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Operator: Hello, and welcome to the Greenbrier Companies Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] At the request of the Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President of Financial Operations, the Americas. Mr. Roberts, you may begin. Justin Roberts: Thank you, Megan. Good afternoon and evening, everyone, and welcome to our fourth quarter and fiscal 2025 Conference Call. Today, I am joined by Lorie Tekorius, Greenbrier's CEO and President; Brian Comstock, Executive Vice President and President of the Americas; and Michael Donfris, Senior Vice President and CFO. Following our update on Greenbrier's record-setting 2025 performance and our outlook for fiscal '26, we will open up the call for questions. Our earnings release and supplemental slide presentation can be found on the IR section of our website. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2026 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. We will refer to recurring revenue throughout our comments today. Recurring revenue is defined as leasing and fleet management revenue, excluding the impact of syndication activity. Finally, Greenbrier will be participating in the following conferences over the next few months. The Stephens Annual Investment Conference on November 19, the Goldman Sachs Industrials and Materials Conference on December 4 and the Susquehanna Virtual Freight Forum on December 10. And with that, I'll hand the call over to Lorie. Lorie Leeson: Thank you, Justin, and good afternoon, everyone. I appreciate you joining us today. A strong finish in the fourth quarter made fiscal 2025 Greenbrier's best year yet. We achieved record full year diluted earnings per share and delivered record core EBITDA, supported by disciplined execution across our business. Our aggregate gross margin was nearly 19%, and Greenbrier generated more than $265 million in operating cash flow. We also achieved a return on invested capital of nearly 11% within our long-term target range. These results reflect our team's resilience and the strength of disciplined execution paired with efficient operations. We're seeing the tangible results of the transformation we set in motion nearly 3 years ago, with key long-term performance goals being realized. Greenbrier today is a stronger, more agile organization, a business better positioned to deliver performance across market conditions as proven by our record financial results for 2025 on 2,000 fewer deliveries than in fiscal 2024. Strong operating performance in manufacturing led to healthy margins and our network is operating with greater efficiency, precision and alignment than ever before. Process improvements, balanced production lines and disciplined cost control have driven sustained expansion in manufacturing margins. Our flexible manufacturing capacity allows us to rapidly respond to changes in demand and maximize operating efficiency. Our in-sourcing capacity expansion in Mexico is effectively complete and the full value of the initiative will be realized as production scales through 2026 and beyond. Likewise, we continue to drive overhead efficiencies throughout our global manufacturing network. This agility and responsiveness are a competitive advantage for Greenbrier. In Europe, we continue to unlock efficiencies through ongoing footprint rationalization driving cost savings and developing a more competitive and responsive platform for the region. As we announced today, we're proceeding with the closure of 2 additional facilities. Combined with our previously announced actions, we expect annualized savings of $20 million from this footprint rationalization. I should note that these actions and savings will not impact our European production capacity. Rather, they position Greenbrier to sustain higher margins in varying demand environments. The steady growth of our Leasing & Fleet Management business has been an important contributor to our performance. Our lease fleet continues to perform exceptionally well with high utilization rates and strong renewals. We've maintained a disciplined approach to growth and are on track to meet our goals of doubling recurring revenues by fiscal 2028. Our capital allocation framework remains focused and disciplined. We deploy capital where returns are strongest while maintaining balance sheet strength and liquidity. This prudent approach and a strong liquidity position support our ability to fund strategic priorities while delivering attractive returns to shareholders. The growth of our recurring earnings, combined with our strong manufacturing provide a durable recycle foundation for Greenbrier. Integration is a defining feature of our model. Manufacturing generates efficiencies and scale and leasing provide stability. And together, they create an earnings base that differentiates Greenbrier. The operational progress and recurring earnings we've built into our business means that Greenbrier now operates at a structurally higher level of resilience. Our results this year clearly demonstrate that our efficiency and lease fleet growth initiatives have raised the baseline of our performance and position us to achieve what I described as higher lows. Today, we are well positioned to continue generating cash flow, financial performance and shareholder value for years to come. Our fiscal 2026 guidance reflects this improved foundation. Our model is designed to perform with durable returns and the flexibility to respond to market demand. Looking ahead, we remain committed to operational excellence, innovation and responsible growth. In closing, I want to recognize our employees, customers and shareholders for their trust and partnership. Fiscal 2025 was a milestone year for Greenbrier, setting the stage for continued momentum into the year ahead and beyond. And with that, I'll turn the call over to Brian. Brian Comstock: Thanks, Lorie, and good afternoon, everyone. Greenbrier delivered exceptional performance in fiscal 2025. In addition to the record financial results already mentioned, we maintained consistent execution during the year and our gross margin improved from the actions we've taken over the last 2 years to enhance our production efficiency. Many of these improvements are structural and are continuing to deliver benefits. We view the near-term market conditions as an opportunity to intensify our focus on production layout, process improvements, cost reduction initiatives and optimization projects ahead of a production ramp-up anticipated later this year. While demand is an external factor, we remain relentlessly focused on improving operating efficiencies and reducing costs. In Q4, Greenbrier received approximately 2,400 new railcar orders valued at more than $300 million, bringing full year orders to more than 13,000 units. We closed the year with a backlog of 16,600 units valued at $2.2 billion. This backlog reflects a healthy mix of product types and customers demonstrating our market leadership. As a reminder, programmatic railcar restoration work is excluded from these figures. This work bolsters manufacturing margin and it's performed on approximately 2,000 to 3,000 units annually. We continue to focus on order quality with activity that supports efficient production scheduling and sustained attractive margins. Our commercial team has done an excellent job navigating a complex operating environment. In North America, freight trends and tariff dynamics are moderating new railcar demand, leading many fleet owners to extend acquisition time lines. I think it's worth reiterating what Lorie mentioned earlier, we achieved record earnings despite operating in a modest market for new railcar demand. In my 27 years at Greenbrier, earning more than $6 per share in a 30,000 car build year seemed unlikely until now. This is a clear reflection on how this leadership team has evolved and what it's capable of achieving. Across our global businesses, we are focused on optimizing our manufacturing footprint and driving additional cost efficiencies. In Europe, ongoing footprint actions are expected to yield about $20 million in annualized savings. Leasing & Fleet Management delivered another solid year. Recurring revenue reached nearly $170 million over the last 4 quarters, representing almost 50% growth from our starting point of $113 million just over 2 years ago. Our lease fleet grew by about 10% in fiscal '25 to just over 17,000 units with high fleet utilization at 98%. The fleet remains diversified by car type, lease term and customer. In fiscal '26, 10% of our leased railcars are up for renewal, and we've already renewed 1/3 of those units at substantially higher rates. We're building a balanced railcar portfolio through discipline and selectivity and we see opportunities to accelerate fleet investments in the medium to long term. Our lease fleet debt facilities, including the warehouse credit facility, senior term debt and asset back term notes are structured as nonrecourse obligations. They are prudently aligned with current needs and support growth at an average interest rate in the mid-4% range, well below prevailing market rates. These facilities provide stability, flexibility and efficient access to capital. Greenbrier enters fiscal '26 with backlog visibility, a disciplined commercial pipeline and an operating platform designed for consistencies. Our teams remain focused on sustaining execution, optimizing mix and maintaining the balance between manufacturing and leasing which has proven so effective. As Lorie noted, the transformation of our business has positioned Greenbrier to deliver more stable outcomes through the cycles. The commercial organization is fully aligned with that goal, pursuing opportunities that enhance the through cycle of earnings, strengthen relationships and extend our competitive advantage. We are confident in our near-term performance and long-term outlook. Our experienced leadership team has consistently demonstrated the ability to successfully manage through market cycles. We remain focused on steady execution and sustained performance as we advance our strategic plan. The progress we've achieved meaning or surpassing every target we have put forward reflects the expertise, commitment and teamwork of Greenbrier employees worldwide. I'm deeply appreciative of their efforts and proud of what we continue to accomplish together. And with that, I'll hand the call over to Michael. Michael Donfris: Thank you, Brian. Greenbrier's momentum carried through the fourth quarter, driven by strong operational performance and meaningful progress on our strategic priorities. We delivered record profitability through effective cost management and disciplined execution. These results position us well entering fiscal 2026. Fourth quarter revenue was nearly $760 million, in line with expectations, enabling us to meet our full year revenue guidance. Aggregate gross margin for the fourth quarter was 19%, an improvement of 90 basis points sequentially. This was driven by stronger operating performance at our Mexico facilities, favorable foreign exchange from a stronger Mexican peso and disciplined manufacturing execution. These gains were partially offset by a $3 million impact related to our European footprint rationalization. Notably, this marks the eighth consecutive quarter in which we've met or exceeded our mid-teens gross margin target. Operating income was $72 million, nearly 10% of revenue and this was partially impacted by $6 million in our European footprint rationalization. Our effective tax rate of 36.4% above -- was above both our prior quarter and our full year structural rate of about 28% to 30%. This was primarily due to jurisdictional income mix. Core diluted earnings per share was $1.26 and core EBITDA for the quarter was $115 million or 15% of revenue. For the 12 months ending August 31, 2025, our return on invested capital was nearly 11% and continues to be within our 2026 target of 10% to 14%. Shifting our focus to the balance sheet. Greenbrier's Q4 liquidity level was the highest in 10 quarters at over $800 million, consisting of more than $305 million in cash and almost $500 million in variable borrowing capacity. We generated nearly $98 million in operating cash flow for the quarter and delivered positive free cash flow for the year, driven by strong operating performance and working capital efficiencies. Liquidity remains robust, supported by solid operations, continued improvements in working capital and expanded borrowing capacity. On debt specifically, we updated our financial statements and disclosures to clearly distinguish between our leasing debt, which is nonrecourse and the rest of our business. This additional disclosure should help us clarify metrics and performance as we grow our lease fleet and nonrecourse debt. Now switching to capital allocation. We are committed to responsibly returning capital to our shareholders through a combination of dividends and stock buybacks. Greenbrier's Board of Directors declared a dividend of $0.32 per share. This is our 46th consecutive quarterly dividend and reflects our confidence in our business. Additionally, during fiscal 2025, we repurchased about $22 million in shares, leaving $78 million remaining in our share repurchase authorization. We will access the capacity opportunistically during the fiscal year and within the framework of a broader capital allocation strategy. With a resilient business model and strong balance sheet, we're positioned for continued performance and long-term value creation. Our guidance for fiscal 2026 is as follows: New railcar deliveries of 17,500 to 20,500 units, including approximately 1,500 units from Greenbrier Maxion in Brazil. Revenue is expected to be between $2.7 billion to $3.2 billion. We expect aggregate gross margin between 16% and 16.5%. Operating margin is expected to be between 9% and 9.5%. I will point out that included within our guidance is a reduction in SG&A of about $30 million versus fiscal 2025. Earnings per share will be between $3.75 and $4.75. For capital expenditures, we expect investment in manufacturing to be approximately $80 million and gross investment in Leasing & Fleet Management of roughly $240 million. Proceeds from equipment sales and -- are expected to be around $115 million, resulting in net capital investment around $205 million. With our strategic goal of investing up to $300 million to grow our lease fleet each year, we plan to continue to look for opportunities to increase this investment. This year, our team delivered record earnings and the highest liquidity in 10 quarters, while continuing to execute our long-term strategy to strengthen the business ahead of the next growth phase. We remain focused on consistent execution and disciplined capital deployment with strong financials and operating excellence, we're well positioned to navigate near-term market conditions and drive long-term shareholder value. And now we'll open it up for questions. Operator: [Operator Instructions] Our first question comes from Ken Hoexter with Bank of America. Ken Hoexter: So just looking at the outlook, right, so you're starting off at 17,500 to 20,500 cars down from 21,500 this year. At earlier in the Industry Conference at the start of this year, the expectation was car builds are going to be lower for the next few years. Maybe just your insight on the backdrop in the market. Your anticipation of if Europe can help offset that? And is this -- we just heard from another company, I guess, a locomotive manufacturer last week that the expectations are down 30%, 40% for car builds into next year based on industry stats. Can you just talk about what's going on in the backdrop and how you can kind of make up for that? Brian Comstock: Yes. Ken, it's Brian. I'll take a stab and maybe Lorie can color in around in around the edges. At the end of the day, when we look at -- we think we're -- if you look at the cycle, we think we're at the low point of the cycle right now and our inquiries are getting substantially more robust. We are forecasting bringing back some product in the back half of the year. And keep in mind that we made a material shift in the way that we think about this business a couple of years ago when we pivoted to utilizing some of our manufacturing space for programmatic railcar restorations. These are large programs that were typically done at repair shops in a very inefficient manner. And they have offset a lot of the degradation that we've seen over the last couple of years in backlog, and we continue to see that building as a partial offset. But we also think the market is a bit stronger than what a lot of people are predicting, particularly when you think about the tank car side of the world and the market and what we're seeing with some resurgence in oil demand as well as just upstream and downstream chemicals and replacement. Lorie Leeson: Let me just say -- I think you said it really well, Brian. While we see green shoots coming in our markets, the interesting thing [ to think ] about what we have done here at Greenbrier is deliveries and backlog is an important metric, but it's not the only metric that's driving our financial results and our cash flow. So we're really proud of how the team is putting up great performance and results even in a more modest background. Ken Hoexter: Great. And then you noticed at the -- noted at the beginning of the call, something was done in Mexico. I just didn't hear what you said. Can you explain what's going on? And I just want to understand within that, right, given the tariffs, what has been the impact on whether it's cost of inputs, pass-through of costs? Maybe just take a minute on what's going on. But if you could start with what you had noted, you had done or changed or improved in Mexico. I missed that. Lorie Leeson: Sure, Ken. So this is -- actually, I think we announced it at our Investor Day a couple of years ago, where we embarked on a journey to invest in our facilities in Central Mexico for in-sourcing because as we ramped up demand, we realized that we were having to go further and further to source significant components. So we've wrapped up the in-sourcing project this year, and it has been providing benefits to our financial results, our manufacturing and aggregate gross margin over the last couple of years and we expect that to continue for many years to come. Brian Comstock: Yes. I'd just add on to what Lorie said is our charter has been taking cost out of the business for the last couple of years, along with the in-sourcing investment, we've really been focused on taking hours out of our units and reducing cost overall, which provides us a bit of lift in softer markets. Ken Hoexter: And any thoughts on the tariff implications? Brian Comstock: No. On the tariff side, I just want to remind everybody that we take pride in the way that we construct our contracts. We feel like we're pretty well protected in our contracts just depending on which way they go. The U.S. footprint is also an important strategic part of what we've always maintained. And so we have some ability to pivot in the event that there are some substantial changes. And then again, we continue to work with our colleagues on the [ Hill ] to really find balance in these negotiations as they're -- they seem to ebb and flow every day. Ken Hoexter: Okay. And if Bascome can indulge me for 1 or 2 more. Just you mentioned after closing 2 facilities, how many did you have in Europe? And what are you down to? Lorie Leeson: We had 3 facilities in Romania and 3 in Poland. So now we will be down to a total of 3 facilities, 2 in Romania and 1 in Poland. Ken Hoexter: Okay. Are you done with the rationalizations at this point do you think? Or have you -- is that just consolidating production? Or is it reduced activity? Lorie Leeson: Actually, Ken, what is really great about this. And if you are ever over in Europe, we'd be more than happy to host you into one of our facilities. But the properties that we acquired, particularly in Romania, have fairly significant acreage. And what we've been on a journey over the last few years is to really bring more modern -- modernization to how we produce wagons. Now wagons in Europe are a lot more specialized than they are in the North American market because we share the rails more frequently with passenger transportation. But what we realized as we modernize some of our processes, is that you have more footprint than we really needed, which meant that we have more overhead than we really needed. So we embarked on the closure of the Arad facility, which was the largest facility in Romania in our second quarter. And then with economic uncertainty in Europe, we accelerated the pace of rationalizing 2 other of our smaller locations in Poland. I think that, yes, this wraps up what we think we need to do, but I think that this leadership team has shown that as opportunities present themselves or as we need to make adjustments in whatever market we are in, we will make that adjustment. Brian Comstock: Yes. And Ken, it's Brian. Maybe just a little escalation point on what Lorie said is we really are consolidating production into fewer facilities. Lorie Leeson: Maintaining the same amount of capacity. Brian Comstock: Exactly. Just consolidation because we have a lot of capacity at those facilities. And as far as the journey goes, we continue to look at North America as well and what we can do to continue to bring cost out. So I'd say, while it's kind of 80-20 rule we're done, there's still always opportunity to continue to improve and rationalize further. Ken Hoexter: Last 1 for me is you gave the full year. Anything you want to comment on first quarter outlook? I guess you ended at 4,900 deliveries. How should we think about first quarter? And with that, I thank you for your time. Lorie Leeson: Hats off to you Ken. You don't never know if you don't ask. But no, we're not inclined to give quarterly guidance. Unless Justin or Michael, you guys want to have something you want to share. Justin Roberts: No, I think that's fine, Lorie. Ken Hoexter: Is there a normal seasonal move from how you end in fourth quarter to first quarter? Or does that not play just given your move to balance production? Justin Roberts: Yes. And I'll take that one. I do think we'll see a stronger back half of the year than the beginning of the year. We're still working through our backlog, and we're still really excited about, as Brian mentioned in his prepared remarks that we're expecting the back half of the year to pick up as well. So it's probably stronger in the back half than the first half. Lorie Leeson: And I would say we've also been reminding workforce that just because we moved from August 31 to September 1, it's not like we reset the clock. We've focus on just moving forward each day, doing the best that we can and looking to create long-term value for our shareholders. Operator: Next question comes from Bascome Majors with Susquehanna. Bascome Majors: I'll start out where Ken left off. I know you don't want to give quarterly guidance nor probably should you. But can we talk about maybe the build pace? I mean, I think there were some prepared remarks talking about we hope they get better in the second half of the year. I would assume that suggests some back-end loadedness but doesn't necessarily flow through to the bottom line -- the bottom line. So can we just walk through kind of maybe frame it as like where we were in 4Q? Is that the run rate into 1Q just from a pure production standpoint, and what sort of recovery are we embedding in the second half? And is that order driven? Justin Roberts: Yes. So Bascome, good to hear from you, by the way. And I would say that we kind of -- if you think about the last 4 quarters and then what we see in the next 4 quarters ahead, you'll see kind of the first 2 quarters of fiscal '25 were higher production, but we kind of stair step down throughout the year. And we expect the Q1 and Q2 of fiscal '26 to be at similar rates as what we're -- at what we exited fiscal '25. And then we'll be ramping up in Q3 and into Q4 to kind of ideally have more state stability in fiscal '27. But it's a little more of our normal seasonal back half loading and some of that is explicitly order driven at this point, just driven by when customers need cars and some of it is driven by expectations. It's just kind of you think about longer lead time items and things that we've talked about in the past. You just have to allow a little extra time. You don't turn on light switches or reactivate or ramp up lines overnight, unfortunately. So -- and we could probably -- if there's any additional kind of detailed questions, we can handle on our call [ downs ] as well. Bascome Majors: Yes. And just to maybe frame it up qualitatively, though, is the production plan based on the current backlog back half loaded? Or is there an assumption that orders could improve to drive that back-end loaded those primarily? Justin Roberts: It's based on backlog orders that we're in discussions with that we expect to finalize and then a fair amount -- not a fair amount, but some improvement as we turn the year into calendar '26 just based on what customers are telling us they need. Lorie Leeson: And I would say that we go into every single fiscal year with some open production because we actually -- that's beneficial for us to be able to be quickly responsive to customers' needs. Brian Comstock: Yes. And just -- this is Brian, just chiming in a little bit as well on the order side. So when we think about the previous question, it was related to locomotives, keep in mind that there's a real large number of cars that continue to attrit out of the North American fleet. And we're at the lowest levels that we've been in probably 4 or 5 years from a national fleet perspective. So there still is a lot of replacement-driven demand versus growth demand, which may be different than what the locomotive people and some others are seeing in our space. Bascome Majors: All right. And can we talk a little bit about the balance sheet and funding for the leasing business? I mean you talked about hitting your recurring revenue or being on pace for your recurring revenue target. And do you expect your investment in the lease fleet to be similar? And over the long term, I know you have a CapEx guide for this year, but over the long term, do you think that's pretty similar year-to-year? Or is there some cyclical gyrations to that? And maybe lastly, as part of that, has the secondary market maintained its stability? And do you have product to continue to support a P&L impact from that net revenue or sorry, our net sales piece of the net CapEx? Lorie Leeson: And so maybe I'll just say something right quick, and then I know Michael and Brian will fill in behind me. But we are looking at all opportunities. We do see secondary market opportunities as well as new lease originations that can go into our lease fleet. So we have got a focused and agile leadership team that is going to be velcro to our customers to understand their needs and figure out how we can drive value. Brian Comstock: Yes, it's Brian. I just would add that our strategy remains consistent. We have talked about adding about $300 million net each year that continues to be our plan, good steady growth. However, to Lorie's point, the secondary market is still very robust. There's a number of books in the market today that we're looking at as well as sort of others. And we have assets that we continue to trade as we rebalance portfolios and we think strategically about how we align our lease fleet long term. So we're very active in the secondary market. Bascome Majors: And from a shaping perspective, you talked a little bit about the production plan and reasons why you think it can be stronger in the second half, both seasonality and some of the conversations you're having with your customers that you think will convert in the calendar '26. Is -- I mean you've talked about your cost takeout program in Europe and frame that as maybe one driver to margins. But beyond that, is it really just production rates and absorption that are going to be the biggest directional driver of margins? Or are there some other things going on between pricing and other inputs that we should think about on the margin cadence for the year? Justin Roberts: As we think about, Bascome, from a cost takeout perspective, this is actually an interesting time period from an operational perspective because this is giving the manufacturing teams an opportunity to take a little bit of a deep breath and look at our -- not just our overhead costs as we've talked about in the past, with an eye for reduction, an eye for reducing inefficiencies, but also take a look at overall our production processes and take unnecessary moves out and basically take hours out, take cost out. And it's kind of a soup-to-nuts approach of how can we reimagine some of our production processes and manufacturing. And so what we're seeing is as we started this journey, as Lorie and Brian and Michael mentioned over the last few years. But this is an opportunity this year as we've got a little bit of a slower cadence in the first half to focus on some of that activity versus just trying to get cars out the door as effectively as possible. And so this is an opportunity where we're able to redeploy some of our plant engineers, our industrial mechatronic engineers and move them around to different facilities and cross-pollinate to make sure that we're sharing best practices, make sure we've got uniform designs. And all of these are really adding up to improved margins. It's not just about overhead absorption, although that always plays a key role as well. Lorie Leeson: Which I'll then throw in a plug for why we keep thinking differently about how do we serve our markets and if it means doing what you call it, programmatic... Brian Comstock: Yes, railcar restoration and [indiscernible]. Lorie Leeson: Programmatic railcar restoration in what would be traditionally a new car facility, that's fantastic. And it's taking -- it's utilizing capacity where we've made an investment. It absorbs overhead, and it generates good returns. Bascome Majors: Maybe lastly for me, can you talk really high level about the competitive landscape in new car builds and order taking? I mean, has price become more difficult as the production rate of the industry has gone down to this level? Has it been pretty stable? I mean, you've been pretty clear on focused on doing the right things for your shareholders and returns on your business. But if you could just kind of talk about the back and forth between you and the remaining competitors in the space and whether that's stable or getting more competitive into this downturn? Brian Comstock: Yes. It's a good question, Bascome. It's Brian. And at the end of the day, it's a little both. So when you look to more commoditized markets, some of your covered hopper cars and what have you, you're seeing a lot more pricing pressure on cars, I say that everybody can build versus tank cars and some of the more niche cars that we're building today. So it's a mixed bag. You're seeing good discipline on the tank side. You're seeing good discipline on other specialty type cars, which is quite a bit of the market today. But where you do see the pricing pressures on those cars that I deem more commoditized, grain cars and things like that. Justin Roberts: And with that, we'll go ahead and end the call. Thank you very much for your time and attention. And --- Oh sorry, Lorie wants to say something. Lorie Leeson: And I'll just say for all of our employees that are listening to the earnings call today, I want to, again, appreciate all of the work that each of you bring every day, staying safe and executing to take care of our customers, each other to generate a record year of financial performance. Thank you very much. Justin Roberts: Thank you very much, everyone. If you have questions, please reach out to Investor Relations at gbrx.com. Have a great evening. