case growth, which we expect to continue through the remainder of the year and to ramp aggressively as we begin the full launch of this product in 2026. Additionally, we are pleased to have recently accomplished another milestone for this platform as we have just announced the next 3P system in the series, 3P Small and Mini has been approved by the FDA. This approval comes ahead of schedule, and we now expect to complete the first cases in the beginning of next year. With the 3P platform, we expect to launch new systems each year for the next several years, bolstering both Trauma and Limb Deformity revenue. T&D remains a core growth engine for our business, powered by our expanding scale, ongoing market share gains and a steady cadence of innovation focused on unmet clinical needs. We have established ourselves as a market leader in T&D, and we are executing with confidence, especially as we see more competitors exiting the space by removing pediatric-specific product lines. Our OPSB specialty bracing strategy continues to build momentum. And with continued execution of our operational goals, our confidence in this long-term opportunity only strengthens. This segment represents a high potential capital-efficient growth avenue and is an integral part of our company strategy. We will continue our efforts to drive targeted territory expansion, accelerate R&D efforts and continue scaling our sales force. As a reminder, when we acquired Boston O&P in January of 2024, there were 26 operational clinics. As previously reported, since then, we have expanded to more than 40 clinics, entered into 8 new territories and launched several new products. Our preliminary expectations for new clinic return on investments of 25% for new clinic acquisitions and 40% for new greenfield clinics are being realized. During the quarter, we expanded our footprint into 2 very large markets, New York City and California. We expanded Denver and Ohio. And for the first time, we expanded internationally with a clinic in Ireland. These latest additions continue to reinforce the importance and need for OPSB clinics, and we anticipate that the strong wave of clinic expansion opportunities driven by high customer demand and a robust pipeline will continue. In addition to expansion opportunities, same-store sales growth has been increasing and generating positive momentum. Our OPSB strategy is delivering strong results and has proven to be a highly efficient expansion path for OrthoPediatrics. Our presence outside the operating room allows us to create deeper partnerships with our customers. This powerful strategy is extending our leadership position in pediatric orthopedics. We remain focused on executing our strategy with precision as we work towards securing a leading share in this growing market. Moving to the Scoliosis business. Our growth of 4% seen in Scoliosis this quarter was led by strong U.S. Scoliosis implant and Scoliosis OPSB growth, offset by $2.3 million lower 7D capital sales. U.S. Scoliosis growth continues to be led by new users adopting OrthoPediatrics technology, including RESPONSE as well as pull-through from past 7D placements. As mentioned, the underlying OUS business grew nicely, but was negatively affected by reduced stocking and set sales in LatAm, primarily Brazil. We expect this will continue for the next several quarters, but are working on an improvement plan to implement in the near future. 7D sales in the quarter were impacted by increased variability in the timing of unit placements that caused delayed capital sales and the corresponding revenue from those placements had a significant impact on quarterly sales and overall growth. Typically, there are a few 7D unit sales within the quarter. But for the third quarter 2025, there were 0 unit sales. This compares to our strongest 7D unit sales results in the third quarter of 2024. We still expect 7D to be a revenue driver for us, but we cannot predict how much and which quarter sales will fall in. To minimize the impact of lumpy 7D unit sales, we have adjusted our outlook, so there is minimal impact on our expectations, which does result in negative growth assumptions from this segment. Looking at our EOS product portfolio. We are pleased to see that our portfolio expansion strategy continues to be effective. In particular, we are seeing positive trends with our recently launched VerteGlide Spinal Growth Guidance System skeletally immature patients. Following the first completed cases in August, we are seeing solid adoption of VerteGlide through the limited release, and we remain on target for the full market release in the coming months. We are excited about the progress made within this portfolio and look forward to progressing the remainder of our EOS products. Moving to international. International underlying sales were solid in the quarter due to extremely strong demand in surgical volume in EMEA and APAC, offset by unfavorable growth from LatAm. The underlying revenue largely comes through our sales agencies and represents a good reflection of high surgeon usage and higher-margin replenishment revenue. We are particularly excited to see our EMEA Scoliosis launch going so well and are eagerly awaiting the EU MDR approval of our 4.5 Scoliosis System, along with multiple other approvals expected before the end of the year. On the other hand, the headwinds in LatAm have persisted longer than we anticipated. In an effort to focus on improved cash metrics, we have made the conscious decision to limit new stocking and set sales to South America. This dynamic continues to play out and negatively impacts our growth, particularly in Brazil. We believe that at this point, our LatAm business would be in a more stable position and that we would see the benefit of growth in Latin and South America again. However, we experienced continued disruption in sales, largely related to timing of large stocking and set orders. We're working towards solutions but expect there to be some variability here moving forward, which we have reflected in our outlook. In summary, we are proud of the way the business performed, excluding 7D and LatAm. OrthoPediatrics continues to lead the pediatric orthopedic market and provide comprehensive solutions to support the care of children. We remain focused on execution across the business, including scaling of OPSB, leveraging previous set deployments and launching innovative new products. This strategy will support revenue growth, increase adjusted EBITDA while meaningfully reducing cash burn as we work towards achieving free cash flow break-even in 2026. Lastly, we believe our strategy positions OrthoPediatrics to help more children than ever before. With that, I'd like to turn the call over to Fred to provide more details on our financial results. Fred? Fred Hite: Thanks, Dave. Taking a closer look at the P&L. Our third quarter of 2025 worldwide revenue of $61.2 million increased 12% compared to the third quarter of 2024. Growth in the quarter was driven primarily by strong performance across Trauma and Deformity, Scoliosis and OPSB, offset by a decline in 7D unit sales and LatAm stocking and set sales. U.S. revenue was $48.7 million, a 14% increase from the third quarter of 2024, representing 80% of total revenue. Growth in the quarter was primarily driven by Trauma and Deformity, Scoliosis and OPSB, offset by a decline in 7D unit sales. We generated total international revenue of $12.5 million, representing growth of 6% compared to the third quarter of 2024 and representing 20% of our total revenue. Growth in the quarter was primarily led by increased procedure volumes, partially offset by lower stocking and set sales to LatAm. In the third quarter of 2025, Trauma and Deformity global revenue of $44.1 million increased 17% compared to the prior year period. Growth was primarily driven by strong growth across multiple product lines, specifically our cannulated screws, PNP Femur, PNP Tibia, DF2 and OPSB. In the third quarter of 2025, Scoliosis global revenue of $16.3 million increased 4% compared to the prior year period. Growth was primarily driven by increased sales of RESPONSE 5560 and revenue generated from FIREFLY, offset by a decline in 7D unit sales. Finally, Sports Medicine/Other revenue in the third quarter of 2025 was $0.9 million (sic) [$0.8 million ] compared to $1.3 million in the prior year period. Touching briefly on a few key metrics. For the third quarter of 2025, gross profit margin was 74% compared to 73% for the third quarter of 2024. The increase in gross margin was primarily driven by favorable product sales mix as a result of lower 7D unit sales and lower stocking and set sales to LatAm, which generate lower gross margin profit. Total operating expenses increased $9.0 million or 19% compared to the prior year period to $54.7 million in the third quarter of 2025. The increase was mainly driven by $2.3 million of restructuring charges, $2.3 million of impairment charges, increased noncash stock compensation as well as the ongoing growth of the OPSB clinics. Sales and marketing expenses increased $1.9 million or 11% compared to the prior year period to $18.7 million in the third quarter of 2025. The increase was mainly driven by increased sales commission expense and an overall increase in volume of units sold. General and administrative expenses increased $2.9 million or 11% year-over-year to $29.2 million in the third quarter of 2025. The third quarter increase was driven primarily by increased noncash stock compensation as well as the ongoing growth of the OPSB clinics. Intangible asset impairment recorded during the third quarter of 2025 was $2.3 million related to our annual impairment test, where we determined the fair value of ApiFix, Telos and Medtech trademark assets and Telos customer relationship assets were below the carrying value. We recorded an impairment charge to reduce the carrying amount of the intangible assets to their estimated fair value. Restructuring charges recorded during the third quarter of 2025 was $2.3 million related to the company's global restructuring plan started in the fourth quarter of 2024, aimed at improving operational efficiency, reducing operating costs as well as reducing staffing. For the third quarter, we recorded additional restructuring expense as we continue to review structural changes required to drive down costs. We saw savings in the third quarter, but anticipate greater impact in the fourth quarter and in 2026. Research and development expense decreased $0.2 million in the third quarter of 2025 due to timing of product development third-party invoices. Total other expense was $2.5 million for the third quarter of 2025 compared to $3.6 million of other expense for the same period last year. GAAP net loss per share for the period was $0.50 per basic and diluted share compared to $0.34 per basic and diluted share for the same period last year. Non-GAAP net loss per share for the period was $0.24 per basic and diluted share compared to $0.18 per basic and diluted share for the same period last year. Adjusted EBITDA was $6.2 million in the third quarter of 2025, a 56% improvement when compared to $4.0 million in the third quarter of 2024. We ended the third quarter with $59.8 million in cash, short-term investments and restricted cash. In the third quarter, we saw a significant improvement in free cash flow performance. For the third quarter, free cash flow usage was $3.4 million compared to $11.7 million of free cash flow usage for the third quarter of 2024. Set deployment was $4.1 million in the third quarter of 2025 compared to $5.3 million in the third quarter of 2024. Turning to guidance. As Dave mentioned, we adjusted our expectation for full year 2025 revenue to be in the range of $233.5 million to $234.5 million, representing year-over-year growth of 14% to 15%. We are reiterating the guidance that our full year gross margin will be within the range of 72% to 73%. We also continue to expect to generate between $15 million to $17 million of adjusted EBITDA in 2025. Additionally, we continue to expect approximately $15 million of new set deployed in 2025. This represents our continued focus on driving the business to free cash flow break-even by 2026, and we anticipate delivering our first quarter of free cash flow positivity in the fourth quarter of 2025. Operator, let's open the call for Q&A. Operator: [Operator Instructions] Our first question comes from David Turkaly with Citizens Bank. David Turkaly: Dave, you made a comment, I thought I heard you make it, so I just wanted to clarify it, something about competitors exiting the space. I was wondering like specifically, what were you referring to there? David Bailey: Yes. Good question, Dave. Listen, we see some of the big OEMs that are -- have notified customers that they're pulling products that historically have been used in pediatric patient population. So we've seen that from J&J. We've seen that from Smith & Nephew in the last 6 months, more recently, J&J with a Hip product that would be a competitor to 3P. And so we have really nice timing that we're coming out with a new Hip system. And just, I think, seeing a continued defocus of these pediatrics in some of the large OEMs, which I think is not necessarily great overall for patients, but certainly good for us from a competitive standpoint. David Turkaly: And I know that you talked about sort of 12% being, I think, the new LRP limit or down, I guess, lower limit of growth. And it seems like you're doing a pretty good job with these clinics. But as we look ahead to the next couple of years, do you think there's an ability to possibly accelerate either the expansions or openings on the OPSB side, maybe to accelerate that number? David Bailey: Yes. I think there is no question that there is extremely high demand for clinics. And this year, I would say we've gotten a lot of experience in terms of the timing of accelerating those clinics and the timing of getting those clinics started. We're pleased with what we've seen so far. And you can bet that if we have the opportunity to do more and do more faster, we would certainly want to do that. Certainly, trying to balance also that against the P&L requirements of trying to drive to increase profitability. But I think the demand is there. And yes, you could assume that if we have the opportunity to open more clinics, we would certainly want to do that. Operator: Our next question comes from Ben Haynor with Lake Street Capital Markets. Benjamin Haynor: First off for me, on OPSB and the 25% and 40% realized returns that you're seeing, is that something that includes any sort of halo effects that you see for other products on either the -- or I guess, on the QD and Scoliosis side? Fred Hite: No, it does not. We -- yes, it would be difficult, I think, to try to quantify that. So that's not included. Benjamin Haynor: Okay. Got it. And then just thinking about the revenue range, the $1 million difference between the top end and the bottom end there with the $2 million difference between the top end and the bottom end of the EBITDA range. Is there anything that folks should read into there? Any additional color on what might drive that EBITDA range to the top or bottom end? Fred Hite: No, it's really product mix is probably the single biggest item that drives the change on the bottom line. That's where it was to start with, and we didn't feel like narrowing that gap on the last update. Benjamin Haynor: Okay. That's fair enough. And then lastly for me, just on the competitors that notified customers that are exiting the market. Do you have a sense of where their shares stand at -- market share stands at for the likes of them? David Bailey: Yes. I certainly don't know their market shares in each one of those individual product lines. No question that our largest competitors historically have been legacy products from those 2 large OEMs. And more of their product sales probably are in the commoditized small plate, small screws types of things like that. But certainly, when there are less options available in the market and we have the best products there, it certainly bodes well for us taking all the share we would credibly want to take in areas like hip deformity correction, for example. Operator: Our next question comes from Ryan Zimmerman with BTIG. Unknown Analyst: This is Izzy on for Ryan. So I heard the comments about accelerating off of 12% for the long-term plan with new clinics opening. But I was just curious if you guys could talk a little bit about what's giving you the confidence in 12% as being the correct base to grow from. David Bailey: Yes. I mean, I guess when we look at implant sales across the board and what we see adoption rates of all our products, the way the Scoliosis business has grown and then we strip out some of the uncertainty that we've seen from Latin America, and strip out the majority of the 7D, which inevitably is going to happen. But as we've said, it's very difficult for us to determine quarter-to-quarter. When you strip some of those things out and look at the momentum we have in all of those other areas of our business, it gives us a lot of confidence that a 12% kind of baseline is a good one for us. And you're right, I mean, I think there's the opportunity for acceleration when you look at the speed with which we're -- the rate with which we're growing the OPSB franchise. I mean there's just a lot of demand for clinics. We're seeing same-store sales within our existing clinics go up. And I don't even think that we have seen the impact yet from the R&D initiatives that we've got going. We launched a number of products on the OPSB side. I think DF2 is the primary one that we talk about because it's growing so rapidly. But I think in the next few quarters, we'll be talking a lot more about a number of new R&D projects that are coming out of the OPSB franchise. And I think when you add all that up, we feel very confident in kind of a baseline growth rate of 12% going forward. Unknown Analyst: Got it. And I heard you call out strength in other international regions outside of Brazil and LatAm. I was curious if you guys are taking any steps to kind of derisk international revenue volatility as we move into 2026. Are any of the other regions where you're seeing strength growing fast enough or strong enough to offset any of the headwinds that you've seen this year? David Bailey: Yes. It certainly, as the international business grows, the dependence on revenue from Latin America, South America, particularly Brazil, becomes less impactful. And we are seeing really nice growth, particularly in Asia Pac as well as EMEA and particularly -- well, really across all of our implant businesses. I'd like to particularly call out the Scoliosis growth that we're seeing in both of those areas, which is new. We haven't really had a Scoliosis business, particularly in EMEA over the last few years. And here in the last 12 months, have really grown it from 0 to -- it's still small, but something nice and it's growing rapidly. And so all of that certainly offsets the volatility that we have from stocking distributors in Latin and South America. And I think Fred and I are going to work hard to determine if there are better structures that we could put in place with our stocking distributors in Latin America as well that could potentially mitigate some of the choppiness or lumpiness that we see in revenue. And so a number of things that we can do. But yes, I think you're on a good track here thinking that as we grow these businesses in our agencies, as our agencies become a larger percentage of our revenue, particularly in EMEA, that will mitigate some of this. Last thing I would comment on is the progress we're making on the EU MDR. So we have a number of files right now before our notified body, and we do expect by year-end, as we talked about earlier in the year to have a number of MDR approvals. I'd say the majority or the main one that we are excited about is the approvals for our small stature scoliosis system, the 45-50 system. Right now, we're growing the EMEA Scoliosis business rapidly, but really feel like we're doing it with one arm tied behind our back. We don't have half of the product portfolio there. And so to see customers so readily adopting RESPONSE when they really only have access to one embodiment of RESPONSE, is really encouraging, particularly knowing that we're on the dawn of getting approval for our small stature system. Operator: Our next question comes from Matthew O'Brien with Piper Sandler. Unknown Analyst: This is Anna on for Matt. I guess I just wanted to ask a bit on the T&D franchise. You've got a bunch of good and new products there, but I guess we were maybe expecting a bit stronger growth. So how much room is left in the market? And maybe how much of that is low-hanging fruit versus penetrating the next layer of docs? David Bailey: So we're really pleased right now with the kind of growth we see, I think, 17% for T&D global. And you could assume that we also see some T&D disruption in LatAm. So I think the underlying growth rate of T&D, our largest business is -- we feel really good about. There's a lot of growth remaining opportunities on the 7D -- a lot of growth remaining on the T&D side. Outside of the United States, as we've talked about, there's a number of EU MDR approvals that are going to help us continue to grow outside of the U.S. And then as you've heard, 3P Small-Mini, 3P Hip, these are product lines that are just now coming out. And again, we see the exiting of some of our competitors, I suppose, of the incumbent providers of products in that market. So I think one of the things that we need to consider or we're considering on the T&D side is just the pace with which we want to grow that business given the volume of sets deployed. You see our set deployment number this year come down from nearly 25 last year to 15 this year. A big portion of those sets are on the T&D side. And so without a direct competitor there, we don't have anybody trying to steal our lunch money, so to speak, in that business. And we can flex our growth rate a little bit. And when we won't want to put as much capital out and driving hard to generate free cash here, we'll deploy fewer sets, and that can impact the growth rate negatively if we deploy fewer sets maybe by a few points or positively if we, in the future, decide to ramp up set deployment and grow the T&D business a little faster. So a lot of low-hanging fruit, I think, still available to us. It's a question more of how we want to either throttle up the growth or throttle back the growth based on the cash usage we want to use in the future. Unknown Analyst: Got it. That's super helpful. And then on 7D placements, there tends to be a strong implant pull-through effect in the next few years following placement. So I was just wondering how the lowered outlook on 7D, how that has any impact on the growth of the core spine business going forward? David Bailey: Yes. That's a great question. I think this is less about our outlook and more about timing. We -- obviously, the unit placements that we anticipated happening in Q3 certainly haven't gone away. you could assume that they're likely to close at some point in time in the future, whether that's a number of them in Q4 or a bunch in Q1 or vice versa, it's hard for us to determine. But I don't think that the delays in the placements of those types of units are something that is significant enough for us to impact the long-term growth rate of the implant business on the Scoliosis side. And so not particularly concerned about that. I think we have more in the top of our funnel on the 7D side than we've ever had. And so I think there's a bright future in terms of set deployments for placements of 7D units. It's just -- again, it's hard to determine which quarter it will happen and pretty unlikely to affect implant sales. Unknown Analyst: Okay. Great. That's great to hear. And then if I can just squeeze in one last one on the profitability improvements we saw in OpEx, what was cut and how durable because you guys did a good job this quarter. Fred Hite: Yes. We're very pleased with the results we saw in the third quarter. Nice improvement both this third quarter compared to the same time last year as well as improvement over the second quarter. As mentioned, the restructuring actions we started in the fourth quarter of last year, took some more smaller actions earlier this year and then some bigger actions here in the third quarter. A little bit of those savings showed up in the third quarter, but more of those savings will show up here in the fourth quarter as well as all of 2026. So despite the softness in revenue, gross margins are strong. Profits are right where we expected them to be even with higher revenue. And that all means improved free cash flow for the business, which is obviously a key goal as well. So definitely taking steps in the right direction here. Operator: Our next question comes from Mike Matson with Needham & Company. Unknown Analyst: This is Joseph on for Mike. So I guess maybe just to start off the EU MDR, the approvals or expected approvals you guys called out. Does that get you to half or above half of the Scoliosis portfolio available over there in Europe? And then just the reduced staffing that you guys called out, I was just wondering, maybe you did mention it where that's coming from. Is that like demand driven? Is it location dependent? Is this just kind of bloat, I guess, just kind of trimming the fat for staff that necessarily wasn't needed? David Bailey: Yes. So from an EU MDR approval standpoint, yes, on our Fusion platform, having the 45-50 would really give us a full complement on the Fusion side. Certainly, the newer products on the EOS, the early onset scoliosis products are not approved in Europe. That said, there are a number of hospitals and physicians in Europe that operate in locations where they can get those types of products through a critical access type of device or emergency use type of device. So we do expect some sales on the EOS side. But yes, we'd have a pretty -- we would have a full complement of product on the RESPONSE side once we get the RESPONSE 45-50 approved. I think on the staffing side, a lot of staffing as we announced last year, we shut down the majority of the facility in Israel, and so we're starting to see some savings there. We have historically used our Telos business, both internally for R&D efforts related to clinical and regulatory efforts related to EU MDR as well as have the Telos business working with a few outside companies. I think as we have gotten to a point where EU MDR or at least the technical files have been submitted on the EU MDR side, we can start to throttle back some of those expenses we had with Telos. And so there was head count associated with that. And I would just say, generally, we're just tightening things up here and recognizing that the business is going to be solidly profitable, and we're going to generate some cash here in the near future and making some changes around the edges that ultimately will help us drive profitability. Unknown Analyst: Okay. Great. Yes, that makes a lot of sense. And then I guess maybe just the, the next-gen or the new spinal fusion system. I guess, is that still expected this year? Or is that more of a 2026 launch? I don't know if that has to do anything with how much momentum you guys are getting with RESPONSE, if that's changing your thinking around the launch there. But yes, any color there would be helpful. David Bailey: Yes. Certainly, Nextgen will be a 2026 initiative, probably not a full-blown launch in 2026, but our hope is to start doing some cases probably in the back part of 2026. you're fairly accurate in saying that while from an R&D perspective, we're heads down on making sure we got the best system. It's not critically imperative that, that product gets launched right away when we see RESPONSE growth as high as it is. So we're certainly not throttling anything back, but it's good to see that when Nextgen comes, we think we'll have an absolutely elite system there, and it will be building on the strength of RESPONSE and an already growing product line in RESPONSE. And so probably 2026, to answer your question, back part of 2026, probably a big launch in 2027, 2028 but not factored into our revenue here this year or really much revenue in 2026. Operator: Our next question comes from Richard Newitter with Truist Securities. Ravi Misra: This is Ravi in for Rich. I have 2 questions. So just the first one on 3P, a number of kind of, I don't know, line extensions or kind of new innovation and how to characterize that new innovation in the space. But just around that, can you help us understand how that gets you into -- I believe you talked about a $450 million or LatAm in that opportunity? Like how does that allow you to penetrate that? And then presumably, should we be thinking of this longer-term as kind of a leverage driver, both SG&A as well as gross margins, given that you have kind of a unified platform of products for production and kind of sale? And I have a follow-up. David Bailey: Yes. So there are -- as we mentioned, the 3P, there is a number of different implant systems in the 3P that will be more targeted to anatomic areas or specific deformity correction opportunities. I would say that the -- I would say that we are opening a lot of new opportunities with 3P because of our existing plating system doesn't have all of the indications covered. And I would say is a little bit antiquated. And so I think 3P being kind of the flagship for our trauma and limb deformity product portfolio on a go-forward basis has a big impact on our capacity to grow the T&D business. I think that it probably gets us deeper, Ravi, into existing accounts. As you know, we're present in every major children's hospital. But I think what we struggle sometimes with is that when there's shelf space and shelf presence for things that are more commoditized and small plates and screws that have been there for a long time. It's going to take some more disruptive technology to get those systems off the shelf and get newer, more modern systems in. And so I do think that as we do the full launch of 3P over the next few years, you're going to see the opportunity for substantial displacement of more of the commoditized product and replace that with some pretty high-technology products that also have very specific plates and screws, shapes and sizes, instruments that ultimately allow surgeons to do the procedures easier. And so it's a big deal for us, and I do think it allows us to get deeper and deeper in the children's hospitals where we're already present. Fred Hite: Yes. And to the leverage question, that's a great call out. I mean it's called a platform for a reason. That's the design from the very beginning is to try to leverage this stuff and to really drive what we've been working on for the last really 3 to 5 years with all of our new product introductions, which is improved return on all of our assets that we're deploying. And by combining this into a platform, we can then leverage similar drivers, similar screws, a lot of the similar items across multiple platforms, which gives us tremendous improved return on investment on these new sets coming out. So more leverage there, leverage with the suppliers than really on the SG&A side. So you'll probably see it show up more in improved gross margin. But absolutely, improved gross margin and better return on investment from a cash perspective is absolutely multiple benefits from that type of a system launch. David Bailey: Yes. And just sorry to amplify Fred's point on the asset utilization metrics here. I mean we've talked to the investment community for a long time about how our legacy products probably where some of those products that are in the market still growing, but they've been out there for 10 and 15 years. And when we developed those products 15 -- nearly 20 years ago, asset utilization metrics were not top of our list when we were a tiny company 20 years ago or 18 years ago. And since the IPO and really over the last 5 years, I mean, new product development is not only focused on meeting major unmet clinical needs in pediatric healthcare, but also being able to do that where we're getting better asset utilization metrics, so either high ASP against -- or less inventory. And I can say with confidence after seeing what we're getting on 3P Hip and what we're getting both from an ASP standpoint as well as just the inventory required to do those elective procedures that the 3P -- first iteration of the 3P platform is doing exactly as we want. It's allowing surgeons to do procedures on kids they would really struggle otherwise and really high demand types of patients, but it's also doing it at a really nice price point for us, a really nice margin for us. And I'm pretty excited to see the return on assets meeting our needs, meaning a substantial improvement over some of our legacy products. Unknown Analyst: Great. And then just maybe one last one. No, no I mean, it's an important product driver, right? So -- and then just on the last -- just kind of a question on the Q&A kind of just struck me around how you're thinking about Latin American growth right now and kind of Brazil as you kind of work your way through the dynamics there. And when you're looking at kind of the long-term 12% outlook that you're putting out there for '26, '27 and beyond, how should we kind of think about -- if you're looking to restart growth, obviously, in that area of the world with a new business model potentially coming in, should we think about maybe trading some profitability for revenue there? Or any kind of comments that you can kind of give us as you work through your new strategy there, given the changes you've seen in the last couple of months would be very helpful into '26. Fred Hite: Yes. What I would say is I think you should expect more of the same in that revenue is important, but improving profitability and improving free cash flow is as important. And so it's not revenue at all cost. It's revenue that's profitable and it's revenue that generates free cash flow for us. And any change that we do, I think, in the business, you could assume is going to follow those same principles. So it's not necessarily going to maximize revenue growth, but more importantly, improve the profitability of sales down there as well as improve the -- dramatically improve the cash flow of that operation. Operator: I'm not showing any further questions at this time. I'd like to turn the call back over to Dave for any further remarks. David Bailey: Well, thank you for everybody for your good questions. Thank you for your time. And I'd just like to thank all of my associates and partners in pediatric health care and our investors for continuing to share in the mission to help 1 million kids a year. Have a great day, and we look forward to talking to you soon. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.
Operator: Good day, and welcome to the Alexandria Real Estate Equities' Third Quarter 2025 Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to Paula Schwartz from Investor Relations. Please go ahead. Paula Schwartz: Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And now I would like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel. Joel Marcus: Thank you, Paula, and welcome, everybody, to Alexandria's third quarter earnings call. With me today are Hallie Kuhn, Peter Moglia and Marc Binda. Let me start off as I usually do with a quote. My friend and mentor, Jim Collins, who wrote his well-known book, Built to Last, noted that, the secret to an enduring great company is its ability to manage continuity and change simultaneously, a discipline that must be consciously practiced, keeping clearly focused on which should never change and what should be open to change. And clearly, our development pipeline is front and center in that. Jim's visionary wisdom and advice is a great frame for Alexandria at this moment in time as the gold standard and leader of our niche. We invented and pioneered life science real estate, a whole new asset class and category 31 years ago during the early years of the biotechnology revolution. Our North Star was and remains our focus on innovation clusters and ecosystems unique to the life science industry different than almost every other property type. We're blessed with best assets, best tenants, best Megacampus and best team. Our relentless mission is driven by building the future of life-changing innovation and enabling the world's leading innovators to advance and better human health. The biotechnology revolution started almost 50 years ago. And in those 50 years, we've only been able to therapeutically address less than 10% of the more than 10,000 diseases known to human kind. No one lives in a family, community, which has not been struck by the wrath of disease and illness devastating in so many ways. We now find ourselves on the precipice of an entirely new age of discovery and innovation at the intersection of biology and technology 50 years later. Biology, it's important to remember, is inherently slow and complex. The life science industry, and particularly the innovation engine of the biotech sector, is mission-critical for a strong, safe, healthier country and planet as well as for America's global leadership, future economic growth and security. As opposed to most property types, office, industrial and resi, we operate in a highly regulated industry that takes extraordinary time and cost to bring life-changing medicines to patients. To get a life-saving product on the market, you only can sell that product for a handful of years in a regime of pricing oversight sometimes control different than other property types. I wonder what Microsoft would say if they were told you could only license window for a decade and then you lose the right to retain revenue or develop revenue from that innovation. If it matters fundamentally if the government is shut down or not operating effectively or efficiently. The four pillars of the life science industry are critical and a critical bedrock to what I've just said about this country's health. We must preserve, protect and grow the strong and basic translational research. It is a critical bedrock of new discoveries, and we must deal, hopefully quickly, with the current limitation on indirect overhead cost, which is timing demand out of the institutional sector. We must preserve, protect and grow the robust entrepreneurial ecosystem with access to affordable capital. Cost of capital today is high for discovery research engines, from the venture capital to the IPO to the M&A, we are in a continuing difficult environment, getting better, but difficult nonetheless. That's the second bedrock. The third one is providing a reliable and efficient and time-sensitive regulatory science framework and pathways. Once again, the FDA must compress timeframes and cost of R&D development. We met with Commissioner McGarry at the end of September, and he is super focused on this issue. Important to note that total development time frame for molecules in the Western world, U.S. and the EU ranges in the neighborhood of about 10 to 12 years versus China, which is about 1/3 of that time frame in their early stage of development in this industry. Approximate cost to bring products to market in the Western world is somewhere in the range of about $1.5 billion. And in China, it's about 50% to 90% below that. So we're faced with a very different circumstance today that the industry must face. And the fourth pillar is providing reasonable reimbursement for innovative medicines, which are costly and time consuming to bring to market. We at Alexandria successfully navigated the dot-com bust in circa 2000, the great financial crisis circa 2008, 2009, both when we were unrated, non-investment grade. And during the GFC, we had 30% of our gross assets in non-income producing land at Mission Bay and Cambridge. But this time, the navigation is once again different than before. We've seen the unprecedented bull market -- the unprecedented bold biotech market post GFC 2014 to '21 capped off by the rocket ship of COVID rate funding and demand, a very low interest rate environment went along with that, which incentivized really foolish speculation by financially motivated real estate companies and they're even more foolish capital partners. This brought an unwanted and unnecessary oversupply to many of the innovation submarkets. This has never happened in this niche before. But they're learning painful lessons that this real estate niche is unique and different from all others. This was followed by a biotech bear market, we're now in the fifth year, which is starting to turn the corner, and we're now witnessing the bottom and early signs of a recovery and strengthening as we predicted at NAREIT in June. The industry is now enduring a government shutdown and the impact to the FDA is pretty serious. This brings us to the third quarter, a critical juncture and time for this industry. On the one hand, the greatest prospect ever for innovation in our time, and coupled with the relentless change in government shutdown. Quite a juxtaposition. Huge congrats to our first-in-class team who are navigating this difficult environment with relentless grit and determination and unparalleled experience and expertise. While declines in FFO per share, occupancy and guidance are tough at any point in time, Alexandria remains strong, tough, resilient and continuing beacon of life for our life science industry. One of our North Stars has been our balance sheet, working out of the GFC when we are unrated to today. We're now one of the top 15 of all REITs. It's strong, flexible and we have the longest weighted average remaining debt of all S&P 500 REITs at 11.6 years, over $4 billion of liquidity, strong fixed coverage ratio 96% -- almost 97% of our fixed rate debt is at [ 3.7% ] blended interest rate and one area of laser focus for us will be to continue to reduce our current non-income-producing assets on the balance sheet from the current 20% as we diagram for you in the supplement and press release, to about 10% to 15%. As opposed to the great financial crisis where we had 30% non-income producing assets as a percentage of gross assets with an unrated balance sheet there was pent-up demand and no supply coming out of the GFC year. So we kept our land at Mission Bay and Cambridge for future development, which provided a decade