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to today's FEMSA's Third Quarter 2025 Results Conference Call. My name is Serge, and I will be your coordinator for today's event. [Operator Instructions] And now I'd like to hand the call over to Juan Fonseca. Please go ahead, sir. Juan Fonseca: Good morning, everyone, and welcome to FEMSA's Third Quarter 2025 Results Conference Call. Today, we are joined by our CEO and Chairman, Jose Antonio Fernandez Carbajal, Jose Antonio Fernández Garza-Lagüera our current CEO of our Proximity and Health division and future CEO of FEMSA; Martin Arias, our CFO; and Jorge Collazo, who heads Coca-Cola FEMSA's Investor Relations team. The plan for today is a little different than usual. We will begin with our CEO and Chairman, who is traveling today and is therefore joining us remotely. Jose Antonio will share with us some thoughts on the past couple of years, where he sees our company today, and how he sees FEMSA position for the future as he gets ready to step down from the CEO role at the end of this week. He will not be able to stay for the remainder of today's call. Next, we will hear from Antonio Hernandez Velez Leija, still in his capacity as CEO of our Proximity and Health division. As you know, he will assume the role of CEO of FEMSA in a few days. But most of his comments today will focus on the performance and trends in our key retail operations during the third quarter, as well as some thoughts on the short- and long-term initiatives we are taking to address an evolving consumer. Next, Martin Arias, we'll discuss FEMSA's consolidated and operational results for the quarter in further detail. And finally, we will open the call for your questions. For the Q&A, please keep in mind that as of today, Jose Antonio is still the CEO of Proximity and Health, and there is a lot to discuss regarding those operations. If you would rather ask him about his views on the broader FEMSA platform, I'm sure he'll be happy to provide some high-level directional comments today, but these are early days as he onboards to his new role. Obviously, we'll be happy to dedicate ample time to this topic during our February call and beyond. And with that, let me turn it over to our Chairman, Jose Antonio, please go ahead. Jose Antonio Fernandez Carbajal: Thank you, Juan. Good morning, everyone. As you all know, in June of 2023, I returned to the role of CEO at a challenging moment because of our good friend, Daniel Rodriguez have fallen gravely ill, and we were in the thick of executing on our ambitious FEMSA Forward strategy. I committed at the time to where the 2 hats of CEO and Executive Chairman for a certain time with a clear plan to fill the CEO position and return to the separation of these key roles within that time frame. With the help of our Board, we've been able to deliver on that plan. And while I'm happy to hand over the keys to the incoming CEO next week, I appreciated the opportunity in these past 2 years to get close to the operations again, particularly through such a key process as FEMSA Forward. Today, I would like to share some thoughts on our recent past and on our future. FEMSA Forward was all about maximizing long-term value creation by focusing on our core verticals, retail and beverages, enabled by digital, and setting out very clear capital allocation target. In the past 32 months, we've been hard at work executing that plan, divesting nearly $11 billion of assets while in our core at the same time. In addition, the capital allocation framework we put in place in February of last year is guiding our actions and allowing us to move steadily toward our leverage objective by distributing between March of 2024 and March of 2027, and expected a total of approximately $7.8 billion of capital through [ ordinary ] and extraordinary dividends, and also through some share buyback. As I briefly recap these last 2 years, there are 2 message -- 2 messages I want to highlight. First, that everything we set out to do when we announced FEMSA Forward, we have delivered on. We told you what we were going to do, and then we did it. Second, that these actions have been driven by our share pursuit of long-term value creation for all of our stakeholders. Our purpose and interests are well aligned. Finally, I would like to quickly touch on how I see FEMSA position today. I feel very confident that our business units have never been stronger. I know this year has been sluggish in Mexico. And I know that the team has addressed this, and we will discuss this later during this call. But I also know that the last year was a banner year. So I am talking about the forest, not the trees. On the retail side, we have OXXO Mexico still with at least a decade of continued store growth at the current pace, world-class returns on capital, and a full range of levers to adjust as we ensure our value proposition continues to satisfy a growing number of needs for an always evolving consumer. In Mexico, we have successfully completed the leadership transition to Carlos Arroyo, an experienced retail operator with a decade -- with a decade's long track record, who is bringing a new set of capabilities that will serve us well for the challenges ahead. In the proximity convenience environment outside of Mexico and in the discount space in Mexico, we have a compelling set of higher growth opportunities that are ready to be scaled up, such as OXXO Brazil, OXXO Colombia and Bara among others. Any one of these opportunities has the potential to create billions of dollars of value over the next decade and beyond. In our other retail investment, specifically Health in Europe, we are laser focused on organic growth and on improving the returns on our invested capital. At Coca-Cola FEMSA, we are in the middle of an ambitious multiyear investment phase, continuing to increase our production and distribution capacity, as well as our long-term growth capabilities. Underscoring the strength and resiliency of this business even as we navigate a challenging short-term environment. On that note the recently announced tax increase in Mexico will present challenges, but we believe this will be the -- like the one we have faced in the past. And we will make the necessary adjustments in order to balance our return on investment capital while allowing us to take advantage of some growth opportunities. At Spin, we continue to grow our user base and engagement as we make steady progress in developing. Unknown Executive: Hello Jose Antonio? Excuse us while we try to reconnect to connect with Antonio. [Audio Gap] Operator: Ladies and gentlemen, we experienced a momentary interruption in today's conference. Please continue to stand by. [Audio Gap] And we've got -- we've back Jose Antonio. Please go ahead. Jose Antonio Fernandez Carbajal: Thank you. I'm very sorry. I don't know what happened and I kept talking, and I didn't notice when I left. Can you tell me where I... Unknown Executive: The paragraph of Spin Jose Antonio. Jose Antonio Fernandez Carbajal: Okay. So I will repeat that paragraph. Thank you. At Spin, we continue to grow our user base and engagement as we make steady progress in developing a digital ecosystem that will better enable our millions of users to navigate and improve their financial lives in a world that is increasingly digital. Although this is one of the longest term bets in our core verticals, we have a firm belief that the digital capabilities we are building are indispensable to OXXO Mexico, and will prove to be a source of value creation, creation for decades to come. Jose will certainly bring a fresh perspective to this business. I have been at FEMSA for nearly 40 years. During that time, I have lived through several reinventions of FEMSA. And today, I am as excited about our long-term growth opportunities as I have ever been, and I hope you are too. I will continue to work to capitalize on those opportunities in my role as Executive Chairman, but I will have fewer chances to speak with you. So I want to take this moment to thank every one of you for your interest in our company and for your full support through all these years. And with that, let me turn it over to our new CEO. Jose Antonio Garza-Laguera: Thank you, [indiscernible]. Good morning, everyone. Today, I want to structure my comments around three topics. First, the quarter's results with a particular focus on OXXO's Mexico same-store sales and traffic, where despite a still challenging environment, we are seeing some encouraging signs. Next, I want to talk about the actions and initiatives the team has put in place at both the short-term tactical level, but also some ideas about more strategic considerations and projects aimed at strengthening the value proposition and relevance of the OXXO store in the medium and long term. Finally, I will share with you some initial thoughts as I get ready to step into the FEMSA CEO role in a few days. So firstly, let's talk about the third quarter. As you saw in our release, same-store sales for Proximity Americas increased 1.7%, with average ticket rising 4.9%, and average traffic contracting 3.1%. This represents a clear improvement versus the first half, marking an inflection in our trend that seems to be improving further in October. This quarter was the first to show positive same-store sales growth since the middle of last year, and importantly, we believe a significant part of the improvement came not from a meaningful change in macro conditions, the weather or the consumer environment, but rather from adjustments we made to address category and channel-specific challenges. As a result, we improved our competitive position in several key categories like beer, soft drinks and snacks. And in terms of the channel, we believe we also improved our overall competitive position versus the traditional trade, reversing the trend we saw earlier in the year. Which brings me to my second topic regarding the short- and medium-term initiatives we have launched to improve performance. There is a long list of actions and initiatives designed to drive our short-term results which are aligned with our long-term strategic objectives. One of our most important such initiatives, which I want to highlight is pursuing affordability in our core categories of beer, soft drink, snacks and tobacco. To this end and working in tandem with our key supplier partners, we were able to improve our assortment and our price package architecture by adding presentations at both ends of the out-of-pocket spectrum. Larger multi-serves and returnable presentations in beverages, smaller packages for snacks and beverages, and lower-cost brands for cigarettes. In addition, we have implemented aggressive promotional campaigns in these categories and a variety of other categories. These initiatives are being supported by strong communication efforts, access to Premia related data, and a focus on store execution, and we are already seeing positive results, improving our competitive position during the quarter for most of these categories relative to the traditional trade. At the same time, we are executing ambitious initiatives to drive productivity and efficiency across the proximity and health organization aligned with our long-term strategy, including our recently launched fit-for-purpose corporate overhead efficiency program, which will make our organization leaner and achieved significant cost savings over the next several quarters, generating a reduction in SG&A. Beyond the short term, we are in the early stages of developing the strategy that will guide the evolution of our OXXO platform in the years to come. As powerful as our value proposition has been to satisfy certain consumer needs and occasions around thirst, gathering and impulse, we believe we can expand our relevance and increase the scope of our value proposition while ensuring affordability in a more integral manner. We also see that coffee and food categories are categories where we can win by making significant improvements. We have performed a deep diagnostic on our current value proposition and are currently in the experimentation phase to launch new offerings. We are excited by the opportunity and we will keep you posted as we advance on this ambitious multiyear effort. Finally, let me talk about FEMSA and my role as future CEO for a minute. As you might imagine, I have been rapidly getting up to speed in all the matters outside the scope of Proximity and Health. However, although it is still early, and I do not start the job until next week, I want to share an initial message of strategic continuity. Over the past few years, we achieved meaningful progress driven by the vision, courage and strategic clarity of those that came before me. They led a powerful transformation, streamlined our portfolio and positioned FEMSA to compete with greater focus and strength. I have the privilege of learning from them and their example continues to shape how I live and think about the future. As a member of the senior leadership team, I was informed and fully supportive of FEMSA Forward and the resulting focus on our core business verticals, and I am completely designed our capital allocation framework and strategy. I am convinced we have in Coca-Cola FEMSA and OXXO Mexico, two of the most remarkable and valuable assets in their respective global industry. Not just because of what they represent today, but just as importantly what they can become in the future. Our retail platform is poised for dynamic long-term growth through OXXO Brazil, OXXO Colombia, Bara and although still at an earlier stage of development, OXXO USA. Our other retail platforms, in particular, Health and Europe, our solid self-funding operations where our focus should be on maximizing the returns on our existing assets through efficiency and primarily organic growth. And I am a firm believer in the potential and optionality of the Spin ecosystem. I also want to take this opportunity to share with you that I am bullish on Mexico. We continue to deploy more than $1 billion in our CapEx in our home country every year. As attractive as some of our international long-term bets are, Mexico will continue to play an outsized role in the value creation at FEMSA for the foreseeable future. As for my management style, I favor thinking in decades while lasting in days, balancing a long-term view on value creation with a sense of urgency in setting the right conditions for execution. We will have plenty of opportunities to talk about these topics in the future. But I can share some examples with you of what I mean by that. Thinking in decades requires that we methodically consider our strategy, ensuring that we do not mortgage our future for short-term fixes and gains at the expense of our long-term growth and competitive position. We should always be driven by the objective of long-term value creation, instilling a relentless focus on sustaining or having an achievable and realistic path to ROIC over WACC. Acting in days requires us to rigorously tighten our grasp on actionable expense and cash flow levers, making it a daily habit across the organization. It includes getting the right people in the right seats right now, as well as testing frequently, learning quickly, moving on fast when we fail, and acting decisively when we find a new solution that serves our customer needs. I would also add that I'd like to communicate in a no nonsense straightforward way, and one thing I can offer you now is a commitment to be in touch with you, our investors and analysts more than in the past. Not just on these quarterly calls, but by meeting you on the road. We are already developing the plans for next year with Martin and Juan, and I look forward to seeing you all in the not-too-distant future. And with that, let me turn it over to Martin to go over the quarterly results in detail. Martin Arias Yaniz: Thank you, Jose Antonio. Good morning, everyone. Let me begin by discussing our consolidated results for the third quarter of 2025. During the quarter, we delivered total revenue growth of 9.1% despite a still challenging but improving environment in Mexico, impacting both Proximity and Coca-Cola FEMSA, which was offset by solid top line trends outside Mexico. Some currency tailwinds, particularly in Europe and the consolidation of the OXXO USA operation. Operating income increased by 4.3% year-over-year, reflecting inflationary effects on our costs and expenses, partially offset by expense efficiency efforts across multiple operations, especially at OXXO Mexico, Coca-Cola FEMSA Mexico, Health and Europe. Net consolidated income decreased by 36.8% to MXN 5.8 billion, driven mainly by a noncash foreign exchange loss of MXN 1.3 billion, compared to a gain of MXN 4.3 billion last year, a swing of more than MXN 5.5 billion. Related defense U.S. dollar-denominated cash position, which was negatively impacted by the sequential appreciation of the Mexican peso during the period. Two, higher interest expense of MXN 5.5 billion, compared to MXN 4.8 billion the previous year, reflecting higher debt at Coca-Cola FEMSA and higher lease obligations across our retail network. And three, lower interest income of MXN 1.9 billion compared to MXN 2.6 billion the previous year, reflecting lower interest rates and lower cash balances. Our effective tax rate for the quarter was 29.3%, showing a sequential improvement. We understand that the spike in the first half of the year in our effective tax rate 42.2% in the first quarter, and 40% in second quarter raised certain concerns. In that regard, I want to make several comments. The quarterly movement of our tax rate can be volatile and difficult to project on a quarterly basis, since it can be impacted in any given quarter by any of the following things. Extraordinary settlement of fiscal contingencies from the past in 1 quarter, reflecting issues from several years in the past. As the year progresses, we also make adjustments to provisions for tax payments given the performance of the business. Foreign currency gains and losses on our foreign currency cash balances and debt can cause important swings. We are requiring our tax rules to include or write-off deferred tax assets relating to NOLs based on adjustments to internal projections. Movements of accumulated cash, excess cash from our subsidiaries to Mexico, reflecting several years of profits can cause an increase in taxes. There are certainly structural reasons why our tax rate is higher than the 30% corporate income tax rate in Mexico, including nondeductibility of certain expenses, losses relating to Spin, and higher [ tax ] rates in countries outside of Mexico. We have guided investors towards a tax rate in the mid-30s range, and we continue to believe that this is the right number under current legislation. Turning to our operating results and beginning with the Proximity Americas division. Same-store sales increased modestly by 1.7%, once again reflecting a combination of a solid average ticket growing 4.9%, offset by a traffic decline of 3.1%. This is an improvement over the previous several quarters. And as Jose Antonio just said, it includes some encouraging information regarding the effectiveness of our tactical initiatives, and an incipient recovery in our competitive position in key categories. Total revenues for Proximity Americas grew 9.2%, or 4.8% on an organic and currency-neutral basis, mainly driven by the expansion of our network 1,370 stores year-on-year, a strong performance in our LatAm markets, which continue to grow at very attractive rates. The consolidation of OXXO USA, as well as favorable exchange rate effect in several of our operating currencies. Gross margin expanded by 80 basis points to 45%, reflecting a continued expansion in Mexico and LatAm, despite undertaking the affordability efforts mentioned previously in Mexico, and the consolidation of the U.S. operations which have a significant component of lower margin fuel. Operating income increased by 7.1%, while [indiscernible] 20 basis points to 8.8%, mainly due to the consolidation of the U.S. operations, which are slightly above breakeven. And despite the fact that Mexico's margin was flat, and OXXO LatAm continued to reduce its operating income losses relative to its revenues. The combined selling and administrative expenses grew at 12%, reflecting continued pressure on wages in Mexico, continued expansion-related expenses in LatAm and consolidation of the U.S. operating expenses. There were some reclassification of administrative expenses to selling expenses in LatAm, which makes comparison more difficult on a disaggregated line item basis. We expect, over the next few quarters, you should be able to see the effects on SG&A as we streamline corporate overhead through our fit-for-purpose initiatives. On the store expansion front, Proximity Americas added 198 new stores in the quarter, in line with our plan for the year. At OXXO USA, the conversion of DK stores into the OXXO banner continue to pace, reaching 50 converted stores in Midland-Odessa and Lubbock. We are making progress in food service with revamped hot food menus and offerings in the 50 OXXO stores, adding new partnerships aimed at driving consumer frequency and strengthening the overall food service value proposition, including clip-ins from our [indiscernible] and [indiscernible]. We are also initiating the conversion process in El Paso, as well as testing stand-alone nonfuel OXXO stores in certain locations. At Bara, during the quarter, we continued our accelerated store expansion opening with 40 new stores, and we remain on track to achieve or surpass a 30% growth rate in 2025. We continue optimizing our discount value proposition by scaling our private label strategy. Bara same-store sales grew 10.8%. In Europe, Valora delivered solid results as total revenues increased by 10.1% in pesos, or 3.3% on a currency-neutral basis, driven by higher Swiss retail sales, coupled with positive trends in Swiss B2C food service, partially offset by softer sales in B2B food service, particularly in the U.S. Gross profit grew 10.1% in pesos, or 3.4% currency neutral, in line with revenues and representing a stable margin compared with last year. Total operating expenses grew below revenues. However, selling expenses grew at almost the same rate as sales, reflecting wage pressures and inflation, but were offset by nearly flat administrative expenses. This reflects broad efforts to reduce corporate overhead expenses. Valora reported a 29.1% increase in operating income, 20.7% on a currency-neutral basis, representing a 70 basis point improvement in operating margin, and reflecting strong growth in Swiss retail, positive contribution from Swift B2C food service, and effective corporate overhead cost management offset by our B2B food service business. Now let me walk you through the performance of our Health division. Total revenues increased 2.9% in pesos with same-store sales growing 0.8%, mostly explained by strong top line performance in Chile and Colombia, offset by Mexico. On a currency neutral basis, total revenues grew 4.5%, evidencing currency headwinds relative to the U.S. dollar in Ecuador and the Chilean peso. Growth in revenues occurred despite the continued challenging environment in Mexico, which saw same-store sales declines and the closure of 423 underperforming stores versus the same quarter in 2024. Operating income declined 4%, and 1.3% on a currency-neutral basis, resulting in an operating margin dilution of 30 basis points to 4%. This reflects operating deleverage in Mexico and higher labor expenses in South America, particularly driven by the rapid expansion in Colombia. [indiscernible], same-station sales increased by 8.3%, and total revenues grew by 5%, reflecting growth in retail volume, offset by a decline in the wholesale business. Gross margin stood at 11.8% and operating margin at 4.6%. It is worth highlighting that during the quarter, selling expenses decreased 1.7% underscoring our continued effort to look for efficiencies and savings to support profitability in such areas as labor costs. Now moving to Coca-Cola FEMSA. During the third quarter, they delivered gradual sequential improvement amid a challenging environment. Total volume declined slightly, driven mainly by Mexico, or a softer macro environment continued to weigh on consumption. On the other hand, South America delivered a resilient performance with volume growth across most territories, demonstrating the adaptability of the business across regions. In terms of profitability, cost protected its margins, mainly through the implementation of mitigation actions, controlling expenses and generating efficiencies, recognizing a more difficult 2025 than expected. You can dive deeper into the results by listening to the webcast of their earnings call held last Friday. Finally, regarding capital returns to shareholders in the context of our capital allocation framework. During the quarter, we distributed a total of [ MXN 11.8 million ] in a combination of ordinary and extraordinary dividends. In terms of share buybacks, we were not active during the third quarter, so we are a bit behind schedule. As you know, whenever we become active, we will make the required filings and you will be able to follow. As we look ahead to the coming year, we are cautiously optimistic. As we mentioned before, we are beginning to see signs of improvement in the October data in Mexico. In terms of the levers and variables under our control, we are confident we are making the right adjustments and achieving the desired results across our platform. From the consumption side, we will have the additional tailwind from the FIFA World Cup to be held in our continent, with matches being played at the right time of day. And hopefully, we will also get a slightly better environment in which to operate in Mexico. We will provide a more detailed update in our next call. And with that, we are ready to open the call for questions. Operator: [Operator Instructions] The first question is from Ben Theurer from Barclays. Benjamin Theurer: Jose Antonio, congrats on the new job. And I actually have a question for you on the old jobs. So as it comes to retail, just wanted to understand a little bit and dig a little deeper into your commentary on the same-store sales performance. Well, clearly, traffic was down only 3% versus the give or take, 6% we saw in the first half. There was a very easy comp versus last year because of some of the hurricanes. But you did mention there is sequential improvement into October. So I wanted to kind of like understand if you could give us a a couple of more data points as to maybe how the performance was from July through September? And how that carried into October? And what we should expect here as we move throughout the fourth quarter and then maybe into next year, just with the closing remarks being slightly optimistic into next year? So I just want to understand a little bit the traffic dynamics at OXXO. Jose Antonio Fernandez Carbajal: Sure. This is great. I was expecting this one to be either the first or the second question. Unknown Executive: Fantastic. Be prepared for that. Jose Antonio Fernandez Carbajal: So -- I mean, obviously, I would say, I am glad that I see a reversing of the trends in OXXO Mexico on this quarter. And I do see better performance in traffic compared to last -- the first half of the year. But obviously, I'm not satisfied because we had, as you say, some easy comps. To the defense of my team and also there were some adverse effect in weather, especially obviously in September and especially in the Central of Mexico, but I -- and I mean what gives me some optimism is that the last couple of months, we've seen market share gains in beer, in soft drinks, and even in snacks, and even in tobacco, especially with the introduction of some lower-priced tobacco. I am -- October is still not over, but I am very encouraged by the results. So if that trend continues, I think we should be facing a much better end of the year. What else I can tell you? I can tell you some of the things that we've been putting in place that we think we're going to take effect much more -- or they were going to take longer to take effect. Like promoting coffee and some food items around coffee and breakfast are really beginning to shape up. Coffee is growing at double digits, and that gives me optimistic. And then the ability to be introducing multi returnable packages, affordability stuff in beer in soft drinks are really, really beginning to take place. And I would say in services, we're implementing new increasing services every, every quarter. And so even though, for example, we're growing a lot with the Asian e-commerce retailers, those things have now scaled back given some tariff restrictions. We're beginning to see other increases in traffic in services that are -- give us high expectations for growth. We're still waiting for the permit to get back into Banorte and other banks. But cash withdrawal with the main banks, some of the big fintechs and with Spin are growing double digits as well. So I would say still not satisfied because I wish we were going better in traffic, but very encouraging signs towards the fourth quarter. Does that help you? Benjamin Theurer: It does. And then obviously, into next year, we get the really easy comps, correct? Jose Antonio Fernandez Carbajal: Well, hopefully, yes. I do think there's a lot of things we need to still do on our part, and I am very encouraged by the obsession towards market share gains that we're following through in OXXO, and I think that's a discipline we will go forward. But we should get better comps. And I do think the World Cup should help as well. Benjamin Theurer: Congrats again on your new role as well. Jose Antonio Fernandez Carbajal: Thank you. Operator: We'll now take our next question from Alejandro Fuchs from Itau. Alejandro Fuchs: Congratulations on their new role to Jose Antonio. I have 2 quick ones, if I may. The first one on OXXO Mexico, another strong performance on gross margins this quarter. I wanted to see if you could maybe elaborate a little bit more into how much of this is the service mix continue to add to the business? How much of this is maybe a little bit of pricing? And where do you see just gross margins in Mexico continue to develop at OXXO in the future? And then the second, on Bara and also in Brazil and another also strong quarter of growth, so congratulations on that. I wanted to maybe Jose Antonio grab your thoughts on where do you see these 2 businesses in the next 10 years? How much of our priority are them to you and to the team? And then maybe if you could elaborate a little bit into what would be the best case scenario, sort of medium to longer term of Brazil and Bara. Jose Antonio Fernandez Carbajal: Yes. Thank you, Alejandro, for I would say, obviously, I've always said that OXXO Mexico has a lot of momentum and still a lot of gross margin to gain. If you look -- I think always the gross margin it's an incomplete number. And obviously, we don't have the full answer, but you would have to say, look, at the full profit pool all the way from the -- of our supplier partners all the way to the consumer. And I always like to see gross margin gains, and I think there's a lot to gain still. But some of that should be given back to our consumer in affordability. Obviously, some categories are more elastic than others. And so we have the smart data to play with that and give back to our consumers some of the gross margin gains. As to this quarter and the gross margin gain, it has a little bit to do with the commercial income that we continue to grow incredibly well. It has a little bit to do with mix. The affordability things allows us to even gain some gross margin as we implement some very profitable promotions in some of the affordable SKUs that we we are trying to promote. So the mix also helps sometimes with the broad margin. But I would say, mainly, it's -- that we continue to win commercial income. And as we grow what you can expect through the year I do expect that there's more gross margin to make, but some of it will be given back to the consumer in affordable promotion and price pack architecture. Afterwards -- afterwards Bara and OXXO Brazil, as I said in this forum, and I will say it in the future, those are 2 of the most exciting avenues for long-term growth for FEMSA. I am incredibly encouraged by the amount of progress that OXXO Brazil has been able to achieve in the last couple of years. We were -- just 2 years ago. We still needed to believe almost a quantum leap in gross margin expansion, in operating cost reduction, in top line goal. And now we are within arms reaching all of those areas. So we know we're going to have a profitable business in OXXO Brazil. We know where our next areas of growth beyond Sao Paulo will be. We're already mapping them. We're already starting them carefully. The big, big question to ask is, do you believe of that it will be a 40,000 store business in Brazil, or a 4,000 business in Brazil? I think it will be something somewhere between. Sorry for the wide margin. But it's up to us to really continue to perfectly engineer the whole process of the business to make it -- to be closer to the higher end belief. But it's one of my big, bigger ambitions for the next decade in FEMSA. Imbera, we are incredibly happy with the progress in terms of increasing our return on invested capital of new opening stores. We still need to polish and perfect the value proposition of Bara towards more -- towards -- closer towards harder discount. We're happy with the deployment and growth of our private label brand, but we still have a long, long way to go, but we are following closely and working with the private label manufacturers from other countries that are one to come and install in Mexico. And we're beginning to grow beyond our core region of El Bajio. And we're seeing very positive results in Guadalajara in Jalisco and we just opened in the north of Mexico. So we're very excited with the progress there. Operator: And we will now take our next question from Antonio Hernandez from Actinver. Antonio Hernandez: Congrats on the results and this new position. So question regarding an update on the health business, both in Mexico and Chile, some news also... Jose Antonio Fernandez Carbajal: Antonio can you be closer to the mic? I'm not being able to... Antonio Hernandez: Yes. Can you hear me there? Jose Antonio Fernandez Carbajal: Yes, better. Antonio Hernandez: Okay. Perfect. Just wanted to get an update on your health business. Both in Mexico and Chile saw some news -- recent news on a new format in Chile. Also, there's a very different trend in Mexico. So I wanted to get an update on that business in both countries. Jose Antonio Fernandez Carbajal: Yes. So in Chile, we were facing a very tough competitive environment in Chile for the last couple of years, and we are very happy that we continue to Gain market share. We're growing in all of our channels. As you know, Chile is a multichannel business. We are in the pharmacy. We're in the franchise business. We're in the distribution to independent pharmacy. And we continue to gain -- and we just even opened our discount pharmacy chain in Chile. And we are seeing incredible growth in sales and in market share, in all of that. Given that it's a very competitive market, sometimes that does not translate to bottom line growth. But even given the huge competitive environment that we see in Chile, we are happy that we are growing even in the income statement. So -- and we expect Chile, it's a mature market. We have very high market shares. But I do feel there's a lot of room for growth in even newer categories in the health and beauty space, in the premium and in the discount space, and we're beginning to get into other adjacencies in the elderly care, I mean the pet and veterinary care, and so we see new avenues for growth for Chile. Very different outlook for Mexico. In Mexico, we are the #6 player. I could obviously put as an excuse. A big chunk of our stores are in the Sinaloa region, which have been affected by security. But it's not enough to explain the drop. To be honest, we need to fix Mexico. We're working very hard to fix it. We have now the right talent in place. But we had to close many stores in Mexico, and we're still on working on fixing that operation, and we hope to fix it in the next few months. Thankfully, we have a very high-growth business in Colombia. And even in Ecuador, we're seeing market share and revenue and profit gains. So in general, health as a business we're happy except for Mexico. Operator: And we will now take our next question from Alvaro Garcia from BTG Pactual. Alvaro Garcia: All the best in your new role Jose Antonio. Two questions. One, the fit-for-purpose /corporate restructuring comments you mentioned earlier, the reduction in SG&A. In my head, I have this $100 million amount that you've typically guided for on the corporate front. Is that subject to change? And if you could just give us more color on how you're thinking on structuring the corporate expenses there? And then just one really quick one on interest expense. Martin, I don't know if you could expand on -- you saw a pretty big uptick at the FEMSA level, ex-cost. What explain that? Jose Antonio Fernandez Carbajal: So I would say, I would split the corporate overhead in 2 phases. The first one, the fit-for- purpose component is something that me and the OXXO team have been working on, and we are -- there were opportunities as we prioritize certain projects in OXXO Mexico and prioritize others. There was a good opportunity to reshuffle the overhead in OXXO Mexicos headquarters, and there will be some opportunities for savings, but also to leave some room for executives to dedicate to the big projects around food, around services, around the affordability that we want to invest. I do expect a big hit on savings. You will see the full number probably by the end of the year and as we start next year. As -- eventually, I would -- when I become CEO of FEMSA, I do plan to take a deeper look on -- and as always, with big changes in management, there are opportunities to look at the overhead in the full company, and I will comment more on that probably in February and beyond. Hopefully, that's what I can answer for now. Alvaro Garcia: The comments on -- fit for purpose for OXXO Mexico specifically at the moment? Jose Antonio Garza-Laguera: Yes, for now, yes. Martin Arias Yaniz: Alvaro, could you repeat your second question? I just want to make sure I got it right. Alvaro Garcia: Sure. On the interest expense, specifically, ex-KOF, we saw a pretty big sequential increase there. I was wondering if maybe there's some derivatives in there that's driving that? Or what drove that sequential uptick there? Martin Arias Yaniz: Well, looking at the total interest expense, KOF, actually went up from -- looking this correctly from [ $1.59 billion to $1.3 billion ] interest expense net and it was flat on interest expense. And so the interest expense went up by MXN 600 million. I don't -- I'd have to get back to you on the detail exactly in the context of everything, it's not that big a number. Interest income is certainly coming down as our cash balance has come down. As interest rates generally come down, particularly in Mexico, but to some degree in the United States. But specifically, that what appears to be a MXN 600 million increase in interest expense at FEMSA, I'll get back to you. Operator: We'll now take our next question from Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: First of all, best of luck on your expanded challenges. And also congrats to your father on another successful transition. We'll be looking forward to connecting more going forward. I have two questions. One is more conceptual, right? When you think about the one thing that you'd like to do differently in FEMSA going forward. What do you think this is the clear opportunity? This is more conceptual, right? But it still related to your vision for the company, and this is somehow also linked to the capital allocation strategy. How do you think the role that Coca-Cola FEMSA will have in the FEMSA overall portfolio going forward? Jose Antonio Garza-Laguera: Thank you, Thiago. Obviously, great question. I would say -- I will answer you with the second one. I would say, obviously, I am in love and have a huge appreciation for the KOF as a business and the talent. It's an incredible business, and it's an operation that has a lot of things going on for themselves to really keep growing, growing the core. I'm incredibly impressive what the opportunities that are -- we see for the digital transformation of the bottling platform. For growth opportunities, not only in their soft drink category, but in their non-KOF. And I see a lot of potential for organic growth in Brazil, Guatemala, Colombia and even in Mexico, with all the -- even with the taxes. So I'm very excited for Coca-Cola FEMSA. The relationship with the Coca-Cola Company is the best one we've had probably in decades, probably since the JV was formed. It's incredible that what the management team from both sides have been able to construct as a growing and fruitful relationship. I do think Coca-Cola FEMSA should play a part in a consolidation space through eventual M&A. And I am excited for the opportunity. I have huge respect for the bottlers in South America. And obviously, here in Mexico, I have a huge appreciation for all of them. And I do think there are opportunities to keep exploring possibilities with other families and bottlers in the space. I will comment more -- in more detail on what I see cost in the future, but that could give you some color of my excitement for Coca-Cola FEMSA. And from what I would say, I would do different? I think I let it be known in what -- in my earlier comments. I do think we need a bigger sense of urgency and a bigger sense of counting every penny. We have the ambition in FEMSA to be one of the best, or the best proximity retailer in the world. Obviously, with the Coca-Cola FEMSA company as part of it. As to do that, you have to have the best management team. You have to have a very demanding workforce, but also lead to the culture that you want to instill for the long-term growth of the company. So I would say my big, big focus on conceptually bigger demand for excellence in our corporate office, bigger demand for excellence throughout the channels in management, bigger speed in making big decisions on capital allocation. And I think that should give you the color on the sense of urgency that we plan to move versus previous years. Martin Arias Yaniz: And going back to Alvaro Garcia's question, the increase in interest expense, excluding Coca-Cola FEMSA, was slightly over MXN 600 million. 2/3 of that can be attributed to an increase in the financial expense associated with the lease accounting under IFRS, and likely the consolidation of the U.S. business is a big reason for you seeing the sort of uptick relative to other periods. For other periods, most of it is related -- all of it is related to organic growth of leases. Operator: We'll now take our next question from Bob Ford from Bank of America. Robert Ford: Congratulations on the promotion, Jose. Martin mentioned some reclassifications. Were there any reclassifications or onetime items that contributed to the gross margin improvement at OXXO Mexico? And Jose, where do you see opportunities to make further improvements in the value propositions at OXXO Mexico? And then one other question, if I could. Could you discuss the charge in discontinued operations, it was a little bit bigger than what we were looking for. We're just wondering how you're thinking about Solistica and the LTL business. Martin Arias Yaniz: Some of the reclassifications -- all the reclassifications that happen in Proximity Americas had to do with OXXO LaTam. None of them had to do with OXXO Mexico. And OXXO Mexico, even on a standalone basis did have an expansion of its gross margin. Juan Fonseca: In fact, I think Bob, expansion in Mexico was something like 130. Yes. Jose Antonio Garza-Laguera: Thank you, Bob. I would say if you look into also Mexico, we are, by far -- or we have a very important market share in what we call impulse gathering the beer, the soft drinks, the services category. But we still have a long ways to go in a couple of categories that OXXO right for winning. One is around food. We are the biggest sellers of coffee. And if you look at our LatAm operations, all of our coffee occasions go paired with very good tasty food. And I think we have a lot of opportunity to win in food around coffee. And obviously, that leads you to breakfast. And if you look at it, there's not really an affordable winning food opportunity. And that's a segment on that we have lower traffic than average. So we are very excited with increasing the opportunity for that. We still are very excited about the opportunities we see on segmentation. And I think we're going to go bigger and tougher on segmentation. We know all of the stores that are close to a discount store, or discount supermarket. And we have very clear actionable steps that we can put in place in the affordability space, not only in the categories that compete in the grocery space, but in the impulse and gathering. So we're beginning to do some of that and it's beginning to react incredibly. And there are things that will take longer to mature. But I am very excited about them. Some of them around the beyond trade and other services. And that requires working with team towards creating payment options that you can pay at Spin, but you can also send people money that they can withdraw at OXXO, and you can reward them for withdrawing at OXXO in a way. We're beginning to see some interesting things. We are still very excited about our growth in OXXO Nichos. They continue to outperform in terms of ROIC and we are continuing to accelerate that. This year, 25%, a little bit lower than what we planned, but still much bigger than previous year. 25% of our stores would be on the niche space, and that should just continue to gain momentum. I would leave it on that. Those are the things that we see are beginning to help us gain share beyond the inputs and gathering categories and towards food and groceries and others. Does that respond your question, Bob? Robert Ford: It certainly does. I just had that one follow-up with respect to the discontinued operations in Solistica. Jose Antonio Garza-Laguera: Martin, you'll take that one? Martin Arias Yaniz: Yes. So Solistica was -- the transaction was completed in early July. So you will see an impact from Solistica being removed from discontinued operations for that quarter. And it should not return. We've had so many transactions going -- going forward. We really have no major transactions to complete or close that should impact other than this quarter, we reconsolidated the only part of Solistica that we kept, which was less than truckload in Brazil, a very small business. But that's the only one that also got removed from discontinued operations and is now consolidated at the holding company level. Operator: We'll now take our next question from Rodrigo Alcantara from UBS. Rodrigo Alcantara: Jose, I would like to focus here a bit on food, right, which is a topic we also discussed back in those days. I mean, food is not a new thing, right? I mean, has been there for a while, remember Doña Tota, right? A couple of years ago, was part of the speech, right? Still ever since food as a percentage of sales in OXXO remains relatively low, right? I mean, kind of like it's on this front over the last decade has been relatively slow. So my question here for you is what makes you feel so excited about food again? Why this time could be different? Or could we expect faster adoption on this front presumably with Sbarro, what you're doing with Andatti, right? That would be my question. I mean, can we expect something faster on this front as opposed to previous years? And my second question would be as presumably, you will consolidate this operation, right, once the transaction is approved. Any indications on how the consolidation of OXXO Brazil may impact your consolidated or your proximity Americas margins once you consolidate these operations? That would be my -- those would be my two questions. Jose Antonio Garza-Laguera: I'll answer you first with the second one. Hopefully, by next year, we will give you more clarity, or a distinction between South American and our Mexico proximity business. So hopefully, that will not bring a lot of noise. Obviously, it's still our operation there. It's 600 stores. So even if we still combine it on the proximity of Americas, it shouldn't move the needle significantly. But our plan is to propose to you guys a different outlook when we show the proximity numbers. We're still working on that with Juan and Martin. On food, obviously, food is a very challenging topic, and we always get the question and what is different? What are you going to do that's really going to change? I would say one of the things that encourages me is that all of our South American operations are incredibly well -- really grew the operations since probably they didn't have the services business to rely on. They were very focused on being customer-centric in food first. And since we had a lot of Mexican executive there, they were very humble in asking really the consumer what you guys need and want? And Brazil, we sell a lot of powre [indiscernible]. We sell a lot of bread, our SKU bread is our #1 SKU. And it's twice in numbers than our second even in sales than our second SKUs. So it tells you a little bit of how big food can be for the on-the-go consumer. It's no different to Mexico. And obviously, you would say, well, but Mexico is still eat on the street. That happens in Colombia, that happens in Peru. That happens in Chile. And so I think that's no excuse. What we're doing different is we are really starting with the coffee offering first. We see the opportunity for coffee. We've always treated coffee almost as a margin developer, and we still -- now we see it as a huge traffic. We still make money on coffee, but I think it should be a much more of a traffic driver. And where we do promotions on coffee, we instantly see the results. I'm very excited with preparing coffee with breakfast products. I would say that's the main thing we're experimenting. But obviously, I am a firm believer that OXXO is not a place for you to sell tacos. It is very complex to sell taco. That is a red ocean. That is taken over by the street. And to be honest, street tacos are very, very good. And so we are beginning to play around different things that our consumer wants, that they want to carry on their hands. They want to get in and out quickly out of the store. And we are beginning to try some things that excite me. Obviously, pizza and our Sbarro partners. It's too early to say. We have two restaurants here in Mexico, but we are incredibly impressed by the results. But that's, I would say -- I don't know if a decade away, but very few years away for being something that can really move the needle. We are doing some clippings in [indiscernible] Doña Tota and they are impacting well. But I think where you will see things moving fast is on affordability for breakfast. For on the road, the road warrior of Mexico, where we see a need where our consumers are really demanding more opportunities and where I think we can differentiate from the taco category. Hopefully, we will be proven right. Operator: We'll now take our next question from Ricardo Alves from Morgan Stanley. Ricardo Alves: Thank you, Jose Antonio, for all the support and all the interactions with the investor community over the past few years. We really appreciate that and wishing all the best to the new CEOs going forward. A couple of questions, guys. Actually, follow-ups. On the gross margin, when we exclude the U.S. in proximity, I think that we're getting to something like 46%. And my question initially was if we were close to a ceiling, but I think that from the commentary that was already made, you made it clear that the answer to that question is no. That you see more opportunity to continue to expand gross margin here. My question is, how is that possible when you compare your business to other convenience store business outside of Mexico globally in Asia. What do you think is going to be this next lag up driver for your gross margin to continue to expand? That's my first follow-up question. And the second one, I think that as Juan suggested, I will leave more strategic questions at the FEMSA level to next year, but taking advantage of the transition that is happening right now for the new CEO. I think that we can still talk about longer-term strategic issues at proximity. There's a lot of things going