of unprecedented growth. Alexandria has and will continue in this environment to accelerate its transition from substantial development to a build-to-suit on Megacampus only development model. We intend to continue to decreased construction spend, preserve capital and not create further supply. And then finally, let me make a couple of comments before I turn it over to Marc for an in-depth review of the quarter and kind of factors impacting 2026. Let me make a couple of comments about leasing. The lifeblood of Alexandria's sector, a leading platform with the largest number of clients and strongest tenant base is our leasing. And our tenant base, of course, 53% of our leases are to investment grade or big cap, tenants with an average almost 9.5 years weighted average lease term for our top 20 tenants, and 18 of the top 20 pharmas are our tenants, a best example of our brand being the most trusted in the industry. And congrats to our team for the historic lease executed in this third quarter for 16 years with a credit -- existing credit tenant for almost 500,000 square feet at our Campus Point Megacampus in San Diego. We're proud to say that our ARR from Megacampus is 77% and is continuing to approach 80%. We continue to benefit from stellar operating margins and a very disciplined G&A run rate. 3Q was a solid quarter of leasing. However, institutional demand is still stuck due to the NIH issues and particularly the reimbursement of indirect costs. Coupled with we need to see more green shoots from early-stage, venture-backed companies as well as the larger cadre of public biotech companies which have yet to recover in a meaningful way. We're starting to see green shoots on that, but that will be a critical litmus test going forward. And finally, before I turn it over to Marc for comments, let me just say we intend to continue to meet the market for our tenants and continue to successfully lease and dominate our space. And with that, Marc? Marc Binda: Thanks, Joel. This is Marc Binda, Chief Financial Officer. Good afternoon. I plan to cover the performance for the third quarter as well as some key emerging trends expected to impact 2026. Our team continues to navigate a challenging environment given macro industry and policy factors beyond our control. Please refer to our earnings release for our EPS results. FFO per share diluted as adjusted was $2.22 for 3Q '25 and included the following three key impacts compared with the prior quarter. First, occupancy was effectively down 1.1% for the quarter after considering the benefit from the exclusion of assets with vacancy, which were sold or designated for held-for-sale during the quarter, and was driven by a challenging life science supply and demand dynamic. Second, there was a $0.03 reduction in rental income associated with one tenant in our Seattle market to adjust rental income to cash basis. Importantly, that tenant remains in occupancy and is current on rent pending future critical milestones in the first half of 2026. And third, other income was down $8.7 million or about $0.05 compared to the prior quarter. Current quarter other income of $16 million remains consistent with the prior 8 quarter average. And as we discussed in our prior call, 2Q '25 did have some lumpy fees in there. Leasing volume for the quarter remained solid at 1.2 million square feet, in line with the 5 quarter average. This includes the previously announced 467,000 square foot build-to-suit lease with a multinational pharma tenant that was executed in July. We continue to benefit from our scale, high-quality tenant roster and brand loyalty with 82% of our leasing activity in the quarter coming from our existing deep well of approximately 700 tenant relationships. Rental rate growth for lease renewals and re-leasing the space for the quarter was solid at 15.2% and 6.1% on a cash basis, which is at the high end of our guidance range for the year. We've reduced our guidance for 2025 rental rate increases on renewals and re-leasing the space by 2%, primarily due to one short-term renewal in Canada that was executed in October as well as some higher free rent. Lease terms on leasing continue to be long at 14.6 years for the quarter, which is well above our historical average, and tenant improvement leasing costs on renewals and re-leasing the space for the quarter are relatively consistent with the prior year and down from the first half of the year. Occupancy at the end of the quarter was 90.6%, which was down 20 basis points from the prior quarter. As of September 30, certain assets with vacancy were designated for held-for-sale and were removed from our operating occupancy metric, which benefited occupancy at September 30 by 90 basis points. As a result, the decline in occupancy for our operating properties on an apples-to-apples basis declined by 110 basis points during the quarter. While occupancy declined due to oversupply in certain of our submarkets, it's important to highlight that our Megacampus platform, which represents 77% of our annual rental revenue as of 3Q '25 outperformed overall market occupancy in our three largest markets by 18%. Our outlook for year-end occupancy was reduced by 90 basis points to a range of 90% to 91.6%. Our outlook assumes up to a 1% benefit from assets with vacancy, which could potentially be sold or designated as held-for-sale by December 31, which implies an 80 basis point decline in occupancy by the end of 2025, based upon the midpoint of our guidance. Our team continues to execute with 617,458 square feet of leasing completed to date for spaces that are vacant today and expected to deliver upon the completion of construction in May of next year on average. Looking ahead to next year, we have 1.2 million square feet of lease expirations through the end of 2026, and which are in great assets in AAA locations but are expected to go vacant, and we expect downtime on those assets. Same-property NOI was down 6% and 3.1% on a cash basis for the quarter. The decline in same-property was primarily driven by lower occupancy. In addition, we provided an alternative same-property presentation, which recasts the first and second quarter results based upon the third quarter same-property pool to provide a consistent quarterly trend view given several assets that were removed from the third quarter same-property pool as they were either sold or designated as held-for-sale. It's important to note that this alternative presentation shows higher same-property performance in the first half of 2025, which means there will be a tougher benchmark in the first half of 2026. We reduced our outlook for same-property performance for 2025 by 1%, primarily due to slower-than-anticipated leasing caused by a slower realization of demand. Despite this change, we continue to benefit from a very high-quality tenant base with 53% of our ARR coming from investment-grade or publicly-traded large cap tenants, long remaining average lease terms of 7.5 years, average rent steps approaching 3% on 97% of our leases, solid rental rate increases of renewed and re-leasing space during the quarter, and our adjusted EBITDA margins remained strong at 71% for the most recent quarter, consistent with our 5-year average. On G&A, we continue to make great progress towards our goal of annual savings for 2025 of approximately $49 million compared to 2024 through a number of prudent and strategic cost savings initiatives. Our trailing 12 months G&A cost as a percentage of NOI was 5.7%, which represents approximately half the average of other S&P 500 REITs. We expect that around half of the 2025 savings will continue into 2026, given the temporary nature of some of the 2025 savings. With projects under construction and expected to generate significant NOI over the next few years, and other earlier-stage projects undergoing important entitlement design and site work necessary to be ready for future ground-up development, we are required to capitalize a portion of our gross interest cost. We have and will continue to curtail our large development pipeline coming off a decade bull run for the industry fueled by the rocket ship demand of COVID. Given the lack of clarity on near-term demand as well as significant availability in some of our submarkets, we are carefully evaluating on a project-by-project basis the $4.2 billion of land subject to capitalization during the first 9 months of the year. With preconstruction milestones in April 2026, on average, we continue to evaluate whether to progress preconstruction or construction efforts beyond the current milestones and in various cases will likely pause or curtail activity. If we decide to pause on a project as it reaches the next milestone, capitalization of interest, payroll and other required costs would cease on that project. While these ultimate decisions have not yet been made, we would like our funding program for next year to include a significant component of land dispositions which help us achieve one of our strategic objectives over the near to intermediate term to significantly reduce the size of our land bank. Sales of land could result in a significant reduction in capitalized interest and potential impairment charges. We expect steady to slightly lower capitalized interest in 4Q '25 and lower capitalized interest beginning in the first quarter of 2026. Despite positive recent activity for the biotech XBI Index, private and public biotech companies continue to remain challenged given the 5-year bear market for the sector. Given these and other factors unique to our venture investments, we did revise our guidance down to a range of $100 million to $120 million. It's important to point out that for the first 9 months of 2025, we realized $95 million of gains from our venture investments, which were included in FFO per share as adjusted or about $32 million per quarter. Based upon the midpoint of our revised guidance for realized investment gains of $110 million, this implies $15 million for the fourth quarter, or a $17 million decline over the average quarterly run rate for the last 3 quarters. We continue to stand out as our corporate credit ratings rank in the top 15% of all publicly traded U.S. REITs. We have the longest average remaining debt maturity among all S&P 500 REITs at 11.6 years and tremendous liquidity of $4.2 billion. We updated our guidance for year-end leverage to 5.5 to 6.0x for 4Q '25 net debt to annualized adjusted EBITDA. The increase from our prior target of 5.2x was primarily due to two factors: first, a reduction in our disposition guidance to a midpoint of $1.5 billion related to $450 million of potential dispositions expected to be delayed into 2026; and second, a projected reduction in annualized EBITDA in the fourth quarter from lower same-property net operating income and lower realized investment gains. We've completed $508 million of dispositions to date, which leaves $1 billion to complete in the fourth quarter, all of which are subject to non-fundable deposits signed NOIs or purchase and sale negotiations. In connection with our disposition program, we recognized impairments of real estate of $323.9 million during the quarter, with approximately 2/3 of that coming from an investment in our Long Island City redevelopment property. Three items to highlight here. First, we acquired the site in 2018. That submarket suffered a substantial setback when Amazon abandoned its plan for new HQ in that location in 2019 and it never recovered. Second, despite the lower rental rate price point and our dominance in that submarket, it has been challenging to get a critical mass of life science tenants to go to this location. And ultimately, we don't view it as a life science destination that can scale. And third, this location has become more of an industrial flex and cinema submarket rather than life science. Ultimately, at the end of September, we decided future capital needs and the sale proceeds related to this project would be better recycled into our Megacampuses where we have greater conviction long term. Looking forward, we have a number of assets under consideration for sale either by the end of this year or sometime in 2026 that have estimated values below our carrying values ranging from $0 to $685 million. Although these potential impairments have not been triggered and final decisions to proceed have not been made, we updated our guidance range for 2025 to reflect these potential additional impairments in the fourth quarter. We anticipate an end to the large-scale non-core asset program by the end of 2026 or early 2027. We also expect dispositions to provide the vast majority of our capital needs for next year. Turning to capital allocation, two points here. First, we are continuing to evaluate some of our development and redevelopment projects expected to stabilize in 2027 and 2028 for opportunities to pivot. Second, we estimate our 2026 construction spending to be similar to slightly higher than the midpoint of construction spending for 2025 of $1.75 billion, which includes the recently announced build-to-suit in San Diego and higher CapEx and repositioning costs necessary to lease vacant space related to our operating properties. But the goal is to continue to reduce non-income-producing assets and other development pipeline -- and our development pipeline over time. Next, on dividend policy. The Board's approach has been to share cash flows from operating activities with investors as well as to retain a meaningful amount for reinvestment which has allowed us to retain $475 million at the midpoint of our guidance range for 2025. In addition, the cumulative growth in dividends and FFO has been highly correlated since 2013. Given the factors that we described in our press release that are expected to impact 2026 earnings and cash flows, we anticipate that our Board of Directors will carefully evaluate future dividend levels accordingly. We provided updated guidance for FFO per share diluted as adjusted for 2025, which was reduced by $0.25, or about 2.7% to a midpoint of $9.01 per share. This change was primarily due to lower investment gains and lower same-property performance driven by lower occupancy. Looking ahead to 2026, as is our long-standing practice, we will provide detailed guidance at our Investor Day on December 3. And in advance of that, we've shared five important trends that will impact earnings for 2026, including core operations and occupancy, capitalized interest, realized gains on non-real estate investments, G&A and our disposition program. Please refer to Page 6 of our supplemental package for more information. Given the various factors impacting 2026 earnings, it's important to recognize the tremendous intrinsic value of our highly differentiated Megacampus assets included in consensus NAV, which is significantly above our current trading price today with that consensus NAV coming in at around $117 per share. To be clear, we continue to be the dominant leader for life science real estate with the best assets in the best locations and the best tenants. Our focus in irreplaceable world-class Megacampuses will continue to set us apart and give us an opportunity to capture premium economics for the long term as the demand and supply picture improves over time. Now I'll turn it back to Joel. Joel Marcus: Operator, please start questions. Operator: [Operator Instructions] Today's first question comes from Farrell Granath with BofA. Farrell Granath: I first just want to touch on, I know last quarter, you had some commentary about potential benefits to occupancy, about $600,000 or 1.7%. I was curious on the update and your expectations or line of sight that you're seeing now? Joel Marcus: Yes. That's a really good question. Marc, do you want to comment on those assets? Marc Binda: Sure. Yes. So we did provide an update, it's in Page 2 of the press release, that number is about 617,000 feet as of September 30. It's primarily at properties located in Greater Boston, San Francisco, San Diego and Seattle. And it's about $46 million of -- potential annual rental revenue of $46 million. And we expect it to deliver on average. There's a lot of spaces in there, as you can imagine, but on average, around May 1 of next year. Farrell Granath: Okay. And also, I guess, a broader question. In previous calls, we've heard that there was early positivity around leading indicators in the biotech market. And you made a few comments around that. But it generally still feels like you're very much seeing the impacts of supply and demand. And I'm curious, what would turn your perspective or optimism a little bit higher, either if that's greater IPOs or different capital market movements? Joel Marcus: Yes. That's also a really important question. I think the two -- well, there are three missing links, as I mentioned in my opening comments to demand today and Hallie, can give you chapter and verse on the green shoots that we're seeing, which are substantial from the capital market side to M&A, et cetera. But one is the FDA, the government shutdown has to stop and the FDA has to open. Number two, venture, earlier-stage venture-backed companies have to start making commitments for space as opposed to kind of holding, waiting for cost of capital issues with the Fed and broadly in the industry. And I think, three, the public biotech sector, which has been, to a large extent, the mainstay of this industry as far as space and demand has to be reignited. And even though the XBI is up substantially, that has not yet translated into action. So I think those are the key things we're looking for. And institutional demand, if the NIH can get its act together on the issues we talked about, one, making sure they're fully funded and disbursing funds and that there's an unlocking of the current bar to the 15% indirect cost limitation. Operator: Thank you. And our next question today comes from Seth Bergey with Citi. Nicholas Joseph: It's Nick here with Seth. Just as we think about the sources of capital, you mentioned equity-like capital. Could you elaborate on that and kind of either the pricing or what exactly you mean by that? Joel Marcus: Yes. I mean we've used that for the last, I don't know, 15-or-so years. That really is just capital that comes into the company through one form or another, it could be savings on dividend like we've done. It could be other sources, joint sales of joint ventures. But primarily, I think Marc stated it pretty clearly, and let me just repeat for everybody, the vast majority of capital for next year's plan, which will unveil on December 3 at Investor Day will be asset sales. And we gave you a pie chart in the press release regarding, at least, this year's proportion of those, so a big chunk from land, a very big chunk from other than fully stabilized assets and then a chunk from stabilized assets. So I don't think that's going to vary much from this year. Nicholas Joseph: That's helpful. And then in your opening comments, you said the bear market is starting to turn the corner. Are you seen that in the transaction market as well for -- on the stabilized asset side? Is there a change in buyer demand given the underlying fundamentals and what you're seeing? Joel Marcus: Yes, Peter? Peter M. Moglia: Yes. I would say that there is strong demand for our assets, especially ones that investors consider to be opportunistic, that's really the sweet spot right now. But yes, we have no shortage of interest in everything that we're bringing to the table, that's life science and things that are alternative uses where we're finding a lot of interest from residential developer. Operator: And our next question today comes from Rich Anderson at Cantor Fitzgerald. Richard Anderson: So can you talk a little bit about -- a little bit more detail on the development sort of process going forward? I think it's a matter of -- maybe it comes down in order of magnitude over the coming years just in dollars in terms of development spend, but also type of development. Joel, did I hear you right that the focus going forward will be more on build-to-suits than anything else, not that you haven't been focused on that. But I mean, I wonder what the development picture is going to look like kind of post-2026, when you top off what's left and then you consider the $4.2 billion that's sort of kind of still early stage in terms of the process. Just if you could sort of give us a line of sight into what this will all look like eventually? Joel Marcus: Yes. And I mean you can look at, we've been at this now for a multiyear period. It obviously is a lot of pick and shovel work. This year is a good example. And again, the chart or the pie chart I referred to just a moment ago, this year's land sales as estimated, both what we've accomplished and what we have left to do, will be an important part of reducing that land bank. And if you look at Page 46 of the press release and supp, you can see the pie chart. Marc has tried to enhance this in as clear a fashion as possible. And you can look just your eyes kind of go to 2 particular places right away. One is the 15% bucket critical milestones coming up, non-Megacampus projects. We clearly want to bring -- to try to, through entitlement, design and sometimes design, but entitlement in particular, trying to create as much value for alternative uses. We mentioned resi and we've been very successful there. So this is a bucket that will clearly not be there over the coming years. The one at its immediate left, 26%, where we have both -- well, stable near-term projects that are not yet fully stabilized, of course, '27 and beyond, we have a smaller amount of leasing. Those are projects that we are going to look at very carefully and make some pretty big determinations as soon as we can get to points in time where we think we've tried to maximize the current value. And my guess is a bunch of those projects will be sold, which will further reduce the land bank. And we'll see on the Megacampus projects, what happens to those. We're clearly unable to do all Megacampuses. And so it's certainly possible we bring one or more. There's a chart of, I think, or pictures of 4 big Megacampuses, one in Seattle, one in near South San Francisco, in San Bruno, another one in San Carlos and then the final one at Campus Point. It's pretty clear that, for example, the San Bruno is one that we're thinking about very carefully. We're working through a very complex project with both entitlements and existing tenants. And we'll see what happens there. But that's the kind of project that we could see potentially exiting at some point as well. So we're trying to be as both as aggressive as we can time-wise, cost-wise, but also very thoughtful. Richard Anderson: Okay. And so do you think that there will be like at Investor Day some sort of run rate development exposure that Alexandria will sort of commit to at the other side of all this? Is that sort of the messaging that you expect to provide, if not right now, but... Joel Marcus: When you say development run rate specifically as to what time? Richard Anderson: Well, as a percentage of assets or however you want to look at. Joel Marcus: Well, I think I actually said it on the call in my opening, we're at 20% today. We were at 30% break GFC, but for different reasons, we decided to hold those, Mission Bay and Cambridge, and those turned out to be the lifeblood of our decade bull run with the biotech industry. I think it's different this time because there's a lot of stupid space that was built by others. And so we don't want to build into that kind of a market. So 20% should come down to 10% to 15% over the coming years, and we're certainly looking at trying to accelerate that as fast as possible because the less we have on balance sheet and the less dollars going into that or the less construction dollars and funding dollars we have to require. So the 2 go hand-in-hand. But 10% to 15% is the number. Richard Anderson: Yes. Okay, you did say that, my apologies. And then lastly for me, on the dividend, you're running at a $5.28 annual dividend and talking about the Board taking a look at it next year. What's your comfort level from a payout ratio sort of when you kind of think about resetting the dividend? I'm just curious where -- what the sort of the policy is -- the dividend policy... Joel Marcus: Yes. Well, the Board will look at that in the fourth quarter and declare a fourth quarter dividend. I think what we want to do is try to be able to frame 2026, I think, very, very clearly, and we'll try to do that to the Street as quickly as we can. But I think that frame then impacts how the Board will think about the metrics of dividend. But remember, that's our cheapest form of capital, so we are focused on that. But Marc, you could give any broad parameters you want. Marc Binda: Well, I would -- the only thing I would add to that is we do have room in our taxable income. So the Board will obviously make the final decision, but there's room potentially up to 40 -- 30%, 40%, but they'll be looking at a variety of factors, including the amount of retained cash flows or capital needs for next year, AFFO coverage as well as a few other stats there. Operator: And our next question today comes from Anthony Paolone with JPMorgan. Anthony Paolone: Just on that last point on the dividend, Marc, do you all have taxable net? Like do you need to pay a dividend? Or do you have the ability to just keep cash? Marc Binda: No, we do need to pay a dividend. That's right. I mean... Joel Marcus: And we intend to. Anthony Paolone: Okay. Just wondering, because also it seems like even after a day like today with the stock down the way it is, and you had brought up kind of where some of the Street numbers are for NAV, like does this bring back the prospect of using capital just for your stock here? Or are the development needs just going to be great enough that you got to keep going down that path? Marc Binda: Yes. Look, I think we believe the price is attractive to buy back, but we're certainly focused on making sure that we have enough capital to finish out the construction commitments that we have, and that's kind of our first priority. Anthony Paolone: Okay. And then just another question. Just in the -- you called out the 1.2 million square feet that are sort of the key leases or move-outs we should be thinking about. But the remaining like 1.3 million square feet expiring next year, are those likely to stay and so you kind of have kept them in a separate bucket? Or should we assume there's still some normal retention to move out in that grouping as well? Marc Binda: Yes. Look, those -- what's left over is -- are things in the normal course of leasing. So what we've called out are items that we are -- we know are going to go vacant. The rest of it are things that are just too early to tell. Anthony Paolone: Okay. If I could just sneak one more in. Just, Marc, you mentioned the $15 million in venture gains for the fourth quarter. I know you'll give details on other income in December, but should we think of $15 million as the new $32 million or any guidepost there at this point? Marc Binda: Look, the $15 million as the number for the fourth quarter is really a reflection of where we think the market is and the unique factors specific to our portfolio of investments. We'll be able to give a clear picture on what we think next year looks like at our Investor Day come December. Operator: And our next question comes from Wes Golladay of Baird. Wesley Golladay: I was just looking at the future pipeline, the $3 billion and the $1.2 billion, how much of the potential residential land plays will come out of that bucket? And then when you also look at the potential for $685 million of impairments, would that mostly fall in that bucket as well? Marc Binda: Yes. It's Marc. I can definitely take the second question on the $685 million. Just to be clear, the $685 million is -- relates to a variety of assets that are under consideration. So there's a variety of ways that, that could go. It just depends on what happens with the buyer, if we can get a price that we like, et cetera, some of these assets we could end up holding if we decide to pivot. But the $685 million, I would say the bigger chunk there has to do with land-type assets. Wesley Golladay: Okay. And then for the -- go ahead. sorry. Joel Marcus: No, please. Wesley Golladay: No, go ahead, go ahead. Yes. Joel Marcus: Well, I was going to say, if you just look at the 4 Megacampuses that are pictured in the press release and supp, each one of those are intended to have a component and some substantial component of resi. So you can make that judgment based on that commentary. Wesley Golladay: Okay. Got that. And then for the leases that are going to commence in, I guess, the first half of next year, was there any -- it looks like there might have been a small delay on that. Was that anything like permitting-wise or just the tenant looking to move in a little bit later? Marc Binda: Yes. No, I don't know that there was necessarily a delay. It's just a -- that bucket continues to evolve, right, as some of it gets delivered and then we're obviously adding new stuff there, right? We're leasing space that then extends that. So that will be an evolution just because that bucket changes from quarter-to-quarter. Operator: And our next question comes from Michael Carroll at RBC Capital Markets. Michael Carroll: Can you provide some color on the type of tenant activity that the company is tracking right now? I mean it sounds like in the prepared remarks that you're seeing activity being kind of flat despite the XBI uptick. But are there certain tenants looking for different types of spaces? I mean, how many tenants are looking for like the Class A space versus the Class B space? I mean is there different price points that tenants are looking at just given them trying to extend their cash burn rates given the current uncertainty? Joel Marcus: Well, yes, that's almost an impossible question to answer because if you look at the press release and supp, we put a pie chart of our -- the tenant sectors in there, and there is certainly demand from almost all of those. There's no government demand. And at the moment, there's muted institutional demand, although we're working on one big deal as we speak. But aside from that, I think what we said is, and it varies submarket by submarket, each submarket has its own particular dynamics. Some are pretty well in balance with supply and demand. Others are imbalanced. And so that is a little bit different. But I think across the board, there is demand. I think what the commentary really is, is that given the recovery in the XBI, we're a little surprised that demand hasn't followed as much. It's not as obvious than maybe in past times, but the reason for that is clear, cost of capital and federal interest rates are being stubbornly high. The government has shut down. The FDA is closed by and large, and there's a lot of log jams out there that are preventing a -- and the IPO market is shut by and large. There's a little bit of activity, but it really isn't an opening. I think those are the factors. But there's demand from a variety of sectors. But again, it's very case specific. And it also depends on, when you say Class A, you tend to have revenue-producing companies looking for Class A space or companies that are extremely well capitalized. Others are looking for either moved out space or second -- true second-generation space after a 5-, 7-, 10-year lease, so it varies all over the marketplace. Michael Carroll: All right. That's helpful. And then just following up on Anthony's question related to the 1.3 million square feet of 2026 lease expirations that are still outstanding that you guys need to address. Is that mostly lab tenants that are looking at that space? Or I guess, what's the mix between lab tenants or maybe covered land plays that those assets were holding? I mean, can you provide any details on what type of tenants are included in that bucket? Marc Binda: Yes. Yes. I mean we try to give some framework for kind of the key drivers there. I think it was on Page 23, footnote 4. If you go kind of line by line through the call out of those properties, most of those are going to be lab related, with the exception of the first one that we called out, which is about in 137,000 in Greater Stanford, that one is probably more likely to be targeted to an advanced technology use, but the other ones that we called out there in San Diego and then also in Cambridge are all lab. Michael Carroll: Okay. Is this the 1.3 million remaining square feet? Or is that footnote talking about the 1.1 million square feet that is expected to move out? Marc Binda: That's related to the -- sorry, I was referring to the 1.2 million square feet of lease expirations that are known vacates. Michael Carroll: And then the 1.3 million that is remaining that is yet to be addressed. Is that mostly lab? Marc Binda: It's a mix. I would say, mostly lab, but it's a mix. Peter M. Moglia: Yes, Marc, it's Peter. I can confirm it's mostly lab. There is also a little bit more tech space in there, just like in the 1.2 million, but it's mostly lab. Operator: And our next question today comes from John Kim with BMO Capital Markets. John Kim: I was wondering if you could provide a little bit more color on the quantum of capitalized interest that may be lowered in 2026. I know you mentioned a lot of this will be driven by land sales, but I'm trying to match that with the $1.75 billion of expected construction spend you'll have next year, which would suggest that the majority of capitalized interest will continue? Marc Binda: Yes, I can take that. So 2 things driving next year in terms of construction numbers, one is the development costs and redevelopment costs to finish what's in the active pipeline, right? We still have a decent amount that's going to deliver next year that is 80% leased. And then we've also got higher, I would say, CapEx or repositioning type costs next year than we had in 2025, and that has a lot to do with the fact that there are some known vacates and it's going to cost -- we're going to have higher maintenance costs just given how much vacancy we have to lease in this market. So those are really the 2 biggest drivers. I think in terms of your fundamental question of how much cap interest rolls off, I would just refer you to the commentary that Joel had earlier about really thinking through that pie chart on Page 46 of the supplemental, the way we're thinking about the various buckets. The Megacampuses, obviously, we'd love to do. They're very valuable, but we can't do them all. You've got the non-Megacampus future land assets, which would be ripe if there are opportunities to sell. And then the 2027 and beyond projects, which we may look at opportunities to pivot there in some fashion. John Kim: Okay. And then going back to the known move-outs for next year, the 1.2 million square feet, can you provide some commentary on why those tenants are not renewing? Whether they're going to new product or they're shrinking footprint or there was some kind of event within the company? Marc Binda: Yes, sure. I can rattle through those. So maybe I'll just go through the 4 that we mentioned there. The first basket was really, I would say, a non-lab tenant. They were a software company that was in there when we acquired those assets in Greater Stanford. That's 138,000 feet. That was a known vacate. The original business plan there was to redevelop it when we bought that a number of years ago. But things are obviously different, and we may choose to do something different there in terms of targeting more advanced type technology users. So that... Joel Marcus: Yes. And there's a lot of tech activity on that location. Actually, it's a very, very unique campus, mini campus. Marc Binda: Yes. And then in San Diego, I would just point to the one asset in Torrey Pines, the 118,000, that was a project that had been occupied by a subsidiary of a big pharma. That big pharma ended up consolidating on our campus at Campus Point and they ended up coming out of that space, but they did expand with us. And I think that project delivers next year. So that was kind of lead behind space. The 84,000 or 83,000 square foot space in Sorrento Mesa, a similar story. That was a subsidiary of a big pharma that also expanded with us on our SD Tech campus, and that was the lead behind space, very good quality spaces in both of those instances, but they're bigger spaces, so it may take some time if we end up either targeting a larger user or smaller-type users since they were big kind of single tenant spaces. And then the last bucket in Cambridge, some of that was -- it's just a variety of different spaces. Those spaces, as we mentioned there were older product that we really hadn't -- at least most of it hadn't really touched since we bought that campus in 2016. So it's a variety of factors. Joel Marcus: Yes. And then you should note that of the 3 noted vacancies on Page 23, footnote 4, we have an LOI signed for 83,000 square feet of that known vacate, and we have an LOI signed of about 40% of the 118,000 feet at the moment. So stay tuned. Operator: And our next question today comes from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess, Joel, bigger picture, you're now in a macro, you sort of called the bottom, but things are uncertain. Obviously, you don't have control over that. It seems like the sales process is also -- it really depends on buyer timing, so perhaps less control and you're trying to solve for leverage and capital needs. So I'm wondering like as you get through this in the next year or 2, to be in a better position to maybe take advantage of distress, why not consider just outright equity to fix the balance sheet, fix your capital needs, rather than having to rely on the asset sale process, which I know is important, but I'm just trying to... Joel Marcus: Well, yes, that's a really good question. But I think, number one, the balance sheet is actually in great shape. Leverage ticked up a little bit, but I think we're pretty comfortable given the sales we have in line. I think what we really want to do is to bring our balance sheet down to a much healthier non-income-producing asset weighting, if you will, now at 20%, down to 10% to 15%, and I think we'll make pretty huge strides on that through the end of next year and early '27. We've got a couple of big sales where we are close to pretty big entitlements and that will help us on valuations. But we feel like we can manage the balance sheet and provide the capital we need through the assets that we would like to shed. And also, we have been selling a lot of non-core assets, some stabilized and some non-stabilized and that's part of our goal to move our Megacampus ARR up to about the 80% level. So I think we feel pretty good about that without the need to go through a common equity raise. Vikram Malhotra: Okay. And then just on this -- the Investor Day, like, there's a bit of a departure, you're giving a lot of tea leaves on '26. I'm just wondering sort of why not so-called rip the Band-Aid just give a high-level number of where you think next year is going to shake out. Just -- it seems like a 2-step process, which I don't know... Joel Marcus: Yes, we get that. Unfortunately -- well, let me just say this, we wouldn't have preferred to plan third quarter earnings so close in time to Investor Day. But I think Marc and his team may very well give a range for FFO kind of a framework for that here shortly to the Street. So keep your eye out for that. We're likely to probably try to do that, so that we don't keep people in a mystery box for 3 or 4 weeks, which we never intended to do. But frankly, the industry is -- as I said, it's a regulated industry. And it is in a tough time because the government shutdown essentially puts almost everything you can't file for, you can't submit to the FDA for new INDs. There are some things coming out the back end, but the wheels are substantially stopped. And then on the other hand, the President has chosen, I think, better than the former administration, who is trying to get much broader price controls. This administration is really negotiating with each big pharma in a sense to get his version of MFN. So far, it's been limited to Medicaid, which I think has been great, but going through 20 big pharmas is tough. So there's a lot of -- kind of a lot of slow-moving wheels out there that we really need to see kind of the wheel put back on the cart so that the industry moves forward. And as I said, the industry has tremendous prospects. Any of us who have seen or in their disease know that there's a lot of wood to chop. We know of a whole number of people who've just been diagnosed with Parkinson's. We still don't have any addressable therapy. We got to get moving on these. So we will try to give the Street guidance here pretty shortly. So there's not a 3-, 4-, 5-week delay in trying to at least frame it. Marc did a -- I thought tried to do a good job giving factors, but we realized with cap interest rolling the way it's going to roll as we reduce the development pipeline, that leaves an unknown numbers out there that we'll try to fill in, broadly speaking. Vikram Malhotra: Great. We look forward to the update and definitely ARE on the other side. Joel Marcus: Yes. And thank you for the thought on that. Operator: And our next question today comes from Dylan Burzinski with Green Street. Dylan Burzinski: I guess just -- maybe going back to some of your comments, Joel, it seems like the only thing that's necessarily changed this quarter versus last quarter is really related to the government shutdown, right? Because if you think about the supply pipeline that sort of continues to dwindle, albeit it's still at high levels. There's obviously been a huge challenging capital markets environment for a lot of tenants. So I guess you mentioned that the government shutdown is having a huge impact in terms of kind of demand, it seems like. So is it the idea that we should think that once the government comes back, that demand start to pick up off of this level or... Joel Marcus: I don't think that's necessarily the issue, but that's a prerequisite for the industry kind of getting on its feet because, again, it's a regulated industry, both from submissions, clinical trials and then approvals. And if the government doesn't open, you can't get any of those really effectively done. Some of -- I think there was one approval to AstraZeneca that kind of came out recently. But I mean the wheels