on there. You have full control of Brazil, now. Mexico, you're focusing on recovering traffic, all these efforts that we discussed here today. Colombia is growing, then you have the U.S. So there's a lot of things moving on going on, on the proximity alone. What do you think should be your focus and our focus to see what is really going to move the needle under your leadership as you think about the different regions for the next 2 or 3 years? Jose Antonio Garza-Laguera: Thank you very helpful. I would say -- on traffic, I mean, on margin, we are I always say the gross margin is a very incomplete number, and I know I said it before, but I think it's important to emphasize. You need to look at the CPG's gross margin, or margins, and the consumer let's say, relative or end price and the relative value. And in that respect, I do think Mexico is an outlier. And you see it in all the major CPG players that come to Mexico. Mexico is one of the most profitable markets for all of the guys that you guys know well, obviously, for the soft drink guys, for the snacks guys, for the beer guys. It's incredible the margins that they make here. And Mexico is an outlier because they do have a big love for brands. And I think the traditional trade still plays an incredibly large amount of -- which creates a moat for the CPG players. We have the added benefit of the commercial income. And as the discount players continue to gain -- grow and they will continue to grow off and others will continue to grow, the CPGs rely more on obviously, the traditional trade, but also on convenience, and they love to use us as a defensible place to promote -- and to promote their brands. And they do see a great benefit in return on promotional income from OXXO. And that's why we still see a lot of potential for growth. Going forward, as we try to gain share in categories where we're not huge, we're obviously beyond impulse, beyond gathering and beyond food, we will go into categories in groceries where we see an opportunity to gain share against the traditional trade and even against the supermarket. And some of that margin will be given back to the consumers. I don't know yet the amount, you will have to do -- a lot to do with elasticity. So I still -- it's very hard for me to say where the end game is. But when I see the margins of my CPG partners, which I love, and I love for them to do business with us, I do still see room for growth, both in promotional income and in gross margin fully in Mexico. So I would give it at that, and I will give -- you will see clearly how we evolve as we begin to get into other categories in groceries in OXXO where I see a big opportunity. Martin Arias Yaniz: I would also complement what Jose is saying with a couple of things. Comparisons with other players outside of Mexico, I think, is also difficult because there are very few players that have the weight of financial services. And the income that we earn on financial services is very high margin. Because the -- there are no COGs really associated with the commissions that we charge for our financial services. It's really more as G&A related to the transportation of cash, and technology that we need to have in place. Number two, the issue of our -- when you strip out financial services, the reality is the margin is different and more comparable to things that you may be looking at. Number two, there are very few players outside of Mexico that have such a scale and breadth as opposed to OXXO in meeting proximity needs, really, our competitors are the traditional mom-and-pop. And I think our value proposition is very, very specific and very distinct which allows us in certain categories, given the imports that we have, that Jose mentioned, to partner up with suppliers for any number of initiatives and work that we do with them. And then finally, it's an evolving thing. The waves of value at OXXO will also impact the margin as we go forward. Food, for example, is properly executed, should be an attractive margin business at the gross margin if you manage to control an issue of waste. So I will tell you, it's very hard. We don't look at the business sort of targeting a gross margin. We look at the entire ecosystem. There are things that can produce enormous gross margin, but that would destroy the economics of the store because of the complexity it would bring to distribution, or the complexity it would bring to the execution in the stores, so we pass on them. And then there are things that are lower margin but drive traffic are very simple to execute, and it may be very attractive. So each one of our categories is really judged on the merits of competitive dynamics, issues in the store, growth going forward, and so we spend a lot less time sort of trying to project what the total amount of gross margin is going to be as opposed to looking at each category, maximizing the value in that category, and let the chips fall where they may. Jose Antonio Garza-Laguera: And for opportunities for proximity, I would say, first and foremost, Mexico. And I would say even also Mexico, in terms of absolute value, an incredibly optimistic about the future. Even I know there's a lot of volatility and there's some of our categories where we have been having lower declines like tobacco and alcohol and others. But some categories go and some categories come. So I'm very optimistic. We just finished an analysis of how many stores fit and even if you put account a drop in services, a drop in tobacco, we still see thousands of stores. The number is so high that I'm scared to give it to you guys, but it's still at least a decade of growth at this rate. And obviously, beyond -- I mean, within Mexico, Sbarro is increasingly getting its act better and getting better and better with every cohort. And so we do see a few thousand Sbarro's in the foreseeable future. And obviously, that market is huge. It's very, very competitive, and the competitors are getting better by the year, but I think there's room for a few of us. So I'm very happy with our results and the expansion. And I would say Brazil is very top of my mind. We still need a lot of work to getting it better and better. But we are impressive by -- I mean, we've been growing same-store sales at double digits for the whole year and the business keeps accelerating. So I'm very optimistic on Brazil, Colombia. And I would say U.S.A hopefully, eventually, we will grow more confident and confident to keep growing it. But it's still on a very early stage there. But I would put my focus on that order. I would finally say, I'm incredibly impressed by the progress we've made in Europe. We have a superb management team. I've said it before. Our biggest challenge is to grow it, and we're beginning to see opportunities for growing -- especially organically. But we are very happy with the progress in Europe, and we are happy with the economic development of Europe in certain markets where we see opportunities. So we're happy there as well. Operator: We'll now take our next question from Renata Cabral from Citigroup. Renata Fonseca Cabral Sturani: Jose Antonio, congratulations on the new role, exciting times ahead and I wish you every success. My question is a follow-up on OXXO digital ecosystem or financial services. The markets in Mexico is quickly evolving on this front and recognizing that OXXO success on this digital front. My question is regarding -- looking ahead, what is Spin's ambition? And where do you see OXXO as distinctive in right-to-mean versus wallet, telco, fintech solutions. And what would be the top capabilities that the company are targeting to invest on those fronts? So that's my question. Jose Antonio Garza-Laguera: That's a very good question, Renata. Thank you. I would say for me Spin is a digital extension of OXXO's value proposition. That's how I see it. We see it as a lever to really enhance the lifetime value of our users. The Premia user average, or Premia users, which are our power users who have the loyalty program, do 3x the average consumption in OXXO in a month than the rest. But if you have a Spin, or your wallet, and the Premia the loyalty program, that's 42% above the Premia user. So I do think there is a lot of value in embedding the whole Spin ecosystem throughout our core missions. We can offer rewards, we can offer personalized promotions. We can offer frictionless experiences that really incentivize you to go more often to the store. So for me, we're in the very early stages on creating an ecosystem with Spin that strengthened the OXXO relevance in our customer lives. Obviously, that includes -- so what some people see as an apocalyptic scenario where everything will go digital like in Brazil with [ PIX ], which could happen. But for us, the potential value shift from in-store to digital, we don't see it as a value migration. We do see it as an opportunity for increasing dramatically the way people interact, and use OXXO almost as a place to cash in your rewards, your points. So we're still very focused on that. I do think at the end, it's about convenience and Spin is much more convenient than cash, but a lot of people need cash, and will need cash for the foreseeable future. Even if we go to a peak level ecosystem cash will still be important for a big sector of the economy. I am incredibly impressed now that I'm in the onboarding phase seeing how people are using Spin in ways that we even didn't imagine. Just to give you an example, people -- the way people are tipping, you're paying your waiter or your people at the gas station. People take a picture of the QR code, the QR code that you can just scan in OXXO and withdraw cash. And it's becoming the main source of people going to the OXXO store to withdraw cash. And it's easier than having to give someone else a Spin account or having to give them your WhatsApp account. You just take a picture of the QR and you scan it in OXXO. And so we see an enormous amount of little things like that, that can enhance the value ecosystem. So obviously, there will be -- there will be a lot of movement towards digital transactions. But digital transactions grow so massively, sometimes exponentially, that the percentage, even if it's 10%, that still means to withdraw cash will be enough to cover, I think, a big chunk of the services decline that we can see at the store. So to me, it's an optimistic angle. We'll see. Operator: We'll now move to our next question from Froylan Mendez from JPMorgan. Fernando Froylan Mendez Solther: Congrats on the new position, Jose. You spoke about that the pace of growth can be maintained for at least 10 more years. Can you go deeper into how the breakdown of this growth should be in terms of store expansion, same-store sales, incremental revenue from commercial income? And your thoughts on what is the adequate level of cannibalization that you can see at any point in time? And how do you feel on the ROICs of the new stores versus the more vintage space today? Jose Antonio Garza-Laguera: That's a very -- if I had a -- a crystal ball to be able to predict exactly that. I wouldn't be here. But I would say, obviously, I mean, if you look at the acceptance level of cannibalization that we take when every time we open a store, and we -- and you extrapolate that for the next 10 years at our expansion. We do think we have at least 10,000 stores to -- and about 60% of that should be normal stores and about 40% of that should be OXXO Nichos. Our numbers say that's even bigger. I would say -- but it's too early to say. So you cannot estimate the stores. How much of that growth would come from same-store sales? I don't know, but we are expecting same-store sales at least to be flat, or even growing slightly with inflation adjustment. So I think there's that. If we win on breakfast, we win on grocery and we win -- we continue to gain share on gathering. Obviously, that number could get higher. But hard for me to give you a precise number at this time. Juan Fonseca: I think, Froy, this is Juan. In terms of -- normally, we separate in terms of new stores. If you model 1,100 per year. Today, that's 4% and change. And over the years, that will probably get smaller into the 3. But then same-store sales, it's a separate part of the growth algorithm. And there, as you know, our kind of our long-term guidance has been to mid-single digits. If you assume an inflation of 4%, which is the upper band of the Central Bank for inflation and add a point from mix and pricing. It gets you to the mid-single digits. So that's usually what we use for kind of long-term broader expectation management, right? So what I'm talking about is, right now, we're almost at 10%. If you add the two together over the years, probably gets you to the very high singles. Geographically, as you know, there are also differences. It's very different for us. when we look at white space in Guadalajara or in the Bajío or even in Mexico City compared to Tijuana or Juárez, right? So a lot of the openings happening in Central Mexico. But yes, that's how I would -- if I were building a model, those are the numbers I would put in. Martin Arias Yaniz: Although you should expect that the type of stores -- this is Martin speaking, the type of stores will also shift over time. Nichos are becoming are about 15%, 20% of the stores that we're opening. Also Nichos our stores that are open within institutional contacts the factory, hospitals, universities. They tend to have significantly lower staffing. They have slightly different assortment because obviously, you're not going to be selling beer in a workplace. Over time, you could also see us -- we've been testing, although we're not ready to roll it out because we don't think there's yet an opportunity what are called OXXO Smart stores, which are unmanned stores. you can one day see OXXO smart stores and apartment buildings, or smaller offices that we meet needs. So the composition of the type of stores will probably shift over time creating new white spaces and new opportunities in the consumption occasions. Jose Antonio Garza-Laguera: And one data point that we provided in the past, having to do with cannibalization is that it probably represents something like 30 basis points of growth in the overall number. So I would also use that for my own modeling. Operator: We'll now take our next question from Hector Maya from Scotiabank. Héctor Maya López: Would love if you could give us your view, please, on how you are progressing on the banking license ambitions in Mexico and the role of Spin and Spin Premia for OXXO to have an edge with that? Also, if we think about innovation at Spin and Spin Premia, what do you think could move the needle in the next 2 years? And how could this help being to compete versus strong alternatives in Mexico that are accelerating the Nubank, Mercado Pago and potentially Cashi from Walmart? Jose Antonio Garza-Laguera: So I will let Martin answer you the first one, and I will defer to February to give you a more detailed outlook as I'm still on the re-onboarding faith on Spin, and I would love to give you more clarity but on February. But for now, Martin will give you some answers. Martin Arias Yaniz: I think we will not be presenting our banking license for a year now -- for a year. We've decided to start with a bigger focus on our credit part of it. That does not mean we're going to be increasing our credit. The pace of our credit business much quicker than we had. As I told you, and I promise we'll keep you informed and up to speed. We don't expect that to be more than a $20 million or $30 million deployment next year in terms of trying out new things. But we came to the conclusion that we want to have greater visibility and a sense of our ability to use our data to be successful in credit before we went for the full banking license. So I'd say we're about a year from making that decision of actually filing the banking license. It's already and prepared -- and we've done a lot of work on it, but we decided to just wait 1 year. Jose Antonio Garza-Laguera: We promise better details on February, Hector. Sorry. Operator: We'll now take our next question from Carlos Laboy from HSBC. Carlos Alberto Laboy: Congratulations Jose. And also thank you to Jose Antonio for really turning over the leadership of FEMSA at a moment in history when the business are really at their most dominant, their most focused, maybe the most talent-rich and fiscally sound position that we've seen, right? So it's a gift that we can get Jose Antonio to put his full focus on and growth and value creation here. So Jose, can you please give us more insights on affordability? Beyond, obviously, the savings aspect. Can you speak to what else is driving consumer sampling, repeat consumption and adoption, or maybe some of the more successful discount brands that you're running into in Mexico. And are there any specific categories where this is most evident? Kind of related to that also, is this pressure improving the differentiated proposition that OXXO is getting from its big branded suppliers to drilling foot traffic? Jose Antonio Garza-Laguera: I didn't hear the last part. Carlos Alberto Laboy: Yes. Is all this pressure, Jose, from discount brands, improving the differentiated proposition that OXXO is receiving from your larger branded suppliers to help you draw in foot traffic. Jose Antonio Garza-Laguera: Yes. It's still semi hypothesis. Obviously, it's an educated, not guess, because we've been talking to our CPG partners. And as they see the growth of the discount channel, they reinforce their partnership with OXXO with strength. I would say, first, if you look at the national level, how many stores are next through a discount of our stores are between 600 meters of a discount store, and it's still below 10% of our stores. So that tells you it's still not really moving the needle so much. But they will continue to grow, ours and others. So we -- where we are next to them, something interesting happens. Some -- we lose sales in some categories, and we even win traffic in some categories because people -- it's very easy to walk into one of our stores and to the other ones. And so you see people may be buying the ice with us or buying or buying the beer with us and then going to do their top-ups and their weekly grocery bill in the other one. So it's an interesting dynamic. But that said, it's an increasingly competitive dynamic. Affordability is here to stay in OXXO because the Mexico consumer is very -- is becoming much more price conscious. And we see the opportunity to really gain a much more relevance in what we call the replenishment occasions. And obviously, that has a role to play in beer where you are beginning to see more returnable glass, or the famous Caguamón, we're beginning to increase our coverage in Mexico, but also multipacks. And we're beginning to see that a lot in soft drinks. I think we were a little late in the game and getting into mini multipacks, or the mini cans, 6 pack or 12 pack, which we're beginning to introduce in the soft drink category. It's driving a lot of success for the bottlers, and we are beginning to introduce that in Mexico. So that's a top-up or a weekly type of consumer occasion, and that's where we're beginning to see affordability taking place. We're seeing it in tobacco. And interestingly enough, we're not seeing a lot of migration from the premium tobacco smoker to the brand -- about 70% of the value brand. About 70% of the -- given the information we have from the tickets and the Premia is that most of the value brand buyers in OXXO in tobacco are people that were not coming into the store that frequently. So we are beginning to lose our fear of cannibalization from premium products to mainstream or value. And so we are beginning to develop more and more assortment of affordable prices and sort of affordable SKUs. And our -- our supplier partners are collaborating with us to help us throughout the spectrum. Part of what I tell them is, if we're going to put a value beer in OXXO, which we didn't use to have for Barrilito, for example, let's also put Negra Modelo in a promotion in San Pedro. And so we like to play on both ends of the spectrum. And I think one of the beauties of our model is that we can really drive affordability in certain regions and corners of Mexico, and we can really drive premiumization in certain regions and corners of Mexico. So we will continue to play that gain. I would say that's all about what I can say for affordability now, but I will bring more information as we continue to gather more granular data about our progress there. Operator: That's all the time we had for today's question. With this, I'd like to hand the call back over to our host for closing remarks. Juan Fonseca: Thanks, everyone. Obviously, we're always available for follow-ups and incremental questions. But other than that, have a great rest of the week. Jose Antonio Garza-Laguera: Thank you, everyone, and we will be seeing each other here in every conference call. So looking forward to more interactions. Operator: This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
Operator: Greetings. Welcome to Brixmor Property Group Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Stacy Slater, Senior Vice President, Investor Relations and Capital Markets. Thank you. You may begin. Stacy Slater: Thank you, operator, and thank you all for joining Brixmor's third quarter conference call. With me on the call today are Brian Finnegan, Interim CEO; and the company's President and Chief Operating Officer; and Steven Gallagher, Chief Financial Officer. Mark Horgan, Executive Vice President and Chief Investment Officer, will also be available for Q&A. Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings, and actual future results may differ materially. We assume no obligation to update any forward-looking statements. Also, we will refer today to certain non-GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website. Before turning the call to Brian, please note that out of respect for Jim's privacy, we will not be addressing any questions regarding his medical leave, and we refer you to the company's October 16 press release. We do ask that you join our Brixmor family in wishing Jim good health. [Operator Instructions] At this time, it's my pleasure to introduce Brian Finnegan. Brian Finnegan: Thanks, Stacey, and good morning, everyone. I first want to say on behalf of the entire Brixmor team that our thoughts go out to Jim and his family. We care about them deeply and are grateful for the well wishes and support for him that we have received from across the industry. In the meantime, the team he built remains focused on executing our business plan, which is demonstrated in the third quarter, continues to deliver outstanding results. As usual, those results begin with leasing. As this quarter, we executed 1.5 million square feet of new and renewal leases at a blended cash spread of 18%. New leases during the quarter were signed at a record rate of $25.85 per square foot as our team continues to capitalize on healthy demand to be in our well-located shopping centers. We're seeing strong activity in both anchors and small shops, with small shop occupancy hitting another record at 91.4%, with room to run as we deliver our reinvestment program. And on the anchor front, the team is making progress on backfilling the spaces recaptured over the past year with new leases executed during the quarter on those spaces with the likes of Marshalls, Total Wine & More, Bob's Discount Furniture and Cavender's Boot City. Thanks to the continued strength in leasing, the signed, but not yet commenced pipeline remains above $60 million despite commencing a record $22 million of ABR during the quarter, which Steve will comment on further. New tenant openings are among the most exciting aspects of our business, and the third quarter included Sprouts Farmers Market in Knoxville, Tennessee, Trader Joe's in suburban Denver, and several openings at 2 of our most impactful redevelopments the Davis Collection in Davis, California, and Block 59 in Suburban Chicago. Staying with reinvestment. During the quarter, we stabilized 8 value-enhancing projects with a total cost of approximately $46 million at an average incremental yield of 11%. This included College Plaza in Long Island, New York, where we added a new Chick-fil-A out parcel and reconfigured existing in-line space for Burlington, Five Below and Ulta to complement a strong performing ShopRite supermarket. We also stabilized the first phase of Barn Plaza in suburban Philadelphia, where earlier this year, we opened Bucks County's first new Whole Foods Market. Thanks to the successful execution of the initial phase of that project by our North region team, we're adding a second phase into our active pipeline this quarter, which includes, first, the portfolio of new leases with Pottery Barn, Williams Sonoma, Sephora and Lovesac. This is one of the many examples across the portfolio where our reinvestment program is enabling us to attract a much higher caliber of tenant than we have historically. Finally, on reinvestment, our partnership with Publix continues to grow as we announced our second new project of the year in Hilton Head, South Carolina, with several more to follow in the future pipeline. Our percentage of ABR from grocery-anchored centers now sits at 82%. And as we've seen a 35% increase in year-over-year traffic when we add a grocer, we're thrilled with the opportunities to add more grocers to the portfolio as we execute our reinvestment program. Switching to transactions. As we discussed at length on our second quarter call, we closed on the $223 million acquisition of LaCenterra at Cinco Ranch in suburban Houston and are pleased with our team's progress out of the gate, with 7 new leases either signed or in process, all well ahead of our initial underwriting. Mark and team continue to raise attractive capital as we exited 8 assets where we had maximized value since our last earnings call, bringing our total disposition volume year-to-date to $148 million. We continue to evaluate opportunities to put our platform to work and still expect to be net acquirers at year-end. To that end, we have approximately $190 million of value-added acquisitions under control and look forward to sharing more about these exciting acquisitions soon. To summarize, our team continues to execute on all fronts, attracting great tenants in a supply-constrained environment at the highest rents we've ever achieved. Our redevelopment platform continues to deliver low-risk compelling returns with several years of runway for future growth. And on the transaction front, we're well positioned to continue to recycle capital out of low-growth assets into those where we see the opportunity to create value through our operating platform. Thank you to the Brixmor team for your continued focus and effort as we continue to create value for our stakeholders. With that, I'll hand the call over to Steve for a more detailed review of our financial results. Steve? Steven Gallagher: Thanks, Brian. I'm pleased to report on another strong quarter of execution by the Brixmor team as we continue to stack rent commencements from the snow pipeline that will accelerate growth over the next several quarters. NAREIT FFO was $0.56 per share in the third quarter, driven by same-property NOI growth of 4%. As expected, base rent growth decreased to a 270-basis-point contribution due to a 150-basis-point drop in build occupancy compared to the third quarter of last year. We expect base rent growth to accelerate into 2026 as build occupancy rebounds, and we continue to commence rent from the snow pipeline at higher rents. Additionally, revenues seemed on collectible contributed 80 basis points to growth in the quarter as we trend to the lower end of our historical run rate of 75 to 110 basis points of total revenue given the improvement in our underlying tenant credit. As Brian noted, we commenced a record high $22 million of new ABR in the quarter. And capitalizing on the strong leasing environment, we executed $16 million of new leases at a record high $25.85 per square foot and ended the third quarter with a 390-basis-point spread between leased and build occupancy. Our assigned, but not yet commenced pipeline totaled $60 million, which includes $53 million