are stopped. That isn't going to -- that isn't directly tied to demand, but it's hugely tied to the health of the industry, which then in turn is tied to demand. I think if you go back to the second quarter, I think people still -- I remember, second quarter call, and then at Nareit, it wasn't clear when the industry would kind of hit this bottom, but it kind of has been bottoming but at a time when the government is shut. I think what we really need to see is lower cost of capital and a clear and condensed regulatory path. I mean I think if you think about a couple of things, what's needed for this industry, there are 3 things I could tell you. One is we must reduce the drug development costs. And that's really in the hands of the FDA and our meeting with Makary confirmed he's hyper-focused on that. We've got to increase the probability of success of drug development. I think AI and other tools will help that. But the FDA, again, is front and center there. And then we've got to lower the regulatory barriers to help streamline a lot of these programs. And I think that's what's needed to bring health back to this industry in a really robust fashion. We need venture to kind of open their pocket book and cost of capital is a big issue there, and we need the IPO market to open and the secondary market to become even more fulsome, not just doing offerings on data per se. If those things happen, then you've got a very healthy industry. Dylan Burzinski: I guess as a sort of follow-up to that, I mean -- and maybe it was asked, sorry if I missed it, I joined late. But I mean I get the sense that reading some -- or listening to the call today, reading some of the tea leaves and the 2026 consideration settlement that demand may have worsened since the second quarter, but it felt like looking back at my note and stuff and your commentary on that, that things are set to improve, and we're hearing out of peers of yours that the demand -- the overall touring pipeline is improving. So just trying to see if maybe I'm misreading into some of the comments made today as well as the 2026 considerations. Joel Marcus: Well, I don't -- again, I don't think you can look at -- this isn't like office where you can look at certain data and be fairly certain that office is going to rebound or data for mini storage or data for resi or something. This industry is far more complex. It's highly regulated, both at the front end and the back end. So I know everybody struggles. They want indicators and factors that point to demand and quarter-to-quarter, it doesn't really work that way. And I think we've had 2 reasonable quarters of leasing, but that doesn't reflect the health -- the underlying health of the industry, which I've tried to articulate, is still in need of a number of pieces to be put in place for that to happen. And then I think you've got a fulsome rebound. So that's the best I can articulate it. Hallie Kuhn: Maybe -- this is Hallie here. Maybe just to add to Joel's comments, when you think about tour activity where we're certainly seeing really great companies looking for new space, thinking about expansion. But as we've mentioned before, decisions are taking longer. We're very conservative in how they think about when to pull the trigger. And given all of the factors Joel mentioned, there's still a lot of uncertainty. And so we do feel confident that there are some fantastic companies, really high quality in this market that are going to need space. The question is, when are they going to get comfort around making those decisions. And to date, there's just still a lot up in the air, especially on the regulatory front. Joel Marcus: Yes... Dylan Burzinski: Yes. Really appreciate that. And maybe just one more, if I can. I know you guys kind of alluded to equity-type capital, and Joel, you mentioned partial interest sales dividends, stuff like that. But I know most of your guys is focused on the dispositions of sort of the non-core assets. I guess is there any desire to sell a partial interest in any of the Megacampuses given it still seems like there'd be a strong bid or depth of demand for that type of product today? Joel Marcus: Well, I don't think that is our game plan because I think over time, our goal is actually to own more of the Megacampus rather than less. But I think there are a variety of campuses. Some are at the absolute upper end, some are in the medium to high end. So it's a matter of selection there and some we already have partners on. But I don't think that's necessarily the key game plan. Our key game plan is to rid the balance sheet of a whole lot of non-income-producing property and reduce our exposure to non-core assets to as minimal as we can. I think that's the core strategy here. Operator: And our next question today comes from Jim Kammert with Evercore. James Kammert: You've given a lot of great color regarding the '26 expirations and potential move-outs. Is it -- given the environment, is it like too early to even start thinking about 2027 type expirations? And how those tenants are looking in terms of their burn rates and their intentions? I'm just curious, as you go into the Investor Day, et cetera, perhaps as much clarity on that would be helpful. Joel Marcus: Yes. Well, we -- it's a good question, Jim, and we're pretty laser focused, not only on next year's roles, but the year after's roles. And in fact, we just had one I think renewal extension we just did, which was a company that I think had a role in 2031. We just extended for a decade. So we're all over every single tenant that we want to keep in our markets about what we can do to preserve them, protect our core and to create future growth, so that clearly is also front and center for us, yes. James Kammert: Okay, great. And quickly second one, there was some press discussion that in Mission Bay, you had been potentially looking to reallocate, I think, is the term they use, some of the lab space there, your 4 assets in Mission Bay to office use, particularly targeting AI? I mean, one, is that a valid report? And if there is validity to it, how would that sort of work? What would you do with your existing tenants? Joel Marcus: Yes. I'll have Peter comment, but we did go in for Prop M allocation for, I think, most of our buildings there. We have them in a partnership, but we're the managing partner, and we got 100% approval on that. And the reason is because, one, we want to be able to offer office to the extent that it makes sense for our existing tenants as they need it. UCSF is a big tenant on campus and sometimes their needs flex between lab and office. Clearly, OpenAI has made that the center of the universe for their needs and campuses buildings around a campus, and that's a very valuable use of space. So it makes good sense to be able to have that flexibility. But Peter, do you want to comment? Peter M. Moglia: Yes. So we already had a couple of properties in Mission Bay, the Illinois properties already had 100% allocation for Prop M. When we developed the Owens properties, 1450, 1500, 1700 Owens and then 455 Mission Bay Boulevard, they only had a partial allocation for about 1/3 of the building area. That would be for pure office users only. Office that houses the researchers is not included in that. We don't have to have Prop M for that. But as Joel alluded to, we're seeing more and more users from our tenant base, both traditional tenant base and otherwise in that area that would like to have all office type of space. And it just makes a lot of sense to have that flexibility. In addition to just the pure office users, though, our lab users are more and more looking for additional office area for computational workflows as they integrate AI and other technologies into their research. So all of the -- we've been thinking about this for a while. We finally had an ability to act on it, and so we did. But I wouldn't read into anything as far as like are we not going to be doing lab there. Of course, that's the primary use. But to the extent that our lab tenants need more office area or there's other alternative tech in the area that is complementary to the innovation economy there, we want to be able to serve it and the counselors agreed with us and allocated the Prop M. Operator: And our final question today comes from Jamie Feldman at Wells Fargo. James Feldman: Joel, I was hoping you can just look into your crystal ball a little bit. You guys are clearly thinking about the balance sheet, making some changes to get capital in line, shrinking construction pipeline. You're probably the league leader in this space. How should we think about what's to come from the competitive set or just the industry overall in terms of finding a bottom and working through other pain in this industry? And I'm thinking specifically about your comment about meeting the market, I assume you meant on rents. Like you think there's a lot more downside on rents across the sectors, across the markets as this all plays out? Just how should we think about what's to come across the industry? Joel Marcus: Yes. So maybe I'll make a couple of comments and ask Peter to come in, in depth. Yes, we don't feel like there is any real competitor out there, probably the next biggest company, which is maybe, I don't know, 1/4 of our size or something like that, 1/3 of our size is, Blackstone, and they're private, obviously, and they have a very different mindset about how they run their business in the sense of they don't -- I mean we view clusters in ecosystems in a different way than, say, a purely financial investor would view it, and that's a pretty important thing. And to a large extent, that's why we ended up with this big lease that we signed in San Diego that was not generated by an RFP. So another company would not have had a chance to really kind of come and bid on that. So we view ourselves very differently. There's nobody who is a public pure play. The one other company that's out there has got a big presence in South San Francisco and heavily weighted medical office. So I don't think that really counts as a comparable, and then there's a whole lot of private guys out there. But I think the point of what I said was, I think that 0 -- very low interest rates coupled with almost a decade-long bull market and this COVID run up. Remember, our demand went up 4x due to COVID. I mean we'd never see anything like that. And you try to meet the demand of your clients, but real estate takes time, and that's unfortunate that you can't meet it instantly. And so I think many, many of those folks that decided to hop into in the circa '20, '21, '22 era built foolishly. There's a lot of building standing empty. Peter and others call them zombie buildings. I just think they're just of a different ilk than buildings in the heart of clusters and wrapped into ecosystems just different. But if we're one-on-one with any other developer and we have space that fits the clients' needs, we're going to win. We almost never lose. And the reason is because we have the best team. We have the best space generally. You can rely on us. We have the highest level of trust and we do what we say and we say what we do. And we've got street cred in the industry that nobody else has anything like that. Peter? Peter M. Moglia: Yes. Look, economics are very important, especially in an uncertain time when you don't know when the next dollar or where the next dollar is coming from, but you need space, you need to renew what have you. There's other choices out there, as Joel alluded to, some dumb space decisions made by others. And what that has caused is a deterioration in fundamentals. We've talked a lot about the TI allowances that are in the market, the free rent that's in the market. By and large, the market has held the rents fairly high. I mean I think we're still above pre-COVID rents in the big markets and especially in the tertiary markets where there's been less competition. But even our tenants, who are used to our great service, they know what's out there, they want to stay with us and they increasingly come to us and say, "Guys, we want to renew. We want to stay with you. We want to make a long-term commitment, but the reality of the market are this." And we just want to assure people that we understand that, and we're going to meet the market. Now are we going to have to go to the bottom in order to make the play? No. Like what Joel said as far as why people come to us, our platform, our service, our Megacampuses, I mean they still value that. But at the same time, they need a deal. And we're out there understanding where we need to be, and we are going to get a premium, but it's not going to be where it was in the old -- in the previous cycle. So we just want to assure everybody that the tenants that are the best tenants in the market that we want to retain, we're going to retain. And if that means more TIs than traditionally we had to get or a roll down in rent, then we'll do it. We're going to get through this time. It's going to take a while, but a lot of these zombie buildings will go and become different uses. The market will get tight, and we'll be in a better position the next time around. But we're going to continue to prioritize occupancy. And that's why Joel mentioned meeting the market. James Feldman: Super helpful. So as you think about -- I mean, your Slide 19, you still have a positive mark-to-market. I mean is it -- could you sense when markets are bottoming or leases are bottoming? Or it's just too early to tell? Can you maintain positive spread? Joel Marcus: I think it varies by submarket, Jamie, because some are very oversupplied and others are within some reasonable balance. But Peter, you can kind of... Peter M. Moglia: Yes. It's a guess, right? But as I see that the majority of supply left to be delivered, which I think right now that we consider competitive is somewhere in the neighborhood of 3.3 million in our 3 big submarkets. Out of that 3.3 million, the majority of it is already pre-leased. So I'd say roughly about maybe 30% of that 3.3 million is going to be delivered vacant and increased availability. But then after that, we don't see anything in -- and that's inclusive of things delivering in '26 by the way. We don't see anything coming in '27. So the availability numbers are going to peak. And maybe it's a little bit into '26 when they peak. And so you're only going to go up from there. So I don't see fundamentals deteriorating further, given that there's just -- we're going to start recovering soon but you never know. Hallie Kuhn: Just to add here, Hallie here, and to summarize that, given all the work myself and the team on the ground are seeing, as we continue to out lease competitors, which we are doing across all of our markets, we do see the early stages and acceleration of conversion of what were targeted as life science spaces going to other uses. And so back to your original question on competition, the more that we continue to out lease and dominate, the more we'll see that balance of supply coming into picture. Peter M. Moglia: Yes. In other words, people are going to be capitulating and pivoting. James Feldman: Yes, that makes sense. And if I could just throw in one more. I mean it seems like a big strategic moment for the company. I mean we've seen some of your office peers talk about asset-light models. Is that something -- I think your answer to one of the prior questions is no, you just want to continue to own your best Megacampuses, but have you thought about that at all? I mean you have such a good operating platform, is there a way to monetize the platform without tying up so much capital? Joel Marcus: Peter, you can speculate on that. Peter M. Moglia: Yes. I mean it's an interesting concept, Jamie, that we actually have discussed a number of times. At this point in time, though, it really doesn't make sense to have so many different players. It's going to consolidate down to where it was before, meaning experienced developers that have their own platforms and a lot of these projects that have deteriorated the fundamentals are just going to -- they're going to be something else and those operators are going to go away. So I don't know if it's really an opportunity to where you're managing other people's projects because those projects aren't going to be lab. That would be my take. Joel Marcus: Yes. And I think, remember, Jamie, that I kind of emphasized a number of times, this is just very different than almost any other property type due to the intense regulation of all aspects of this industry -- the underlying industry. And demand is just different as well. It isn't just about what's the cheapest space or what's just simply available. It's -- I've got mission-critical both assets and processes in that space, and I don't want somebody to screw it up and lose me a whole lot of money. So that matters. Whereas if you're just going in for Wells Fargo office, whether you're in this building or that building, generally isn't going to make a huge difference. But for lab, it actually makes a giant difference. So it's just different. Operator: And this concludes our question-and-answer session. I'd like to turn the conference back over to Joel Marcus for closing remarks. Joel Marcus: Just simply say thank you, everybody, be safe, be well. Thank you. Operator: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Liliana Juárez González: Good morning, and welcome to our third quarter 2025 earnings call. Joining us today are our President and CEO, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein; and our CFO, Jaime Pous. They will be discussing the company's results followed by a Q&A session. This call is for investors and analysts only. Please note that this call may include forward-looking statements under applicable securities laws. These are subject to several factors that could cause the company's results to differ materially, as described in our filings with the U.S. SEC and Mexico CMBB. These statements speak only as of the date they are made, and Volaris undertakes no obligation to update or modify them. All figures are in U.S. dollars compared to the third quarter of 2024, unless otherwise noted. And with that, I'll turn the call over to Enrique. Enrique Javier Beltranena Mejicano: Good morning, everyone. This quarter once again demonstrated that Volaris' agility and discipline continue to set us apart in a complex environment, driving tangible results. We acted nimbly and with focus, fine-tuning our network and capturing sequential improvement in demand across our core markets. Our results this quarter confirm that our commercial and operational strategies are delivering according to our flight plan. In our last earnings call, we noted that demand momentum was starting to build, and this quarter validated that trend. The recovery we anticipated for the second half is unfolding day by day as we projected. We observed stable domestic demand in a rational supply environment. Additionally, travel sentiment improved in the cross-border market, notwithstanding the geopolitical disruptions observed throughout the year. We executed where it mattered most, taking deliberate actions to strengthen profitability. The third quarter's performance in terms of unit revenue was fully in line with our expectations. The year-over-year variation in TRASM has narrowed each month, confirming that demand recovery continues to strengthen across our network. The sequential improvement is the proof statement that our strategy is delivering consistent momentum, and we believe that improved booking curves for the fourth quarter should position Volaris for a stronger 2026. In the domestic market, supply rationalization across all players continues to create a healthier balance between capacity and demand. Our load factor in the Mexican market reached 89.8%, consistent with last year's levels and reflecting a stable demand under a more rational supply environment, which supports healthier yields going forward. In the international market, we are seeing a steady recovery in cross-border demand with traffic improving month-over-month and holiday bookings already trending ahead of last year. Our 77% load factor reflects our tactical focus on optimizing yields to maximize TRASM. We remain focused on what is within our control, maintaining cost efficiency, adapting quickly, and executing with discipline. As a result, TRASM, CASM, ex-fuel, and EBITDAR margin all came slightly better than our guidance, reaffirming our ability to deliver consistent execution. Building confidence from this solid performance, we're maintaining our full-year 2025 capacity growth outlook of approximately 7% with prudent growth, unparalleled cost control, and improving demand trends towards year-end, we are reiterating an EBITDAR margin in the range of 32% to 33% for 2025. Looking ahead to 2026, we are embedding flexibility into our fleet plan and targeting ASM growth in the range of 6% to 8%, while retaining the ability to adjust a few percentage points in response to demand trends or OEM developments. This level of growth would bring us back to year-end 2023 capacity levels, underscoring that our growth remains prudent and aligned with market conditions. Our capacity decisions remain firmly anchored on customer demand and sustained profitability. I want to make it very clear to our investors. Volaris will continue to control growth with discipline fully aligned with market demand. Taking all necessary actions to efficiently reintegrate aircraft returning from engine inspections to ensure we meet this commitment. Having said that, as demand continues to recover, we are also seeing healthy supply dynamics, particularly in Mexico's domestic market. Volaris continues advancing from a position of strength with leadership in core domestic markets and a world-leading cost structure that will further improve as we reduce fleet ownership costs and gradually narrow the gap between our productive and nonproductive fleet. Sustaining differentiation requires constant evolution. We're not standing still. We're constantly adapting our ultra-low-cost carrier model to Mexico's unique dynamics, lowering barriers to traveling, enhancing service and maintaining our unwavering commitments to low costs and low fares. Leveraging Volaris' scale as Mexico's largest airline, we've built meaningful customer loyalty and driven strong repeat flying across our network. A strong example of this evolution is Guadalajara. A decade ago, this market handled a modest passenger base with limited international connectivity. Today, thanks to Volaris' expansion and market development, Volaris Guadalajara boosts nearly 100 daily departures, connecting travelers to 26 domestic and 22 international destinations. Over our 19 years of history, Volaris has proudly transported more than 90 million passengers to and from this market. Similar to what we've seen in Guadalajara, this trend is emerging across other markets that are rapidly evolving and opening new opportunities for growth, a typical emerging market phenomenon that underscores our role as a catalyst for national mobility and economic development. As our network matures, so has our customer base. We began as an airline built predominantly around VFR traffic, and we have since evolved into a more diversified customer mix. Today, roughly 40% of our passengers remain VFR, while the remainder represent a broader range of travel motivations from business to leisure to other niche segments. This evolution positions us to further strengthen our network through better frequencies, attractive schedules, and varied destinations, reinforcing Volaris as the airline of choice for both our VFR base and all passenger segments traveling from our core markets. Building on this momentum, the next phase of our model focuses on capitalizing on repeat travel and driving incremental TRASM growth across all revenue streams. As Holger will discuss, we continue launching new ancillary products and advancing network and commercial initiatives to better serve a broader customer base, all while maintaining the low-cost DNA that defines Volaris. This evolution builds on our core bus switching strategy, which remains foundational to our growth. As a result, we remain committed to serving this segment by consistently offering low fares. Leveraging our ultra-low-cost carrier model, Volaris is strategically positioned to continue improving TRASM by expanding our product suite and optimizing distribution channels. We're enhancing the customer experience across multiple fronts, refining our network strategy, streamlining boarding processes and offering enhanced seat selection options that continue to strengthen revenue diversification while preserving the cost efficiency that underpins our long-term profitability. Sequential PRASM improvement and a resilient cost structure highlight our disciplined execution. We're closing 2025 and entering into 2026 stronger, more efficient and better positioned to continue delivering value to our customers, capturing opportunities and driving sustained profitability. Volaris has proven its resilience time and again and will continue to do so. I'll now turn the call over to Holger to continue to discuss our third quarter commercial and operational performance as well as the evolution of our broader product offering in more detail. Thank you very much. Holger Blankenstein: Thank you, Enrique, and good morning, everyone. Operationally, our team delivered another quarter of strong disciplined execution. Volaris PRASM performance reflects our ability to anticipate market shifts and respond decisively, managing capacity to protect yield and maximize profitability. Volaris maintained network stability and operational flexibility throughout the quarter, effectively managing delays in aircraft deliveries and ongoing engine constraints. As a result, ASM growth reached 4.6%, coming in slightly below our guidance of approximately 6%. Overall, total third quarter load factor stood at 84.4%. The domestic load factor reached 89.8%, supported by steady demand through the summer season in a balanced supply environment. August performed particularly well, benefiting from an extended public school vacation period. Looking forward, current booking curves for the holiday season look solid. International load factor was at 77% as we actively prioritize yields overloads to optimize profitability. For the fourth quarter, as we head into the holiday high season, international traffic is tracking stronger with historical seasonality, setting the stage for improved profitability as we close the year. And as Enrique mentioned, VFR cross-border demand has been recovering sequentially. We believe we have reached an inflection point in the U.S.-Mexico transborder market with booking trends showing sustained improvement compared to last year. While we remain disciplined in our capacity deployment, this strengthening demand backdrop provides greater visibility heading into 2026. Moreover, we continue to drive robust ancillary adoption. Our average ancillary revenue per passenger for the third quarter reached $56, marking the eighth consecutive quarter above the $50 threshold. Ancillaries now consistently account for over half of total revenue, remaining a standout driver of resilience and profitability across all market conditions. This performance highlights the structural strength of our ULCC model in our markets and the sustainability of our revenue mix. The sequential TRASM improvement we anticipated last quarter materialized fully in line with our expectations. with third quarter TRASM reaching $0.0865, just ahead of our guidance and down 7.7% year-over-year, improving from the 17% and 12% declines recorded in the first and second quarters, respectively. These results confirm that the actions we took earlier in the year are delivering tangible progress. We have good momentum heading into the year-end with forward bookings showing sequential improvement and providing visibility into sustained strength and healthy demand through 2026. As these results demonstrate, Volaris has built a business model and network that allow us to flexibly and decisively capture demand where it is strongest across our markets. As our customer base becomes increasingly diversified, we continue to refine our ULCC model, lowering barriers to travel, encouraging repeat flying and broadening our customer mix while continuing to offer low base fare in our core traffic. A key pillar of this evolution is our ancillary and affinity ecosystem, which continues to grow in both scale and contribution. Our affinity portfolio, including v.club membership, v.pass monthly subscription, the annual pass and the IVex co-branded credit card together represent an increasingly relevant share of our business. Today, v.club represents a growing share of total revenues, while 1/3 of all sales through Volaris direct channels are made using our co-branded credit card. The index card is the largest co-branded credit card for any industry in Mexico. In July, we seized the growing affinity for the Volaris brand by launching our in-house loyalty program, Altitude. We are encouraged by a strong early response with membership enrollments tracking above our expectations. We see significant potential for this franchise, particularly as we integrate our co-branded credit card early next year into Altitude, allowing all card transactions to earn Altitude points. The ultimate goal is to position Volaris as the airline of choice, not only for our core VFR base, but for all customer segments traveling from our core cities across our network in Mexico's domestic market. We already serve a broad mix of travelers from small business to leisure to multipurpose passengers, alongside our loyal VFR base. Guadalajara, which Enrique mentioned, has become a strong market for the multi-reason customers, such as those who travel for leisure on some occasions and for business on others. The growing mix of repeat travelers on the flights we operate represents a structural tailwind to our average fare, ancillary sales and ultimately, margin. This evolution of demand is also unlocking new profitable opportunities for our network, capacity allocation exemplified by the addition of our Mexico City to New York route and increased route breadth from Guadalajara. We are enhancing our product and service offering to better capture the full value of these segments. Simultaneously, as the AOG situation with Pratt & Whitney stabilizes and the political and economic environment improves, we have been able to refocus our efforts on strengthening our network and ensuring industry-leading breadth and depth across our core cities, particularly in Tijuana and Guadalajara. We are also optimizing itineraries and schedules to better serve each segment, for instance, shifting certain red eye flights to more convenient time slots for business and leisure travelers. We expect the financial benefits from these adjustments to begin materializing in our TRASM results next year. In addition to our recent launched Altitude loyalty program and code shares, we continue to introduce new products and partnerships in a cost-efficient, low-complexity way that strengthens our revenue diversification. We are proud to announce recent initiatives that include expanding our presence in GDS through Sabre's new distribution capability or NDC standard. Volaris will expand its reach to Sabre's broad network of corporate and leisure travel agencies across North America and beyond. We are also ramping up marketing for Premium Plus, our blocked middle seat product for the first 2 roles. We are implementing these new revenue initiatives with a focus on the latest technology and minimizing costs and complexity. With this, we are broadening our customer base while remaining true to our ULCC DNA. Overall, we continue to prioritize low cost, operational efficiency and superior customer service. To this end, one recent innovation has been the introduction of AI agents that can immediately assist customers across multiple languages and channels, boosting our speed and efficacy and volume of interaction. Today, 79% of Volaris customer service is handled through digital channels, up from zero before the launch of our AI agent. This allows us to manage 3x more call volume while cutting service cost per interaction by nearly 70%, a clear example of how technology supports both our customer focus and cost leadership. At the same time, our NPS remains strong in the 40s, reflecting how our customers continue to recognize the total value we deliver across our flights, products and services. Looking into next year, we will continue to manage capacity with discipline, adding growth selectively across our network and leveraging our flexibility on lease extensions, redeliveries and network development to support our 6% to 8% capacity growth outlook. At the same time, the foundation we've built this year positions Volaris to continue strengthening into 2026. Supply rationalization in the domestic market is expected to support a healthier yield environment while cross-border demand continues to recover. Our initiatives to expand the customer base and grow ancillary revenues should drive higher revenue per passenger, positioning Volaris for continued profitable growth into 2026. Now I will turn the call over to Jaime to cover our third quarter 2025 financial results and full year 2025 guidance. Jaime Esteban Pous Fernandez: Thank you, Holger. Our third quarter financial results reflect our adjustments to prioritize profitability as cross-border traffic conditions gradually improved throughout the summer. Despite external headwinds, we succeeded in controlling what we can control, and we delivered on each line of guidance. Let me first turn to our P&L for the third quarter compared with the same period last year. Total operating revenues were $784 million, a 4% decrease. On the cost side, CASM was $0.079, virtually flat versus the third quarter of 2024 with an average economic fuel cost down 1% to $2.61 per gallon. CASM ex-fuel was $0.0548, aligned with our guidance and up just 2%. This result reinforces the success of our variable cost model and our effective cost management as we achieve our CASM ex-fuel guidance despite flying fewer-than-expected ASMs and encountering a peso that appreciated more than planned versus the second quarter. While a stronger peso is a benefit to Volaris' overall results, it adversely impacts our cost lines. As a reminder, fleet-related expenses such as depreciation and amortization, depreciation of right-of-use assets and maintenance continue to reflect the full fleet included grounded aircraft. In addition, as we approach a higher number of lease returns in 2026, the P&L line for aircraft and engine variable lease expenses captures the effect of the delivery accruals, which means this line item includes related maintenance for aircraft returns scheduled in the future. Current market conditions have created opportunities to acquire aircraft coming up for redelivery on attractive terms, helping reduce future redelivery expenses and extend time on the assets. Leveraging these opportunities, during the quarter, we acquired two of our formerly leased Cos, acting selectively and only where it made strategic sense. During the quarter, this also represented a benefit to the aircraft and engine variable lease expense line as it involved the cancellation of redelivery accrual related to these aircraft. Moreover, on the other operating income line, we booked sale and leaseback gains of $6.6 million related to the Airbus deliveries of three new aircraft. This line also includes our aircraft grounding compensation from Pratt & Whitney. EBITDA reached $264 million with a margin of 33.6%, aligned with the guidance provided for the quarter. EBIT was $68 million, resulting in a margin of 8.6%. The sequential tighter spread between our EBIT and EBITDA margins reflects our efforts to mitigate the impact on our P&L from engine-related AOGs. Finally, we generated a net profit of $6 million, translated into an earnings per ADS of $0.05. Moving briefly to our P&L for the first nine months of 2025. Total operating revenues were $2.2 billion. EBITDAR totaled $659 million with an EBITDA margin of 30.6%. EBIT was $35 million, representing an EBIT margin of 1.6% and net loss was $108 million. Turning now to cash flow and balance sheet data. The cash flow generated by operating activities in the third quarter was $205 million. The cash outflows used in investing and financing activities were $69 million and $130 million, respectively. Third quarter CapEx, excluding fleet predelivery payments, totaled $106 million and year-to-date stood at $195 million in line with the $250 million we guided for the full year. Volaris ended the quarter with a total liquidity position of $794 million, representing 27% of the last 12 months total operating revenues, sustaining our disciplined and conservative approach to cash management. At quarter end, our net debt-to-EBITDA ratio stood at 3.1x. And going forward, our focus remains to deleverage. Importantly, we have no planned near-term need for additional debt and have already financed all predelivery payments for aircraft scheduled for delivery through mid-2028. Our strong flexible balance sheet remains a key pillar of business. Looking ahead, we will continue to explore financing alternatives beyond traditional sale and leasebacks for a means to structurally reduce fleet ownership costs and further strengthen our capital structure, potentially switching operating for finance leases where appropriate. Looking back, the first nine months of 2025 tested our resilience amid volatility in demand. Yet we remain disciplined and focused on our core priorities. Cost control, profitability and conservative cash management, actions that preserve the strength and value of our business. I want to highlight that we originally had an ASM growth plan for around 15% during the year as guided in October 2024. We have since adjusted our plan to nearly half that level due to external circumstances while keeping CASM ex-fuel in line with our original plan. This demonstrates not only how much control we have over our cost base, but also the strength and adaptability of our ULCC model. With approximately 70% of our costs being variable or semi-fixed, we maintain a uniquely flexible structure that allow us to efficiently navigate operational headwinds and protect profitability. Now turning to engine availability and our fleet plan. As of the end of the quarter, our fleet consisted of 152 aircraft with an average age of 6.6 years and 2/3 being new models. On average, during the quarter, we had 36 engine-related aircraft groundings. Regarding our future fleet plan, we are in a favorable position of having an order book of 122 aircraft, 84% of which are A321neos with competitive economics from the group order. As mentioned, capacity growth is anchor on customer demand and sustained profitability. We have multiple levers to control growth and optimize the deployment. First, we have the option to realign our delivery schedule as we did last year through our rescheduling agreement with Airbus, supporting disciplined single-digit annual growth over the next few years. Importantly, this plan already factors in the aircraft returning to operation at the engine shop visits. Second, we have the flexibility to either extend leases on aircraft due for redelivery or when conditions and terms are favorable, acquire aircraft approaching lease expiration, enabling us to make the decision that best balance cost efficiency and strategic value. Finally, more than half of our upcoming deliveries are intended for fleet replacement. Together, our order book and staggered lease returns represent a meaningful competitive advantage, allowing us to plan growth with precision, sustain structural cost leadership and preserve the agility to adapt to market conditions. We will continue to manage our fleet plan effectively, maintaining flexibility to optimize value and support a strong cash position. Our fleet strategy continues to evolve. To this end, last month, we phased out the last A319 from operations, an aircraft type that at the time of the IPO comprised over half of our fleet. Over the past 10 years, we have continuously adapted transition and became more efficient, and we are committed to continue doing so in the decade ahead. Turning now to guidance. As Enrique and Holger explained, we continue to see demand gradually improve as we head into the holiday season. For the fourth quarter of 2025, we expect ASM growth of approximately 8% year-over-year, TRASM of around $0.093, CASM ex-fuel of approximately $0.0575 with the sequential increase reflecting the timing of heavy maintenance events and a seasonally higher proportion of international operations. And finally, an EBITDA margin of around 36%. This outlook assumes an average foreign exchange rate of around MXN 18.6 per U.S. dollar and an average U.S. Gulf Coast jet fuel price of $2.2 per gallon in the quarter. These quarterly figures are aligned with our full year 2025 outlook, which we reaffirm as follows: ASM growth of 7% year-over-year, EBITDA margin in the range of 32% to 33% and CapEx net of predelivery payments of approximately $250 million, unchanged from our prior outlook. The macros in our quarterly guidance led us to a full year average foreign exchange rate of around MXN 19.3 per dollar and average U.S. Gulf Coast jet fuel price of approximately $2.15 per gallon. Now I will turn the call over to Enrique for closing remarks. Enrique Javier Beltranena Mejicano: Thank you, Jaime. I'd like to conclude our remarks with several reminders. First and foremost, Volaris continues to prove the strength and adaptability of our ultra-low-cost carrier model. We have shown once again that we can respond to market dynamics with discipline. Throughout 2025, we have adjusted our capacity growth from around 15% to nearly half that level while keeping our CASM ex-fuel fully in line with our original plan. Currently, travel sentiment, especially in the cross-border market is improving, a clear validation that our strategy is working. These trends position Volaris well for 2026 and beyond. Regardless of external conditions, our cost leadership, flexibility and expanding product suite are enabling us to address customer needs, capture profitable growth and continue creating value. At the same time, Volaris remains focused on offering low-cost, high-value service that makes air travel more accessible to our broader set of customers, including our core bus switching VFR segment. We are also optimizing itineraries, strengthening distribution and expanding our commercial offerings to drive higher TRAS among a diversified passenger set. We believe our markets are evolving. How European low-cost air travel developed 2 decades ago with strong growth potential, expanding passenger segmentation and a clear preference for affordable high-value travel. Volaris is advancing from a position of strength, leading in our core markets with one of the most efficient cost structures in the world, one that will further improve as we reduce fleet ownership costs and close the gap between productive and nonproductive aircraft. Finally, let me be clear, we are not changing our DNA. Our proven low-cost, low complexity model continues to evolve with enhanced ancillary and loyalty offerings that attract a broader customer base, improve fare mix and strengthen long-term profitability. In short, we are disciplined. We're evolving, and we are well positioned to continue delivering sustainable value for our shareholders. Operator: [Operator Instructions] Our first question is going to come from the line of Duane Pfennigwerth with Evercore ISI Institutional Equities. Duane Pfennigwerth: You mentioned a couple of interesting things in the prepared remarks. One, international is tracking stronger than normal seasonality. And then two, that you believe we're at an inflection point in U.S. transborder. Can you just elaborate on both of those? Holger Blankenstein: Duane, this is Holger. So yes, let me talk a little bit more in detail about the U.S.