of net new rents. In addition, the blended annualized rent per square foot on the signed, but not yet commenced pool is $22.30 per square foot, approximately 21% above our portfolio average, reflecting the below-market rent basis in our centers. We expect 80% of the snow pipeline to commence by the end of 2026, with 2026 commencements slightly weighted to the first half of that period. From a balance sheet perspective, at September 30, we had $1.6 billion of available liquidity, including approximately $400 million from our September 2025 4.85% issuance, which prefunded our June 2026 maturity of $600 million at $4.125%. One note on the capital markets front, our SEC shelf registration statement is due to expire next month. So we'll be filing a replacement shelf registration statement this week. As part of that process, we'll also be reviewing our existing ATM program and DRIP. We will also be extending our buyback program for another 3 years, which together will continue to provide Brixmor with maximum flexibility to capitalize on a wide range of potential capital market environments and support the long-term execution of our business plan. We are pleased to announce a 7% increase in our annual dividend to a rate of $1.23. The revised dividend, which approximates taxable income, allows the company to retain as much free cash flow as possible while meeting our REIT dividend requirements. In terms of our forward outlook, we have updated our FFO guidance to $2.23 to $2.25, and affirmed our same-property NOI range of 3.9% to 4.3%. Our increased FFO expectations is driven by higher-than-expected lease settlement income in the fourth quarter as we continue to capitalize on opportunities to proactively recapture and accretively backfill space. As such, we expect lease settlement income to be a headwind to 2026 FFO growth. We are excited about how we are positioned heading into next year with significant tailwinds from 2025 rent commencements a strong snow pipeline and reduced exposure to at-risk tenancy, coupled with the strong demand from tenants to locate in our centers. And with that, I'll turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question is from Michael Goldsmith with UBS. Michael Goldsmith: Steve, a question for you. On the implied acceleration of the same-store NOI growth in the fourth quarter, can you walk through kind of the contributing factors there? Is that a function of the snow pipeline being activated, what you've already done, what you -- what is due in the fourth quarter? And then also, can you just talk about the role of the comparisons in the acceleration to just -- the sustainability of that? Steven Gallagher: Sure. Yes. I mean, as we talked about, we commenced $22 million of rent in the quarter, right? And we've talked a lot over the last several quarters about just the stacking of rent and how that provides growth heading into future quarters. So you obviously get a partial benefit of that rent that commenced in the quarter. And then you get another partial benefit in Q4 as it's fully in for the entire quarter. And then you also have approximately $19 million of rent that we expect to commence between the end of the third quarter and fourth quarter, that will provide growth into that quarter as well. I think the only other thing I would just remind you is, when you look to the prior year quarter ending 9/30, the entirety of the tenant disruption that we've experienced over the last year was in and billing as of that period. So that rent starts to fall off the fourth quarter and then through 2025, just as you're thinking about the year-over-year comparisons. But what we're really looking forward to is that tailwind that the commencement of this new pipeline is providing. Brian Finnegan: Yes, Michael, I would just add what we're really excited about there on the commencement front, too, is some of these larger redevelopments starting to come online, like Block 59 in Chicago, which I mentioned. We're also seeing the first of the boxes that we backfilled last year that we took back at the end of the year starting to come online as well to Ross boxes that we opened last week. So everything that Steve said, again, gives us good visibility to the end of the year, but some anecdotes there in terms of the nature of that as well. Operator: Our next question is from Samir Khanal with Bank of America. Samir Khanal: I guess, Brian, in your opening remarks, you talked about shop occupancy hitting another record and you also stated there's more room to run. Maybe expand on those comments as we think about occupancy into next year. Brian Finnegan: Yes. We've been pleased with the progress on the shop front, as I mentioned. But if you look at that future reinvestment pipeline, we're several hundred basis points below where occupancy sits today. And Samir, when we've seen historically, as we bring those projects on, you're seeing a lift in shop occupancy. So we do feel like we have several hundred basis points more to run. And when you think about the nature of those projects in that future reinvestment pipeline, a great future pipeline that we have with Publix think about Plano, Texas, other projects that we have in Florida, suburban Atlanta, Metro New York, which gives us real good visibility in our ability to drive that forward. So that's really that piece in terms of what's left and our ability to get it even higher than it is today, which, again, we're pretty pleased about. Operator: Our next question is from Craig Mailman with Citigroup. Craig Mailman: Brian, you had mentioned some additional acquisitions that are in the pipeline. Could you just go through what the opportunity set looks like and where cap rates are trending? And kind of are these going to be more like LaCenterra that are longer-term opportunities that maybe aren't initially accretive? Or are there some stabilizing there that can kind of boost FFO in the near term as well? Brian Finnegan: Craig, I'll hand this to Mark, but I would just say we're really pleased with what we're seeing on the transaction front, but also pleased with not just what we're doing out of the gate in LaCenterra, but what we're doing out of the gate with the $300 million of acquisitions that we closed last year. So maybe I'll hand it to Mark to give an overview on what he's seeing in the market. Mark Horgan: Sure. the market remains really competitive. As we've discussed on past calls, we're seeing new entrants and capital, actually on the sidelines really seeking exposure to open-air retail. A lot of that capital is actually seeking smaller, simple grocery anchor deals. And so what's interesting is that's really allowing us the opportunity to be efficient when we capital recycle. And we're selling some assets where we see low hold IRRs from our perspective, well below IRRs when we'd like to generate. We've got the ability to recycle that capital into assets like LaCenterra, where we see really strong growth and the ability to drive strong IRRs and really drive our return on invested capital from here. With respect to the deals that we're buying, we really try to focus on, from an acquisition perspective, value-added opportunities. So the ones that were in the pipeline today, which we think will continue to grow over time, that pipeline will continue to grow. They look pretty similar to LaCenterra and that they have very strong growth opportunities, and we're going to leverage our platform to drive strong cash flows through occupancy gains through rent mark-to-market and some redevelopment. I would say the ones that we're looking at today are not lifestyle centers. They're more traditional open air retail centers that fit right into our platform. A good example on one of those assets were using a platform to drive an immediate increase and an anchor rent that's giving us better growth through the term of the anchor rent and increasingly going in cap rate by about 50 basis points, which we feel is very compelling from an acquisitions perspective. And really, I think, speaks to the strength of the platform as we think about future acquisitions from here. Operator: Our next question is from Michael Griffin with Evercore ISI. Michael Griffin: Great. And first of all, my thought to Jim and his family, wishing him a speedy recovery. Brian, maybe you could talk a little bit about how the leasing pipeline looks as we head into next year? I mean, our retailers still looking to expand and grow their business. You guys have done some pretty strong new leasing year-to-date, but just give us a sense of what those conversations are like kind of caveating that while it seems like we've gotten some trade deals done, there is still this macro uncertainty as it relates to tariffs and the potential impact to retailers. Brian Finnegan: We appreciate the kind words about Jim, Michael. And we remain very optimistic and encouraged by what we're seeing in the leasing environment. The pipeline today is higher than it was a year ago despite the fact that we've signed 10% more in GLA this year. The retailers who were growing with are not only looking to add store count in both infill locations and where they have additional white space with specialty grocers, off-price apparel, health and wellness operators, the tenants are performing. If you listen to those second quarter calls, you saw -- you heard some very strong results from a lot of the retailers that we continue to grow with. From a tariff perspective, they've been able to navigate this with suppliers. And so as we think about our core tenant mix as well as the new operators who are expanding with us in the portfolio, they continue to have strong open-to-buys as they head into 2026. And interestingly, we have a full slate for New York ICSC coming up in a few weeks. Those discussions will be primarily around '27, right? There are still deals that we're signing towards the end of the year that we're going to get open in late '26, part of that focus to is 2027 pipeline. So we remain very encouraged. We continue to keep a close eye to see if there are any cracks in that, but to date, we're really not seeing it. Operator: Our next question is from Todd Thomas with KeyBanc Capital Markets. Todd Thomas: I wanted to go back to the same-store growth and ask a bit about the building blocks for '26, if I could. You talked about the headwinds from bankruptcies and tenant disruptions for the year. I think you noted it was about 230 basis points last quarter. Any early thoughts about how we should think about that drag today as we look into '26? Whether you expect that to alleviate, or do you see a similar level of drag? Brian Finnegan: Yes. I mean, as we sit here today, right, I think the one thing we've talked about a lot over the last couple of quarters is just to reduce exposure we have to average tenancy, right? When you look at our watch list today versus -- even versus our peer, but especially compared to 5, 10 years ago, right, you just see a lot less exposure to some of those names that you all were worried about as were we, Big Lot, Party City, JOANN. And you're seeing more exposure to things like Whole Foods, Sprouts, Publix, right? So I think as you look into '26, I mean, obviously, one of the headwinds is going to be we did recognize rent for that bank of space in '25 that's not going to recur in '26, right? But I think sitting here today, there doesn't look to be a lot of significant tenant disruption out there moving forward. Obviously, we'll see how the next couple of quarters play out, but we really feel comfortable sitting here today with the tailwind from that snow pipeline commencing in '25 and then also into '26. But obviously, just reminding that there is some [ BK ] headwinds for the rent be recognized in '25. Operator: Our next question is from Greg McGinniss with Scotiabank. Greg McGinniss: Brian, I just want to touch back on the tenant health commentary. Looking at the bad debt expense, guidance was maintained and despite previously trending towards the low end, Q3 was up versus Q2. Could you just provide some insight on that increase? And then generally -- more generally, how you're feeling about the range in the year? Brian Finnegan: Well, I'll let Steve hit the guidance piece. But just to expand on what he just said, right? Our office supply exposure has been cut in half. We have a very low drug store exposure. If you look, we have 17% of our ABR comes from local tenants. And the underlying credit quality of the tenants who backfilled the space we took back over the last year, is very strong. So we feel very confident in terms of where that watch list exposure sits today. There's always categories that we're keeping a close eye on. But as Steve noted, that has dropped meaningfully from where this portfolio was historically. And Steve, maybe you could touch on the guidance piece. Steven Gallagher: Yes. I mean, obviously, we are trending to the lower end of the range. I'm still within the range. I'd just remind you about things we've talked about over the last couple of years, right, is the first half of the year, due to some of the out-of-period cash collections on real estate taxes, generally has a lower -- when you're just looking at as a percentage of total revenue. And then the back end is all -- a little bit higher. So I think we feel comfortable where we're headed within the range, but I'd just remind you that third and fourth quarter, when you're looking as a percentage, is a little bit higher. But I think when you're comparing to the prior year, obviously, it's a favorable trend. Operator: Our next question is from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: And just echoing the speedy recovery thoughts for Jim. Mark, the cap rates in the acquisition world have definitely come in even Power Center. I know you guys really aren't looking at that, but even that's getting a strengthening bid. As you look at your opportunity set, do you sort of have a minimum threshold where you're like we can't buy below x yield because the deals need to be accretive from Day 1? Just trying to understand with more focus on REITs delivering earnings growth -- true earnings cash flow growth, do you find that you have a floor that you won't go below? Or how do you balance that given the increased competition for assets? Mark Horgan: Look, I think everyone in the room understands that our job is to grow earnings [indiscernible] and that's what we're going to be focused on over time. Our acquisitions program historically and today remains focused on driving high unlevered IRRs. When we look at the deals, we've been delivering, that tends to be in that 9.5% to 10.5% range. So when we find compelling opportunities, we're going to go after them to acquire. Last year, we acquired Plaza Britton -- Britton Plaza pointing down in Tampa, which was a lower going-in yield, where we see very, very significant value-add opportunities in that asset. So we're not going to pass up the ability to buy something like Plaza Britton in the future. With that said, the assets we're working on today, we think have attractive going in yields and growth. So we're really focused on both parts of that plan from an acquisitions perspective. Brian Finnegan: And Alex, since we're funding that through capital recycling, we're funding that with assets that we don't see that long-term growth potential into assets, just to Mark's point, where we do. So with everything Mark said, we feel that there are a lot of compelling opportunities out there for us today despite the fact that it is... Mark Horgan: The other thing I would add, and we talked about this in the past, we continue to mine out things like land parcels in this portfolio, which are not yielding any casual today are really native cash flow given the carry cost. We did that earlier this year. We have some in our pipeline today that again, will provide us some really well-priced capital to put the work in the acquisitions market. Operator: Our next question is from Cooper Clark with Wells Fargo. Cooper Clark: It looks like G&A came down in the quarter around $2 million to $3 million. Curious what drove this? And if $26 million is a good run rate moving forward, or if it was driven by a more one-timing item? Mark Horgan: Yes. I mean, we're obviously not going to provide guidance on G&A right now. But if you just look at the comparison to the prior quarter, we did do a restructuring in the prior year, which did have a charge in that quarter and importantly, gave us a better run rate going forward of a reduced G&A, which you're seeing in that line year-to-date. So it's really about the comparison and what happened in the prior quarter. We feel pretty comfortable where G&A is today. Operator: Our next question is from Juan Sanabria with BMO Capital Markets. Juan Sanabria: Thoughts with Jim and his family. I just wanted to ask about the Publix relationship you kind of noted at the top in your prepared remarks and what we could see going forward? Any opportunities for some greenfield developments? Brian Finnegan: Yes. I'll first -- touching on the Publix relationship one, our South region team has a long-standing relationship with them. We've done into the double-digit projects in terms of in-place redevelopments. We've got 2 new projects that we've done this quarter in Southeast Florida and Hilton Head, South Carolina, which we recently announced. We just announced yesterday another redevelopment in St. Pete with them. And we've got a long pipeline with them and a great partnership in terms of they've been reinvesting, like a lot of our grocer partners in their stores in both Florida and some other Southeast markets. So team in the South region has done a fantastic job with them, and we look forward to continuing to see that grow. And you could see many of those projects in the future pipeline. As it relates to new development, our focus is on redevelopment. We've got several years of runway of future growth in that future reinvestment pipeline. As Mark touched on, he's adding additional opportunities to that as well. Never say never because we do have great relationships with the likes of Publix, Kroger, HEB, I could go down the list that we have a lot of -- we've had a lot of good report -- not just report with, but we've been able to execute with historically. So we'll continue to look at things, but generally, that focus is going to be on redevelopment. Operator: Our next question is from Haendel St. Juste with Mizuho Securities. Haendel St. Juste: Best wishes to Jim. I wanted to build on the last question, it looks like the average yields for redevelopment projects ticked down a bit sequentially to 9% versus 10% last quarter. Is that a mix issue? Are you starting to see the impact of tariffs or higher cost or maybe this is a new level we should expect near term? And then some thoughts broadly, I guess, on minimum yield or hurdles in light of the lower debt costs. I'm curious if you're changing that at all in light of lower debt cost? Brian Finnegan: Juan, -- I'm sorry, Haendel, we -- if you look at where we said historically and where we've been delivering, it's been high single digit, low double-digit returns. So it's just effectively the mix that we had of what was stabilizing during the quarter. As we look out in that future reinvestment pipeline, we still see, as I said, several years of runway similar returns. There have been instances where there have been some cost increases, but we're getting it back in terms of our rents. And we continue to be able to invest accretively. These are incremental returns. We're also not including in those returns the follow-on leasing that we continue to see in these projects several years after. So we remain very encouraged by what we're seeing in terms of the projects going forward and the nature of what those returns look like. We're not changing our threshold. If anything, as we've done some of these larger projects we want a higher pre-lease threshold from where we've been historically to limit our risk. These projects are still fully bought out, and we have a great line of sight on where costs are going to go. But generally, we're very pleased with what we've been seeing both in the existing and future pipeline as it relates to those returns. Operator: Our next question is from Caitlin Burrows with Goldman Sachs. Caitlin Burrows: A big part of the Brixmor story is your ability to quarter after quarter achieved large leasing spreads as you bring rents up to market rates. So I guess with Jim having become CEO almost 10 years ago, it would seem like a lot of this opportunity has been realized by now, but maybe that's not true. So could you give some detail on how you think about what portion of that upside, the outsized leasing spreads has been realized? How much is left? And how long leasing spreads can continue in the like mid-teens rate? Brian Finnegan: Yes. Well, Caitlin, I would just say we're very pleased with the rent growth trends in the portfolio, both with what we've been able to execute as well as what we see coming down the pipe. So if you think about the quarter, we signed the highest rents we ever have in overall small shop and anchors. Over the last year, we've signed the highest rents that we ever have in all those categories as well. If you look at that future leasing pipeline, it sits at about 40% higher than our in-place rents today. And as we continue to reinvest in the portfolio, we expect to continue to drive rents higher. And we still have a low rent basis in terms of the spaces that we are taking back, and we're backfilling these boxes accretively. So we still see a long runway for future rent growth. You could see some fluctuation in a given quarter, but really pleased with what we're seeing from the team. Operator: [Operator Instructions] Our next question is from Floris Van Dijkum with Ladenburg Thalmann. Floris Gerbrand Van Dijkum: Wanted to ask about the recycling of capital. One of the unique elements that you guys had is selling stabilized low-growth assets at attractive cap rates and reinvesting into your significant redevelopment activity. As I noticed, you haven't sold that much year-to-date. I think it's $190 million-ish or thereabouts, less than what you've acquired. Could you talk about the pipeline of dispositions and what the impact of that is going to be? Because you do have a significant redevelopment pipeline as well that is in the works and you're adding on to it. Brian Finnegan: Well, Floris, I'll start and then maybe I'll hand it to Mark. There's always going to be, and Jim has said this historically, a portion of the portfolio where we've maximized value. And then we're going to take that capital and recycle it in to places where we see more compelling growth opportunities that align with the growth profile of the company. So with that, maybe I'll hand it to Mark in terms of some more detail on the pipeline. Mark Horgan: Yes, sure. The one other comment I'd make with respect to our funding of the business, but don't forget, we do generate significant free cash flows here post dividend, post our normal leasing spend. And that's really what's funding our -- the vast majority of our redevelopment program. So yes, there's probably some limited amount of dispos that go into keeping us leverage and neutral there. But ultimately, I wouldn't forget that as you think about how we're funding the business. On the pipeline for dispositions, as I mentioned, what's most interesting to us in the market today is this new capital coming in, again, is seeking exposure to the space. We think we've got the ability here to be opportunistic and sell assets that Brian highlighted that have less growth in our overall portfolio and put it back to work in assets where we are compelled to see higher growth rates and really drive that ROIC for us over time. Floris Gerbrand Van Dijkum: And just to make sure, the cap rates on the dispos are broadly in line with what your acquiring except maybe the lifestyle center, but that it should be on a -- sort of a cap rate neutral basis? Or is there a little bit of dilution involved there? Mark Horgan: Yes. Our year-to-date cap rate, like it's been for many years, it's in and around 7%. The acquisitions are going to be slightly lower than that when you blend them all together this year. Last year, we think it was about neutral. So it depends on the mix of what we're selling. But importantly, we're really focused on that long-term hold IRR. And we think that growth of what we're buying is significantly better than what we're selling, and we're seeing that through looking back at the assets we bought. So we remained convicted in the adjustment program to add value to the company over time. Operator: Our next question is from Linda Tsai with Jefferies. Linda Yu Tsai: Can you comment on the yield for LaCenterra? And then in terms of traditional open-air centers being in your acquisition pipeline, just wondering why you highlighted that they are not lifestyle centers? Brian Finnegan: Well, I'll take the second part first, Linda, sorry about that. And we did touch on LaCenterra the last quarter, but Mark can spend a little bit more time on that. I think what Mark was saying is we are looking for assets that have compelling growth profiles. And if you look at that in terms of what we bought historically, it's been a mix. And so when Mark was comparing it to LaCenterra, it's very -- these assets are very similar in that they're grocery anchored, and we feel like we can put our platform to work to have compelling growth out of those properties. So maybe, Mark, I don't know if there's a little bit more to add on for LaCenterra? Mark Horgan: Yes. I would really point to the comments we made last quarter, we went through it in detail. And what I would highlight is that since last quarter, we've outperformed what our expectations were in the initial ownership periods. So we remain convicted in the growth that we're generating. We remain convicted that the yields were going to roll will be a little bit higher in year 1 and moreover, the growth that we see coming from that asset. We think it's a really compelling opportunity for Brixmor. And just to highlight what I was trying to highlight was the assets that we're buying, we have high conviction in growth, just like we did with LaCenterra. The ones in the pipeline today that we have under control are just -- they look more like traditional shopping centers. We're always going to focus on growth. Operator: [Operator Instructions] Our next question is from Hong Zhang with JPMorgan. Hong Zhang: I guess your lease to occupied spread has gone down throughout this year, but still remains above historic levels, just given the strong rent commencements you expect in 4Q in 2026, do you expect to be back to more historic levels by the end of 2026 going to 2027? Brian Finnegan: I'll take that. I would expect that to still remain wide. I mean, obviously, you'd expect it to tighten since we commenced a record amount of ABR during the quarter, but we're also leasing a lot of space. And we've got a large legal pipeline that where we continue to fill deals in the leasing committee in terms of the flow in the leasing committee on a weekly basis remains strong. So the pipeline remains elevated. We like what we're seeing from a demand perspective. You should expect that to remain somewhat elevated, but it is exciting in terms of the commencements that we've had here that we had in the third quarter and that we look forward to seeing in the fourth. Operator: There are no further questions at this time. I would like to turn the floor back over to Stacy for closing remarks. Stacy Slater: Thank you, guys, for all joining today. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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: Good day, and thank you for standing by. Welcome to the BrightSpring Health Services Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Deuchler, Investor Relations. Please go ahead. David Deuchler: Good afternoon. Thank you for participating in today's conference call. My name is David Deuchler with Investor Relations for BrightSpring. I'm joined on today's call by Jon Rousseau, Chief Executive Officer; and Jen Phipps, Chief Financial Officer. Earlier today, BrightSpring released financial results for the quarter ended September 30, 2025. A copy of the press release and presentation is available on the company's Investor Relations website. Please note that today's discussion will include certain forward-looking statements that reflect our current assumptions and expectations, including those related to our future financial performance and industry and market conditions. Such forward-looking statements are not guarantees of future performance. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We encourage you to review the information in today's press release and presentation as well as our quarterly report on Form 10-Q that will be filed with the SEC, including the specific risk factors and uncertainties discussed in our Form 10-K and Form 10-Q. Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any duty to update any forward-looking statements, except as required by law. During the call, we will use non-GAAP financial measures when talking about the company's financial performance and financial condition. You can find additional information on these non-GAAP measures and reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort in today's earnings press release and presentation, which again are available on our Investor Relations website. This webcast is being recorded and will be available for replay on our Investor Relations website. And with that, I will turn the call over to Jon Rousseau, Chief Executive Officer. Jon Rousseau: Good afternoon, everyone, and thank you for joining BrightSpring's Third Quarter 2025 Earnings Call. First off, I would like to thank all of our BrightSpring employees in the field and in administrative support roles who make a real impact for patients and people every day. I'm grateful for their continued dedication and commitment to providing the high-quality and compassionate care and services to the individuals we serve. BrightSpring is a leading health services provider in home and community settings in large and growing pharmacy and provider markets, and we believe a scaled platform in home and community health care differentiates and positions us well for the future. Today, we reported third quarter financial results that are in line with the preliminary financial results we announced on October 20. The third quarter exceeded our expectations and our ongoing commitment to high-value and high-quality services, operational execution and continuous improvement, all hallmarks of our company culture have driven the financial results so far this year. Before discussing BrightSpring's third quarter performance, I would like to remind you that the company's financial results and 2025 guidance pertain to the continuing operations and do not include results from the Community Living business. At this time, we now expect the Community Living divestiture transaction to close in the first quarter of 2026, which remains subject to final federal regulatory approvals and typical closing conditions. For the third quarter, BrightSpring revenue grew approximately 28% and adjusted EBITDA grew approximately 37% versus last year's comparable quarter. Total company revenue was $3.3 billion, with Pharmacy Solutions revenue of $3.0 billion, increasing 31% year-over-year and provider services revenue of $367 million, increasing 9% year-over-year. Total company adjusted EBITDA of $160 million in the quarter grew 37% compared to the same period last year, driven by strength across the businesses. EBITDA margin for the company was 4.8%, which grew approximately 30 basis points compared to the third quarter of last year and up 30 basis points versus second quarter. Margin expansion was primarily driven by disciplined operating expense management and modest revenue mix shift within pharmacy with greater contribution from generics. On cash flow, the company realized over $100 million of cash flow from operations in the third quarter and leverage declined to 3.3x at the end of the quarter sooner than previously communicated expectations with an updated goal of 3x by year-end as is and below 3x pro forma for both the Amedisys and LHC Home Health branch acquisitions and the Community Living sale. The company continues to deliver growth, reflective of each business line executing on our internal goals. Given the third quarter update today and current expectations for the fourth quarter of 2025, we are increasing total revenue and adjusted EBITDA guidance for 2025. A week ago, in the October 20 release, we increased our adjusted EBITDA guidance to a range of $605 million to $615 million, which compares to $590 million to $605 million communicated in August following our second quarter results. As a reminder, this 2025 guidance excludes Community Living and any M&A activity not yet closed. We continue to expect the Amedisys and LHC branches to close later this quarter and expect this to be immaterial to our 2025 results. We look forward to having the Amedisys and LHC colleagues join BrightSpring and Jen will discuss BrightSpring's third quarter financial results and 2025 outlook in more detail shortly. At BrightSpring, we're focused on quality and continuous improvement in our people and services to deliver comparatively low-cost, timely and attentive patient-centric care to complex populations. Quality and patient satisfaction scores across our service lines in the third quarter remained at very high levels. In home health, 94% of our branches are at four stars or greater with timely initiation of care at an industry-leading level of 99%. In hospice, we continue to be a top 5% ranked hospice program in the U.S. with a CAHPS overall hospice rating of 89%, up from 85% in the second quarter. Overall, hospice quality index scores and the number of visits we provide patients per month on average remain well above national average. In rehab, our patient satisfaction scores remain exceptionally high. And in personal care, we have strong internal client records and quality indicator audit scores, along with a satisfaction score of 4.54 out of 5. In infusion, our patient satisfaction score was approximately 95%, and our discharge rate due to completion of therapy was stable at 96%. Home & Community Pharmacy demonstrated 99.5% order completeness and on-time delivery of 97.2%. In Specialty Pharmacy, our medication possession ratio remains much higher than the national average at approximately 95%, and we have a time to first fill of 3.7 days. Our company continues to demonstrate high levels of execution and customer satisfaction across service lines. Turning to the company's financial results by segment. Total Pharmacy Solutions revenue grew 31% in the third quarter and adjusted EBITDA grew 42% versus the prior year, with total pharmacy census growth facilitating total pharmacy script volume of $10.8 million in the quarter. Though script volumes demonstrated strong growth in both specialty and infusion with over 30% script growth in the subsegment, total pharmacy volumes declined 1% versus the prior year due to the majority of scripts being in Home & Community Pharmacy and a decline in the Home & Community Pharmacy total scripts dispensed due to divestitures associated with the customer that previously declared bankruptcy as well as flu season beginning later in 2025 as compared to 2024, operational decisions made to exit specific uneconomic customers and a difficult comparison to last year when we added the same aforementioned customer in the third quarter. In the specialty and infusion business, revenue grew 42% year-over-year, which exceeded expectations. The performance in specialty and infusion was driven by limited distribution drug launches, generic drug utilization from conversions over the past year, strong commercial execution from the team and excellent patient service. Specialty scripts grew approximately 40% in the third quarter, driven by strength in both brand LDDs and generics. We ended Q3 with 144 LDDs, including five LDD launches in the quarter. Through the end of October, our LDD portfolio has now expanded to 145 therapies, and we continue to expect 16 to 18 additional LDD launches over the next 12 to 18 months. We are honored and proud to have been chosen as a preferred specialty pharmacy partner for these new therapies that are being utilized to treat a range of cancers and rare orphan diseases. We work diligently to deliver high-quality care to patients and gain the trust of manufacturers, prescribing physicians and patients to support long-term therapy innovation and growth. Within Infusion, performance in the quarter was in line with expectations, driven by solid double-digit volume growth and continued benefit from operational improvements and procurement initiatives to streamline the business and improve profitability with strong year-over-year EBITDA growth well into the double digits. Our strategy is a broad-based one in terms of both acute and chronic therapies. We remain excited about the acute market where we believe there exists a multibillion-dollar market where our leadership team can leverage best practices and scale the business in new geographic markets efficiently. We also remain constructive on our ability to expand chronic infused therapy offerings as we look to innovate delivery to patients living with chronic disease. In Home & Community Pharmacy, revenue performance in the quarter was in line with our expectations, and we continue to optimize the go-to-market strategy and customer mix to ensure profitable growth in attractive and targeted end markets. Under a new and expanded leadership team, we continue to implement operational initiatives to augment efficiency with year-over-year EBITDA up outside of several unusual items in the quarter. Over time, we expect to continue to expand our presence in target markets with industry-leading operational processes, quality and efficiency. Turning to the Provider segment. We are pleased by the performance across each of our service lines in the third quarter. Provider revenue grew 9% year-over-year and segment adjusted EBITDA grew 16% with a segment adjusted EBITDA margin in the quarter of 16.5%, up approximately 90 basis points year-over-year. Home health care, which represents about 50% of the revenue in provider segment and is comprised of home health, hospice and primary care grew 12% year-over-year. The home health care business continues to perform very well, driven by strong quality metrics and patient satisfaction scores, ongoing operational investments and advancements, de novo expansions and preferred provider Medicare Advantage contracts are continuing to advance. Average daily census in home health care was 29,592 in the third quarter, representing a 3% increase year-over-year with hospice increased approximately 15% year-over-year in the quarter. In the third quarter, home health settings in five states were awarded accreditation by the Accreditation Commission for Health Care, or ACHC, reflecting compliance with ACHC standards and CMS' conditions of participation, highlighting our commitment to providing safe and high-quality care to patients. Home-based primary care also delivered solid growth in the quarter. We believe primary care at home remains a large opportunity as we continue to build out the business, particularly as it relates to the benefits of our integrated services and ACO and SNP payment models, which we continue to make steady progress on. Moving to rehab care, which represented approximately 20% of provider revenue in the third quarter, growth was 9% year-over-year, underpinned by 11% growth in person served and approximately 17% growth in hours billed in the core neuro rehab services. We have continued to see a long history of performance and positive momentum in the rehab business and the expansion of our rehab into ALS and home settings with Part B rehab for seniors is now ongoing as we went live in the quarter with a key milestone and integrated home health and rehab offering in ALS. In personal care, which represented approximately 30% of provider revenue in the third quarter, revenue grew 6%. Personal care growth, operations and performance remained very steady, including solid growth in person served. Overall, we continue to realize and see many benefits from our high-value services in targeted markets with one integrated and coordinated enterprise. Finally, we are excited to announce that we will be hosting an Investor Day on March 17 in Louisville. We look forward to the opportunity to review our company strategy with the investment community, discuss each of our service lines and outline the prospects for each in the years to come. To close, we are pleased with BrightSpring's operating performance and financial results in the third quarter and the progress we have made so far in 2025, and we look forward to entering 2026 from a position of strength with continuing investments for long-term differentiation and sustainable growth across the organization. With that, I'll turn the call over to Jen. Jennifer Phipps: Thank you, Jon. Before I discuss our financial results for the third quarter of 2025, I'd like to remind you that in the first quarter of this year, we began to record the Community Living business in discontinued operations as indicated in the press release and 10-Q to adhere to accounting standards required on an interim basis. As such, all BrightSpring financial results and forecasts that I will discuss are related to continuing operations and exclude Community Living. Management believes the presentation of the non-GAAP financials from continuing operations is a useful reflection of our current business performance. In the third quarter of 2025, total company revenue was $3.3 billion, representing 28% growth from the prior year period. Pharmacy Solutions segment revenue in the quarter was $3.0 billion, achieving 31% year-over-year growth. Within the Pharmacy segment, Infusion and Specialty revenue was $2.4 billion, representing growth of 42% from prior year and Home & Community Pharmacy revenue was $590 million, which was approximately flat year-over-year. In the Provider Services segment, we reported revenue of $367 million in the third quarter, which represented 9% growth compared to the prior year. Within the Provider Services segment, Home Healthcare reported $188 million in revenue, growing 12% versus last year. Rehab revenue was $76 million, growing 9% versus last year, and Personal Care revenue was $102 million, representing growth of 6% year-over-year. Moving down the P&L. Third quarter company gross profit was $392 million, representing growth of 21% compared with the third quarter of last year. Adjusted EBITDA for the total company was $160 million in the third quarter, an increase of 37% compared to the third quarter of 2024. Adjusted EPS for the total company was $0.30 for the third quarter. In the third quarter, continuous lean automation and efficiency programs at the company contributed to growth and margin improvement, and we anticipate additional improvements in the fourth quarter from ongoing operational initiatives. Further, we have seen a positive impact in the third quarter and into Q4 from our targeted growth investments, including in recent home health volume, hospice volume, rehab volume and an accelerating infusion volume and growth in LDD and generics in the specialty oncology and rare and orphan therapy business. Turning back to segment performance in the third quarter. Pharmacy Solutions gross profit was $246 million, growing 30% compared with the third quarter of last year. Adjusted EBITDA for Pharmacy Solutions was $141 million for the third quarter, an increase of 42% compared to last year, representing an adjusted EBITDA margin of 4.8%, which was up approximately 40 basis points versus last year. Provider Services gross profit was $146 million, growing 9% versus the third quarter of last year. Adjusted EBITDA for Provider Services was $61 million for the third quarter, growing 16% versus last year, representing an adjusted EBITDA margin of 16.5%, up approximately 90 basis points versus last year. Not included in the company's reported adjusted EBITDA of $160 million, as previously stated. Community Living's adjusted EBITDA was an additional $40 million in the quarter, an increase of 18% from the prior year in this business. On a total company basis, cash flow from operations was $108 million in the third quarter, we continue to expect to deliver over $300 million of annual run rate operating cash flow in 2025, and we remain focused on improving our leverage ratio towards our year-end goal of below 3.0x pro forma for both the pending home health acquisition and the Community Living divestiture. Our adjusted EBITDA growth, combined with our cash flow generation during the quarter has led to a leverage ratio at September 30 of 3.3x. Longer term, with continued growth, execution and cash flow generation, we remain on track towards a leverage target of 2.5x, which at current trends could be realized by mid or later next year, excluding acquisitions or other uses of cash. As of September 30, net debt outstanding was approximately $2.5 billion. As mentioned previously, in January, we expect to receive approximately $715 million of net cash proceeds from the $835 million of gross cash consideration in the pending Community Living sale. As a reminder, net interest expense includes interest income related to cash flow hedges due to our three received variable pay fixed interest rate swap agreements that we have in place, which matured on September 30, 2025. As part of our process to monitor and address risks, during the quarter, we entered into two three-year interest rate hedges, which are additional to the one-year extension that was entered into during the first quarter, providing stability to our interest rate risk through September 2028. Prior to any proceeds from the pending Community Living divestiture, quarterly interest expense is still expected to be approximately $43 million, including approximately $1.2 million of interest expense related to the TEU instrument. Turning to guidance for 2025, which excludes the Community Living business as well as any acquisitions that have not yet closed. Total revenue is expected to be in the range of $12.5 billion to $12.8 billion, including Pharmacy Solutions revenue of $11.05 billion to $11.3 billion and provider services revenue of $1.45 billion to $1.5 billion. This revenue range reflects 24.1% to 27.1% growth over full year 2024, excluding Community Living in both years. Total adjusted EBITDA is expected to be in the range of $605 million to $615 million for full year 2025. This would reflect 31.5% to 33.7% growth over full year 2024, excluding Community Living in both years. I will now turn it back to Jon. Jon Rousseau: Thanks, Jen. Thank you for your time today to go through BrightSpring's Third quarter 2025 results. We will now open up the call for questions. Operator? Operator: [Operator Instructions] And our first question comes from A.J. Rice of UBS. Albert Rice: Just one question and a follow-up maybe. On the discussion about the pacing of new drug launches, I know for some time, you talked about 16 to 18 launches over an 18-month period. Earlier this year, you sort of said that, that pacing had -- you've seen that go in a year. I know today, you made the comment that looking ahead, you still see that 16 to 18 over the next 12 to 18 months. I guess I'm just trying to understand, is the pacing of new drug launches that are relevant to you accelerating? Is it about what it's always been? And is the -- if it's accelerated, is the pipeline still pretty robust? Jon Rousseau: A.J., how are you? Thanks for the question. I think the pipeline remains unchanged, just given the magnitude of it, both in the next year and over the next five to seven years on the brand side. We have had probably one of our strongest years in terms of brand wins going back several years, it's been robust, but this year has been a very good year. So we've seen some therapies come to market sooner, and we've been in a good position to be a partner on most all of those therapies. So it has been a good year, a little bit ahead of expectations, but we still expect a similar number of the 15 to 18 over the next year, 1.5 years. Nothing's really been pulled forward that would affect the future. Some things happen a little bit sooner, but the pipeline remains robust as we go bottoms up drug by drug, we still feel confident in that pace going forward. Albert Rice: Okay. And then the follow-up question I was going to ask is, in your prepared comments about the pending transaction, I know you mentioned Amedisys and LHC branch acquisitions. How -- it sounds like maybe what you're buying has changed a bit. Can you give us any specifics on is it significantly bigger than what you were originally looking at? Or any other ways in which you ultimately are ending up buying has changed? Jon Rousseau: Yes. There's always been some of the divested branches were LHC, but it's been the minority. So I think we've just more or less said Amedisys in the past. It is the significant majority of those branches as United was working through all of its final agreements with the FTC, the universe did increase a little bit, not dramatically at all, but a little bit. So there's been a handful more branches that have been included in the group in the past couple of months, and we do expect that transaction to close in the quarter. Albert Rice: Do you have any early read on whether it will be accretive to '26? I know you said it would be neutral this year. Is it meaning any significant accretion next year? Or is it neutral? Or how should we think about it? Jon Rousseau: I think accretion is a fair comment, yes. Operator: And our next question comes from David Larsen of BTIG. David Larsen: Congratulations on a great quarter. Can you talk about the sources of accretion for like the Amedisys transaction or quite frankly, any transaction, where do you drive the incremental margin and profit from, please? Jon Rousseau: We're limited -- I'm trying to make sure I understand the question. We're limited on what we're able to disclose about this transaction still due to some of our agreements with the other party. I think it's fair to say that we would look to integrate the operations as seamlessly as we can. We've had a really good partner, which has enabled us to dialogue with the other side to make sure we do this as well as we possibly can. We're very excited about it, and we're optimistic about applying some of our practices, some of our payer contracts, some of our IT and technology and people practices to the organization. But look, it's well run, always has been well run. That's one of the things that we were very enthused about, and we look forward to keeping up that consistency. And if there's any synergies that are really beneficial, really more from a growth and efficiency perspective because we'll retain all the employees for sure. But if there's any other synergies in the technology area or other areas similar to those that we're able to drive on other acquisitions, we're certainly going to be planning and looking to do those. David Larsen: Okay. That's very helpful. And then I think I'm calculating an EBITDA per script increase of 32% year-over-year. Is that correct? That sounds high, which is good, obviously. Just any color around sort of the sustainability of that growth rate and what some of the key drivers there would be? Jennifer Phipps: Yes. So, I think directionally, that is accurate. It's really probably just a little bit higher on a per script adjusted EBITDA basis from a pharmacy perspective. The sources of those changes are really mix. We've had higher growth in specialty and specialty scripts, which those are our highest gross profit and adjusted EBITDA scripts that we have. And so we -- as Jon mentioned in his prepared remarks, we had over 40% growth in specialty scripts during the quarter. And so you see a mix impact associated with that. David Larsen: Great. And one more quick one. Can you just remind me, as a drug launches biosimilar or goes generic, how much of an earnings lift is there typically in terms of margin per drug? Jon Rousseau: David, that's not really information that we really reference. But when a drug goes generic, I think it's common knowledge that there are more manufacturers and that reduces the procurement cost. And overall, the price of the drug comes down pretty dramatically. But net-net, that's a very positive thing for all stakeholders and everybody in the industry. But really as a function of a lot more manufacturers typically able to provide the drug, you see a dynamic there, which is favorable to all stakeholders. Operator: And our next question comes from Charles Rhyee of TD Cowen. Charles Rhyee: Jon and Jen, just wanted to ask, obviously, in one of the big competitors in community and pharmacy would be Omnicare and they declared bankruptcy. Just curious to what do you think of that as an opportunity to pick up incremental share? What kind of overlap in the markets are you there? And is that an opportunity to enter into new markets? Or is skilled nursing really maybe not that attractive to keep expanding into first? Jon Rousseau: Charles, I don't know that we have any view that, that's going to be material. As we understand it, it was really related to some litigation going a ways back, less to do with operational performance. But we're just very focused on our customers and our end markets. including some that we think are really interesting, like assisted living, behavioral, hospice, et cetera. And that is where the majority -- the vast majority of our Home & Community Pharmacy EBITDA comes from. I will take a second to talk a little bit further about the script growth in the quarter on the hospice, on the infusion, on the specialty pharmacy side, all really, really strong growth, well, well, well into the double digits. On the SNF side, just a few dynamics that will probably be dynamics for the next couple of quarters, but doesn't impact anything from an EBITDA standpoint. We signed a large customer last Q3, which at the time was a really great event. That's the customer that has subsequently declared bankruptcy. And we've been unwinding some of those buildings. We've also taken the opportunity with the new leadership team to heavily scrutinize the customer base and make some decisions proactively about what we want to do there to make sure we don't ever encounter sort of any payment issues or unprofitable customers. And so we've been very proactive about that. It's been very constructive. The flu season also started later this year. And so you have basically a huge customer that was coming online last Q3 that is going offline. And from an EBITDA perspective, the business is doing extremely well, just given growth in the other markets and our focus on a lot of operational efficiencies. And so -- but that's a dynamic that you'll see for the next quarter or two as we work through just the timing element around that, really that one customer. I think importantly, we are growing and doing extremely well in the areas that matter that drive EBITDA. And we're extremely excited about Home Community Pharmacy's prospects over the long term. Their EBITDA was up this quarter. I couldn't be more enthusiastic about a lot of the operational automation, AI efficiency projects in there with the new team and super excited about the business, but that is the dynamic when you look at last Q3 versus this Q3. And since Home & Community scripts are 77% of the pharmacy scripts, that's the net number for the year-over-year. But in some of our key service lines, exceptional performance and again, where we're looking to drive the most growth with Home & Community being a play around targeted end markets and continued operational and automation improvement there. Charles Rhyee: That's helpful. Just one follow-up on LDDs. Obviously, the FDA, I think there's been some concerns about the pace of drug approvals. I know that there were relatively fewer drug approvals in the first half of this year. Just curious what you're seeing, if you're starting to see that pick up, if that causes any concerns for you in terms of sort of the LDDs you have on deck in terms of timing? Jon Rousseau: We haven't seen any impact. Our performance on the LDD side has really kind of been a record year and the pipeline is as big