-Mexico market. We're talking about an inflection point because since mid-August, our sales in the U.S.-Mexico transborder market are above last year's level. And that clearly demonstrates our ability to fine-tune our capacity, manage demand and capture the market momentum that we're seeing. If we look into the fourth quarter, the U.S.-Mexico transborder booking trends are also showing a sustained improvement compared to last year. And that's why we are quite optimistic about the fourth quarter traffic evolution, both in the domestic, but also in the transborder market. Duane Pfennigwerth: Okay. And then maybe you probably covered this and maybe I missed it, but can you tell us the number of lease returns that you expect next year, how many aircraft will go back? How does that compare to this year? And I don't know if there's any good way to kind of net that expense relative to the reimbursement that you're getting from Pratt? Like how do we think about the net of lease return expense and reimbursement in '25 and '26? Jaime Esteban Pous Fernandez: Duane, this is Jaime. In terms of redeliveries of plan, next year, we're budgeting 17 redeliveries versus 7 that happened this year. So, it's a high number of deliveries. I would like you to focus there are many pieces related to aircraft deliveries, engine returns and redeliveries. So rather than focusing on just focus on our full year growth it is important that our priority, as Enrique mentioned, is to narrow the gap between productive and nonproductive fleet while ensuring that we deploy capacity to a market that is consistent with customer demand, all while maintaining the flexibility to adjust capacity up or down as well. Operator: [Operator Instructions] Our next question will be from the line of Thomas Fitzgerald with TD Cowen. Thomas Fitzgerald: A lot of good stuff in the deck. I was wondering if you could dig into Slide 8 a little bit more and how we should think about the potential RASM uplift over the coming years as those initiatives ramp Holger Blankenstein: So, Thomas Fitzgerald, this is Holger again. So, we've quantified the potential for each of the products that we saw on Slide 8, and we expect a positive year-over-year impact on TRASM of these products in 2026. We expect that our commercial initiatives that you saw will begin contributing financially in 2026, and we will communicate the specific targets on all of those products as the adoption of those products scale. These initiatives that you saw there are going to be incorporated in our TRASM guidance for the next year for 2026 when we provide guidance in the next earnings call. Thomas Fitzgerald: And then I'm just kind of curious, as your customer mix diversifies and you take on more SME traffic, is there any investment or maybe it's immaterial, but just that you have to do for your cabin crew just on the soft product and maybe people who especially as you take in volume from some of your interline partners? Holger Blankenstein: So Tom, it is very important to mention that we are implementing the broadening of our customer base and target customers while maintaining a low cost, low complexity model. So you should not see any meaningful impact in our costs and in our complexity of the onboard product, for example, as we implement these products. We are broadening our target customer base, for example, through implementing different distribution channels like the GE, for example. We're going to diversify our revenue base, but we will maintain our low-cost, low complexity model. Operator: Our next question will come from the line of Michael Linenberg with Deutsche Bank. Shannon Doherty: This is Shannon Doherty on for Mike. Thanks for taking my question. Enrique, you alluded to some growth trends or the growth trends, I should say, that you saw out of Guadalajara emerging in other markets. Can you provide us with some more examples? Enrique Javier Beltranena Mejicano: Sure. I think when you look at our bus fare customer base, I mean, that's a segment that grows by far much more rapidly and much more different than any other business traffic that we can see, for example, in the U.S., okay? You can also see how our capacity to penetrate the market has improved our number of passengers that are using the airlines, okay? In the last years, we have developed more than 10 million passengers that have become first-time flyers, and that's really important. So that makes a dramatic difference versus a mature market. Shannon Doherty: And maybe more generally, what do you guys think is driving like the improved travel sentiment in the cross-border market? Like and how is demand in other Central American markets to the U.S.? Holger Blankenstein: This is Holger. So we actually did a survey of our customers, both in the U.S. and Mexico, and they target two main factors for not increasing travel more quickly in the first half of the year. We did it entering the summer season. The first was economic uncertainty, which is about 50% of the responses. And that economic uncertainty is improving significantly as macro conditions in both countries are strengthening in the second half of the year. So that's the reason for not traveling has evaporated and is improving significantly. The second concern was related to migration policies. People were worried about traveling and leaving the U.S. or going to the U.S. And in the public discourse, we are noting that, that has evolved from a broad concern about all immigrants to a more focused conversation around individual and legal violations of immigration policies in the U.S. and that really has reduced the perceived apprehensions among our customer base. So we're seeing more willingness to travel in the transborder market in the second half of the year and specifically in the fourth quarter, where we're seeing solid booking curves in the transborder market. And that brings us to the guided TRASM, which is basically at the levels of last year 2024. Just to maybe close this point off, travel in the transporter market was delayed in our opinion at the beginning of the year and is now catching up as people want to visit their friends and family in Mexico or in the U.S. Operator: Our next question comes from the line of Rogério Araújo with Bank of America. Rogério Araújo: Congratulations on the results. I have a couple here on fleet. First, you said 17, one seven aircraft returned. Is that correct? And how many you expect to be delivered by '26? Also on that matter, what is the number of expected grounded aircraft throughout 2026? I understand you have 36 now. And lastly, how to think the net CapEx for '26 compared to this $250 million in '25? Jaime Esteban Pous Fernandez: This is Jaime. And Jose back into our fleet plan. And let me try to be really on a summary. Our goal next year is to reduce significantly the gap between productive and nonproductive fleet. And it has many moving pieces. I want to start with the AOGs. We see an improvement in AOGs. Remember, this year, we expect and year-to-date, we have 36 average planes. We expect that, that will improve to around 32, 33 next year with the highest point of the AOGs initially in January and significantly going down by year-end. The second [indiscernible] is, is deliver strong Airbus, we’re expecting around 12 to 13 deliveries of new aircraft from Airbus still we need to confirm that with Airbus and we will give detailed guidance in the next earnings call. And finally, with delivery, we are budgeting 17 aircraft to be redeliver. All of those details, we are planning, you should think about ASM growth next year, as Enrique mentioned and reiterated in the range of 6% to 8%, which factors all of the above that I mentioned. Compensation [indiscernible] multiyear agreement remains to 2028, but we are seeing an improvement and we are planning with the flexibility to adapt our demand to customer demand and market condition with the capitalization of flexibility in our market. And the last question was with respect to CapEx. This year guidance is still the same $250 million. Expect that next year is going to be higher than this year because we are investing in the maintenance related to engines returns and the delivery of aircraft. Enrique Javier Beltranena Mejicano: I just want to say again, I mean, our numbers of growth for next year are all inclusive. They include the returns of the engines from Pratt, the deliveries from Airbus, replacement of aircraft from the actual fleet. They include the deliveries, they include everything, all of the above. It's included in the number. So please think about that number as a total number of growth and not the conflict with capacity into the market. Operator: Our next question will come from the line of Filipe Nielsen with Citi. Filipe Ferreira Nielsen: Congrats on the results. My question is regarding CASM ex-fuel. You guided $0.0575 [ph]. You mentioned about the timing of having maintenance putting this a little bit higher than expected. I just wanted to understand how this should evolve? Is it a one-off in fourth quarter related to maintenance? Or is it something that will continue throughout 2026? How are you looking at this trend and not only at the quarter? Just trying to understand the cost impact here. Jaime Esteban Pous Fernandez: This is Jaime. I'm going to start with the 4Q. The sequential increase reflects the normal seasonality in specific cost lines that higher in the 4Q happened last year. It represents higher landing and navigation expenses due to the increased mix of international operations in the 4Q. We also have addition related to deliver maintenance events, which temporarily elevated unit cost are not structural impact aligned with our planned maintenance schedule. And as I mentioned, we will provide full guidance for 2026 in the next earnings calls. You are going to see a higher CAS than this year related to the investment in maintenance and delivery to have the fleet aligned with our growth plans. Operator: Our next question comes from the line of Jens Spiess with Morgan Stanley. Jens Spiess: So on the point of groundings and being the peak at the beginning of next year and then gradually improving, by year-end, how many aircraft do you expect to be grounded? And then when do you expect groundings to reach 0? Is it by mid-'27, by the end of '27? Like what's your visibility on that? Enrique Javier Beltranena Mejicano: Sorry, I'm going to repeat it. We expect that by year-end of 2026, the average number of AOGs will be around 25 to 27. And we believe that we are going to be with no material impact on AOGs related to engines by the end of 2027. End of 2020. Jens Spiess: Okay. Perfect. And if I may, just one additional one. Obviously, you already gave a lot of details on ASM growth for next year and all the variables. But clearly, you have a lot of flexibility given the redeliveries, the 17 redeliveries you have next year. So if demand is much better than expected, by how much could you potentially increase ASM growth? And conversely, if demand is weak by how much could you reduce it potentially? Enrique Javier Beltranena Mejicano: By around 2 percentage points, either up or down. Operator: Our next question will come from the line of Guilherme Mendez with JPMorgan. Guilherme Mendes: Just a quick follow-up. Holger, you mentioned about an overall rational supply on the market, so meaning rational competition. Just wanted to hear your thoughts on how should we think about competition in '26. There's additional capacity coming online from you and from some of your peers, if you do expect the current rational and disciplined competitive environment to remain in 2026? Holger Blankenstein: Sure. This is Holger. So we have some visibility on the domestic market. For us, in the Mexican domestic market, we are budgeting low to mid-single-digit growth for 2026. And we will provide more granularity on our growth rate in the domestic market when we provide the full year guidance in our next earnings call. If we look at the competition, we have visibility on the published schedules of our domestic competitors and industry growth is likely to remain rational from what we can see right now. And that obviously supports a higher and healthier fare environment for us. We are seeing now that competitors have been following a meaningful capacity rationalization to bring capacity in line with domestic demand. And we see that trend continuing into 2026, which will lead to a more balanced and healthy domestic supply-demand environment. Operator: Our next question comes from the line of Alberto Valerio with UBS. Alberto Valerio: Just a follow-up about the groundings. So you expect to normalize it in the end of 2027, 2028. Am I right about this? And about cycles, how have been the cycle of engines and also the deliveries of Airbus, when we should see some normalization on this? And if I may, another one is about one line on the results that is the variable leases come a little bit below what we were expecting, what we were estimating. Should we keep that for the future? This is more related to engines. Is that correct? If you can give some color on that? Enrique Javier Beltranena Mejicano: As mentioned, we expect a positive trend on engines from the shops. We rescheduled with Airbus. So this year, the deliveries are quite aligned on what we plan some minor delays or not material delays. We expect that to continue next year. We have not because we schedule year-end. And we are planning accordingly with that with a lot of flexibility with the different levers that we have in our fleet plan between the deliveries of planes coming back from the shop. We are optimistic and planning around that. If you're right, we should be out of the material impact by 2027 with some minor in terms of absolute 2028. And compensation over[Indiscernible] 2028 in contrast. Operator: Our next question comes from the line of Abraham Fuentes Salinas with Banco Santander. Abraham Fuentes Salinas: During this quarter, we see an improvement in the aircraft and engine rent expense. So I wonder if you can give us a little more color what you expect during 2026 in terms of ASM. Enrique Javier Beltranena Mejicano: Can you repeat the question was too low. Abraham Fuentes Salinas: Yes, of course. We saw an improvement during this quarter in aircraft and engine rent expense. So I wonder if you can give us a little more color what to expect for 2026 measure as ASM. Enrique Javier Beltranena Mejicano: I think the benefit in this quarter is related to the conversion of operating leases into finance leases. So that was the viable aircraft and lease line has the benefit in this quarter. As we continue next year and make decisions in the deliveries, we may explore, as we mentioned during the call in order to lower the total ownership cost of the fleet. And next year, we think that, that number should be a little below what we had this year and more aligned to 2024. Operator: This concludes today's question-and-answer session and I would like to invite management to proceed with his closing remarks. Please go ahead, sir. Enrique Javier Beltranena Mejicano: This is Enrique. I would like to finish the call saying that we continue to demonstrate the strength and adaptability of our ultra-low-cost carrier model and our command over our markets and cost structure. I want also to say again that regardless of the external environment, our cost leadership flexibility and the capacity to expand our product suite ensures that we address customer preference. I also want to say again that we'll continue to control growth with discipline, and that includes everything. It includes all the pieces of the question and it's fully aligned with market demand. It is also important that we will continue prioritizing low cost with high-value service to increase access to air travel for a broader set of customers, and it is important to say that we will continue with leadership in core domestic markets and a world-leading cost structure. Having said that, I would like to thank you, everybody, for being in the call, and thank you to our family of ambassadors as well as our Board of Directors, investors, partners, lessors and suppliers for their support. I look forward to speaking to you all again next year. Thank you very much. Operator: This concludes the Volaris conference call today. Thank you very much for your participation, and have a nice day.
Operator: Thank you for standing by. This is your conference operator. Welcome to the TMX Group Limited Third Quarter 2025 Results Conference Call. [Operator Instructions] The conference call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Amin Mousavian, Vice President of Investor Relations and Treasurer and Interim Chief Risk Officer. Please go ahead, Mr. Mousavian. Amin Mousavian: Good morning, everyone. We join you from our Montreal office today to discuss the 2025 third quarter results for TMX Group. We announced our results for another outstanding quarter and our fifth consecutive double-digit revenue growth, highlighting strong performance across all of our business units. Copies of our press release and MD&A are available on tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Chief Executive Officer; and David Arnold, our Chief Financial Officer. Following the opening remarks, we'll have a question-and-answer session. Before we begin, let's cover our forward-looking legal disclosure. Certain statements made during the call may relate to future events and expectations and constitute forward-looking information within the meaning of the Canadian securities law. Actual results may differ materially from these expectations and additional information is contained in our press release and periodic reports that we have filed with the regulatory authorities. Now I will turn the call over to John. John McKenzie: Thanks, Amin, and good morning. [Foreign Language] Good morning, everyone, and thank you for joining the call this morning, broadcasting to you live from our Montreal office on a beautiful morning here in La Belle Province. Now as Amin mentioned, we announced third quarter results last night and TMX delivered outstanding performance in the quarter, highlighted by strong year-over-year growth in revenue, adjusted earnings per share and operating leverage. And as David will cover the quarter in more detail in a few minutes, I'm going to focus my remarks this morning to provide important context around our -- how our year-to-date progress sets the stage for future success. At last year's Investor Day, we unveiled an ambitious strategy we've been working on for a number of years called TM 2X. And I say ambitious because what we needed to do was shift the organizational mindset from a growth -- to a growth mindset from incremental to transformational. It took the organization 14 years to get from $0.5 billion in total revenue to $1 billion, but our aim was to double that pace to reach $2 billion in 5 to 7 years, and we are well on the way. People across our enterprise have embraced this challenge. And I'm happy to report that as we move along in the fourth quarter, we are delivering on the promise of bigger and faster. And we are now 5 consecutive quarters of double-digit growth into the TM 2X journey, well on our way. So turning to our results for the first 3 quarters of 2025. Our overall revenue increased 18% compared to 2024, reflecting gains across all business lines, highlighted by double-digit growth from derivatives and clearing, equities trading and Global Insights. Our organic growth, excluding acquisitions, increased 16% and adjusted diluted earnings per share increased 25% from the first 9 months of last year. Our results showcase the power of a unique diverse portfolio of interconnected global businesses as well as the resiliency of our market ecosystem. And 2025 success stories span the entire enterprise across established traditional business areas as well as new business areas and geographies. Our overall operating expenses for the first 9 months increased as well year-over-year, reflecting expenses related to recent acquisitions, and continued investment in organic growth. And David will walk through the expenses in more detail following my comments this morning. Now moving through some of our business area highlights. Trading activity on core domestic markets remained strong throughout the first 9 months. Revenue from derivatives trading and clearing, excluding BOX, increased 32% year-over-year, driven by strong trading activity across both equity and interest rate derivatives. The first 9 months also featured continued upward momentum in our Government of Canada bond futures products, supported by a record open interest and increased client adoption. Macro environmental and geopolitical factors drove record investor demand for derivative instruments. MX overall open interest reached an all-time high of 33 million contracts in September and finished the month 57% higher than the same date last year. On the equity trading side, increased activity due to market volatility as well as higher yields on premium products drove revenue gains. Overall revenue from equities and fixed income trading and clearing increased 11% compared to the first 9 months of 2024. On a combined basis, TSX, TSX Venture and Alpha volumes increased 22% year-over-year. Now looking beyond Canada, building on our early success, AlphaX U.S., our new U.S. equities trading venue continued its impressive growth trajectory during Q3. Market share grew 30% and average daily volume increased more than 30% quarter-over-quarter. But what we are most encouraged about is the pace of industry adoption with approximately 30 participants now connected representing a range of firms all connected to AlphaX U.S. Turning now to Global Insights. This has been a key contributor to our tremendous year-over-year performance and a propulsive force in our strategic growth. Revenue during the first 9 months increased 16% compared to 2024, led by double-digit increases from TMX Trayport and TMX VettaFi. TMX Trayport revenue grew 21% year-over-year or 14% in pound sterling, driven by a number of factors, primarily an increase in the number of licensees and increased adoption of analytics and other trader products. Trayport's forward strategy is focused on 3 primary client-centric components: strengthening the core jewel network by investing to improve speed, scalability and reliability while supporting enhanced capabilities and product innovation; number two, expanding into new asset classes and geographies; and three, adapting to address the evolving needs of energy trading clients with innovative data analytics tools. Our revenue from TMX VettaFi increased 24% compared to the first 9 months of last year or 20% in U.S. dollars due to higher indexing revenue driven by organic growth in assets under management and recent acquisitions. TMX VettaFi continues to execute against an opportunistic expansion strategy, moving to capitalize on specialized long-term global trends. And so earlier this month, we acquired 3 indices that track the nuclear energy sector, crucial for AI infrastructure from Range Fund Holdings and North Shore Indices, including the Range Nuclear Renaissance Index. These latest acquisitions expand TMX VettaFi's industry-leading indexing platform to over 1,250 indices across a diverse group of major asset classes. Now moving now to the third key component of Global Insights, TMX Datalinx. We also made some news earlier this month. We acquired Verity, a leading buy-side investment research management system, data and analytics provider. The addition of Verity brings a dynamic new financial data and proprietary analytics and capabilities, along with an expert group of professionals to our Datalinx team to enhance the services we offer to more than 5,000 clients worldwide. And I'd like to take that quick opportunity to welcome the Verity team into TMX. Now turning to capital formation. The first 9 months of revenue increased 8% when compared to 2024 due to higher revenue from additional listing fees and the inclusion of revenue from Newsfile. You'll recall at the beginning of the year, we separated the Capital Formation segment into 2 primary components: Traditional capital formation, the role of our stock exchanges, TSX and TSX Venture play in helping listed companies raise growth capital. And TMX Corporate Solutions, an end-to-end set of services, including TSX Trust and Newsfile to serve the needs of public and private companies through all their capital raising activity and stages of evolution. And we established then a long-term objective of generating over 50% of the revenue from capital formation from these corporate solutions. But the story of this quarter is actually really about capital raising itself and the strength of our public market ecosystem. Combined, TSX and TSX Venture market capitalization reached a record high in the quarter, topping $6 trillion for the first time, highlighted by $1 trillion in the mining sector alone, also an all-time high. And most importantly, we are also seeing sustained positive momentum in activity at the crucial foundation of the ecosystem, led by a surge in the mining sector, equity financing dollars raised by TSX Venture issuers increased 67% through the first 9 months compared to that same period last year. And over the past few quarters, we've talked about our efforts working closely with a well-defined pipeline of private companies to prepare them to join our ecosystem. Earlier this month, we proudly welcomed Calgary-based Rockpoint Gas Storage to the Toronto Stock Exchange, the largest independent owner and operator of natural gas storage in North America. The company raised over $700 million during its IPO, and we are hopeful that this is a signal to the community of issuer prospects and to the entire marketplace that the conditions for going public are right and that we are on the cusp of a robust IPO season. Growth momentum also continued through the third quarter in Canada's ETF industry. Through September 30, 200 new ETFs listed on Toronto Stock Exchange this year, surpassing the full year record set in 2024. And now as I close, I'd really like to take a moment to thank our employees around the world for their continued and essential contributions to our success. TMX has an impressive track record of leadership and innovation and we have a long proud history. Last Friday marked TMX's 173rd birthday. And in 2 weeks, we will celebrate 23 years as a publicly traded company, and I believe in celebrating our milestones. Those of you who have followed us through the years have seen the yellow evolution from a regional exchange operator into a global competitive force. Now to be clear, I haven't been here for 173 years, but it's been my absolute privilege to work here during the most transformative era. And I feel very strongly that we're on a course for an even brighter future. As we move forward towards the end of this year, we are equipped and emboldened to take TMX to new heights from promise to delivery, ambition to execution. And with that, let me turn the call over to David. Thank you. David Arnold: Thank you, John, and good morning from Montreal. I'm pleased to report that the TMX Group delivered outstanding financial results in the third quarter of 2025, reflecting the strong momentum across our franchise and the effectiveness of our strategic initiatives. We once again achieved double-digit increases in both reported and organic revenue in the third quarter. Our Q3 revenue of $418.6 million equates to a robust 18% year-over-year growth. This exceptional performance was broad-based across all of our business segments, with particularly strong contributions from our derivatives trading and clearing, TMX VettaFi, TMX Trayport, TMX Datalinx and equities and fixed income trading businesses. The strength in our revenue, coupled with disciplined expense management, led to strong income from operations and earnings per share this quarter. Diluted earnings per share increased 43% to $0.43, while our adjusted diluted EPS grew 27% to $0.52, driven by growth in our income from operations, which increased 23% compared with Q3 of last year. Now turning now to our businesses, beginning with the segments that saw the largest year-over-year increases. Global Insights revenue grew by 18% this quarter, reflecting double-digit increases across the 3 business segments -- 3 businesses in the segment. Revenue from TMX VettaFi grew 35% in Canadian dollars and 32% in U.S. dollars this quarter. This growth included $4.6 million of revenue from recent acquisitions, namely iNDEX Research, Bond Indices and ETF Stream. Revenue, excluding these acquisitions, increased 21% in the third quarter, reflecting strong organic growth in assets under management higher analytics revenue and higher revenue from digital distribution. TMX VettaFi's assets under management continued to show robust growth with over USD 71 billion at the end of September. Now as John mentioned, earlier this month, TMX VettaFi continued to expand on its indexing capabilities and product offerings through the acquisition of 3 nuclear sector indices. These thematic equity indices track nuclear energy and uranium miners, which is a rapidly expanding sector, especially as the world economy seeks to power generative AI and other energy consumption-driven technologies and services. Revenue from Trayport was up 16% in Canadian dollars or 12% in pound sterling this quarter, primarily driven by a 6% increase in total licensees, annual price adjustments and incremental revenue from data analytics and other trader products compared with last year. TMX Trayport ended the quarter with average recurring revenue for the quarter on an annualized basis of CAD 275.7 million or GBP 148.6 million, which is up 18% and 13%, respectively, compared with the same period last year. Now revenue from TMX Datalinx grew 12% from Q3 of last year, reflecting growth in benchmarks and indices, data feeds and higher revenue in subscribers and usage related to prior period billing adjustments. There was also a favorable impact from pricing changes that came into effect earlier this year, and an increase in analytics revenue, coupled with the growth in colocation. Our revenue in our derivatives trading and clearing businesses, excluding BOX, was up 27% from Q3 of last year, driven by a 31% growth in the Montreal Exchange and a 20% growth in CDCC revenue on the heels of a 13% increase in volumes and a higher rate per contract this quarter relating to the sunset of the CRA Market Making program in Q2 of this year. Our derivatives business demonstrated sustained strong performance through the first 9 months of 2025. And as John mentioned earlier, open interest in September is up 57%. Revenue from BOX increased 27% this quarter, driven by a 27% growth in volumes compared with Q3 of last year. Now turning to our Capital Formation business. We saw encouraging trends in capital formation activity this quarter, with revenue up 15% from Q3 of last year. Additional listing fees grew 42% year-over-year due to an increase in the number of transactions billed at the maximum fee on both TSX and TSX Venture Exchange or TSXV for short, and higher average fees for transactions below the maximum. Sustaining listing fees and initial listing fees also grew compared to last year, reflecting increased activity on both TSX and TSXV as well as a higher revenue from ETFs. TMX Corporate Solutions grew by 9% in Q3, reflecting $1.8 million increased revenue from TMX Newsfile, which was acquired in August last year and a higher transfer agency set of fees from TSX Trust. The revenue increase in TMX Corporate Solutions was partially offset by lower net interest income revenue, mainly due to lower yields compared with Q3 of last year. Now in our Equities and Fixed Income Trading and Clearing segment, revenue was up 10% in the quarter, driven by growth in trading, while revenue in our clearing business was up 2% from Q3 of last year. The increase in equities and fixed income trading reflected 35%, driven by higher volumes in our equity marketplaces, including 18% on TSX, 86% on TSXV and 40% on Alpha Exchange and DRK combined. Our combined equities trading market share for TSX and TSXV listed issues was approximately 61% this quarter, down approximately 3% from Q3 of last year. On the fixed income trading side, revenue decreased versus Q3 a year ago, primarily reflecting lower activity in Government of Canada bonds this quarter compared with a very active Q3 last year as well as lower credit and swap activity. Now as John mentioned, I'd like to take a closer look at expenses. So let's take a closer look at our expenses. On a reported basis, operating costs in the quarter increased by 14% and included the following items: First, we incurred $7.4 million of higher dispute and litigation costs compared with Q3 of last year. These costs include a settlement provision and external advisory services related to these matters, which are not part of our ordinary course business have been excluded from our adjusted EPS. Second, we incurred $7.9 million of additional expenses related to new acquisitions. Excluding these items, our operating expenses increased by approximately 7% or $13.2 million on a comparable basis, largely due to 3 key drivers. First, over half of this increase or $7 million is driven by higher headcount, payroll costs and year-over-year merit increases. Second, approximately 1/4 of this increase or $3 million relates to IT operating costs reflect the higher licensing and subscription fees, mainly related to supporting our growth initiatives compared to last year. And the remaining quarter of this increase relates to $2.5 million of higher amortization relating to the launch of our post trade system and $1.1 million representing higher costs related to AlphaX U.S., which was launched in January of this year. partially offset by $0.4 million of other net cost decreases. Now let me be crystal clear. We delivered double-digit positive operating leverage in the third quarter, driven by a robust 17% organic revenue growth, outpacing the 7% increase in comparable operating expenses, and our entire management team cannot be prouder of this excellent result. Turning now to our sequential results. We maintained strong momentum from Q2 into the third quarter of 2025. Total revenue decreased by $3.1 million or 1% in Q3 from a record revenue quarter in Q2. The decrease reflected lower revenue from capital formation due to the seasonality of TMX Corporate Solutions revenue, primarily driven by TSX Trust revenue related to Annual General Meetings in the second quarter and lower fixed income trading revenue from decreased activity in Government of Canada bonds. This decrease was partially offset by higher revenue from our Global Insights segment, driven by TMX VettaFi AUM growth. and higher revenue from derivatives trading and clearing, driven by higher rate per contract due to the sunset of the CRA Market Making program in Q2 of this year. Now turning to our sequential expense analysis. Operating expenses in Q3 decreased $2.8 million or 1% on a reported basis from Q2, primarily reflecting $1.6 million of lower employee performance incentive plan costs and recoverable expenses and lower costs related to the now completed post-trade modernization project. These sequential decreases in operating expenses were partially offset by $1.6 million of increased acquisition and related expenses in the second quarter and $1.3 million of higher operating expenses related to ETF Stream, which was acquired in June of this year. Our balance sheet remains exceptionally strong, providing us with the financial flexibility to pursue strategic opportunities for growth to accelerate our strategy while maintaining our commitment to long-term shareholder returns. Our debt to adjusted EBITDA ratio at September 30 was 2.3x, which is within our target leverage range of 1.5x to 2.5x. We continue to maintain a disciplined approach to capital deployment, as evidenced by the recent acquisition of Verity for approximately USD 98 million completed in early October, which was completed with existing cash and commercial paper. We continue to demonstrate our ability to execute strategic investments while maintaining financial discipline and prioritizing returns for our shareholders. Turning now to our cash and marketable securities financial position. As of September 30, we held over $585 million in cash and marketable securities, which is $371 million in excess of the approximately $214 million we target to retain for regulatory purposes. Net of excess cash, our leverage ratio was 1.9x at September 30 and 2.1x following the acquisition of Verity. Last night, our Board of Directors approved a quarterly dividend of $0.22 per common share payable on November 28 to shareholders of record as of November 14. This represents a dividend payout ratio of 42% for both the third quarter and the last 12 months, consistent with our target payout range of 40% to 50%. Our cash generation capabilities remain robust, supporting both our growth investments and our commitment to returning capital to shareholders. The strength of our financial position, combined with our diverse revenue streams and strong market positions provide a solid foundation for continued growth and value creation. So with that, I'll now turn the call back to Amin for the Q&A period. Amin Mousavian: Thank you, David. Chuck, would you please outline the process for the Q&A session? Operator: [Operator Instructions] Our first question will come from Ben Budish with Barclays. Benjamin Budish: Maybe just first on Trayport. Just curious if you can unpack what's going on maybe across the energy franchise. I think this was the first time in a while your revenues declined sequentially. There's been some headlines sort of indicating that energy trading is getting more difficult for some of the big trading firms. We generally see lower kind of volatility in gas pricing and things like that. So just curious if there's any read through for some of those macro factors into what's going on in Trayport and any other thoughts on kind of the underlying health of the end clients? David Arnold: Ben, it's David Arnold here. I appreciate the question. Yes. So look, sequentially, revenue was slightly lower, but it was actually entirely driven by onetime revenues. So we had about $1.4 million. There was a delta between the delivery of client projects and other consulting work in Q2. So that didn't obviously recur in Q3. But the underlying recurring revenues are up about GBP 0.5 million or 1.5% from Q2 to Q3. So Trayport is obviously continues to still be a high-growth business for us Ben. And we continue to target the 10% plus revenue CAGR over the long term. So as I did mention in my remarks, right, average recurring revenue is up 18% in CAD or 13% in pound sterling. So really, if I just bring it all back full circle, Ben, it's really just because of some of the, as I said, client project consulting that was in Q2 that didn't recur in Q3. Benjamin Budish: All right. Helpful. Maybe one follow-up, David, on Verity. Is there anything you can share there in terms of the P&L impact we'll see starting in Q3? How you think about cross-sell opportunities across the existing Datalinx customer base? Any other details there could -- if you could share would be helpful. David Arnold: No, I appreciate it, Ben. What I'm actually going to do is I'm going to hand it over to John first just to talk about some of the strategic rationale of the acquisition and a little bit about the business, and then I'll give you what I can regarding economics. John McKenzie: Thanks, David. And thanks for the question because we're actually very, very excited about bringing this business in and what it actually does for our product suite and for the client base. I think you hit it in a bit of the question of the cross-sell opportunities. We see those as being substantial, both from a cross-sell opportunity, but also from a product development opportunity. So the Verity business line has got some really good enhanced data capabilities in terms of unique investor insight data, that's analytics and insights, that's built from data. We're going to be able to apply that to underlying Canadian data sets as well. So we're going to be able to expand the reach of the product. And to your point, the cross-selling opportunity is how we the ability to then sell that Verity data and applications to a broader audience base that we have. And I think I gave in the notes, we've got approximately 5,000 clients and Datalinx globally that are now an addressable market for that product set. The other interesting piece on the Verity business that comes in is it does have a research management platform. So an actual solution that sits in the research site for an asset manager, that's another way for us then to engage in the asset managers in terms of a larger share of wallet because right now, what we really provide is just raw data there. So it's a complementary service. So you've got it exactly right. These are all cross-selling, upselling opportunities, but really about providing a deeper solution set into the client, and that's why we're excited about what we can do with it. So let me turn it back to David to talk a bit on the economics. David Arnold: Thanks, John. Yes. I mean, Ben, what I can tell you is the annual revenue is probably comparable to our Datalinx colocation business contained within our Global Insights segment. So that's the first data point that I can share with you. And then obviously, the most important one really for us is besides the strategic rationale that John outlined, is consistent with previous acquisitions, it's expected to be accretive to our adjusted EPS well within the first year. So that should give you enough. It's a significant investment strategically for the Datalinx business. But the grand scheme in terms of TMX overall results, it's not a material in-quarter movement in adjusted EBITDA. Operator: Next question will come from Etienne Ricard with BMO Capital Markets. Etienne Ricard: Okay, thank you, and good morning, team. So VettaFi continues to be quite active acquiring indices in specific sectors, I'm thinking energy infrastructure. A nuclear, for example. My question is, how does the team think about expanding in some of these specific sectors without having too much concentration risk AUM-wise. John McKenzie: Yes. I mean, that's a great question because what we're actually doing is diversifying some of that concentration risk as opposed to accumulating more. So this sector, we talked about in the notes in terms of the nuclear sector. If you look at any of the long-term independent analysis in terms of where energy demand is going to be supplied from in the future. This is a sector that's going to see a lot of investment, a lot of investor interest. And so it was a natural piece for us to then expand into future asset classes. While it sounds like it's more energy sector, this is very independent from the components that we've got that are in the more AMLP based indices, which are on more midstream pipeline infrastructure. So they're very unique and different in terms of the investor and the assets that they're servicing. But as you know, these are not the only transactions we've done this year. We brought in the suite of fixed income indices earlier on this year. At the end of last year, we brought in the iNDEX Research team to get access to a larger suite of European-based indices, which are up substantially now since that acquisition as well. So it is part of a core strategy of continuing to diversify the asset base that we can deliver through the iNDEX factory at VettaFi. And the bigger governor for us is actually just being pragmatic about how quickly we can integrate things really well so that they're part of our ecosystem and deliver them for clients. So I will tell you that we look at a lot of opportunities. We decline far more than we move forward with because we really want to make sure that they're going to create value for clients, we can integrate them well and deliver them on a scale basis in the platform. Those are key components that we're never going to step aside from when we're looking at these opportunities. Etienne Ricard: And John, staying on VettaFi, we know that digital distribution and data is quite a meaningful revenue driver for this business. How do you think about growth for this line item through the market cycle? In other words, are asset managers willing to get more data when the industry is experiencing market appreciation and net flows? John McKenzie: Yes. I'm always very careful about separating line items in here because what we are trying to do is grow the franchise as a whole and in some cases, using the different product lines to help create cross-sell opportunities. So if we can use a digital distribution opportunity to help drive the acquisition of a new ETF client for long-term indices and grow through AUM. We're looking at that strategic packaging of opportunities as opposed to thinking about being this as one line versus another line. It's exactly why we did the ETF Stream investment in London that we did earlier this year. It was about having some of that same distribution capability in the European market because it gives us that extra strategic and competitive advantage when we're talking to new ETF providers, but the suite of offerings that we can provide to them. So in terms of how we manage the business, it isn't on a line by line by that. It's on the overall basket and driving that double-digit growth rate across the whole firm. Now I'll just add in caveats when firms are doing well and they've got strong marketing budgets, that absolutely helps in terms of the tailwinds in terms of those stand-alone product sales. Operator: The next question will come from Aravinda Galappatthige with Canaccord Genuity. Aravinda Galappatthige: I wanted to start off with Datalinx. Obviously, you provided some detail around the growth there. It's picking up from a period of more flatter growth. I wanted to understand what sort of the bigger components were that sort of drove that spike to 12%? And just to sort of assess the sustainability there. I'll start there. David Arnold: Aravinda, it's David Arnold here. Yes, as I mentioned in my formal remarks, right, there's obviously, year-over-year pricing increases, which we spoke about in prior quarters. There was also some billing true-ups for clients, but then also just robust growth in all pockets. So there isn't really one specific item I can point to other than some billing true-ups and we're getting some feedback on the line. Could you hear me, Aravinda? Aravinda Galappatthige: I can hear. David Arnold: Okay. Good. So yes, so it was across the board across multiple parts of the product line. The only item that I called out that was slightly different was some higher-than-normal billing true-ups. And obviously, feeds volume is up too. Aravinda Galappatthige: And then for my second question, just going back to VettaFi. Considering some of the changes we're seeing in technology, in particular, sort of the rapid growth in Agentic AI and some of those platforms that are coming out. How do you see sort of the future of VettaFi? And how can you sort of insulate or future-proof VettaFi as you think about the next 3 to 5 years, ensuring that, that sort of growth can be sustained, perhaps any of the tailwinds or the headwinds or the threats you can talk to there? John McKenzie: Yes, actually, it's actually -- we think it as an opportunity. When you think about the nature of the business, and we are -- this is a technology-first platform. It is one of the first platforms that's completely cloud delivered and 100% scalable in terms of how we deliver those solutions. We already have teams working on potential AI enhancements in terms of the ability to do that smarter, faster and actually build additional scale. So we are looking at those technologies and really see them as a way to actually do more and create more productivity out of the platform. Operator: Next question will come from Stephen Boland with Raymond James. Stephen Boland: I just quickly go back to Trayport. I mean in terms of quarter-over-quarter, you kind of explained that. I just want to make -- find out and be clear that the lower energy prices is not -- like is the correlation to slowing growth or momentum? What drives that revenue growth? Is it volatility? Is it high energy prices? I'm just trying to get an idea of what the impact of lower energy prices may have. David Arnold: Stephen, it's David. I'll start and John will add if need be. I think the key thing here is -- as we've said in the past, right, the revenue model for us at Trayport is a SaaS-based recurring revenue model. There is a small amount of consulting and advisory, which is sporadic as we onboard new clients and help them connect to the network. And that really is the key driver of what's going on sequentially, as I mentioned earlier on. But I think the important point to also make is part of our revenue model is actually not tied to the trading activity of our clients on the network. So really, the movement in energy prices and/or demand in the marketplace doesn't have a direct correlation to the revenue of Trayport. Now indirectly, it can, as potentially other trading firms decide to open up a desk to trade in natural gas and power in the European marketplace. They would naturally, if they wanted to trade in that and have those trades be via brokers and on exchange, they would love to connect to the Trayport network and that would obviously result in some increased volume. But the core message here is really at the revenue perspective, it's a very, very small delta, and it's related to, as I said, some project and kind of new client onboarding expenses and revenue. But what I can also tell you is that the annual recurring revenue still being north of 100% is a critical key success factor for us that we keep looking at. Stephen Boland: Okay. That's helpful. And then just VettaFi and Datalinx, I guess some of these -- the ETF Stream, the purchase of the indices, even Verity. I mean can you just quickly give how the, I guess, integration happens on -- in TMX? Is it just a link to the existing site? Or is all the technology integrated, the tech stack and then sales was integrated? Just trying to get an idea of the process. David Arnold: Steven, it's David. Yes. So I'll touch a little bit on kind of the mechanics of our integration. I mean -- and your question is a good one, but it was quite broad-based. So I'm really going to focus on the things that are the immediate day 1 to day 120 in any of our acquisitions, right? And so when we tackle the integration, our integration team, first and foremost, is -- it's about really making the onboarding experience for our new TMX family members, a pleasant one. And really, that starts with getting them on to our productivity suite first and foremost, right? And that's everything from our e-mail system to all of our productivity tools as well as our HR and financial systems. So that really becomes the primary. And then at the same time, our sales teams are working on cross-selling opportunities and introduction and then actually leveraging the acquired businesses network with our network. And -- but it doesn't result in a day 1, let's integrate CRM systems, or let's go and integrate production systems. That's really a later decision after we kind of really tackle the productivity suite first. And then we turn to how can we actually look at reducing infrastructure costs, right? And that may result in server rationalization, cloud service provider rationalization and so forth. So that's really the general principle. And with Verity, it's following exactly the same kind of course. John McKenzie: The only piece I'll add there is from a strategic standpoint, we've gotten very good at this. So we've got actually a dedicated team that leads the organization, a lot of folks that spend full time in terms of doing integration well. We've got our own playbook in terms of what are our standards that we move things on. But more importantly, before we do transactions, before we transact, we have a hypothesis of how the business will run as part of TMX. And I think that's really important because it helps you make the right decision as to whether or not you're going to acquire or invest if you know in advance how you're going to operate it as part of our ecosystem. So knowing upfront, especially when you're doing something smaller, that this is going to run as a business line. It's going to run on TMX capabilities. It's going to be TMX people, all in one same team, gets it into a really honest conversation right upfront in terms of what we're going to do. And then afterwards, we're pragmatic around the steps that we take in terms of what order because we didn't want to have -- you don't want to have an integration activity disrupting the opportunity to build sales momentum in terms of that new relationship. So that's the strategic way that we're thinking about it. It's part of the deal decision upfront before we ever execute. Stephen Boland: Okay. And I'll sneak one more in, if you don't mind. Just the litigation and dispute seems pretty material. Maybe you mentioned this in the past. I just can't remember. Is this multiple disputes? Is this one case and maybe just what it's related to? David Arnold: Yes, it's David here. What I would say, which is important, right, is it's our policy not to Stephen, to comment on obviously ongoing legal disputes. But what we do, do is we adjust these as they're really not representative of the kind of ordinary course activity. And we do believe that by doing that, it provides a more meaningful analysis for the investor community to really understand the underlying operating and financial performance. What I can tell you is that we are not in the business of litigation. But from time to time, it does arrive. And depending on the matter, we obviously highlight the litigation costs and/or provisions. But then to the extent that there are settlements, both a positive settlement or a negative settlement, that will also be highlighted in our results as and when that occurs. So you've at least got comfort as to what we're incurring that is really not normal course. And then any settlement that may occur afterwards is obviously not normal course as well. And it's really not necessary. Stephen Boland: Sorry. So this is actually cash paid out, not like a provision that's been set up. David Arnold: No. What I can tell you is some of it is provisions and some of it is payments to lawyers. Operator: The next question will come from Jaeme Gloyn with National Bank Financial. Jaeme Gloyn: I wanted to start on the AI theme, and I guess you kind of answered a little bit of it around VettaFi. But more broadly, what are some of the strategies or technologies that you have in development right now to really sort of maintain the competitive advantage that TMX Group has? That would sort of be one. And then number two on the theme would be what is your view today of potential AI disruption around new trading platforms or exchanges that could impact your market share or growth prospects? John McKenzie: I mean that's a great question, and it's one we're spending a lot of time on. In fact, our Board session that we're doing this afternoon is really focused on what are those major industry themes that have the potential to change or disrupt in the future and AI is one of those topics. From a deployment in the firm, there are a number of pillars that we're working through right now. So first of all, we've actually already deployed a number of different AI solutions throughout the organization. Every employee in the organization has got access to certain tools the actual engagement level of employees using them is very high. And I put the categorization of those tools and things that are productivity enhancing. So the tools that help the everyday employee do their job better, more efficiently, more timely, so that they can increase their own productivity, do things faster, deliver more for clients. There are also specialty tools that were deployed. I'm not going to talk to specific tools because I don't think that would be appropriate. But as you can imagine, we've got tools that are deployed that are helping us build more enhanced data products that help you get more data access out of the proprietary data sets we have. We've got tools that we are using in the development sphere. There's multiple ones that we are testing right now in different areas that help to accelerate development. The way we've deployed these in the organization, again, is that sense of how do we actually increase productivity, the ability to go faster to build products faster. And then to your point, we're also looking at where are the product opportunities going forward. And given an organization like ours, which has actually a robust set of proprietary data, we come into this with some competitive advantage because we have the ability to build on top of data sets we already have as opposed to just acquiring market data and building things that are not proprietary on top of them. The Verity acquisition actually is right in that exact theme that there's some really interesting tools and capabilities in there that allow us to do more things with our actual data. The last thing we talked about on the trading side, I always want to remind people when we're talking about trading is trading is already highly digital and highly automated and a substantial amount of trading flow is actually already an algorithmic tool. So this is really just a next generation of those tools. So we don't see that, that's a material change. We want to make sure the appropriate guardrails are there that protect the marketplaces from essentially what you could have as really high messaging volumes that would come out of AI-generated trading activities. So you always want to make sure there's market integrity. And we'll continue to look at how we use these tools to enhance the capabilities that we've got in terms of both development, throughput, et cetera, et cetera. So you've got it exactly right. It is top of mind. I would say our strategic approach is to be fast follower in a lot of these, not to use the absolute bleeding edge because a lot of those technologies we found are already obsolete. So we're using a lot of ones that are becoming more mainstream and are also partnered with core technologies we're using throughout the franchise. So I hope that gives you a sense of how we're thinking about it strategically, but it's an everyday conversation. It's deployed right through the firm. Jaeme Gloyn: Yes. Perfect. One of the other themes out there is around a shift to semiannual reporting. Maybe you can share some of your early discussions and thoughts around that as well. John McKenzie: So I mean, I'll start with the top line, which is as much as I like talking to all you guys, if we could do that twice a year instead of 4 times a year, it would probably be better. We wouldn't talk about the quarterly trends as much, and we look more long term. But that's just a thematic piece. So this is an area where as an advocate for markets, we've been advocating this, particularly for smaller companies for over 7 years. We didn't wait for Trump to have this idea. Because at the end of the day, especially for smaller companies, when you think about the cost and burden and resources around doing reporting every quarter, and that also goes to audit resources, which are in scarce supply for smaller companies. It's an unnecessary burden compared to the value of the disclosure that the investor needs. These companies are small. Their stories don't change on a material basis. And if any company has any material change, they're required to disclose that whether you're on a quarter or not. So this is -- we've advocated this for all venture companies already. There was a move to put it in the strategic plan of the CSA earlier this year. There's now some piece out for public commentary on a proposal from the CSA to pilot this for companies under $10 million. I mean our response to that is going to be that we appreciate that this is now being made a priority, but there actually isn't a need to pilot something that's been used in 2/3 of the global capital markets of the world. It's already piloted and tested. And $10 million is too small. We should make this available for all venture companies. And should the U.S. move, we should make this available to all companies immediately. And it would be voluntary because it really then becomes a discussion between the company and their shareholders as to what's appropriate. So just because the voluntary semiannual doesn't mean you can't do more if that's what's appropriate for your business. The last simple piece is, in addition to reducing cost and burden for small companies, it actually lets companies engage with their investors more. So any company has quiet periods as soon as their quarter ends, which could be 5 or 6 weeks that you really can't engage with the investor community. When you take 2 of those cycles out, you're essentially giving 3 months back to a company every year to engage with investors, with analysts, asset managers, et cetera, and tell their stories. So we think this would be really positive in terms of meaningfully changing the burden for small issuers, helping them ease the burden of being a public company without really degrading investor access to information in a meaningful way. Operator: The next question will come from Graham Ryding with TD Securities. Graham Ryding: I wonder if I could discuss just the topic of regulation in the U.S. It looks like they're moving towards getting rid of the order protection rule and trying to set the stage for the trading of tokenized equities on blockchain type platforms. So I just wanted to get your view and your opinion on if the U.S. market does go in that direction, what's the implication for the Canadian equity market and yourself. Do we need to follow a suit in some respect? Or and if so, how would that process play out? John McKenzie: Yes, those are great questions. And I'm going to separate the 2 of them because the order protection rules, I thing our regime is already more liberal than the U.S. regime as it is. So what we know the Canadian regime is probably closer to where they're going as opposed to the other way around. And we've been able to provide some input into the SEC in terms of what's worked and not worked in the Canadian marketplace. I do see the subject on tokenization, particularly tokenization of equities to be a different topic of conversation. Sorry, I was just going to ask you if actually, could you just mure the line for a second because your typing is really, really strong. All right. Perfect. Thank you. Tokenization piece, there are a couple of components to it, and this is going to be a regulatory discussion for a while. In the U.S. market, people have been clear that if you tokenize the security, it is still a security. And that's a really important component because the rules around investor protection need to apply, and we need to have level playing field between marketplaces. However, they are exploring whether or not there are caveats or carve-outs or exemptions for some new platforms to that foster innovation. And that's an area where regulators have to be very careful because there's unintended consequences when you start to open that up without the same rules of the game. And I know the Canadian regulators are also right on top of this. When it comes to tokenization itself, this is an area as a firm. We've been looking at this for a number of years. We've got pilot projects in different parts of the franchise, either ones we've done on the trading side in terms of the ability to trade on exchange, things we've looked at on both the custody side and the clearing side, we're continuing to do that. But it is a little bit of a solution that's looking for a problem. It's not clear what the benefits are of tokenization of an existing equity to the actual retail audience. So a lot of these things have got to be driven by demand in terms of what's the benefit to the marketplace. A lot of what's getting done in the U.S. right now is actually more serving the ability to get U.S. equities that are demanded in foreign markets in overseas time zones, the ability to trade them over the counter. That's a very limited opportunity because it's really around a handful of equities that are globally interested in the Asian time zone. So it also intersects with 24/7 discussions. So -- but that's the washout. We want to make sure that tokenization is done smartly. Having just a token on a security that's then traded outside of the regulatory system is not a technology innovation. It's an arbitrage. And it actually takes risks around investor protection. It impacts liquidity and can have unintended consequences around price discovery and capital formation. So these are all the things that the industry needs to consider. There are some smart proposals that are on the table right now in the industry to look at. To your point, I would say that Canada again, would be a fast follower here. If the U.S. moves that we would be able to move with it. But again, driven by what is the actual demand from a trading standpoint. I got a really good reminder, and it came from a U.S. expert that reminded us that in the existing system today, securities are all digital. The formation, the issuance of a security, the custody, the trading of it, it is digital end-to-end. So like there is no traditional finance versus diversified finance here that actually differentiates. The tokenization of a security is actually less efficient than the current system because it takes that security out of the centralized system. You can no longer use it in terms of either collateral offsets, et cetera, et cetera. So we're watching it closely. We're going to make sure Canada is prepared. Our marketplaces are prepared, but the use case is still a question mark in terms of the value add. Graham Ryding: I appreciate the thoughtful answer. You talked about the demand for this. Should we view this really as potential for competition from crypto-based platforms, who are interested in sort of moving into the equity trading market? Is that where the push and the demand is coming from? John McKenzie: Yes. I mean I think it comes from 2 things. So I think you're absolutely right. It's a supply-side push. So organizations that are trying to, like you said, engage in the equity market. And my expectation is at the right point, regulators are going to say that's fine, but you've got to follow the same rules as other marketplaces, which in terms of fair access, DR capabilities, the audit trail, capital preservation, all those components of separation of assets, the kind of things that got FTX in trouble with a number of years ago. So there's going to have to be a bit of a level set in the playing field for those organizations to participate in that ecosystem whether it's a token or not. And even if it's done on an exemption basis earlier on, this is going to get leveled out in terms of making sure we have fair orderly marketplaces. To my other point, the second area of demand is this over-the-counter piece on overseas trading. There are now, particularly on the U.S. market, a substantial portion of the assets of some large U.S. firms are held overseas and there's a lot of retail and institutional trading interest in them when the U.S. markets are closed. So tokenized or off-market securities are being used as another way to provide liquidity into that region. But it is a very limited set of securities that are being demanded and it's really kind of the 10 biggest names in the U.S. market that are where the demand side is for the investor trading activity. Graham Ryding: Okay. Great. I'll leave it there, but just one quick question, if I could. Is this a topic that you guys are discussing at your Board meeting today? John McKenzie: Absolutely. In fact, this was a topic I was at the World Federation of Exchanges last week, meeting with exchanges from around the world. This is a topic we are talking about in all jurisdictions. So I think this has been something that the industry is right on top of. And the most important thing is we remember what the value of central marketplace is for in terms of helping companies raise capital, price discover and build businesses. And always be thoughtful of what are the unintended consequences of fragmenting that. And so that's what everyone is trying to figure out in terms of what we think is the right kind of market structure approaches going forward to get the benefits of new technology with while you can still preserve the value that efficient centralized capital markets have created. Operator: Next question will come from Bart Dziarski with RBC Capital Markets. Bart Dziarski: Congrats on a great quarter. I just wanted to follow up on the AI theme and kind of hone in on Trayport specifically. So you guys have done a good job in the past kind of highlighting some opportunities around AI as it relates to Trayport. But I was hoping you could maybe dive a bit deeper into substantively like why do you think that this business is defensible against some of the AI threats? And is it the network effect? Is it other kind of dynamics that ultimately gives you the comfort to continue that 10% plus target revenue growth rate? David Arnold: Bart, it's David Arnold. I first want to welcome you for initiating coverage on TMX on behalf of RBC. So welcome to your first call, sorry, Bart, should I say. The point that I wanted to make over here is, and you actually somewhat answered your own question. It's really the network effect of Trayport that creates the defensible and/or opportunistic ability for growth in that business. But when you talk specifically about AI and so forth. We actually were -- the predecessor for this in the kind of trading space would be algorithmic trading and large language models and so on and so forth. So that is part of one of the premium offerings in our Trayport ecosystem. So the demand is currently not there from the clients to radically change the landscape for algorithmic trading. But we continue to work closely with our clients on the features and functionality that they need as they engage in trading in the natural gas and energy marketplace in Europe. So -- and that's really a common theme, right? Like most of our innovation is driven, if not all of it, by client demand. And as opposed to when John was speaking on the last question about. It's not us trying to sell something. It's really trying to solve a problem for the clients that the clients have either made clear to us or that we've highlighted and requested whether or not they think that that's something we should address. And we're not getting a strong client demand right now to change the fundamental premise of the algorithmic trading features and functionality within the Trayport Software-as-a-Service platform. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mousavian for any closing remarks. Please go ahead. Amin Mousavian: If you have any further questions, contact information for Investor Relations as well as media is in our press release, and we'll be more than happy to get back to you. I know your valuable time is finite, and we thank you for spending with us this morning. It's also a couple of days early, but I wish you all a happy Halloween. And until next time, goodbye. Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for your participation, and have a pleasant day.
Operator: Greetings. Welcome to Varonis Systems' Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Tim Perz of Investor Relations. Tim, you may proceed. Thank you. Tim Perz: Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis. After preliminary remarks, we will open the call to a question-and-answer session. During this call, we may make statements related to our business that will be considered forward-looking statements under federal securities laws, including projections of future operating results for our fourth quarter and full year ending December 31, 2025. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned, forward-looking statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available on our third quarter 2025 earnings press release and our investor presentation, which can be found at www.varonis.com in the Investor Relations section. Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson. Yaki? Yakov Faitelson: Thanks, Tim, and good afternoon, everyone. We appreciate you joining us to discuss our third quarter performance. We finished the third quarter with 76% of our total company ARR coming from SaaS which means that we have now completed the SaaS transition in less than 3 years and more than 2 years ahead of plan. In February, on our first quarter earnings call, we noted that Varonis is a story of 2 companies, and this remains true today. Our SaaS business, it drives our momentum as SaaS customers benefit from the simplicity and automated outcomes of the platform and our on-prem subscription business, the drag on total company ARR growth and masks the strength of our SaaS business. Let's start by reviewing our third quarter results. ARR increased 18% year-over-year to $718.6 million. However, in the final weeks of the quarter, we experienced weaker-than-expected renewals in our federal business in our non-federal on-prem subscription business, which resulted in Q3 coming below our expectations. As a result of continued underperformance in the federal vertical, we will be reducing the size of the team until we see improvement. Now that we have completed our SaaS transition, we are now announcing the end of life of our self-hosted solution as of December 31, 2026. We expect this to result in increased uncertainty with our remaining OPS business going forward. In each of the first 2 quarters of this year, we saw improvement in our gross renewal rate across the business, which is why the reduction in the renewal rate that happened in the final weeks of Q3 was unexpected. To account for this recent change as well as our decision to end of life our self-hosted solution, we are baking in additional conservatism to our guidance and have assumed even lower renewal rates in our OPS business for the fourth quarter. We are also taking thoughtful and prudent steps to manage expenses across the business, which includes a 5% reduction in headcount in order to reallocate our resources where we see the highest return on investment. Now I will review our results and updated guidance in more detail shortly. Despite the softness we experienced in our OPS business, we again saw strong demand for our SaaS platform during Q3. This is happening because customers are able to secure their data with significantly less effort. Within our SaaS portfolio, Varonis for cloud environments continue to show traction during Q3, which was driven by the investment we have made in our platform to expand to additional use cases and protect many more platforms. Our ability to protect cloud data represents a significant growth opportunity for us as we're just beginning to scratch the surface. Because the transition is complete, our reps can put more focus on new business and upselling existing SaaS customers as we believe this additional focus on upsell will help us unlock this market potential. Now I would like to take a step back from our near-term results and discuss the opportunities we are excited about moving forward. As I have said in prior quarters, bad actors are not breaking in, they are logging in. Once an identity is compromised, there is no perimeter and companies need a sophisticated data security platform to keep their data safe. Varonis takes a data-first approach and helps companies locate their sensitive data, visualize who has access to it, automatically lock it down and then automatically detect and respond to threats on it. Performing only 1 or 2 of these tasks is insufficient to secure data. What sets Varonis apart is our ability to successfully do all 3 of these tasks on data everywhere. Our SaaS platforms and MDDR have significantly reduced the amount of effort and resources needed to secure data. AI continues to put a huge spotlight on the need for data security and the CISOs that I speak with want to ensure 3 key things. They won't have a data breach, they won't face compliance fines and they want to secure their data to enable safe use of AI in an effortless way. Addressing this problem has always been difficult and in the age of AI, it becomes even harder to secure data without sophisticated automation. In the third quarter, we continue to see demand from companies looking to protect their data to safely realize productivity benefits of Copilot, and we believe we are still in the early stages of starting to capitalize on this tailwind. In July, we announced an update to our strategic partnership with Microsoft and are making significant investments to deepen our integration with them to better enable customers to securely adopt Copilot over time. We believe these investments will ultimately better position us to capitalize on this massive opportunity. In July, we announced the release of our Next-Gen Database Activity Monitoring or DAM, which stems from the acquisition of Cyral. Varonis Database Activity Monitoring provides a cloud-native agent-less solution that offers next-generation database security and compliance for the AI era. Unlike legacy database activity monitoring tools that are slow to deploy and offer limited compliance value, our next-gen DAM solution is part of our broader SaaS platform, which delivers rapid deployment, real-time threat detection, automated remediation and deep visibility into sensitive data access. This provides customers with automated security outcomes on any kind of data using our unified SaaS platform. Earlier this month, we introduced Varonis Interceptor, which offers customers a breakthrough AI native e-mail security solution designed to stop data breaches before they start and stand on the recent acquisition of SlashNext. The introduction of Interceptor is a natural evolution of our platform and significantly expand our total addressable market by connecting the dots between e-mail, identity and data. We believe we will dramatically increase the value for MDDR service and help customers stop threats even earlier in the attack path. With that, I would like to briefly discuss a couple of key customer wins from Q3. We continue to see strong demand for new customers and one of these was a fintech company that wanted to replace its limited DSP endpoint tools with a data security platform. The incumbent classification vendor could not scale, failed to provide forward and complete classification scale and also failed to automatically remediate risk or detect threats. Varonis was able to quickly discover overexposed PII data and credentials and plain text that were surfaced by Copilot users. Varonis also automatically remediated this exposure and provided a current and complete view of their cloud data under a single dashboard. They purchased Varonis SaaS with MDDR for hybrid environments and Copilot Azure, AWS, ServiceNow, Snowflake and databases. We also continue to see our self-hosted customers looking to convert to SaaS. This quarter, one example of this is a global financial services company that has been a Varonis customer since 2010. As a heavily regulated organization, they have historically used Varonis for compliance and auditing use case. They wanted additional visibility into their IaaS data and wanted to simplify the ongoing maintenance of its deployment under 1 unified SaaS tenant. They evaluated a number of DSPM vendors, but they did not provide the breadth of support and automated outcomes that Varonis did. This organization upgraded to Varonis SaaS for hybrid environments in Copilot, Active Directory, Exchange Online, Edge, UNIX, privacy automation and Varonis for IaaS. In summary -- although we are disappointed with the performance of our on-prem business during the final weeks of the third quarter, we continue to be encouraged by the strong demand we see for our SaaS platform, which now represents 76% of total company's ARR. This demand is driven by the automated outcomes and scale that it provides as well as customer interest in deploying AI initiatives and securing data in the cloud. With that, let me turn the call over to Guy. Guy? Guy Melamed: Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. As Yaki mentioned, we see Varonis as 2 companies: our healthy SaaS business which now represents 76% of our total ARR or approximately $545 million, and our on-prem business, whose weaker performance is masking the underlying growth of SaaS in total company results. I will expand on this shortly, but let me first recap our Q3 results and update guidance. In the third quarter, ARR increased 18% year-over-year to $718.6 million. Our quarterly results did not meet our expectations due to weaker-than-expected renewals in our federal and nonfederal on-prem subscription business in the final weeks of the quarter. In each of the first 2 quarters of this year, we saw an improvement in our gross renewal rates across the business, which is why the reduction in the renewal rate in the final weeks of Q3 was unexpected. Since it is unclear if this reduction is specific to the customers that were up for renewal in Q3 or will be applicable to the population of remaining on-prem subscription customers, we have assumed a lower renewal rate in the fourth quarter and expect continued variability in our on-prem renewal rate going forward. As it relates to our guidance, we are now baking in additional conservatism for the fourth quarter to account for our weaker Q3 results and the decision to end of life our self-hosted solution. At the same time, our SaaS business remains very healthy, even when excluding the impact of conversion, and we continue to see the SaaS NRR trend at very healthy levels. We expect that this demand will continue to be the growth driver of our business going forward. This is driven by 3 factors: one, continuation of the healthy new customer demand that we've seen since the introduction of our SaaS platform; two, an increased focus on the SaaS upsell motion starting next year due to the completion of the SaaS transition; and three, the investments that we've made in the Microsoft partnership and the acquisition of Cyral and SlashNext that we expect will start to generate returns. In the third quarter, ARR was $718.6 million, increasing 18% year-over-year. And year-to-date, we generated $111.6 million of free cash flow, up from $88.6 million in the same period last year. In the third quarter, total revenues were $161.6 million, up 9% year-over-year. SaaS revenues were $125.8 million. Term license subscription revenues were $24.8 million, and maintenance and services revenues were $10.9 million as our renewal rates remained over 90%. Moving down to the income statement. I'll be discussing non-GAAP results going forward. Gross profit for the third quarter was [ $128.3 ] million, representing a gross margin of 79.4% compared to 85% in the third quarter of 2024. Our gross margin continues to track ahead of our expectations, and we feel very