as ever. Operator: And our next question comes from Pito Chickering of Deutsche Bank. Kieran Ryan: This is Kieran Ryan on for Pito. Apologies if I missed something on this, but I was wondering if you could kind of provide a little more color on the breakout of the pharmacy guidance between SEC and infusion and Home & Community, but with a focus on kind of what it implies for SEC and infusion. I just wanted to see if maybe a little bit of the potential slowdown there in 4Q, if that was kind of related to your comments on how it's been kind of a record year on the branded side and maybe that's normalizing a little bit. Jennifer Phipps: So what we would say is that we don't really see a slowdown. We did update our revenue guidance. And when you look at that, I think you'll still see strong growth year-over-year, and we do expect that in Q4. From a pharmacy perspective, from a revenue standpoint, we did have obviously increased revenue guidance. That largely relates to the specialty and infusion business as it relates to the continued strong growth from a scripts perspective that we continue to see in that business. I would also add, though, that from a margin perspective or an EBITDA perspective, we do have -- we have increased our guidance to include additional efficiencies in the projects that we had talked about earlier and throughout our script, the operational projects that are going on, both infusion and home and community pharmacy, and we do expect those to accelerate in Q4 as well. Kieran Ryan: Got it. That's helpful. And then if you could just provide maybe a quick update on what you're seeing within M&A pipeline and kind of your priorities there. I know it's mostly focused on the tuck-in style deals, but just a quick refresher there would be helpful. Jon Rousseau: Yes, that's right. Nothing imminent outside of that other than obviously the Amedisys, LHC transaction. So as we've been working through the Community Living divestiture and then the Amedisys, LHC branch acquisition, we have just been focused on really small deals and target attractive geographies that are highly accretive. And that will probably continue at least for another quarter or so. There's nothing imminent in terms of anything sizable, but our M&A strategy will remain primarily focused on accretive tuck-ins in target geographies and probably a little bit more activity in deals of a little bit higher size, call it, in the $3 million to $10 million of EBITDA range. Those might start to get more focus again as we get past these two transactions into next year. We remain open and flexible to something interesting, a little bit larger, but certainly nothing transformational that's on our radar screen whatsoever right now. We really like our current strategy and where our organic growth is and where the balance sheet is. Operator: And our next question comes from Brian Tanquilut of Jefferies. Brian Tanquilut: Congrats on the quarter. Jon, maybe as I think about generics really quickly since you touched on that in your prepared remarks, anything you can share with us in terms of the cadence of upcoming patent expirations in your portfolio and also the dynamics in terms of the margin ramp? Like what is the runway for margin ramping on a per script basis for a new generic launch? Jon Rousseau: Yes. I think some of the information, Brian, we've laid out publicly remains the same. We expect numerous more brand to generic conversions over the next couple of years, including a more significant one probably at the end of Q1 next year. And we expect similar overall dynamics in these conversions that we've seen and experienced in the past and over the past 10 years. So our ability to partner with manufacturers and win innovative new brand therapies, the very strong growth in our fee-for-service business in that business and then the steady stream of these brand to generics really all underpinned by our service levels and commercial team and efforts. I think really remains very consistent as we look out still over the next five years. So, I think the information that we've put out there publicly and in our slide deck remains our current view. Brian Tanquilut: Got it. And then, Jon, just on the delay on the Community Living divestiture, anything you can share in terms of what that is or what caused that? And just anything we should be on the lookout for to get that closed? Jon Rousseau: Yes. No, nothing unusual. Unfortunately, these processes can just take time these days. The recent government shutdown wasn't overly helpful. But we remain very optimistic that this will close in Q1. There were a handful of markets that the buyer needed to work through with the FTC, which is ongoing and seems very straightforward and is well down the path. So we expect that to occur in Q1. Operator: And our next question comes from Ann Hynes of Mizuho. Ann Hynes: Great. Just anything on the Washington front that we should be on the lookout in the next coming months, especially with a potential health care bill going through Congress at the end of December? Jon Rousseau: Yes. Ann, there's nothing too noteworthy from our perspective on that front. It's been pretty consistent over the last few months. On the home health rule, that's supposed to come out any day. It could be delayed a little bit due to the government shutdown. While any potential -- if you look at what's historically happened and some strong industry advocacy, we expect to see some mitigation of the proposed cut in the final rule. While any cut is not a meaningful impact on us today, just given the percent of revenue and EBITDA that, that business is, we'll navigate any rate changes pretty readily. And ultimately, these critical services need to be appropriately funded going forward. So we'll continue to be very vocal about that, try to educate where we can, and we look forward to partnering with CMS as best possible on some aligned solutions there. On the IRA front, we're very pleased that CMS sent a letter to the payers in the quarter directing them to account for the IRA and their 2026 pricing. And we're also pleased to our advocacy on the hill and with the administration that we have a lot of champions who understand the unique impacts on LTC pharmacies from IRA. There's a bill in the House. There's one hitting the Senate soon. But that said, there's a lot going on in D.C. up until the end of the year. And regardless of what happens, we feel like our internal mitigation plans along with the strength of the breadth of the enterprise put us in a really good situation. And so really no material update since how we framed that before. Operator: And our next question comes from Matthew Gillmor of KeyBanc. Matthew Gillmor: I wanted to drill down on the EBITDA guidance raise. You raised the outlook a bit more than the beat on the quarter. From Jennifer's comments, it sounds like that reflects the combination of core performance and then pulling through some efficiency efforts. Was that about the components of the change? Jennifer Phipps: That is correct, yes. Matthew Gillmor: Okay. And then as a quick follow-up, I think in the past, you've talked about being conservative with the value-based care accruals, but you have some potential shared savings to go get. I just wanted to see if there's been any change in thinking there, if there's still some potential to pull through some shared savings at some point later in the year. Jon Rousseau: Yes. I think at this point, we've gained clarity that we will get some shared savings there. But that after receiving news about last year here just very recently, looks to be probably a little bit of opportunity there that will be realized. Operator: And our next question comes from Joanna Gajuk of Bank of America. Joanna Gajuk: So, I guess a couple of follow-ups. So, first, I appreciate the comments around the acquisition of the assets from Amedisys and LHC will be accretive next year. But anything else we should be thinking about heading into next year in terms of any high-level tailwinds and headwinds? I'll stop here. Jon Rousseau: Yes. Joanna, look, I mean, I think there's been just real consistency throughout the year. And certainly, as we sit here today, we expect that to continue really something we've seen all year long every quarter is each service line is performing really well individually. And I would say here more recently, a lot of our efforts, as we've talked about in infusion in the past 18 months or so are bearing fruit. Extremely excited about that being a real tailwind for next year. Hospice continues to perform extremely well. That rate increase will go into effect in Q4. And obviously, some of the momentum around the LDDs and the conversions on the specialty side, home health with the acquisition of the divested branches A lot of great things going on there in the business, too, including automation initiatives, hiring a new sales team. We had the best admissions month ever in September in home health, and that's where we have a new sales leadership team in place. We're tracking right now to have our biggest customer win quarter ever in home and community pharmacy. We're excited about that. And as Jen mentioned, we are really investing heavily. We've always had a focus on lean continuous improvement and efficiency. We're just continuing to invest there. We -- as maybe mentioned last quarter, I can't remember. We have a new CTO, and we're building out an internal AI team that is well underway. We've got all of our projects identified. We're also working with outside vendors on AI implementations. And so look, from a growth and from an efficiency standpoint, we just continue to push as hard as we can and a lot of positives there. I would also note just the balance sheet and where that's gotten to here. Even a quarter ago, we were sitting at about 3.64x leverage. Now we're at 3.31x. That's a pretty good decline in a quarter. I think a quarter ago, we were talking more about 3.5x year-end leverage. Now our view is 3x, 3.0x year-end. We were talking about getting down to 3.0x after the Community Living sale. Now we think that puts us well below 3x when the Community Living transaction closes, even net of the Amedisys and LHC acquisition. So we just feel really good and are enthusiastic about our progress on the balance sheet and being at or quite a bit below 3x leverage at the end of the year on the other side of that Community Living divestiture. We also have been talking about $300 million of OCF this year. That number is probably more like $375 million, maybe a little bit more, probably $260 million, $270 million of free cash flow before debt, amort. So, a lot of focus in the organization too on the balance sheet around cash flow, and that's been really positive. Joanna Gajuk: And if I may a couple of follow-ups. So on this comment about infusion, right, you sound very excited about this, and I guess you've been growing it nicely. But as we think about the pharmacy segment, I guess, in totality or maybe the specialty infusion, but the Pharmacy segment, the revenue is going to grow more than 25% this year, right? So how should we think about your ability to kind of grow on top of this fast growing into next year? Jennifer Phipps: So, from an infusion standpoint, obviously, as they're growing faster than they are today, we would -- so specialty, we don't see any changes as it stands today, we don't see significant changes to their pace of growth. We do see infusion accelerating. So we think that provides a little bit of a tailwind for us into next year. Operator: And our next question comes from Erin Wright of Morgan Stanley. Erin Wilson Wright: A couple of questions. First one is kind of bigger picture. Just can you speak to kind of some of the future opportunities across kind of pharmacy solutions and specifically kind of specialty pharmacy. The focus has been on oncology, but can you speak to rare disease or other areas and also the opportunity around some of those value-added manufacturer biopharma services and the respective margins associated with some of those opportunities evolving over time? Jon Rousseau: Yes. Thanks, Erin. I mean those are all accurate. The -- we do, do quite a bit of the rare and orphan therapies today. Quite a few of those are in the oncology space, too. That is certainly a big focus, whether it's inside or outside of oncology, and we'll continue to do that. The fee-for-service business, whether it's data agreements, clinical hubs or other programs with pharma, it's been good to see that continue to gain a ton of traction over the last couple of years. It's become a meaningful piece of EBITDA in the business, and we expect that to continue with a lot more launches next year of programs with them. On the infusion -- with manufacturers. On the infusion side, we are really trying to grow both acute and chronic therapies. Acute is a very big market, multibillion-dollar market in the U.S. Some folks have stepped away from that market. It can be more operationally challenging. We are leaning into that. We saw the benefits of that in Q3. It was a big part of our growth rate. And then really focusing on customized programs for chronic therapies, including some LDDs on the infusion side. That's really where we're spending a lot of time. And then in Home & Community Pharmacy, some of these markets like assisted living, IBD, behavioral hospice and PACE can still be significantly bigger for us from a market share perspective, and we're excited about that. writ large then across all of the pharmacies, just a large focus on process and efficiency in the organization, deploying automation, deploying AI throughout the businesses to try to be as efficient as we possibly can and to try to leverage our scale as much as we possibly can. So I think quite a few growth drivers within each one of the businesses and a constant across all of them is the process and automation work that we're doing. And I think the net of that makes us really enthusiastic about next year and the coming years. Erin Wilson Wright: Okay. Great. And then can you speak to what percentage of the portfolio is now more directly tied to drug pricing dynamics with potential MFN pricing as well as you spoke to IRA earlier, which we spoke to, I think, at length before. But what percentage of the book would be branded therapeutics that would be potentially exposed? Jon Rousseau: Yes. So the fee-for-service part of what we do is still the minority, the far minority. But as we've talked about before, we do our best to drive generic utilization for the industry, which is positive and good for all stakeholders. We also have a lot of our therapies, for example, in acute, which is immune from any of this discussion, too. So if you look across the breadth of our portfolio, branded GP is not the majority just given the diversification of what we do. And then as it relates to things like DTC, our pharmacy services are really to complex and high acuity patients. and often very local with significant clinical support needs. So they really don't lend themselves to DTC. Operator: And our next question comes from Stephen Baxter of Wells Fargo. Stephen Baxter: Obviously, the sequential progress you made on margins in the pharmacy business has been really notable. It sounds like you're expecting that to continue in the fourth quarter based on the guidance that you've given. And then broadly, you're describing kind of the conditions around further progress on LDDs and further the generic dynamics continuing in 2026. I guess how do we think about the trajectory of margins exiting this year and opportunity for further improvement in 2026? Jennifer Phipps: Yes. So from a guidance perspective, margins in Q4 are expected to be higher than what we've seen in the last couple of quarters. Q4 tends to be our highest margin quarter for a number of different reasons. But we do see continued growth in our different businesses that -- and different mix of products that will cause Q4 to be a slightly higher margin, landing us from an annual perspective, slightly higher as indicated in the guidance. Jon Rousseau: I would just say from an enterprise perspective, as we think about margins, it's a lot of these lean and efficiency and operational initiatives that we continue to drive across the organization, which will be really helpful as provider grows, they have a higher margin. Some of our -- a lot of our acquisitions with synergies come over as a result, pro forma with a higher margin. So we're really focused on being efficient in the organization while also providing as best quality as we possibly can and leveraging that quality where we can to partner with payers in preferred ways to help with appropriate and more enhanced rates, too. So margin fundamentally, obviously, is a key function of mix, but some very intentional efforts across the organization to try to make sure we're operating as smoothly and efficiently as we can. Operator: And our next question comes from Larry Solow of CJS Securities. Lawrence Solow: Great. Congrats on another great quarter. Just from a high level, quickly, I really appreciate all the color. Things sound really good. Just your visibility as we look out, Jon, I know maybe you'll share some of this too, coming up in March. But as we look out three to five years, maybe this 30% or even 40% volume growth this quarter, that's not sustainable. But from a high level, I know you've spoken about double-digit growth in Pharmacy Solutions going forward. Clearly, that seems very attainable. But how do we -- I mean, can we continue to grow at these rapid 25%, 30% levels? Or directionally, do we -- the Street is coming down to low double digits as we look out over the next few years. Where do we think we end up? Is it closer to that? Or clearly, maybe this 30% is not sustainable, but can we continue to grow at well over the low double-digit rate? Any color on that would be great. Jon Rousseau: Yes. I mean it's a good question, obviously, and one we spend a ton of time thinking about. Our historical CAGR going back really a decade now has been about 15%. It's been higher than that in the last couple of years. And that's been a function of a lot of things. I mean we've really tried to assemble a platform that we feel like is well positioned and in particular, comparatively well positioned for the future in a lot of different environments. And so one of the reasons why corporate was up a little bit in the quarter and has been up this year, we continue to make investments for the future, for example, building out an AI team and hiring very real people from the tech world to do that. These are things that we're going to continue to do, investing in new marketers and numerous of our businesses, heavily investing in our development teams. And so we will continue to do that. Hard to -- really impossible, I think, to sit back today and say you would expect these growth rates over the next four to five years. I don't know who would say that. But we don't. As we sit here today, and we've got to get through Q1, obviously, I think it is fair to say, based on everything we know, we would expect to grow again next year well above that historical CAGR, and we'll see. But as we look at each one of the businesses, other than maybe personal care, we aspire to grow at or above 20% in every business. And we really try to do that based on quality, operational process and then really educating and advocating for these services for as many patients as we can to drive better outcomes and lower cost. in the industry. I mean that's really what we're passionate about. Some of the businesses from time to time have opportunities to do better than our internal goals. Some of them might fall a little bit short. But we always set a really high bar. We like the markets we're in. We've tried to really curate what we do pretty well. I think we will get acceleration in the future from more and more integrated care across our platform. We're just getting into some ALS now with a combined offering, which is very well received. I do think primary care and some value-based contracting, which is all upside, will continue to scale. So we think about the business in terms of core growth and strategic growth. Core growth is each and every one of our businesses having very clear objectives over the 1-, 3-, 5-year time lines. And then we think about strategic growth being things like home-based primary care, value-based care contracts, pulling it all together, things like integrated selling into ALS, things like building out AI products, et cetera. So -- and it all really makes a lot of sense and fits together well within the constellation of assets that we have. So look, as we sit here today, as we said on the call, we think we're in a good position heading into next year. We learned a lot more in Q1. But we're very optimistic, and we'll continue to do what we can to grow the platform as best we can, leveraging numerous different businesses that all have really attractive opportunities, driving some strategic growth and then all the while trying to drive a lot of these operational and technology investments and innovation throughout the organization. Lawrence Solow: Great. I appreciate that color. Really helpful. Just quickly, on the bankruptcy in Home & Community, is that actually a little bit of a drag on EBITDA in this quarter, maybe for the next couple? Jon Rousseau: No, we don't expect it to be whatsoever. So that was announced in the last quarter. I think based on the strength of our platform and our diversification, it was a nonevent for us in Q2. We talked about that. I only mention it because that's part of the reason why the home and community scripts had a tough year-over-year comp just given we were coming on to that contract last Q3, and now we're kind of going off. And so that's that. But really attractive growth within all of our pharmacy businesses and the ones that matter the most across specialty infusion, hospice, behavioral, et cetera. So, and in Home & Community Pharmacy, we're seeing right now, our pipeline has us looking at our biggest customer signing in three to four or years. So things are moving in a really good direction. And one of the things surely we will talk about at the Investor Day is how much automation and process innovation is going into that pharmacy business today, which is going to be extremely constructive. Operator: We have no further questions at this time. I'd like to turn it back to Jon Rousseau for closing remarks. Jon Rousseau: Yes. Thank you for the time today, everybody. We appreciate the interest in the company. Thank you for all the questions, and we look forward to talking with you again in another quarter. Have a great rest of the day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Welcome to Booking Holdings Third Quarter 2025 Conference Call. Booking Holdings would like to remind everyone that this call may contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guaranteed of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements. Expressions of future goals or expectations and similar expressions reflecting something other than historical fact are intended to identify forward-looking statements. For a list of factors that could cause Booking Holdings' actual results to differ materially from those described in the forward-looking statements please refer to the safe harbor statements in Booking Holdings' earnings press release as well as Booking Holdings' most recent filings with the Securities and Exchange Commission. Unless required by law, Booking Holdings undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. A copy of Booking Holdings' earnings press release is available in the For investors Section of Booking Holdings' website, www.bookingholdings.com. And now I'd like to introduce Booking Holdings speakers for this afternoon, Glenn Fogel and Ewout Steenbergen. Please go ahead, gentlemen. Glenn Fogel: Thank you, and welcome to our third quarter conference call. I'm joined this afternoon by Ewout, our CFO. I'm pleased to report another strong quarter that underscores the power of our platform, the discipline of our execution and momentum we're building for the future. Our room nights gross bookings and revenue all exceeded our prior expectations. Beyond the financial results, I am very encouraged by the progress we've made on our strategic priorities. We are at a moment where advances in AI are just beginning to create new ways that people plan and experience travel. With our history of innovation, scale and data that helps us understand what customers want and when they want it, we are well positioned to harness these developments to drive more value for both our travelers and partners. I'll share specific examples from the quarter shortly. But before diving into those, let's review our third quarter financial highlights. We delivered double-digit gross bookings and revenue growth, reflecting robust demand across our globally diversified business. Our third quarter room nights reached 323 million, an 8% year-over-year increase. This exceeded the high end of our prior expectations, driven by healthy demand across 4 of our major regions. Of particular note was the U.S., where growth accelerated to high single digits, supported primarily by stronger outbound travel and momentum in our B2B business. The better-than-expected room night growth helped drive third quarter gross bookings up 14% and revenue grew up 13%. Adjusted EBITDA reached $4.2 billion, up 15% from the prior year quarter. All 3 metrics were above the high end of our prior guidance ranges. Finally, adjusted earnings per share in the quarter grew 19% year-over-year. Consistent with our prior earnings guidance, I want to note that FX benefited our growth rates by approximately 400 to 500 basis points. As we enter the fourth quarter, we continue to observe stable levels of global leisure travel demand. Ewout will provide more detailed financial insights shortly, including our outlook for this quarter and for the full year. Beyond the headline numbers, I'm excited about the meaningful progress we're making on key initiatives. We're advancing our Connected Trip vision, strengthening our loyalty programs and building AI capabilities that create more value for both travelers and suppliers. Asia and alternative accommodations continue to remain growth drivers Together, these efforts are reshaping how people, plan, book and experience travel and how we are unlocking greater value for our partners. Let me start with the Connected Trip. We continue to advance on our long-term vision to make the planning, booking and traveling journey simpler, more personalized and with less friction while providing new opportunities for our partners through data-driven insights. Today, Booking.com, travelers can already book accommodations, flight, rental cars, pre-book rides and attractions on our platforms, and we continue to invest to expand these verticals and to deliver a more seamless experience. For example, we enhanced our home screen to adapt dynamically to each traveler's most recent search, making it easier to move across verticals and transition smoothly from planning into booking. And we continue to broaden our flight supply, most recently adding new partnerships with Ryanair in Europe and Southwest in the U.S., giving travelers even more choice. These efforts are resonating Connected Trip transactions, meaning a trip that includes more than one travel vertical grew mid-20% year-over-year in the third quarter and now represent a low double-digit percentage of Booking.com's total transactions. Our other verticals also continue to deliver strong growth with flight tickets up 32% year-over-year and attractions up close to 90%, albeit from a relatively smaller base. Most importantly, travelers who choose to book multi-vertical trips with us also choose to come back to us for future bookings more often, which reinforces the long-term value proposition of a Connected Trip vision. Now I'd like to spend some time on Booking.com's Genius loyalty program, which plays an ever more important role in attracting and engaging travelers and stands out as one of our core differentiators. The purpose of Genius is straightforward, reward our most loyal customers with extra value while delivering real benefits for our partners. Genius members book