confident in our long-term target set at our Investor Day. Operating expenses in the third quarter totaled [ $128.1 ] million. As a result, third quarter operating income was $0.2 million or an operating margin of 0.1%. This compares to an operating income of $9.1 million or an operating margin of 6.1% in the same period last year. Third quarter ARR contribution margin was 16.3%, up from 15% last year. During the quarter, we had financial income of approximately $10.1 million, driven primarily by interest income on our cash, deposits and investments in marketable securities. Net income for the third quarter of 2025 was $8.4 million or net income of $0.06 per diluted share compared to a total of net income of $13.8 million or net income of $0.10 per diluted share for the third quarter of 2024. This is based on 134.1 million diluted shares outstanding and 134.7 million diluted shares outstanding for Q3 2025 and Q3 2024, respectively. As of September 30, 2025, we had $1.1 billion in cash, cash equivalents, short-term deposits and marketable securities. For the 9 months ended September 30, 2025, we generated $122.7 million of cash from operations compared to $90.9 million generated in the same period last year, and CapEx was $8.7 million compared to $2.3 million in the same period last year. Turning now to our updated 2025 guidance in more detail. For the fourth quarter of 2025, we expect total revenues of $165 million to $171 million, representing growth of 4% to 8%. Non-GAAP operating income of breakeven to $3 million and non-GAAP net income per diluted share in the range of $0.02 to $0.04. This assumes 133.4 million diluted shares outstanding. For the full year 2025, we now expect ARR of $730 million to $738 million, representing growth of 14% to 15%. Free cash flow of $120 million to $125 million. And total revenues of $615.2 million to $621.2 million, representing growth of 12% to 13%. Non-GAAP operating loss of negative $8.2 million to negative $5.2 million. Non-GAAP net income per diluted share in the range of $0.12 to $0.13. This assumes 134.8 million diluted shares outstanding. Lastly, as we announced today, our Board has authorized $150 million share repurchase program. We're able to make this announcement due to our strong balance sheet with over $1 billion in liquidity and our healthy free cash flow generation. In summary, while we are disappointed with the performance of our on-prem business during the third quarter, we remain confident in the performance of our SaaS business. We will continue to thoughtfully manage our business, which we believe will ultimately benefit our customers, company and shareholders in the long term. With that, we would be happy to take questions. Operator? Operator: [Operator Instructions] Our first question comes from Meta Marshall from Morgan Stanley. Meta Marshall: Maybe a question for me is just in terms of kind of you guys had just received FedRAMP high authorization for the SaaS platform. And so I guess just what went into kind of some of the decision to kind of terminate some of the people on the federal team. And just how do you kind of pursue that opportunity going forward? Yakov Faitelson: We have the FedRAMP moderate, but we just don't have just the empirical evidence that in terms of when we're looking at all of the investment, this is the place that we need to invest in. We said all along that it doesn't behave like the enterprise business. And we haven't figured out why the federal continued to underperform. It's just the result, we are reducing the footprint of our federal team and just grouping and reevaluating the strategy there. The data there is important, but we see when we just move these customers to SaaS, it's just a tremendous value proposition with all the automation, and we believe that the database activity monitoring and the e-mail is very strong and just want to mainly invest in the place that we can move these customers to SaaS as fast as possible. Operator: Our next question is from Matt Hedberg from RBC Capital Markets. Matthew Hedberg: Yaki, was there anything you heard that was consistent for why the on-prem deals didn't renew? I mean, I guess, was there anything competitively? And then, Guy, you noted SaaS NRR trends remain at healthy levels. I wonder if you could put a finer point on what level that might imply. Yakov Faitelson: Matt, so the win rates stayed the same. We have more than 75% of our ARR coming from the SaaS and the SaaS platform is performing very well. We identified that some of our [ apps ] were very focused on the SaaS customers. And unfortunately, they didn't have the account management trigger for the last leg of the OPS customers, primarily when they are single threaded and not using the full Varonis platform on-prem. You know our methodology of find, fix, alerts. Find the critical data, do the remediation and do the threat detection. And we're just going back to the basics and make sure we are getting back of taking care of these customers in the right way and that they are going to them in a very systematic way, demonstrating the value of SaaS almost treating them as a new sales campaign and just not assuming that the fact that there are good signs and positive conversations, they will just move on. When we look at it, there is just not one common thread. There is not one common theme why this OPS customer didn't renew. And this is why we are just very careful. But I think that what we have seen more than anything else that this is crystal clear tale of 2 companies, this automated platform with just all the coverage that is very easy to take all the rest of the integration. Many customers want DA Cloud and when we are competing with this, what we call, the DSPM ankle biters, we have very, very high win rates there to these OPS customers. So this is really what we are doing now is to make sure we are very focused on the last leg and to move these customers to SaaS. Guy Melamed: And Matt, in relation to your NRR question, as Yaki mentioned, this is definitely -- there's 2 companies right now in Varonis. We talked about that in the Q4 earnings call about the fact that the SaaS business is strong. And when we look at the results in Q3, I think the overall on-prem subscription business is somewhat dragging and masking the healthy business that we have in SaaS. When you look at NRR, and I'm looking at NRR on the SaaS side because that's really what matters. We're definitely seeing that NRR continuing to be in very healthy levels and well ahead of the total company NRR. We do disclose the NRR number on an annual basis, and we will provide the SaaS NRR at the end of Q4. But just to remind you, the conversion uplift is not included in that calculation. So it's really a reflection of kind of the ability to go back to our SaaS customers and continue to sell them additional licenses. And we definitely have plenty to sell to those customers with the amount of platforms that we have. So we're extremely encouraged by the numbers that we see there, and we feel very good about the SaaS business. Operator: Our next question is from Fatima Boolani from Citigroup. Fatima Boolani: Guy and Yaki, you've sort of identified that this nonrenewal or rather churn on an enterprise customer presumably was maybe more of an isolated event, but you are being prudent and you are frankly, taking a hatchet to your ARR guidance for the year. So I'm wondering, in the 24% of the ARR base that is not SaaS. What are some of the granular assumptions or thought processes you're reflecting to give us a better sense that, hey, we've kind of hit the floor on something like this happening again and frankly, for most of next year, ahead of which maybe customers are going to have an air pocket in terms of their decision-making. So can you help us through some of that in terms of how you're putting parameters on the risk to the 24% of ARR that is not SaaS? Guy Melamed: So when you look at the fourth quarter, and I'll talk about the fourth quarter first, and then I'll give you some color on kind of how we're thinking about 2026. But the fourth quarter is really the largest quarter of the year. And we want to wait and see how the business performs before providing really a formal look into 2026. I will tell you, and I want to talk about Q4 for a second, that if we had the same renewal rate that we saw for the on-prem subscription business in H1 2025 and the same renewal rate that we saw for the full year 2024 for the on-prem subscription business, we would have raised our full year guidance. So this reduction of guidance is isolated to the on-prem subscription and the fact that it behaved, I would say, unpredictably, especially in the 2 weeks -- in the last 2 weeks of the quarter. When we were going throughout the quarter, we didn't see any change, and we really saw this happen in the last 2 weeks of the quarter. And that's why we want to evaluate when we see in Q4 and kind of take into consideration whether this was a onetime on the on-prem subscription or if this is a much more of a trend. I will tell you that from a guidance perspective, we baked in additional conservatism because we want to make sure that we account for this behavior and also for the fact that we announced end of life on the on-prem subscription. So we are baking both of those things into our guidance. And based on what we see in Q4, we will take that into consideration when we look at 2026. Operator: Our next question is from Joshua Tilton from Wolfe Research. Joshua Tilton: Can you guys hear me okay? Guy Melamed: We can, yes. Joshua Tilton: Awesome. Maybe just one for me. And the answer might be you guys are still kind of trying to figure it out. But, I guess, I'm listening to everything that's going on the call, and I'm just -- I understand what happened in the quarter, but I'm still a little confused on the why. Like do we -- like from your perspective and like what happened, what was the reason as to why you saw some of these lower-than-expected renewals in the on-prem business, both for Fed and non-Fed? And my follow-up to that, maybe just a little more directly is on the Fed side, was it related to the shutdown? And on the non-Fed side, were these customers aware that the end of life was going to happen? Or is this announcement of end of life kind of post quarter, if that makes sense? Guy Melamed: So I kind of -- we kind of heard you scrambled at the end, but I think I got the gist of the question. And I want to give some color as to kind of the what has -- within the Q3. So really, as it relates to this quarter, we really saw multiple factors that came up, but we didn't identify any big theme that relates to our customers that did not renew on the on-prem subscription renewals. I think we identified sales process issues on the convergence that weren't related to the contracts and the documentations that we've talked a lot about in the past, and we are going back to basics to address these issues. We also identified and we are seeing some additional budgetary scrutiny from customers this quarter. But it's really hard to say for certain if that was a factor because it happened so late in the quarter. And obviously, as you mentioned, we had the federal underperformance. I can tell you that one thing that was clear to us is that we didn't see a change in the competitive win rates, and we're still in discussions with some of these customers that did not renew. Yakov Faitelson: And with some of them, it was clear that they were what we call single threaded that did some classification and audit and didn't do all the find, fix, alert methodology. And in some cases, the teams just -- the heart of the sales process is a POC and then QBR that showed the value and an EBC that showed everything that we have in terms of road map and so forth and some teams didn't really follow this methodology. And also, it's a tale of 2 companies, but the vast majority is now in SaaS. And for some of the teams, it's easier to pay attention to the SaaS customers, and we want to make sure that we are managing their attention and making sure that we are taking care of this last leg of the transition in the right way. Operator: Our next question comes from Joseph Gallo from Jefferies. Joseph Gallo: Should we expect you to ease on that 25% to 30% ASP uplift for conversions? Or is there anything you can do to further incentivize the on-premise customers remaining to move to SaaS? And then just in your conversations with customers, is there any sense of the number or percentage of business that maybe would never be willing to or can't move to SaaS? Yakov Faitelson: We are just uncovering every stone here. And as we said, there is not one thing. This is something that till now just worked extremely well. It was a surprise in the last 2 weeks of the quarter. So we just need to see how it will play out. Guy Melamed: And I want to add, when we look at the Q1 and Q2 renewal rate in 2025, we saw that renewal rate increase. So I think when we're looking at the Q3 renewal rate on the on-prem subscription coming down, we're truly trying to understand if this was a one-off or if this is something that we need to pay more attention to going forward. And that's why we reduced the guidance to bake in additional conservatism. And I think when we look at the Q4 results, we can identify for 2026, what is kind of the right rate that we should assume going into the year. But when we look at kind of the actions that we have taken, including the reduction of 5% of our headcount and adjusting some of the costs to better adjust to the top line and taking into consideration that conservatism on the guidance, we're trying to do everything right and be active in addressing that and making sure that we uncover every stone to identify how to address this going forward. And that was the thought process following the Q3 OPS renewal rate. Operator: Our next question is from Brian Essex from Goldman Sachs (sic) [ JPMorgan ] Brian Essex: It's Brian from JPMorgan. I guess maybe, Yaki, for you or maybe, Guy, if you want to pick this one up. On the SaaS business, it sounds like that business is still very healthy and kind of as expected. Can you give us a sense of where you think ARR could shake out for the end of the year? I think if we use like your previous 82% guide, that puts us in the neighborhood of, I don't know, $615 million at the midpoint, somewhere in that neighborhood. But just a sense of the -- what to expect on the SaaS side? And then as a follow-up, contribution from SlashNext Cyral what you expect that could contribute for the rest of the year? Guy Melamed: So I think when we talked about growing 20-plus percent, we feel very confident with our ability to grow 20-plus percent on the SaaS business. Obviously, kind of the behavior of the on-prem subscription renewals was a surprise to us, and we're trying to address that. But when I look at the SaaS business, it's acting very strong, very healthy, both in the value that we provide to our customers, then in our ability to go back to those customers and sell them additional licenses and additional platforms. So obviously, there is that headwind from the on-prem subscription business. But I would say that -- when we look at our -- we plan to end the year with 83% of our total ARR coming from SaaS. And the fact that, that business is performing really well gives us the confidence that we can continue to grow 20-plus percent on that business. That's part of the reason that we announced the end of life being at the end of next year. We want to have this on-prem subscription business in a confined time frame to be able to -- to be 100% SaaS and show all the benefits that the platform has to our customers and all the leverage and financial benefits that it can generate for the company. Yakov Faitelson: Regarding SlashNext, we believe that it's a very good acquisition for us and a natural extension for our customers. So today, most of -- a lot of these attacks, the way that they are happening is the sophisticated social engineering from a trusted source, this supply chain attacks. And they have -- SlashNext is an unbelievable detection engine for that. And it has a very, very strong multiplier with our MDDR service. And we just started to introduce it and the reaction is very good. And regarding the database activity monitoring, there are these 2 incumbents that we can replace. People want to consolidate around one data security platform for security, compliance and AI usage and [ sterile ] proxy works extremely well and everything that we are building around it. So we just feel that these are 2 very strong additions for our platform and work very well and organically within our sales motion. Operator: Our next question comes from Rudy Kessinger from D.A. Davidson. Rudy Kessinger: It's kind of been asked. But I'm just curious, the end of life for self-hosted by the end of next year, and you just had lower renewal rates than you were expecting in Q3. I mean, do you feel at all that this push to migrate to SaaS is in any way alienating a certain portion of your customers who are just never going to move to SaaS? And if so, I guess, why do that? I imagine some of those customers might be very large strategic customers who could have very high lifetime values. Why not let them have a longer time frame to migrate to SaaS or remain on term license if they want to? Yakov Faitelson: So we wanted to move everybody to SaaS and we said -- and get rid of the OPS. We always say that it's 10% of the effort and order of magnitude, 10x more value. Just as a business to operate it, everything that we are doing with engineering and the value that customers are getting, the integration of all our products, the way that we provide support. You need the right platform, then you need the right business model and the right operating model. And all along, the whole thought process was to move to 100% SaaS business. And we just want to also make sure that we are accelerating it because we also believe that in terms of the attention because this is one of the most important ingredient of our salespeople. We want that their attention will be on getting value to customers, selling more DA Cloud that is doing very, very well this year, selling the SlashNext product, the database activity monitoring, and we are doing so many more. And we just want this low-touch support model and MDDR and provide all the automations and the whole operating and business model of the company and also the value proposition is geared towards us. Guy Melamed: Add to that, just when you go back to our Investor Day that we held in Q1 of 2023, we defined a transition to be complete when we get anywhere between 70% to 90% of our ARR coming from SaaS. This is actually the first quarter that we are above that 70% threshold, finishing at 76%. And if you go back to conversations that we've had, we always said that we don't want to maintain 2 types of code, that there are a ton of financial benefits for the organization to be only under SaaS. And as Yaki mentioned, there's obviously a tremendous difference in value provided to customers that are SaaS versus customers that are on the on-prem subscription. So if you look at the benefits for the customers and if you look at the financial benefits for the organization, we don't want to be stuck between the on-prem subscription business and the SaaS business, SaaS business performing really well. And obviously, the on-prem subscription renewals acting the way they did in Q3. So that's -- we would have announced the end of life. That was our plan all along. But obviously, with what we see in Q3, we kind of expedited that announcement, but really talking about December -- end of December of next year. And we will work with our customers to make sure that they can move to SaaS and benefit from it. But as we mentioned all along, we didn't want to maintain 2 types of code, and there are significant financial benefits for the organization, not maintaining those 2 types of on-prem and SaaS and being just on SaaS. Yakov Faitelson: And also the ability of our sales force to do effective account management to take care of our customers in the right way. The whole company now, the lion's share is a SaaS business and gear... Operator: Our next question is from Roger Boyd with UBS. Roger Boyd: Just to go back to Josh's question for a minute to just be clear, was there any change to how you're approaching renewals on maintenance and term license in the quarter relative to the second quarter or last year and whether that maybe led to some of this unpredictability. I guess, the context is we had heard some anecdotes that you were maybe more heavily encouraging on-prem customers to move to SaaS or in some cases, living in the ability for customers to renew on maintenance. And just wondering if that at all was informed by this planned end-of-life on-prem business. Guy Melamed: So again, going back to kind of the reasons for the lower renewal rate of the on-prem subscription, we just saw multiple factors. I don't think there was any one big theme that we can pinpoint to the reason of the on-prem subscription renewals behaving the way they were, especially when you look at the Q1 and Q2 renewal rates where the -- when you look at the renewal rate of the company going up in Q1 and Q2, we definitely didn't expect that the Q3 renewals of the on-prem subscription would behave that way. I think that when you go back -- if you go back historically, our sales force has been trying to convert customers in discussions with our customers for -- since we announced the transition. We were able to move as quickly as we have because our reps were discussing this with customers. We obviously believe that the benefit of having SaaS and MDDR has much greater value for our customers than being on the on-prem subscription and then having those customers manage the platform themselves. So obviously, I don't know what you heard, but our sales team has been working with customers, and we'll continue to work with our customers to make sure that they get the best platform that we have to offer, which is the SaaS plus the MDDR and all the functionalities that we have under SaaS that we don't have with the on-prem subscription. I think that as we look at the results in Q3, we see a very healthy business under the SaaS platform. And obviously, the on-prem subscription acted in a way that surprised us, which is part of the reason that we want to be 100% SaaS by the end of next year. So this -- I don't see this as something that is different in Q3 compared to Q2. I think there were multiple factors that contributed to kind of the lower renewal rate of the on-prem subscription. We talked about the sales process issues. We talked about additional budgetary scrutiny. Obviously, we talked about the federal underperformance. But as I said before, there was one thing that was clear to us, and that was that we didn't see a change in the competitive win rates, and we're still in discussions with some of those customers that didn't renew. So we think we might be able to get some of them back. We're in discussions with them. But obviously, we -- from a guidance perspective, we're assuming a more conservative guidance for Q4 because of the rates that we saw in Q3. Operator: Our next question comes from Jason Ader with William Blair. Jason Ader: So if customers are not renewing their on-prem subscriptions with Varonis and not going to your SaaS, then what are they doing? Because obviously, you wouldn't think they'd want to be exposed if they've had Varonis data protection and all of a sudden, they don't have access to the technology anymore. So maybe just talk us through that, like what are they doing? And then separately, is term -- is there an element of compression in term contract duration at all because we saw that with another software company this morning where they saw some compression in term duration. Guy Melamed: So let me address the first question and then I'll tackle the second one. When we look at those on-prem subscription renewals, most of them didn't go anywhere. And as I said before, we're in discussions with some of them. For many of these customers, they were single threaded, meaning they were only protecting on-prem data with a single use case, and they weren't using the full platform that we have with our SaaS offering. Historically, we converted these customers without many challenges. But in Q3, we encountered some of these issues and really can't really tell if it was a one-off or a new trend. And that's part of the reason that we want to see how Q4 behaves in order to get more color on kind of the rest of the non-SaaS business. In terms of the duration, that wasn't an impact here. We looked at that and analyzed that, and it didn't have an impact. Operator: Our next question is from Mike Cikos from Needham & Co. Michael Cikos: Mike Cikos here. I'm trying to get a sense if there was anything unusual about this OPS renewal cohort in the final weeks of the third quarter. And really, what I'm trying to get at is I'm wondering if the renewal rates was really tied to a smaller subset of customers, i.e., the breadth of customers really skewed to the renewal rates that we're talking to. And does that in any way help explain why the team is uncertain on the impact of these renewal rates, maybe just because we don't have enough observed data points. And then, I guess, secondly, have the OPS renewal rates that we saw on those final weeks of Q3? Have they persisted in the 4Q now that we have October, essentially behind us? I'm just trying to get a sense of what's transpired in the following 4 weeks. Guy Melamed: So let me touch on the second part of the question. And I think I -- my understanding is -- are we seeing any trends in Q4 on the renewal rates. I think it's important to note, and we've disclosed this in our SEC filings, our business is back-end loaded, and we closed a significant portion of our business in the last 3 weeks of the quarter. It's very hard to see how the renewal rate will behave in Q4 when you own the data points that we have sitting here today. And if you go back to Q3, the business was tracking on plan, but really it was only in the final 2 weeks of the quarter that we experienced a decline in our renewal rate for the on-prem subscription business, which related really to both the federal and nonfederal sectors. So it's very hard for us to bake in any assumptions. And from a guidance perspective, we have never baked in positivity before we see it come to fruition. We always assume either the trend continues or gets worse, which is what we did in this case of the guidance. In our Q4 guidance, we assumed lower renewal rates that would take into consideration not just what we saw in Q3, but some of the impact of the announcement of end of life for our on-prem subscription business. So that was the thought process there when we looked at the Q4 numbers. And obviously, as we see the results at the end of the quarter, we'll give additional color from all the analysis that we'll see and kind of look at 2026 with the lens of Q3 and Q4 and not just based on Q3 as one data point. Yakov Faitelson: There's no one thing. There is no one plan. But in some cases, definitely, there are account -- basic account management problems that customers use a small subset of the platform and our reps assumed like in other situation, they automatically will move into SaaS for the full hybrid complete. They had some positive discussions, but because of the limited usage and some deals [indiscernible] just all over it to make sure that we are getting control over these situations. Operator: Our next question comes from Erik Suppiger from B. Riley Securities. Erik Suppiger: Just can you remind us what your contribution from Fed was and maybe what the contribution from the on-premise Fed business because I think all the Fed is probably on-premise. And then you've specifically identified both your Fed on-prem and the non-Fed on-prem. Was there a difference in terms of the decline in renewal rates between those 2 categories? Or were they both down similarly? Guy Melamed: So federal business has always been around 5% of our total ARR. And when we look from a guidance perspective going into Q3, we basically assumed a flat contribution going into the quarter, but we actually had a headwind related to the federal business that was really coming from the renewals in the federal business. And we had several million dollars of a headwind coming from the federal business, which is kind of why we're making the adjustments to the team. But when you look at the renewals, there were actually -- the renewal rate decline was both on the federal side and also on the nonfederal side, which is the reason that we're reducing our Q4 numbers. If it was only the federal, I don't think we would have adjusted the full year guidance the way we did. Operator: Our next question comes from Shrenik Kothari with Robert W. Baird. Shrenik Kothari: So now that the conversion phase is largely complete, right, for your initial target for the mix and with the end of life, and in light of your kind of prior confidence in sustaining 20% top line growth, if we can really help kind of triangulate what the underlying growth cadence looks like going forward in your view now with the conversion out of the picture. Just from that $545 million SaaS ARR core, like how much of that is considered sort of early stage with significant room for upsell, cross-sell next year and after via, of course, usage and module attach and versus how much is already a little more mature with product adoption such as MDR and stuff like that. Just wanted to understand how to think about underlying growth cadence into next year and ahead. Guy Melamed: So again, it goes back to the tale of the 2 companies. And when you look at the SaaS business, we definitely see that business acting strong. We believe in our ability to grow 20-plus percent with our SaaS business really due to the momentum we're seeing with new customers and the strong NRR we see with our existing SaaS customers. I think that -- when you look at how we plan to exit the year and we raised our expectations on the SaaS mix coming out of total ARR going from 82% to 83%, I think we are kind of -- the strength of the business is very apparent to us under the SaaS ARR. So we feel very confident in our ability to continue to grow going forward. We're addressing the issue that relates to the on-prem subscription renewals. We're taking kind of the necessary measures there. But it really is -- the on-prem subscription renewals are really masking the strength of our SaaS business. Operator: Our next question comes from Junaid Siddiqui from Truist Securities. Junaid Siddiqui: As you expand your platform to cover adjacent use cases like SaaS and cloud infrastructure, just curious where is the source of that incremental budget that you are taking coming from? Are you seeing like a budget reallocation from existing security categories? Or is this tapping into net new spend from customers? Yakov Faitelson: Well, we definitely see that customers have more budget to data security. It's important for them, and this is how we sell. Operator? Operator: Ladies and gentlemen, this now concludes our question-and-answer session and does conclude today's teleconference as well. Thank you for your participation. You may disconnect your lines, and have a wonderful day.
Anja Siehler: Thank you, Maria, and also a very warm welcome from the Nordex team in Hamburg. Good morning. Thank you for joining the management call on the upgraded full year 2025 EBITDA margin. As always, we ask you to take notice of our safe harbor statements. With me are our CEO, José Luis Blanco; and our CFO, Ilya Hartmann, who will lead you through the presentation. Afterwards, we will open the floor for your questions. And now I would like to hand over to Jose Luis. Jose Luis Blanco: Thank you very much for the introduction, Anja. Good morning, everyone. Thank you for joining us on such short notice. As you saw in ad hoc released last night, we managed to deliver a strong performance in the third quarter and, hence, we are now raising our full year 2025 EBITDA margin outlook after careful review of the full year forecast. Today, I'm pleased to walk you through our preliminary Q3 results and the rationale behind our upgraded guidance. So let's start with our preliminary third quarter results. We delivered revenues of EUR 1.7 billion in the third quarter, broadly in line with the same period last year. This was partially driven by project scheduling mix and temporary supplier-related delays in Turkiye. On the profitability side, we exceeded expectations. Q3 EBITDA margin reached 8%, up from 4.3% in Q3 last year, driven by stronger execution and ongoing improvements in service margins. This brings our year-to-date EBITDA to EUR 324 million with 6.5% EBITDA margin for the first 9 months. As highlighted in our Q2 results, we continue to generate solid free cash flow in Q3, bringing the year-to-date total to EUR 298 million. Looking ahead, we expect to maintain positive free cash flow generation in Q4, supported by increased activity levels, continued momentum in order intake and disciplined working capital management. Let's move to the next slide, where I will walk you through the key drivers behind our margin upgrade. Over the past 3 years, we have made consistent progress in strengthening our profitability. With an EBITDA margin of 8% in Q3 and 6.5% year-to-date, we have continued that positive trend. The performance, along with our updated outlook for the remaining of the year, has led us to raise our profitability guidance for 2025. The margin improvement reflects operational progress across the businesses. Project execution exceeded expectations with some of the contingencies we had built in earlier this year not materializing. Service segment continued its recovery faster than anticipated, contributing positively to the overall margins. And not least, stable supply chain conditions and disciplined pricing also supported the upgrade. We are encouraged by the progress so far, but our focus remains firmly on the execution and disciplined delivery in the fourth quarter with record high activities. Our aim is to close the year with consistency and operational strength while continuing to manage risk carefully. Moving to the last slide to the guidance. Based on a solid 9 months performance and the review of our forecast for the remaining of the year, we now expect 2025 to register a significant step-up in profitability compared to 2024 levels, bringing us very close to the medium-term EBITDA margin target of 8%. Reflecting strong service EBIT margins and solid project execution, we have raised our EBITDA margin guidance to a range of 7.5% to 8.5%. While we are not issuing formal guidance on free cash flow, we remain confident in our ability to deliver another year of robust free cash flow generation. The strength of this performance will depend on, first, continued momentum in order intake, of course, sustained profitability improvements and disciplined working capital management. All other elements of our guidance remain unchanged. With this, I'm handing over to Anja to open for Q&A. Anja Siehler: Thank you, José Luis, for guiding us to the presentation. I would now like to hand over to Moira to open the Q&A session. Operator: [Operator Instructions] The first question comes from Constantin Hesse from Jefferies. Constantin Hesse: Can you hear me okay? Ilya Hartmann: Yes, we can. Constantin Hesse: Well, first of all, congratulations, guys. Quite incredible, what Nordex has been doing in the last 3 years. So well deserved guidance upgrade. A few questions on the margin very quickly. So looking at the margin and the volume profile, it looks like these margins are now coming through at volume levels that were much below those 8 to 9 gigawatts that we were talking about before. So is that kind of the new volume level that we could expect this level of profitability? Then looking into 2026, I'm assuming that there are no major one-offs. So we're talking about this level of profitability now going forward into 2026. I'll start with those two. Jose Luis Blanco: Thank you, Constantin. I mean, this is a project business and there are always risk and chances and some materialize or not. This year I think we see better supply chain stability. So as a consequence, some risk, some contingencies didn't materialize and can be released to the profitability. But you cannot extrapolate this for the future. Today, we would like to explain you why this uptick, but 2026 is too early. I think we still have a huge quarter ahead of us in terms of activity, in terms of expected order intake and how 2026 -- we are in the middle of the budget preparation for 2026, how '26 is going to look like. We will know better beginning of next year and we will report in the schedule of the financial calendar. But I wouldn't extrapolate a quarter performance in a long-term view. Nonetheless, if all things being equal, we are confident that we can do a better year than '25. Constantin Hesse: Okay. That's understood. Can I just on -- so when you say contingencies, it's basically just risks that haven't materialized. It's not like there has relief... Jose Luis Blanco: Very much so, very much so. Constantin Hesse: Okay. Understood. And just on the volume levels, so it's fair to say that volume levels wise, it looks like profitability is coming through better than anticipated as levels of volumes that are lower compared to what you had anticipated previously. Jose Luis Blanco: Let's be cautious there. I think we were always signaling that this extra volume will boost extra profitability to achieve the 8% midterm target. And looks like we are going to achieve this midterm profitability target with a lower volume. But as said, project business risk and chances. So... Constantin Hesse: Okay. Fair enough. Understood. Last two questions. Order intake, you're still very confident that you're going to beat next year -- sorry, last year. And just on this Turkey situation, could we potentially expect any small liquidity damages in 2026 from any potential delays? Or how should we think about that? Jose Luis Blanco: Order intake, you know, Constantin, we don't guide order intake. So to exceed the last year performance, we need to do a good Q4. That, we expect to do. But so far, the bucket is empty. So with still 2 months to go -- no, I'm just joking a little bit. So it's still 2 months to go, and we still need to bag a big number of orders. So yes, without guiding you, we remain optimistic that we can achieve and slightly improve last year without guiding for order intake. Regarding Turkiye, the situation, as you can imagine, is quite complex. So in mind, your assumption might be correct. But I will prefer not to go into more details because complex negotiations with several stakeholders that, as we speak, we are having. So we hope that we can solve the situation. We don't know yet what the impact is going to be for '26. For '25, we know, and it's included in the guidance that we provided today. Operator: The next question comes from the line of Vivek Midha from Citi. Vivek Midha: I'll stick to one. Regarding the performance in third quarter and fourth quarter, the contingency that you're referring to, could you -- is it possible to be more specific on what the contingencies were? So how much was related to, say, project execution? How much was related to perhaps the warranty provisions you've been booking earlier this year? Any color would be helpful. Jose Luis Blanco: No, thank you for the question. I think you remember the very unfortunate situation a couple of years ago where we were missing our targets and disappointing everybody. So the situation there was quite unstable. So step by step, we tried to improve our pricing. We tried to improve our transfer conditions and we improved as well the provisions that we booked for project execution. After several quarters, you have more visibility for the year and you realize that those contingencies that were increased compared to previous years are not any longer needed, even that we could execute even below the contingencies of former time. So this released profitability to the P&L. So it's general contingencies for project execution. Ilya Hartmann: And maybe to give some color to Vivek. So this is everything that has to do with the projects, if you go to logistics, sprains, installations, crane time. So all of things that can go wrong in a project and have gone wrong in the past are baked into the project contingencies. And if they don't materialize over the year, people realize that the execution goes better than they had thought. And that is the basic principle here in the project business. Vivek Midha: Understood, understood. And just to be -- just one quick follow-up as well. On the free cash flow commentary, I fully understand it, of course, depends on the working capital developments and so on. But just in terms of what we see at the end of the year, sounds like you may do, for example, EUR 550 million to EUR 600 million or so of EBITDA. We've got the CapEx guidance, working capital. Is there anything else to be aware of when we think about what you could do for the free cash flow for this year? Jose Luis Blanco: Today, the way we see it, I mean, the building blocks is expected order intake, keep stable execution, which we are confident. And this is why we are guiding you. The risks are on a high activity level in project installation as well as high activity level in manufacturing in the last quarter of the year. But if everything is stable, Ilya, the math is correct. Ilya Hartmann: I think so. And again, as José Luis said, we're not guiding neither for cash or free cash flow, but the two of you have done the building blocks and of those assumptions, the chips fall the right way to calibrate you, but really just calibration, could we do again the same free cash flow in the last quarter on the back of the items discussed than we've done in the 9 months, so twice as much as current. Probably, we could. If some of the things don't go away, maybe a little less, but I think that is where the math is correct. Operator: The next question comes from the line of Sebastian Growe from BNP Paribas. Sebastian Growe: Can you hear me? Just to clarify. Ilya Hartmann: Yes. There is a little bit of noise on the line, but we can hear you, Sebastian. Sebastian Growe: Okay. I'll try my very best not to have any technical issues. So the first question would be around the gross profit margin. And I would like to make some reference or get some reference to the order backlog in this case. So you mentioned currently a good execution in '25. At the same time, however, you will know what you do have contracted both from a regional and also from a gross margin perspective, I think. So against the backdrop, my question is simply, if you do see any relevant changes from either a mix or a gross profit margin quality perspective based on the existing backlog when looking into sort of the future. So it will be the first one. And the other one is -- well, maybe start there. Then we take them one by one, that would be great. Jose Luis Blanco: The answer is not really, not really. I would say that the -- yes, there are certain regions with a slightly better margin, but it's not -- I would say, generally speaking, 80% of the project execution, 80% of the backlog is very much with normalized margins. So we don't see a big difference in regions so far. Sebastian Growe: That sounds good. And then the other question is on free cash flow and also more higher level discussion, if I may. I would just be curious to hear your thoughts around if there's anything visible at this stage for relevant free cash flow that might change, be it the level of cash interest, cash taxes, the working capital, terms and conditions that you find in the market, also the CapEx because I think all of those items have been fairly stable now, and just curious to hear your thoughts if there might be any changes. Ilya Hartmann: I'll start and then José Luis might think of any other levers. No, I think all the large building blocks, especially you touched upon CapEx, more or less, give or take, we believe, are on the run rate that we have been giving in the past years. Yes, the truth is that now with an improved standing of the company, our financial costs will go down. I mean, the cost for our bonds, which is our bread and butter. Business, of course, depends on the risk profile of the company, and that is improving as we're talking about it. So if anything, financial costs or interest for the bonds might go down. And that's probably the most relevant lever I can think of. But José Luis, have anything else? Jose Luis Blanco: No, no. I think the biggest building blocks, of course, expected order intake and EBITDA. And the EBITDA is mainly from keeping the stability in the supply chain. And that's it, I think understanding that there is a big activity quarter as always, winter for installation and factories fully loaded in the quarter. So the risk profile of the quarter is slightly higher. Last year, we delivered. We expect to deliver this year. Sebastian Growe: Yes. And that's actually a good segue to my last question, if I may say that. The first one is a very technical one. I'm sorry if you had answered that before. But could you quantify the impact on the revenue delays that you attributed to Turkey to the extent that is possible or give at least a rough magnitude? And would you expect the full catch-up in the fourth quarter? And on a more structural note, I'm just a bit irritated by apparently, we have seen order intake going far higher now for a couple of years really in comparison with the revenue execution volume. So when should these two lines convert? So you're running on orders of 8, 9 gigs. At the same time, the deliveries and execution are probably 6.5, 7, somewhere in that neighborhood. So how should we think about that from a timing and as I said, convergence perspective, that would be great. Jose Luis Blanco: No. Thank you, Sebastian, for these two questions. Regarding Turkiye, you need to allow me not to be -- I cannot be very specific there in the best interest of all stakeholders of Nordex because everything I say might impact the ongoing negotiations that we have with several stakeholders. The impact for this year is within the guidance and that has dragged revenue. And let's put it that way, the revenue we see we are guiding midpoint, but we see more risk on the revenue than on the EBITDA for this year. And Turkiye is one of the big contributor factors for that. But I really cannot be more specific there. We are dealing with that the best way we can. This might impact slightly 2026. But here, we are talking about Q3 and full year guidance for '25. Regarding the second question, it's a very good one. And what you see there is a shift in the order intake profile of the company and in execution coming from close to 50% of the volume in previous years. In the Americas, where the lead time is very, very short, so you contract Q4 this year and hit P&L execution Q4 the year after, to majority of the volume being contracted now in Europe and in Germany where the lead times is more in the range of 18 to 24 months. So as a consequence, you will see that delay. We expect next year to be a higher volume than this year because of that delay in the order intake going through the P&L, especially in Germany. And that's the main reason why the order or the book-to-bill has been increasing, so because the lead time in orders in Europe, mainly in Germany, takes twice the lead time of an order in North America, in U.S., for instance. Operator: The next question comes from the line of Ajay Patel from Goldman Sachs. Ajay Patel: Congratulations on the release. I have two questions. I wanted to take it a little bit high level for a second. This year, if we look at what you put out today, points to at the midpoint, an 8% margin number in terms of EBITDA. And you start to think, well, -- you haven't had the real ramp-up of Germany and typically, they're better margin projects. There is project execution or at least order intake coming on the U.S. side for the likes of Vestas and potentially that's an opportunity for you also. I find it very difficult to understand that volumes don't grow over the next 2 to 3 years. And if you're already having a base year margin of around 8% this year, that we don't see a more improved margin environment than the 7% or so margin that is in consensus for next year. Could you talk to some of the building blocks that maybe I need to think about because it feels pretty clear the direction of travel as I see it. So maybe I'm missing something. And then on the cash flow, I think Ilya pointed to the call pointed to around EUR 550 million of free cash flow -- free cash flow. That points to just over EUR 1.5 billion net cash for the full year. That's like 25% of the market cap. When are we going to get some details on what does capital allocation look like? How much do you need for the balance sheet? How much do you need to invest going forward? What can be returned to investors? And to what degree that's a consideration? Jose Luis Blanco: Thank you very much for the two questions. Let's do this together. I think starting with the second question, the first priority -- the answer is we will talk about that in the annual results presentation in February next year. But keep in mind that the first and foremost important thing for us is to strengthen the balance sheet. And we have -- we expect to have -- we have today and we expect to have a very solid cash position, but the equity ratio is still what it is. So we need to reinforce the balance sheet to make sure that we prepare the company for higher volumes in the future. And this goes in line now with the first question. Do we expect higher volumes in the future? I mean, we are not here guiding '26 or midterm. But if the high level, your assumption, we agree. I mean, if the book-to-bill is increasing and increasing, sometimes you need to process those orders because you cannot increase the book-to-bill forever. So all things being equal, we should be able to see growth, and we should see some profitability improvement associated with the growth. But as said before, project business, contingencies for the projects this year we didn't need or we don't need. This might not be the case next year. So I'm not saying that what we released today are one-off, but I want you to understand that this is a project business. And sometimes you consume certain level of contingencies in execution and in other moments, you consume a different level. And Eli, I don't know if you want to. Ilya Hartmann: No, I think on that point of what you and Ajay are discussing on the 8% and the trajectory, that is obviously everything you said I subscribe. And to the capital allocation, a little to add. But to underline, it is a very fair question. And we've been saying in the past when shareholders have been supportive of the company that we will not forget about that once the company is doing well. And right now, it is on a healthy track, as José Luis has explained. So please bear with us until the full year results. As we said, we will come back with something on that, but it is a question that is front and center on our minds and will be discussed and explained when we do the full year call. Operator: The next question comes from the line of William Mackie from Kepler Cheuvreux. William Mackie: Can I just maybe ask some questions about the contingency process in your projects business, Jose Luis, with your vast experience. I mean, since the last 3 or 4 years, clearly, you've been nursing the business back to the health we see today. And with that adopted or allowed your project teams to adopt more caution perhaps than normally you might expect. So can you talk a little bit to how you would think the contingencies were being accrued or assessed at the beginning of the year? And then when this became visible to you? So as the year progressed and the execution and the costs, were the execution better and the costs lower, when was it clear that the contingencies were overly prudent? And when we think about how you run the business into '26, '27, to what extent do you think you'll change the way you challenge the project leaders and teams in the way that they're allowed to accrue contingencies going forward? Jose Luis Blanco: Yes, that's a very good question. The way we operate, we assess the risk in the supply chain. We take into consideration previous and current experience in project execution. We assess the world and the risk and the configuration of the supply chain. And based on that, during the order intake phase of the project, we build certain contingencies for executing the project. So the order intake then moves from an offer to a contract, and then we put that into the machinery of the company. And from there, it goes into a planning for the year. And from the planning goes a budget, and then you start execution. Usually, the first quarter of the year is very low activity. So very low activity. You cannot fully assess if you are conservative or optimistic in the view of the year with a quarter of low activity. So second quarter, slightly more activity than first quarter. So you start to have a better visibility how the year might look like. And then around the third quarter, you have a way better visibility to narrow what you think the company can deliver, is this process going to change for the future? I don't think so. I think we keep the same process. What we will do is after hopefully 2 or 3 years of very stable execution, if we see that our contingencies are over conservative, we might revisit that. But for the time being, we haven't done that because the macroeconomic is quite still uncertain. I mean there is trade discussions, duties, yes, no, this influences currencies. So I don't think we are in a position where we can say, well, the macro environment is fully stable. You need to be more aggressive in the way you build your contingencies for the projects. William Mackie: Maybe the second is a follow-up to questions that have been asked a number of times. But I mean, the basic arithmetic suggests that your Q4 EBITDA margin is 11% and maybe the second half is close to 10%. Unless the world becomes topsy-turvy again or changes to the risk side, I guess the questions that are coming are more why shouldn't -- or why should we not assume that you can maintain a similar level of performance in '26 towards that we've seen in the H2 '25 when you're expecting higher volumes, your pricing has been stable. The supply chain is stable with the exception of Turkey. And therefore, already, you're going to be hitting above your midterm targets for adjusted EBITDA. And I guess I hear you need to go through the planning process before disclosing that more widely, but is there anything that we should be missing that should hold our thinking back for '26 on '25? Jose Luis Blanco: No, I think the building blocks you name them. I think the biggest -- and let's not talk '26 before time because we are in the middle of the planning. But the biggest lever is the expected order intake. So we still need to sell a lot of projects to make real the assumption that we will see a growing company next year. We expect to do so, but everything is still needs to be executed. Regarding supply chain activity, I mean, we've had years of bad surprises and years of good surprises. So if we are in a neutral supply chain and we don't deteriorate profitability in execution, is this going to be an uptick like this year or it's going to be neutral versus how we build the contingencies for the project to be seen, and the Turkey effect, we need to assess what the Turkey effect is going to be for 2026. For 2025, we know. We plan for that. For 2026 is still in discussion. And as I mentioned before, I will rather stay silent there because there are several negotiations ongoing with key stakeholders that it's important that we keep information limited. And I'm sorry for that, but I think it's in the best interest of the company. Operator: The next question comes from the line of Alex Jones from Bank of America. Alexander Jones: Two, if I can. First, just back on the supply chain. You talked about that being sort of more stable perhaps than you expected at the start of the year. Are there any signs apart from Turkey that, that changes going forward? I'm thinking things like the tighter EU steel quotas? Are you pretty happy at the moment with how things look going forward? And then the second question, just on service margins, which you called out specifically. Is there anything else that sort of improved the service margins other than the sort of strong execution you're talking about? Or to phrase it differently, is this a pull forward of the improvement you're expecting in service margins or just an indication that actually they can be more robust than you had previously expected? Jose Luis Blanco: Okay. So first question, I would say, all things being equal, there is the elephant in the room of CBAM and what the impact of that could be and who needs to pay for that impact. So this will translate into cost increases. And eventually, we would like to translate to the price. The quotas for steel is a little bit the same. Can this be a pass-through to the customers and to the tariffs and to the consumers or not in CBAM, we at Nordex, we have a clear position. I think CBAM is an environmental tool that put a lot of burden on the supply chain, and that might delay the biggest contribution to fight climate change. So every turbine we sell has a CO2 payback of 2 months. So if you put a CBAM increased prices, this might delay the installation of turbines and as a consequence, delay the net zero. So it's a tool that goes against the intent of the tool that puts a lot of pressure on supply chain and on customers and consumers. So let's see because negotiations are ongoing. If this could be extent for our sector, yes or no. The second impact, which is related with that is steel and the quotas and the prices, and we'll try to manage this portfolio in the best possible way and translate the cost increases to customers. And Turkey, we already mentioned. Regarding services margin, we are very happy with the service performance. And it's very much that you pay less liquidated damages because the company and the technology is doing well and the failure rate is moving into the right direction. And I don't think this is a one-off. I think this is sustainable. But to what extent the service business growth and what the profitability of the service business growth is a slow moving -- is a slow but steady moving business, both in the top line and in the profitability improvement and that we expect that for the future. Operator: The next question comes from the line of Anis Zgaya from ODDO BHF. Anis Zgaya: I have only one left question on prices, they are holding quite well for quarters now. But don't you see that it could be additional pressure going forward coming from Siemens Gamesa's return to the market and increasing Chinese competition? Jose Luis Blanco: That's a very good question. I think we try to keep the price that we need based on our cost base to deliver a decent profitability for our company and for our shareholders. So far, we managed to achieve that. But of course, there are geographies that we suffer more. In Latin America, we suffer. In South Africa, we suffer where we compete against Chinese competitors. But the geographies where we operate in, it's not straightforward for Chinese competitors to land because it's very complex, the permitting, the characteristics of the turbines that you need and so on and so forth. So far, we have been managing to keep market share, eventually improve while not compromising in prices and margins. To what extent this could continue in the future, we just don't know. We think -- I wish that the sector behaves reasonable, but you never know what other competitors can do if they want to improve their market share. We just don't know. Operator: The next question comes from the line of Xin Wang from Barclays. Xin Wang: I just want to clarify one thing. Is it possible to break out how much of the margin upgrade is underlying and how much is contingency release? Is it aiding Q3 already or will release in Q4? And also, when you say '26 margin will be better than '25, does this mean '26 underlying without a similar level of contingency release against '25 underlying? Or is it against '25 with contingency release, please? Jose Luis Blanco: Maybe, Ilya, I don't think we can give too much clarity there. Ilya Hartmann: No, I think we can. I think we can. Maybe we do that again because I think you did a very good explanation of the contingency, how that works. So I think it's worthwhile to say that this is the underlying margin so that we're talking of an operational performance of the company. I think Jose explained quite well how we do the planning, the budgeting and then the execution. And I think William asked you about how do you think about the profile going forward. And I think for now, we're not going to change much. So this is how the company operates. It's not something special. Jose Luis Blanco: Yes, that's it. Ilya Hartmann: So the further you progress in the year and if you have a good year of good execution and you don't see the risks materialize, the people and their projects start to release those contingencies. And if you -- 9 to 10 months into it, you do a review of the forecast again and look what do you think for the rest of the year is going to happen. So it's a project discussion. It's an operational discussion, nothing else. Xin Wang: Okay. Understood. Yes. So I think how contingency release works is explained very well. But I'm looking at the midpoint of your new guidance suggests potentially EUR 2.6 billion revenue in Q4. And at the same time, it's a massive margin uplift. So essentially, do we expect a similar level of tailwind going forward in Q4 next year? Is that needed for the margin in '25? Jose Luis Blanco: You cannot do that correlation because the portfolio of projects next year is a different portfolio of projects. So this year, in Q4, we have high activity levels and very good execution profile. So provided that we deliver these high activity levels in the factories and in the projects and provided that our view one quarter ahead of the expected cost to go goes in the direction, that releases that level of contingency and that gives you a profitability for the quarter. Q1 next year is going to be lower activity than Q4 this year. So the profitability -- I mean, I haven't seen because we are in the middle of the planning process for next year. But I bet that the profitability of Q1 next year will be substantially lower than the profitability of Q4 this year. And in Q1 next year, we will look at the year. We will assess risk and chances of the projects. And very much, we will see if we were over conservative in the contingencies bill or not or if the contingencies are needed because the execution of next year is a different profile than the execution of this year. Xin Wang: Okay. And maybe -- I mean, we will get the full release next week. But can we get some indication of how much of the free cash flow generation is the net working capital tailwind from order intake? Ilya Hartmann: Yes. Let's discuss that in detail for -- on the quarterly call next week. But for this year and the full 9 months, the working capital is not the key driver. It is more from the operational free cash flow that comes from the profitability. But the details we'll give you and a bit of an outlook for the full year on the call next Tuesday. Operator: Next question comes from the line of Kulwinder Rajpal from Alpha Value. Kulwinder Rajpal: So firstly, just wanted to come back on service margins. So would it be fair to assume that we reach the 18% to 19% range this year itself and then continue from there on, all things being equal from what we see so far this year? And secondly, just wanted to understand how the discussions with customers in U.S. have evolved during Q3 and maybe what you have seen so far in the month of October? And how is that market looking for you? Jose Luis Blanco: Sorry, we couldn't get in full the first question. Will you be so kind to repeat, please? Kulwinder Rajpal: Yes, absolutely. So I just wanted to confirm something regarding service margins. So is it fair to assume that we will already be somewhere between 18% to 19% for this year and then continue progressing from there on, all things else being equal? Jose Luis Blanco: I think, yes, service margins, I mean, you can have quarterly variations, slightly up, slightly down. But if you take the last 12 months as an indicator, this should be slowly growing going forward. So we don't see any reason why this should not be the case. So we see service business as a high single-digit revenue growth going forward and the associated profitability improvement, and you should not look at it from a quarterly because there are adjustments on the warranties on certain things, but you should look at it from the last 12 months profitability. And this, we expect to have a small improvement going forward. Regarding U.S., it's very much a moving target. I think we are in discussions with customers. And that's so far as far as we can go. We think that we will have a role in that market. And we think that, that market will have a role in the energy supply that the country needs, but discussing as we speak. Operator: The next question comes from the line of Richard Dawson from Berenberg. Richard Dawson: Just one clarification from me and going back to what you said about Q4 order intake and sort of needing that to give you the confidence that FY '26 margins could be a similar run rate to H2. But just given that it takes new orders sort of 18 to 24 months to really hit the P&L, why do we wait to see where Q4 order intake lands? Ilya Hartmann: The line wasn't super clear. Could you help us one more time with the last part of that question? Sorry for that. Richard Dawson: Yes, no problem. Is this better? Ilya Hartmann: Way better, way better, yes. Richard Dawson: Perfect. It was just a question on -- you had comments there about sort of waiting to see where Q4 order intake lands to really give you some confidence into where margins could be for FY '26. So just comments on why do you need to wait for Q4, given you have such a long sort of 18- to 24-month period before any of those orders actually would hit the P&L, so sort of post FY '26? Jose Luis Blanco: No, because it's the way -- of course, we issued the guidance in February, around February. In February, we still have expected demand in our planning process that have impact in the P&L of the year. If we advance 2 quarters, then the visibility is way lower. So we don't feel comfortable to guide the company 5 quarters ahead. We feel comfortable to guide the company 3 quarters ahead with certain level of expected demand to be closed. In other words, the expected demand to be closed today is higher than the expected demand to be closed in February '25. So the risk profile, if we guide you today for next year, we will be assuming a higher risk profile that we don't want to do. Richard Dawson: Okay. That makes sense. And maybe just one other question, just going back to Turkey. And I appreciate you can't go into too much detail on this. But do you expect those temporary supplier-related delays to actually result in additional revenue being recognized next year as that situation reverses? Is that sort of how we should be thinking about Turkey? Jose Luis Blanco: I think we need to -- and we are working in a plan to produce local content blades there. To what extent that plan will succeed or not and how many blades can be produced is still to be seen and what the impact for the projects might be that might impact our revenue, and we will try to avoid liquidated damages if we can. But first, we need to have a plan of how many blades and when will be available in Turkey. Operator: We have a follow-up question from Sebastian Growe from BNP Paribas. Sebastian Growe: One quickly around service. It's just about the attachment rates apparently in the first half of '25, that had nicely improved if I look at what is under service from the installed base perspective. I would just be curious to hear your latest thoughts about if this is continuing at the sort of mid or even higher 70 percentage sort of rates? And then the second question is in regards to the supply chain more related to specific components, rare earth apparently topic of last few days, I think. So what's the visibility here? And how many years would you potentially have secured from a rare earth perspective in particular? Anja Siehler: Sebastian, and we couldn't really understand you. Could you maybe repeat and be closer to the microphone? Sebastian Growe: So probably just as before with a one-to-one sort of taking the questions. So the first one is on service. And the question was that the attachment rates had nicely increased. So if one just looks at what you have under service contracts as opposed to what the installed base overall is. My question is simply if these high attachment rates would have continued and if you would dare to say that probably with the higher exposure towards Germany, this is sort of also structurally improving from here? That's question number one. And maybe start there. Ilya Hartmann: Sebastian, it's not about you being near to the microphone. The line is quite -- there's a lot of distortion. But let me try. I think what we gathered from the service question is whether you believe that -- or whether we believe, sorry, that by the kind of orders we have that we have a high grade of order intake that come with long-term service contracts, that at least how we understood the question. If that is the question, the answer is yes because we continue to have a geographical mix, which is very largely driven by European contracts and European contracts very, very standard come with those long-term service contracts. So then the answer would be yes. But we're afraid we're not 100% sure we got your question there. But if that was the question, that is the response. Sebastian Growe: Very close and for sure good enough. So move on to the other question that I had and that was around the supply chain and the question then for around rare earth. So I was just curious if you could share how many years eventually of the required rare earth materials you would have contractually agreed at this point? Jose Luis Blanco: I don't think -- we are using very limited quantities of rare earths. And so our exposure is quite limited. We are working in contingency plans to put in place to have alternative designs. But our generator doesn't use rare earths. So we only use small, very small quantities in some very minor motors that we are working on to have diversity of supply, but we rely on China. Even for those small quantities, we rely on China suppliers. But our technology can be adapted to induction motors. It will take us some time, but we are working in a plan in case needed not to use rare earths. Operator: There are no more questions at this time. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Third Quarter 2025 Armstrong World Industries, Inc. Earnings Call. [Operator Instructions] It is now my pleasure to turn the conference over to Theresa Womble, Vice President of Investor Relations and Corporate Communications. You may begin. Theresa Womble: Thank you, Nicole, and welcome, everyone, to our call this morning. Today, we have Vic Grizzle, our CEO; and Chris Calzaretta, our CFO, to discuss Armstrong World Industries third quarter 2025 results and rest of year outlook. We have provided a presentation to accompany these results that is available on the Investors section of the Armstrong World Industries website. As a reminder, our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of the SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of the presentation we issued this morning. Again, both are available on the Investor Relations website. During this call, we will be making forward-looking statements that represent the view we have of our financial and operational performance as of today's date, October 28, 2025. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-Q we issued earlier this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. Now I will turn the call over to Vic. Victor Grizzle: Thank you, Theresa, and good morning, everyone, and thank you for joining our call today to discuss our third quarter 2025 results, the progress we are making on our initiatives to deliver consistent profitable top line growth and our expectations for the remainder of the year. Today, we announced record-setting third quarter net sales and earnings results with strong Mineral Fiber average unit value, or AUV, a second consecutive quarter of Mineral Fiber volume growth and double-digit net sales growth in Architectural Specialties. On a consolidated basis, we delivered year-over-year top line growth of 10%, resulting in record-setting quarterly net sales with robust performance in both our Mineral Fiber and Architectural Specialties segments. Consolidated company adjusted EBITDA increased 6%, while adjusted net earnings per share increased 13%, along with strong double-digit free cash flow growth in both the quarter and in the year-to-date period, allowing for execution across all our capital allocation priorities. This includes the increase in our quarterly dividend of 10% we announced last week, and our latest Architectural Specialty acquisition of a Canadian wood sealing manufacturer, Geometrik. These results were driven by our differentiated and resilient business model, along with solid operational and commercial execution across our enterprise that once again allowed us to overcome lingering market softness and some timing-related cost headwinds. I want to take this opportunity to thank our teams across the company that continue to execute at the highest level that make these consistently strong results possible. So thank you. Like the last several quarters, we have remained laser-focused on operational efficiency, commercial execution and our growth initiatives as we continue to navigate a dynamic and uncertain macroeconomic backdrop. These efforts not only contributed to strong top line growth, but also continue to support our industry-leading profit margins even as we dealt with timing-related costs this quarter. While Chris will discuss these in a bit more detail, it's worth noting without these timing-related expenses, we would again have expanded EBITDA margin in the Mineral Fiber segment and at the total company level, and we remain poised to deliver margin expansion for the full year on both of these metrics. Despite these timing-related expenses, with our consistent underlying execution, the building blocks of Armstrong's formula for profitable growth remains strong and on full display in the third quarter. And as a reminder, what these building blocks are, they include: first, our focus on delivering consistent AUV growth in Mineral Fiber, all driven by the innovation and quality that feeds the category dynamic to mix up and our best-in-class service levels supported by technology that help us earn our pricing in the marketplace. Secondly, our laser focus on achieving consistent annual productivity gains throughout our operations. Thirdly, our investments to expand our product offerings and capabilities to continue our successful penetration in the Architectural Specialties segment. And lastly, our investments in digital growth initiatives like Project Works and Canopy that drive volume, AUV and contribute to margin expansion. In the third quarter in our Mineral Fiber segment, net sales increased 6% versus 2024 results, primarily driven by strong AUV growth and positive contribution from sales volumes. This marks the first time since 2022 that we reported back-to-back quarters of Mineral Fiber volume growth. This volume result was slightly ahead of our expectations as demand conditions in our markets remain relatively stable compared to our expectation of a modest slowdown expected mostly in the more discretionary type renovation activity. That said, the most notable volume growth driver was strong commercial execution and the contribution from our growth initiatives continuing to gain traction, enabling above-market growth rates as well as positively contributing to our strong AUV performance. Adjusted EBITDA in the Mineral Fiber segment also grew 6%, reaching a third quarter record and a continuation of our strong performance in 2025. On a year-to-date basis through September, Mineral Fiber EBITDA has increased 9% with margins expanding 160 basis points on a year-over-year basis in overall flattish market conditions. Importantly, we continue to expect strong Mineral Fiber adjusted EBITDA margin performance for the full year of approximately 43%, which would be the highest full year result since our last high watermark in 2019. Now before moving to discuss Architectural Specialties results, I'd like to take a moment to highlight some of the ongoing efforts within our Mineral Fiber plants that contributed to our results as they have all year. First, we continue to generate solid productivity gains in our operations at a similar rate as in the second quarter, and this helped partially offset the timing-related expenses I mentioned earlier. We also continued our execution at a high level on quality and service. One measure we use to gauge our quality and service to customers at our Mineral Fiber plants is called our perfect order measure that combines 6 different metrics that determine a perfect order in the eyes of our customer. The way it works is if any line item on a customer order misses any of these metrics, it's a 0 on the scale of 100% perfect order. These metrics include things like accurate order fill rates and on-time delivery and billing quality. It's a tough measure and rightly so as this is what our customers expect and are willing to pay for. I'm pleased to report that our plant teams delivered a record result in this measure this quarter. It's service and quality results like these that builds customer trust and loyalty that enables the retention of customers and pricing support for the value that we create. Now moving to the Architectural Specialties segment. Our third quarter net sales in this segment increased 18%, driven by the benefits of both our 2024 acquisitions, 3form and “Zahner”, along with solid organic growth. Adjusted EBITDA for the segment increased 10%, generating an adjusted EBITDA margin of approximately 19%. On an organic basis, adjusted EBITDA margins for the segment remained in line with our long-term target of 20% for the second quarter in a row despite these timing-related expenses mentioned earlier. I'm pleased with how we continue to leverage our Architectural Specialties network and together with our new acquisitions and the benefits of more Architectural Specialty products incorporated into our Project Works platform, we continue to improve our ability to win more projects. And this is most evident in the continuation of double-digit growth in orders and backlog for our Architectural Specialty products. We're also excited to welcome another acquisition, Geometrik, to our growing portfolio of products and solutions. Based in British Columbia, Canada, Geometrik is a leading designer and manufacturer of wood acoustical ceilings and wall systems that expands the variety of wood species we can offer our customers. With 9 complementary wood species across multiple products, including highly sought-after Western Hemlock, this company strengthens our wood portfolio and adds geographic diversification to our manufacturing footprint. Geometrik's on-trend products and design expand our portfolio with more of the warm wood looks and biophilic designs that are in high demand from architects and owners. Their Western Canadian production location also enhances our ability to serve our customers in Canada and on the West Coast. We're excited to welcome the Geometrik team to Armstrong's industry-leading specialties platform. Along with our acquisitions, we continue to be delighted by how our digital initiatives are progressing and making a positive contribution to both our segments. I mentioned Project Works earlier as it continues to gain traction with architects, designers and contractors by quickly providing visualization of complex designs, eliminating the waste in the design process and providing a complete bill of goods for clear and simple ordering. With increasing demands on limited construction labor availability, Project Works provides significant productivity value to our customers and strengthens our ability to hold on to project specifications throughout the construction process and ultimately improves our win rates in the market. Again, in both the Mineral Fiber and Architectural Specialties segments. Another one of our digital initiatives contributing nicely in the quarter is Canopy. Canopy like Project Works benefits both our business segments by providing an easy way for smaller customers to access a wide range of products through an online education and selling platform. And I'm pleased to share that the Canopy platform had both record sales and EBITDA in the quarter and continues to be a key differentiator for Armstrong. Now I'll pause and turn it over to Chris for more detail on our financial results. Christopher Calzaretta: Thanks, Vic, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our website. And please note that Slide 3 details our basis of presentation. Beginning on Slide 6, we summarize our third quarter Mineral Fiber segment results. Mineral Fiber net sales were up 6% in the quarter, primarily driven by favorable AUV of 6% and a slight increase in volumes. The growth in AUV was primarily due to favorable like-for-like pricing with a modest contribution from mix. The benefits of increased volumes and favorable mix were driven by the strong execution of our commercial sales organization, along with benefits from our growth initiatives. Mineral Fiber segment adjusted EBITDA grew by 6% and adjusted EBITDA margin was 43.6%. Q3 Mineral Fiber EBITDA growth was primarily driven by the fall-through of AUV, contribution from our WAVE joint venture on strong price/cost benefits and slightly higher Mineral Fiber volume versus the prior year. As Vic mentioned, our results were negatively impacted this quarter by some timing-related discrete costs in both segments. In Mineral Fiber, these costs primarily related to an increase in medical claims above our normal run rate, which mainly impacted manufacturing costs. In addition, our strong year-to-date financial performance and updated full year outlook resulted in higher incentive compensation in the quarter, which primarily impacted SG&A. We do not expect the third quarter SG&A results to be indicative of our go-forward run rate. As a result of these in-quarter cost headwinds, Mineral Fiber adjusted EBITDA margin compressed 30 basis points over the prior year. For the Mineral Fiber segment, the total discrete costs in the quarter represented approximately $5 million of an outsized headwind, which is reflected in both manufacturing and SG&A expenses. Excluding this cost headwind, adjusted EBITDA margin in the Mineral Fiber segment would have expanded in the quarter versus the prior year period. On Slide 7, we discuss our Architectural Specialties or AS segment results, where we highlight net sales growth of 18%. This growth was driven primarily by contributions from our 2024 acquisitions, 3form and Zahner, both of which continue to perform better than expected as well as a 6% increase in organic sales, driven by growth across most of our specialty product categories. AS segment adjusted EBITDA grew 10% with an adjusted EBITDA margin of approximately 19%, which includes the dilutive impact of our recent acquisitions. On an organic basis, we are pleased to have achieved an adjusted EBITDA margin of approximately 20%. Q3 AS EBITDA growth was driven by the benefit of higher net sales, partially offset by higher manufacturing costs as well as an increase in SG&A expenses. Higher SG&A expenses were primarily due to our 2024 acquisitions in addition to an increase in selling expenses, driven primarily by higher net sales as well as additional investments in selling capabilities. Slide 8 highlights our third quarter consolidated company metrics. We delivered 10% sales growth and 6% adjusted EBITDA growth with total company adjusted EBITDA margin compression. Additionally, adjusted diluted net earnings per share grew 13%. Incremental volume from both segments, strong AUV performance and solid equity earnings from WAVE drove our adjusted EBITDA growth in the third quarter versus the prior year period. These benefits more than offset higher SG&A expenses, which were primarily driven by our 2024 acquisitions as well as the previously mentioned impact of discrete costs in the quarter. At the total company level, the total discrete costs in the quarter were approximately $6 million, which impacted both manufacturing and SG&A expenses. Excluding this cost headwind, adjusted EBITDA margin at the total company level would have expanded slightly in the quarter versus the prior year period. Turning to Page 9. We highlight our year-to-date consolidated company metrics, which reflect double-digit net sales and adjusted EBITDA growth with margin expansion. Through the first 9 months of the year, with sales up 14% and adjusted EBITDA up 15%, margins expanded 20 basis points versus the prior year period, which includes the year-to-date dilutive impact of our 2024 acquisitions. Adjusted diluted net earnings per share increased 21% and adjusted free cash flow increased 22%. The drivers of year-to-date adjusted EBITDA growth are similar to the previously mentioned third quarter drivers. Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year. The 22% increase was driven primarily by higher cash earnings, lower income tax payments and dividends from our WAVE joint venture, partially offset by an increase in capital expenditures as we continue to invest back into the business. Our demonstrated ability to consistently deliver strong adjusted free cash flow allows us to execute on all of our capital allocation priorities. As a reminder, these are: first, to reinvest back into the business with a disciplined focus on opportunities that deliver high returns. Among our year-to-date investments was the enhancement of manufacturing capability at one of our Mineral Fiber plants to support the growth of our Templok Energy Saving Ceiling offering. Target investments such as these underscore our commitment to executing our growth strategy while maintaining a balanced capital allocation approach. Our second capital allocation priority is to execute strategic acquisitions and partnerships that add unique attributes or capabilities to our business that will create value. Recently, in the third quarter, we acquired the issued and outstanding shares of Geometrik for a purchase price of $7.5 million, subject to customary post-closing adjustments for working capital and future earn-out potential. Lastly, our third priority is to provide direct returns to shareholders through dividends and share repurchases. On this front, then as Vic mentioned last week, we announced a 10% increase to our quarterly dividend, marking the seventh consecutive annual increase since the inception of our dividend program in 2018. This increase reflects our Board of Directors' continued confidence in our growth strategy and ability to consistently generate strong adjusted free cash flow. Additionally, in the third quarter, we provided a direct return of $40 million, comprised of $13 million in dividends and $27 million of repurchased shares. As of September 30, 2025, we have $583 million remaining under the existing share repurchase authorization. With a healthy balance sheet and ample available liquidity, we remain well positioned to execute our strategy. Slide 11 shows our updated full year 2025 guidance. With strong year-to-date net sales and adjusted EBITDA growth and stabilizing market conditions, we are raising our full year guidance across all key metrics. We are pleased with the full year double-digit growth outlook for net sales, adjusted EBITDA, adjusted diluted net earnings per share and adjusted free cash flow. We now expect full year Mineral Fiber volume to be flat to down 1%, an improvement from our prior expectation of flat to down low single digits due to stabilizing market conditions. We expect AUV growth of approximately 6%, modestly lower than prior expectations on slightly stronger Big Box volume than expected in the third quarter. Additionally, we expect full year AS sales growth to be approximately 29%, driven by robust contributions from our 2024 acquisitions, coupled with high single-digit AS organic growth. We continue to expect full year margin expansion in both segments with a Mineral Fiber adjusted EBITDA margin of approximately 43% and an AS adjusted EBITDA margin of approximately 19%, with an organic adjusted EBITDA margin of approximately 20%. Additionally, we now expect full year adjusted free cash flow growth of $342 million to $352 million or 15% to 18% over the prior year. Our improved outlook for adjusted free cash flow growth is primarily driven by higher expected net cash provided by operating activities, excluding an approximately $21 million full year cash tax benefit related to the tax reform bill that was passed in July. As a reminder, this onetime cash tax benefit relates to unamortized research and development tax credit fully recognizable under the Act in 2025 and is excluded from our full year adjusted free cash flow guidance reconciliation, which is a normalized metric. Note that sales, adjusted EBITDA and cash flow contributions from our recent acquisition of Geometrik are not expected to be material for the full year. With our strong year-to-date results and robust full year outlook, we are confident that we will finish 2025 strong and enter 2026 with momentum. And now I'll turn it back to Vic for further comments before we take your questions. Victor Grizzle: Thanks, Chris. 2025 is proving to be another strong performance year for Armstrong as we've successfully navigated uncertainty at the macroeconomic level and its ripple effect on our end markets. It's been a challenging year to call in terms of the level of market activity. As you all will recall, in February, we were expecting the market to be softer in the first half of the year, given the transition to the new administration and its potential new policies and then a modest pickup in the back half once there was more clarity around what these new policies would be. However, beginning in April and through the second quarter, the macroeconomic outlook became cloudier as the impact of more significant tariffs increased the level of uncertainty, which led us to modestly adjust our volume outlook for the back half of the year. Now sitting here today, we have not seen the anticipated modestly softer market conditions, but rather more of the same of flattish kind of stabilizing market conditions. And we expect these market conditions to continue for the remainder of the year. The Dodge first-time bidding activity data in terms of the number of projects continues to be at lower levels. However, the value of projects being bid overall has increased ahead of inflation and was up nicely in the quarter. A look at actual starts, which reflects how much of this bidding activity turns into actual projects was mostly flat and coincides with the overall market conditions that we're currently experiencing. Looking at specific verticals, a recent research from JLL provides some positive signs for the office market. After 2 years of stabilization and signs of leasing footprints beginning to expand, U.S. office vacancy rates declined in the third quarter for the first time in 7 years. Their research notes that as occupancy of Class A offices increases, the need for renovating Class B office space is expected to accelerate. Factors influencing these trends include a continuation of return to office mandates and the potential for lower interest rate environment. While we've discussed that New York and cities across the Sunbelt have been quicker to recover, their research now shows strengthening across more regions in the U.S. And this is encouraging data for the office vertical that represents about 30% of our demand profile. The transportation vertical remains strong from a bidding and start perspective. An additional tranche of funds was recently released by the federal government, specifically for airport projects, and we continue to expect airports and other transportation hubs to be a multiyear opportunity for Armstrong. Within these stabilizing market conditions, our Architectural Specialties segment is experiencing broad-based strength in quoting and ordering, which in part is driven by Armstrong's ability to provide the broadest portfolio of specialty products with our industry-recognized commitment to service and quality. In addition, we're continuing to see benefits from the sales and marketing optimization program that I mentioned last quarter. We've strategically realigned the commercial team to drive greater efficiency and unlock selling capacity to better serve both our A&D customers and our distribution partners and more effectively sell our industry-leading product portfolio. These changes alongside our ongoing innovation and growth initiatives are contributing to strong performance, delivering above-market performance. In terms of recent product innovation, we continue to be excited by the opportunity for our Templok Energy Saving Ceiling products to drive future growth. With Templok's innovative use of phase change materials, these ceiling products help regulate temperature in buildings and can meaningfully reduce the energy used for cooling and heating. We've also completed some successful validation projects, including a pilot project with the Palm Springs Unified School District in California using Templok. The results were compelling. Classrooms equipped with Templok experienced a measurable reduction in cooling energy demand and a nearly 2-hour delay before air conditioning was needed. Findings like these across the country and in various verticals, including education, health care and offices are validating the energy saving potential of our technology and reinforce our belief that Templok could ultimately become the standard across the ceiling category. As the innovation leader, we are committed to continue to innovate to make these energy-saving products even better and more cost effective. This month, we launched an upgraded Templok product line that is now part of our sustained portfolio of products that meets the industry's most stringent sustainability requirements. In addition, the latest version of Templok has improved passive heating and cooling capacity at a higher fire rating and increased thermal comfort attributes. This makes it even more attractive and specifiable by architects and designers and more compelling for building owners and operators. In the quarter, as Chris mentioned, we also completed a capital project at our Macon, Georgia plant to expand production capacity for this new upgraded version of the product. In closing, with the strong results achieved thus far in 2025, we are expecting continued momentum and a strong close to the year. As our financial guidance indicates, we expect 2025 to be another record year with double-digit top and bottom line growth as we once again outperformed the market. Our consistent AUV growth, Architectural Specialties penetration, innovation leadership and productivity gains remain our building blocks for profitable growth. And these building blocks, coupled with a healing office vertical and ongoing contributions from our growth initiatives positions us well for another year of profitable growth in 2026. And with that, now we'll be happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Susan Maklari with Goldman Sachs. Susan Maklari: Nice job on the quarter, Vic. My first question is, can you talk a bit about the benefit that you're seeing from the new products, how that's helping the mix component of that AUV in there? And also how that's coming through in terms of the strength of quoting and bidding activity that you talked to in your comments? Victor Grizzle: Yes. Susan, on our mix, we continue to do very well at the high end of our portfolio. The -- even recent years, our innovation around the smoother, wider look, our higher acoustical performance and the combination of the look and the higher acoustical performance is really coming through in 2025 again. We're growing at near double digits at the high end of our portfolio. And again, just really confirms that the technology that we're bringing to the marketplace at the high end and where the products are most specified, which is at the high end is where Armstrong continues to do very, very well with our innovation. That's really on the Mineral Fiber side because that's how we measure mix is at the Mineral Fiber business. In the Architectural Specialty business, although we don't measure mix the same way there because of the custom nature of that business, the innovation that we're bringing to the marketplace in both metal and wood, our turf, our felt products, they're all making an impact driving what as I reported, double-digit orders and backlog growth in Architectural Specialties. And that's really important. The new products are really important there to make sure that we're winning the large renovations and the new construction projects. So really pleased with how our innovation is driving mix in both the Mineral Fiber and the Architectural Specialty business. And again, double-digit growth in our Architectural Specialty business like that, both in orders and backlog is really encouraging because we all know the market is not growing double digits. And so this is a good measure of how well we're penetrating and participating in that market. Susan Maklari: Yes. No, absolutely. That's great -- are you there? Victor Grizzle: Yes, Susan, we can hear you. Susan Maklari: Okay. Sorry, I thought I lost you for a second. No, that all sounds really good. And I guess building on that, right, Architectural Specialties is getting close to that 20% margin target that you've had out there. Can you talk about the forward trajectory of that as we continue to see these acquisitions coming through? And how we should think about where that can go over the course of the next year if the environment does stay more challenging like it is today? Victor Grizzle: Yes. Susan, the -- I'm really proud of how our teams have driven the improvements over the last 4 years really in Architectural Specialties, every year making an impact on operating leverage and doing a great job in the marketplace and pricing our products. And organically, even with some of the timing-related headwinds that Chris mentioned, organically, we're at the 20% level. And we expect for this year for the first time on this side of the pandemic is to get back to that 20% level organically. And of course, so as the base gets bigger in our Architectural Specialty business, organically, we can offset more and more acquisitions as we add them on. As you know, most of the acquisitions we're buying are dilutive until they get scaled up on our platform and then we're able to drive the operating leverage to the 20% or greater. The forward look on this, as we've said very publicly, we think this is a really good spot for us to be as long as we have double-digit growth opportunities in the marketplace as long as we're continuing to penetrate the market and take share, we don't want to optimize on margins at the expense of growth. And so as long as we have that growth curve in front of us, and we do see that ahead of us still for several years, we like greater than 20%, but we don't need to optimize much greater than that at the expense of growth. That's kind of how we're going to run the business. Operator: Your next question comes from the line of Tomohiko Sano with JPMorgan. Tomohiko Sano: My first question is EBITDA margin pressure. So while sales and EPS was strong, both consolidated and segment EBITDA margins declined year-over-year in 3Q. Could you elaborate on the timing-related cost headwinds such as higher incentive compensation and medical costs and how you expect these to trend in 4Q and into 2026, please? Victor Grizzle: Yes. Chris, do you want to take that? Christopher Calzaretta: Sure. Yes. So on the SG&A side, let me just start with just an overarching comment around our mindset around cost control and the continued thinking around employing a cost control mindset even in more stabilizing market conditions that we mentioned in our prepared remarks. So in the quarter, we had highlighted higher SG&A costs in the Mineral Fiber segment, and that was really driven by higher incentive compensation costs. These are related both to our annual incentive plan and our longer-term incentive plan. And the driver of these costs really relate to our year-to-date financial performance and our updated full year outlook that I commented on in my remarks. And I also said we don't expect this third quarter SG&A result in Mineral Fiber to be indicative of our quarterly run rate moving forward. Vic mentioned the thinking around continuing to get leverage on our investments, and that certainly is the case. We look to get operating leverage out of our SG&A investment base, and we'll continue to be mindful of the rate and pace of our spending. Again, the compensation -- the incentive compensation costs were really timing in nature and were an outsized cost in the third quarter. Let me take the second part of your question next around medical and just take a step back a bit and talk about the higher medical costs that we experienced in the third quarter. We're self-insured from a medical perspective. So when higher medical claims are incurred, they impact the P&L directly. And what we saw was an uptick in several high-cost claims in the third quarter, and these claims were above our normal run rate of medical experience. So while we do experience medical costs in the ordinary course, the number and the magnitude of what we saw in Q3 was atypical. It would be very unusual to see that level of medical claims in consecutive quarters as well. Tomohiko Sano: And my follow-up is, Vic, macro end market trends. You talked about office and also on transportation mainly. But could you talk about education, health care and data centers and those kind of vertical into Q4 and 2026 expectation, please? Victor Grizzle: Yes. The Education and Health care segments continue to be, I would say, stabilized as we've experienced throughout the year. So no real inflection in health care and education that we're seeing. In fact, health care remains slightly positive, both on the new construction and the renovation forecast that we're seeing. So I would say kind of stabilized activity levels in the health care and education. Of course, the data center is -- the opportunity continues to be very robust, and we're very active in participating in that with our new products. We have a new launch of tile products as well as some of the grid products that we've been talking to you about. We're also launching some additional structural grid products to go along to target that marketplace. So it's an exciting opportunity, and it continues to have a lot of growth behind it in addition to what we're seeing in transportation and the green shoots that I'm talking about in office. Operator: Your next question comes from the line of Keith Hughes with Truist Securities. Keith Hughes: Yes, I'm here. Okay. A question -- I'm sorry, so these SG&A expenses, it's health care related. Would those most likely come down over the next quarter or 2 to something more consistent with what we've seen in the past? Is that the message you're trying to send? Christopher Calzaretta: Yes. I think, Keith, it's fair to assume that both on the incentive comp and the medical side that they'd be kind of more at a normal run rate. Again, very atypical to see the outsized impact that we saw in medical this quarter. And again, that wasn't tied to a specific operation or event. But yes, to your point, not the expectation going forward. Keith Hughes: And what's the outlook for manufacturing costs in the next few periods? Or is inflation starting to creep in to the inputs? Christopher Calzaretta: Yes. I'd say on the manufacturing side, I mean, for sure, we have inflation, but our ability to continue to drive productivity in our plants remains one of the value creation drivers and building blocks of the business. So I'd expect more of a run rate that we saw through the first couple of quarters of this year. Again, continued strength in both a continued cost control mindset across the enterprise, coupled with our productivity programs and productivity gains. Keith Hughes: Okay. And final question for Vic. I hear you what you're saying on the office and the Class C moving to Class A. Has that started to occur yet in quantities that are moving the numbers? Or is office still a lagging category? Victor Grizzle: Yes, it seems to be a lot of ground level activity, which -- so it's moved from some of the bidding activity and some of the start activity that we've been tracking into what I'm hearing in the marketplace from our regional teams is that there is more tenant improvement type projects on the ground there. So I think we're just beginning to see some of that. So I wouldn't say they're needle movers. It's -- they're real -- it's a stabilized, I would say, vertical at this point and with some green shoots in terms of the improvement that could be out there going into 2026. Operator: Your next question comes from the line of Adam Baumgarten with Vertical Research Group. Adam Baumgarten: Question on the AUV, just on the home center mix. It sounds like that impacted year-over-year mix benefits in the quarter. I know you said it was positive but maybe less so than it's been in prior quarters. I guess do you expect that mix headwind to abate in the fourth quarter? And then if we think about the August price increase starting to flow through, should you see some level of year-over-year AUV improvement in the fourth quarter? Victor Grizzle: Yes, you're right, Adam. The -- as you know, the retail business is a limited set of products and lower AUV. So when we get some additional strength in one of those -- well, in that channel, you're right, it does drag down the overall mix. I will say we still -- these are profitable products, and they're profitable contributors to our bottom line. So we like that volume. But you're right, on the AUV line, it can be a drag a bit on our normal AUV run rates, and that's what we experienced in the third quarter. We don't expect that to continue into the fourth quarter. I just will caveat that sometimes this is not forecastable in terms of some of their inventory replenishment or even drawdowns as we've reported on in quarters past. But we're not expecting that to continue into the fourth quarter at this stage. Christopher Calzaretta: And I would just add on to that and say we still expect a strong AUV quarter in Q4. Again, that was the Big Box that we mentioned in the third quarter kind of pressured the full year outlook, if you will, but still expecting a strong Q4 and about 6% AUV for the full year. Adam Baumgarten: Okay. Got it. Great. And then just switching gears to AS. Just given kind of the strong backlog and order commentary that you made and some level of visibility, especially on larger projects, are you still -- or should we expect growth next year? And maybe any kind of additional color in terms of end markets and kind of what's getting you excited about 2026 at this point? Victor Grizzle: Yes. I mean what's encouraging, Adam, in our order rate and our backlog build is not just for the rest of the year, which it is contributing to the rest of the year and our confidence for the rest of the year, but how it's building for '26. So yes, we would expect to continue to grow in 2026. Again, almost irrespective of what the market is doing because, as you know, most of our growth there is really through penetration, really taking share. So our expectations and the way it's building in our backlog, we would expect growth in '26. Operator: Your next question comes from the line of Rafe Jadrosich with Bank of America. Rafe Jadrosich: I wanted to just follow up on some of the comments on office, which has obviously been sort of a headwind for, I think you guys said 7 years. Can you talk about -- if that comes back or we start to see an improvement, is there any either ASP or margin tailwinds, like particularly either on the Class A side or anything from a regional perspective? And are you seeing like specific green shoots on any like San Francisco or New York? Is that meaningful in any way? Victor Grizzle: Well, I think what the data is showing now, and I mentioned this in my prepared remarks is how it's broadening out beyond some of the major cities and the Sunbelt, as we've talked about, how the South has been actually an early recovery zone for the office segment. So in addition to that, what the research says it's actually much broader now. In fact, into 18 regions across the country, we're starting to see some positive activity there, both on the leasing front. And of course, that drives the renovation activity in the market. So that's encouraging, I think. As I mentioned earlier, we're still very early into seeing some of this work actually land into the marketplace. But the -- certainly, the signs are encouraging and supported by some of the forecasts that we're looking at as well. Rafe Jadrosich: Got it. Okay. And then I understand that like sort of it's tough to give a volume outlook into '26. But wondering if you have any at least directional visibility on cost inflation, AUV, SG&A, any of those points as we think about trends into next year? A just like specific puts and takes? Christopher Calzaretta: Yes. Rafe, it's Chris. I'd say at this point, we're still preparing our modeling and going through assessing the market, et cetera, for 2026. But if I could take a step back and just talk a little bit about the building blocks of the business and what we've talked about in terms of AUV growth, our ability to continue to drive productivity and really how we're thinking about SG&A investments and margins next year. I'd say our thinking and the mindset really hasn't changed. I think those value creation drivers are in place. We'll continue to invest and invest back into the business where there are the highest returns. And I think we'll absolutely be thinking about EBITDA growth and margin expansion heading into next year. But absent that, too soon to formulate any more details around the specific inputs of those. But I'd be thinking about the value creation drivers of this business on a relatively consistent basis going forward. Vic, I don't know if you want to add anything more. Victor Grizzle: I think that's well said. Operator: Your next question comes from the line of Brian Biros with Thompson Research Group. Brian Biros: Last quarter, your outlook was for a slightly softer second half kind of driven by that uncertainty with discretionary commercial work expected to slow. A lot of commentary today around market stabilizing here. Can you just help compare the current outlook to your expectations from 3 months ago, kind of what stabilizing really means in this scenario? And I guess really just what is driving that kind of positive change from uncertain to stable? Victor Grizzle: Yes, Brian, thank you for the question. It's a good question because if you remember, the way we talked about some of the smaller, more discretionary type renovation activity is where we have the least amount of visibility in the marketplace, right? It doesn't involve an architect and they tend to be, again, smaller in nature. So it kind of shows up through distribution. So -- and really full disclosure of that, we don't have great visibility. And we've been using prior models to kind of predict what happens there because we know because it's highly discretionary, it can move to the sidelines very quickly in higher degrees of uncertainty in the marketplace. We saw that. We experienced that in prior years, namely in 2022. And so with the forecast for the back half of lower economic activity, lower GDP and expecting some of that activity overall in the economy to slow down. We expected that to create some uncertainty -- additional uncertainty that would affect this discretionary renovation activity. As we all know, some of the economic activity has actually been revised upward. And we've not seen the slowdown in that discretionary work as we were expecting. And remember, it was a slightly modest, so it wasn't a significant downturn, but just some softening there. We did not see that. But I'll say, Brian, most encouragingly in the quarter was on the volume side was the contribution from our initiatives and our growth initiatives. Given a little flatter plane here, we can really start to see the impact of our growth initiatives above and beyond what is still relatively flattish to softer market conditions. So really pleased by that. And sitting here today, where we are into the fourth quarter, we continue to not see a softening in that discretionary renovation activity pipeline. And so we're basically calling the rest of the year as we've been experiencing all year and this kind of more stabilized flattish market conditions and then executing very well there to expand margins, grow our earnings and our top line double digits. Brian Biros: Good to hear. And then second question, I guess, on the Mineral Fiber margins, stronger this quarter, even with the discrete expenses, even excluding discrete expenses. Can you just help unpack that number a little bit more here? I think you provided some drivers. But maybe just putting it really in the context around this level of margin you have with this level of volume and kind of just how it compares historically because it's -- I believe it's a good number on a lower volume base. So just any more context around how you guys are thinking about that? Victor Grizzle: Yes. That's again, another good question. Let me take that, and Chris, I'll let you add some color to this. But I mean, really, when you look at -- in spite of some of those unusual and atypical expenses that Chris talked about, we delivered a 44% EBITDA margin in the Mineral Fiber segment. That's really strong. And so when you think about for the rest of the year, we're going to finish at 43%, as I was saying in my prepared remarks. And that's back to the highest watermark that we experienced before the pandemic in 2019. So we're really encouraged by the way the business underlying is performing. And the building blocks of that, again, is really making sure we're getting good price realization to more than offset inflation in the marketplace, which we're continuing to do very well. selling a richer mix into the marketplace, which we're doing very well, slightly offset a little bit as we talked about earlier on the retail channel. And then productivity, continuing to drive meaningful productivity in our plants to help us offset inflationary costs. So that's what leads to really good margin performance in the business, and we expect that to continue. And Chris, I'll let you add any additional color there. Christopher Calzaretta: Yes, absolutely. You hit on all the key building blocks. The only additional item to mention there in terms of Mineral Fiber EBITDA margins is the contribution from WAVE equity earnings expected to grow about 6% this year. So again, with that contribution, really pleased with the overall EBITDA margin for the Mineral Fiber segment. Operator: Your next question comes from the line of Garik Shmois with Loop Capital. Zack Pacheco: This is Zack Pacheco on for Garik. Maybe just one more on the Mineral Fiber margin over 43%, that pre-pandemic level. Do you guys kind of see a natural cap getting over that through maybe just the industry dynamics or your level of investment? Or how do you kind of view taking that next step above that pre-pandemic level? Victor Grizzle: Yes, it's a common question we get. And honestly, we just keep pointing back to the building blocks, what the drivers of margin. And really -- and that's a good measure of the efficiency in how we run the business, right, in terms of making sure we're pricing and getting enough price to cover inflationary dynamics and driving productivity in the plants, innovating to make sure that we're bringing higher-margin products, higher AUV and value products to the marketplace. Those same building blocks we were just talking about, I think as long as those are present and we continue to invest behind those, which we're committed to do, we continue to look for greater efficiency and greater margins from here. Zack Pacheco: Understood. And then just quickly an update on the Geometrik acquisition from earlier in the quarter and kind of just the M&A environment in general as you guys see it. Victor Grizzle: You bet. Yes, the Geometrik is a great add for our business, our Architectural Specialty business and in particular, for the Wood platform, which is one of the fastest-growing platforms in the Architectural Specialty business. It's an exciting on-trend look and feel that architects and owners are looking for. And this really adds two real dimensions of competitive advantage. Number one, the extension of the product portfolio to include a greater number of species, really on-trend type species in our wood portfolio. And it gives us a geographic advantage also by being out West. So it's a really great add to the portfolio. And we like these kinds of acquisitions that bring competitive advantage, additional capabilities for us to bring into the architects' offices with the rest of our portfolio. So it's a good example. It's on the smaller side, but we're open for business in terms of our acquisitions. We have a dedicated team that's getting up every day and it's working our pipeline. And we believe there's more of these bolt-on type acquisitions out there for our Architectural Specialty business. So more to come on that front as well. Operator: Your next question comes from the line of John Lovallo with UBS. John Lovallo: I guess the first question is just on the Mineral Fiber volumes up slightly in the quarter. How do you think the performance there compared to the underlying market? Victor Grizzle: Yes, it's really hard to put a very precise number on that. But when the markets are flat, they're anywhere from plus or minus 1, maybe 0.5 point either way. So -- but what we do know is that the growth initiatives and the volume contribution from our growth initiatives really was a nice contributor to the overall upside that you saw that we experienced in the quarter. Markets are still relatively soft. So these flattish conditions can actually be reflective of these -- of the market activity at a lower level that we've been experiencing all year. So I think that's the best way I can describe it, John, in terms of how the overall market is performing. John Lovallo: Okay. Got it. And then sticking on Mineral Fiber, it looks like sales to the distribution channel were actually very strong, up 9% year-over-year. What drove this kind of relative strength compared to the other channels? Christopher Calzaretta: Yes. I'd say, John, just to continue to point to our strong commercial execution, really, again, coupled with the initiatives that Vic mentioned, we continue to be pleased with the level of performance there in the quarter and are excited about just the way that we've executed in that particular part of the market. Operator: Your next question comes from the line of Philip Ng with Jefferies. Philip Ng: A question for Chris. Can you give us an update how you're thinking about inflation broadly for the full year, some of the major inputs and whatnot and the pace in the back half? And then in terms of productivity, you sounded pretty upbeat about what's still in front of you. Should we expect a pretty consistent steady dose of productivity that you still have available for 2026 to kind of tap into? Christopher Calzaretta: Sure. Yes. Thanks for the question, Phil. Yes, I'll take the second part of that first. In terms of productivity, yes, pleased with our level of productivity in our plants, certainly year-to-date in the quarter and what we're expecting for the full year. And going back to our comments around the value creation drivers and the building blocks of the business, I feel very confident about our ability to continue to get those productivity gains on a go-forward basis. From an inflation perspective, just a reminder in terms of call it, the categories of inflation. In Mineral Fiber, about 35% of our inflation of COGS is raw materials and then energy is about 10% freight is about 10%. So from a total input cost perspective for the full year, we're outlooking low single-digit inflation with freight about flat compared to prior year, raws in that low single-digit inflation range and then energy in that low double-digit inflation range. So hopefully, that gives you a little bit more color around the bits and pieces of how we're thinking about inflation on a percentage basis versus prior year for '25. Philip Ng: And Chris, any big nuances in front half versus back half in terms of some of those inflation components, if it's moderating or it's been pretty steady all year? Christopher Calzaretta: Yes, I'd say slightly moderating a bit in the back half but not significantly. Philip Ng: Okay. That's helpful. And then Vic, AS has been a home run for you guys, really strong growth, strong organic growth. And I think you pointed out in your prepared remarks, orders and backlogs are still growing at double-digit clip. And I think you mentioned if you could grow at double-digit clip, I mean, 20% EBITDA margin is a good way to think about the business in the medium, longer term. So my question really comes down to, obviously, you have some really tough comps in the first half of '25. What's a good way to think about organic growth in that business when we look out to 2026? Is it double digits the right way to think about? Or that's the number that includes M&A? I just want to be mindful of the tougher comps next year. Victor Grizzle: Yes. On the organic side, we've been running in the high single digits this year. And we'll stop short to forecast what that looks like for next year. But again, with the double-digit growth in our order intake, a lot of that's organic. So I would expect the growth for next year organically to continue to be at a really good clip. What exactly that is relative to this year yet, I think we still have to do our work and our modeling on that to accurately answer that. But I still expect good solid organic growth in that business in addition to the inorganic bolt-on acquisitions that we expect to continue. Christopher Calzaretta: Phil, if I could come back. Yes, my comment on the moderating versus back half was really around what we expected back in July. So if I were to take a look at the fourth quarter relative to our actual run rate for the first 9 months of the first 3 quarters, a little bit of an uptick in energy and a little bit of an uptick in raws, but it's really not that big. But relative to July, a moderating expectation versus where we were last quarter for the full year. Operator: Your final question comes from the line of Stephen Kim with Evercore ISI. Aatish Shah: This is Aatish on for Steve. Just one quick one for me. You touched on it a little bit in the prepared remarks, but could you talk a little bit more about the digital initiatives and kind of how you've seen that -- the impact of that grow over time and evolve over time, maybe some lessons learned? Victor Grizzle: Yes. The ones that I called out in our -- my prepared remarks around Project Works, let me just start there for a second because I think this is an automated software platform that takes the intelligence of a long time of designing ceilings and automates those design rules and a platform that can help architects really expedite the iterations on different types of designs or iterations of designs. And that's a huge productivity tool that the architects are learning about as we get more and more products onto the platform to meet their needs. In addition to that, because of this automated platform is based on historical data, we can pump out very accurate bill of materials that allows them to really predict the project costing and also the ordering for the contractor. If you think about these really complex projects, there's a lot of parts and pieces that go into the installation of these on the job site, and we can get really precise with exactly the number of pieces and components that have to go. And that's really attractive for the contractor community to not have to guess about how much they need of something. So for both of those customer bases, this Project Works platform continues to grow every quarter, more and more users and more and more activity. And we're really pleased with -- we think when we look at the data, the win rate of projects that go through Project Works is higher than when they don't because of the value that we're creating with architects and the contractors. So we continue to be very encouraged by the traction it's getting in the communities that we're operating in. Canopy was the other one that continues to adjust itself and serve the smaller customer that we feel like kind of falls through the cracks that doesn't really know where to go or how to get their ceiling repaired or replaced. And it leads them through an educational process that gets them to placing an order. It's turning out to be a very effective platform, and we continue to improve it every quarter on making it even better and better of a customer experience. And so I was really pleased with the traction that it's getting, not only at the top line, setting a record top line, but really the profitability of that platform, delivering a record EBITDA level of performance and contributing now to the overall business. So those two digital initiatives I was talking about, I think that's a little bit more color behind them, but we continue to get really good operating leverage on both of those investments. Operator: With no further questions in the queue, I will turn the call back over to Vic Grizzle for closing remarks. Victor Grizzle: Great. Thank you, and thank you all for joining our call today. Again, we're on track to have another record year in 2025. Really pleased with both double-digit top and double-digit bottom and maybe mostly the traction that we're getting with our investments and the way that we're expanding margins in the business. So we're excited for finishing the year strong and setting up what is going to be another exciting year in '26. Thank you again for joining our call. Operator: Thank you again for joining us today. This concludes today's conference call. You may now disconnect.