more often, convert at higher rates, book further in advance, cancel less and choose to come back more consistently than non-Genius customers. In fact, in the third quarter, travelers in Genius Levels 2 and 3 made up over 30% of our active base and accounted for a mid-50% range of our room nights over the last 4 quarters, increasing from last year's levels. Today, Genius is available at over 200 countries and territories. The program spans our range of supply from large global hotel chains to independent properties and increasingly alternative accommodations and our other verticals. What sets Genius apart is that travelers get immediate tangible benefits such as tiered discounts or perks like free breakfast or room upgrades. We're continuing to invest to make these benefits more personalized, data-driven and relevant to each traveler's journey. On the partner side, we carefully designed Genius so that it provides incremental value rather than simply shifting existing demand. Our data shows that Genius members submit reviews more often, driving higher property visibility and increasing occupancy rates for participating properties, particularly during off peak periods. That helps partners optimize their revenue management. At the end of the third quarter, over 850,000 partners had chosen to participate in Genius. Looking ahead, we see several opportunities to continue strengthening our Genius offering. We're already expanding our offering across verticals and exploring ways to provide additional benefits. Loyalty programs remain a core pillar across our brands, not just at Booking.com. Most recently, OpenTable enhanced its program, which is now called OpenTable Regulars. The updated program offers new ways for diners to redeem points on experiences and introduces a new loyalty tier that provides enhanced benefits such as one named priority Notify Me which will alert diners to last-minute tables earlier than others with additional benefit launches planned over coming quarters. For restaurants, it helps encourage more repeat visits from high-value guests. Let me now turn to Gen AI, which we continue to believe represents a major opportunity to enhance the traveler and partner experience. While there is certainly a lot of excitement in the industry, our approach has been disciplined and focused on where AI can make a real difference for our customers, our partners and our business. On the customer side, we saw encouraging developments this past quarter. At Agoda, for example, we launched an AI-powered chatbot that provides travelers with prompt hotel-specific answers. By cutting through complexity and delivering precise information quickly, it helps travelers make timely and more confident booking decisions, reducing uncertainty and improving the overall experience. Another example is KAYAK's AI Mode, a natural language search experience that combines KAYAK and large language model data to deliver smarter contextual results right from the home page. At Booking.com, we've begun integrating new features into our app to assist travelers earlier in their planning process. These include natural language search capabilities that offer more inspiration such as destination highlights. As we further develop our agentic capabilities, combine them with our data-driven insights on when to offer relevant suggestions and advance our Connected Trip vision, we believe travelers will increasingly recognize the value proposition of our platform. We also see important opportunities for AI to create more benefits for our partners by driving better personalization and conversion, AI helps generate incremental demand across our verticals. Just as importantly, we are applying AI to make partner to guest communication faster, more streamlined and more intuitive. A core strength of our business has always been the unique value we bring to our supply partners and AI is enhancing these capabilities. As an example, Booking.com continued to add to its robust suite of Gen AI tools for partners, including Smart Messenger and Auto-Reply. Smart Messenger uses intelligent response generation and automated workflows to bring together relevant partner, property and reservation information, knowing when and what to suggest to support accommodation partners in their communications to guests. Auto-Reply takes this further allowing partners to set custom reply topics that deliver instant personalized responses to both common and unique guest questions. Early results have shown an increase in partner satisfaction compared with our prior messaging tools, underscoring how AI can provide tangible, differentiated value to our partners. Beyond our internal efforts, we're also building relationships with leading AI organizations reflecting our ambition to remain at the forefront of this rapidly developing field and to broaden our potential sources of customer traffic. We recognize that Gen AI is transforming how travelers research and find inspiration for their trips, and we are committed to continue to expand, evolve and meet them wherever they choose to search. Most recently, we were one of the first wave of apps available in OpenAI's ChatGPT App Store after being one of the launch partners for their operator platform earlier this year. Our strong relationship with companies such as OpenAI, Google, Amazon and Salesforce combined with our disciplined approach, give us confidence that Gen AI will be an important driver of long-term value for our travelers as well as our partners. On alternative combinations, we are continuing to strengthen our offering. In the most recent quarter, listings grew to over 8.6 million up approximately 10% year-over-year with double-digit room night growth. Travelers value choice and the breadth of supply across hotels, homes and unique properties differentiates us as a platform. Alternative accommodations remain a long-term growth opportunity. Customer demand for alternative accommodations is healthy across every region and our ability to combine that breadth of supply with our marketing reach and payments capabilities makes us well positioned in this segment. Finally, I want to touch on Asia, which remains a driver of growth for us and is one of our most exciting long-term opportunities. It is the fastest-growing major travel market in the world with industry growth expected to remain in the high single digits over the next several years, and our ambition is to grow even faster than the market. Our offering in the region is built on the complementary strengths of Agoda and Booking.com. Agoda is a strong local player with consumer trust across Asia while Booking.com brings global reach and brand recognition together. They create a combination that allows us to serve both local and outbound travelers across the region. As we look forward, we know we are operating in a period of rapid change, driven by geopolitical developments, macroeconomic uncertainty and accelerating technological innovation. What gives us confidence and makes me optimistic about the future is the strength of our value proposition through the Connected Trip, our Genius loyalty program and our relationships and innovations in Gen AI, we are building products that engage travelers, generate incremental demand and value for our partners and create differentiators. With that, I'll turn it over to Ewout to walk through the financial results in more detail. Ewout? Ewout Steenbergen: Thank you, Glenn, and good afternoon, everyone. I'm pleased to walk you through our results for the third quarter and share our current outlook for the fourth quarter and full year. All growth rates are on a year-over-year basis and the reconciliation of non-GAAP to GAAP financials can be found in our earnings release. Now let's turn to our third quarter performance. Our room nights in the third quarter grew 8% a positive result versus a strong prior year comparison and exceeded the high end of our guidance by nearly 3 percentage points. This outperformance was helped by an expansion of the booking window beyond our prior expectation and what we experienced in the second quarter, resulting in more room nights being pulled forward into the third quarter. We saw broad-based strength in room night growth across all major regions, and each region exceeded our expectations. Europe and U.S. were up high single digits, and Asia and Rest of World each delivered low double-digit growth. Our globally diversified portfolio proved its value once again as we continue to see robust growth in certain travel corridors, including Canada to Mexico and Europe to Asia, which effectively offset softer demand in certain inbound corridors to the U.S. Notably, our U.S. booker room night growth accelerated meaningfully from the second quarter driven by solid improvements in domestic and outbound growth, and we believe our growth once again outpaced the broader U.S. accommodations industry in a meaningful way. We're also encouraged by the growth in our direct channel in the U.S. We saw the booking window in the U.S. normalize in the third quarter, which is also an encouraging improvement from the second quarter. That said, in the U.S., we continue to see slightly lower ADRs and a shorter length of stay versus the prior year which may indicate that some U.S. consumers are continuing to be thoughtful on their discretionary spending. More broadly, global ADRs on a constant currency basis were up about 1% year-over-year, which was an improvement from the second quarter, and the global average length of stay remained similar to last year. While we are pleased with our third quarter results, we remain focused on accelerating our long-term earnings potential and are energized by the progress we are making across many key strategic initiatives. We continue to strengthen our direct relationship with our travelers and see tangible progress with increases in our direct mix, mobile app mix and loyalty mix. Over the last 4 quarters, our B2C direct mix was in the mid-60% range, which was up versus the low 60% range 1 year ago. The mobile app mix of our room nights was in the mid-50% range over the last 4 quarters, which was up from the low 50% range 1 year ago. We find that the significant majority of bookings received from our mobile apps come through the direct channel. We continue to drive engagement in our Genius loyalty program that delivers value to both our travelers and partners. The mix of Booking.com room nights booked by travelers in the higher Genius tiers of Levels 2 and 3 was in the mid-50% range over the last 4 quarters, and this mix increased year-over-year. These Genius Level 2 and 3 travelers have a meaningfully higher direct booking rate than our other travelers, which demonstrates the strength of the program's value proposition. We also see continued momentum in diversifying and expanding our business into growth areas such as alternative accommodations, payments, flights and attractions. For our alternative accommodations at Booking.com, our room night growth was about 10% and growth outpaced our overall business in each of our major regions. The global mix of alternative accommodation room nights was 36%, which was up 1 percentage point from the third quarter of 2024. Our total merchant gross bookings increased 26% year-over-year in the third quarter. Over the last 4 quarters, merchant gross bookings surpassed $123 billion in total transaction value representing about 68% of total gross bookings, an increase from about 61% 1 year ago. Our merchant payments business is foundational to the Connected Trip, offers more flexibility for our travelers and partners and generate incremental revenue and contribution margin dollars for our business. We marked another quarter of solid growth in our other travel verticals, reaffirming our strategic focus on building on our Connected Trip vision. During the third quarter, over 17 million airline tickets were booked across our platforms, representing an increase of 32% year-over-year, driven by the continued growth of our flight offerings at Booking.com and Agoda. We also delivered another quarter of meaningful expansion of our attractions vertical with tickets booked on our platforms growing nearly 90% year-over-year from a relatively smaller base. As Glenn mentioned before, we're seeing healthy growth in Connected Trip transactions, and our data shows that travelers who book more than one travel vertical with us more frequently choose to book directly with us in the future. The progress across all these initiatives is interrelated and the combined effect is helping us expand the number of customers who choose to come to us directly and book with higher frequency. Before turning back to our third quarter results, it's important to note that the third quarter has historically been our seasonally highest absolute quarter in terms of revenue and earnings. Gross bookings of $50 billion increased 14% year-over-year or about 10% on a constant currency basis. The constant currency growth rate was approximately 2 percentage points higher than room night growth due to about 1 percentage point from higher bookings growth from flights and other travel verticals as well as an increase in constant currency accommodation ADRs of about 1%. The increase in gross bookings exceeded the high end of our guidance by about 4 percentage points, driven by the room night outperformance as well as about 2% higher accommodation ADRs versus our expectations. The impact from changes in FX was about in line with our expectations. Third quarter revenue of $9 billion grew 13% year-over-year, which exceeded the high end of our guidance by about 4 percentage points, in line with the outperformance on gross bookings. Constant currency revenue growth was about 8%. Revenue as a percentage of gross bookings of 18.1% was lower by about 30 basis points year-over-year due to an increased mix of flight bookings as well as increased merchandising contra-revenue, some of which was tied to bookings made in prior quarters. This was partially offset by higher revenue from payments. Marketing expense, which is a highly variable expense line increased 9% year-over-year. Marketing expense as a percentage of gross bookings was a source of leverage, driven by changes in traffic mix and lower brand marketing expenses as a percentage of total gross bookings. We continue to make disciplined investments in social media channels at attractive ROIs. On a combined basis, marketing and merchandising as a percentage of gross bookings also had leverage in the quarter. As expected, third quarter sales and other expenses as a percentage of gross bookings was slightly higher compared to a year ago, driven by an increasing merchant mix, resulting in higher payments expenses partially offset by increased efficiencies in customer service. Adjusted fixed operating expenses increased 10% year-over-year or mid-single digits after normalizing for changes in FX. The year-over-year increase was also impacted by increased cloud costs. We continue to drive efficiencies in our fixed expenses through our ongoing cost optimization initiatives while, at the same time, reinvesting into the business to effectively drive long-term growth. Adjusted EBITDA of approximately $4.2 billion grew 15% year-over-year, which was about 6 percentage points faster than the high end of our guidance due primarily to stronger revenue growth. Adjusted EPS of $99.50 per share was up 19% year-over-year, faster than the growth in adjusted EBITDA, helped by the benefit of a 4% lower average share count. During the third quarter, we realized approximately $70 million of in-quarter savings from the Transformation Program, primarily in sales and other expenses and in personnel expenses. We also took further actions during the quarter to advance certain efficiency initiatives into the implementation phase. And as a result, we now estimate in-year savings for 2025 will exceed $225 million and we have enabled approximately $450 million in annual run rate savings, surpassing our prior expectations. For the full program, we now expect to deliver about $500 million to $550 million in run rate savings, and we estimate the aggregate transformation cost will be approximately 1x the run rate savings. In the third quarter, we incurred $105 million in transformation costs, which were excluded from our adjusted results. As a reminder, we're reinvesting approximately $170 million above our baseline investments in 2025 to support our strategic priorities for long-term value creation. This reinvestment is funded by the savings generated from the transformation program, combined with additional operational efficiencies in our ongoing operations. Now turning to our cash and liquidity position. Our third quarter ending cash and investments balance was $17.2 billion compared to our second quarter ending balance of $18.2 billion due to a reduction of $2.4 billion from deferred merchant bookings and other current liabilities. We generated $1.4 billion in free cash flow, offset by capital return activities, including about $700 million in share repurchases and about $300 million in dividends. Additionally, we paid $1.5 billion to redeem high coupon debt that was originally due in 2030. As we look ahead to the fourth quarter, while there remains some uncertainty in the macroeconomic and geopolitical backdrop, we're pleased to see continued momentum with steady travel demand trends in our business so far in the fourth quarter. As always, we will continue to closely monitor the travel environment for any changes. Our guidance for the fourth quarter assumes recent FX rates for the remainder of the quarter, including the euro-U.S. dollar at 1.17. We estimate changes in FX will positively impact our fourth quarter U.S. dollar reported growth rates by about 5 percentage points. We currently expect fourth quarter room night growth to be between 4% and 6% and we expect growth to moderate from the third quarter as we expect the booking window to be less expended in the fourth quarter. We currently expect fourth quarter gross bookings to increase between 11% and 13%, including about 2 percentage points of positive impact from higher flight ticket growth. We expect constant currency accommodation ADRs to be about in line with last year. We currently expect fourth quarter revenue growth to be between 10% and 12% lower than the increase in gross bookings due to a higher mix of flight bookings. We currently expect fourth quarter adjusted EBITDA to be between $2 billion and $2.1 billion or about 14% growth at the high end. We currently expect fourth quarter adjusted EBITDA margins to be slightly higher than last year, driven by leverage on adjusted fixed operating expenses. Turning to the full year 2025. With a strong third quarter on the books, steady trends to date, along with improved visibility for the fourth quarter, we're increasing our full year guidance. Assuming recent FX rates will remain steady for the remainder of the year, we estimate changes in FX will positively impact our full year reported growth rates by about 3 percentage points for gross bookings and revenue and by about 4 percentage points for adjusted EBITDA and adjusted EPS. On a constant currency basis, our latest expectations are above our long-term growth ambition of at least 8% growth bookings and revenue growth and 15% adjusted EPS growth. On a reported basis, for the full year, we now expect room nights to be up about 7%, gross bookings to be up about 11% to 12%, revenue to be up about 12%, adjusted EBITDA to be up about 17% to 18%, adjusted EBITDA margins to expand year-over-year by about 180 basis points higher than our prior expectation of about 125 basis points, revenue to grow faster than both marketing and adjusted fixed operating expenses, sales and other expenses to grow similar to revenue and adjusted EPS to be up slightly more than 20%. In conclusion, we're energized and highly motivated by the clear momentum in the business. Our continued progress reinforces our confidence that our loyal customers and global supply, along with our technology and data all powered by our people are industry-defining assets that will fuel our long-term success. Thank you to all of my colleagues across the company for their shared commitment and extraordinary work. With that, we'll now take your questions. Operator, will you please open the lines. Operator: [Operator Instructions] And our first question comes from the line of Kevin Kopelman with Cowen. Kevin Kopelman: I was hoping to dig in on your U.S. acceleration in Q3. Could you talk about your B2B initiatives in the U.S. that you mentioned and maybe globally? And then it sounds like B2C also accelerated in the U.S., so any additional color on what you saw as the key drivers there would be great. Glenn Fogel: Kevin, so obviously, we are very pleased about our U.S. acceleration. I haven't looked at the numbers. So I guess it's 3 quarters in a row that we have some acceleration, which is always good to see. And it is both B2B and B2C. And we are pleased about what we're doing in the B2B region. We haven't talked about it a lot in the past. We're not there beating our breast about how great our B2B is, but it's pretty darn good. And we've been winning some contracts. We don't make big announcements about them, but they are good, and we'll continue to advance. So we're very pleased with where we are. There's nothing really specific to talk about right now. We have talked a little bit about bringing together become more efficient. We have many different B2B units around the world because we have the different brands, have different B2B units. We're going to create things that are more efficient, really bring the best of old breeds together. So we really have something that's even better for our partners and our travelers. In regards to the B2C area, also, good numbers there. We're really pleased to see what we're doing. But this has been a very long-term process that we've been talking about for many, many years. about how improving the product will improve the results, and that's what we've been doing. There's nothing that's miracle. There's no magic bullet happening, et cetera. It's bringing the brand together, it's doing a product better. I mean, just to give you an example, I hope people watching the baseball have seen some of our branding there. I certainly have gotten some calls from people. And that's the thing, make people aware that we have a great product and then execute and do what's necessary. If anything goes wrong, provide that great customer service that really brings people back because they love using it. I don't know, if you have anything more to add to that? Ewout Steenbergen: Yes. Let me add a few other data points, Glenn. Kevin, clearly, we saw healthy growth domestically in terms of travel as well as outbound saw some healthy growth. So both were doing well from a U.S. perspective. Another important thing that I would like to point out, and I think we're really positive and really excited about this. This is the growth of our direct channel in the U.S. So what we are seeing is clearly a payoff of our brand awareness that is getting stronger in the U.S., more familiarity and therefore, more customers coming now direct to us in the U.S. So that is really something that has seen quite a step-up in the third quarter, and we see that as a really positive trend. And ultimately, that is all the result of all the investments we have been making over the last number of quarters and years. Investments in products, investments in supply, in marketing and in brand. So overall, indeed, thank you for pointing it out, we're very happy where the U.S. is this quarter. Operator: And our next question comes from the line of Doug Anmuth with JPMorgan. Douglas Anmuth: I know you were early in the test program with OpenAI as well, but can you talk about your thought process heading into the app integration and what you're seeing in the early days? And just how should we think about economic impact if bookings were to shift from direct traffic or from Google? Glenn Fogel: Doug, well, that's a question I would have expected. Of course, you sort of -- you gave the answer there about how early it is. So it's a little difficult to talk about anything besides and say, it's early. We're very happy to be in the first wave of apps with OpenAI. I think that says something about us and the value we bring to partners that they would do it with us to get it going. It's one of those areas that, obviously, we want to explore every area where a traveler may want to begin their discovery, their inspiration, et cetera, and then be able to provide that traveler with what they need in terms of actually executing what they want to accomplish in their travel needs. Your question is really what will the future be if more and more people started OpenAI, that obviously is the old -- I think it used to be called the $64,000 question, I think it's much bigger nowadays. It's something that a lot of people don't know, but what I am very confident of is that even though people may change over time, how they want to start their travel inspiration, discovery, I believe that we will always be there in the area to provide what is really necessary, which is going beyond that and executing and doing the actual transaction fulfillment. They're working to make sure they're getting the best value, the area of making sure you're doing the right types of payments. They're making sure you're following all the regulations, very complex. It's one of those things where people sometimes are a little naive about how incredibly complex this travel business is. And it's not so easy. You just throw some, oh, it's easy, you just put up a name and somebody is going to be able to book across and just intermediate somewhat, that's not the way the world works. And if it did work that way, we were anticipating a long time ago, Google would have taken this thing over a long time ago. Look, we're very proud of where we are right now, but we're even more proud of how we are building out even more value. And that goes into things like the Connected Trip. Being able to bring together all the different verticals in a way that the traveler really sees is the reason they want to come to us because they really are getting more benefit from users. And of course, the other side being able to use our Connected Trip in a way that the partner is able to get more incremental demand, and it's using science. It's using data. It's using our proprietary knowledge that we have, that we don't share with people. Those are some of the things that we have that we believe are key to keep us at the forefront of the travel industry. And I don't know, Ewout anything you want to add? Ewout Steenbergen: Yes, maybe a couple of points, Doug. Just you also asked about the economics and some of the data. So first of all, what we are seeing in terms of traditional search that we still see volume growth. So travel clicks that are coming to us from traditional search are still going up year-over-year. That, of course, might change over time, but I think that is an important data point. The other is the number of leads that we're receiving from large language models relatively small, but it is growing. And probably over time, these 2 worlds might become more hybrid because we are seeing, of course, more AI being built into browsers at this point in time. What are we measuring in terms of impact, ultimately, faster search, better conversion, lower cancellation rates and higher customer satisfaction, very early signals we're having around it. But overall, very encouraged we are with what we are seeing at this moment. Operator: And our next question comes from the line of Lee Horowitz with Deutsche Bank. Lee Horowitz: Maybe sticking with the AI topic. There's obviously a lot of noise in the market around some of your hotel partners looking to partner directly with some of the generative search players in order to perhaps increasing the bypass platforms like yourselves. I guess how do you contextualize this particular risk? And what tools do you think you have at your disposal to maybe mitigate this kind of disruption? Glenn Fogel: So for a very long time, Lee, as you know, hotels have found it a way that they can be shown for, let's say, Google. And some people will go to Google, and we'll go directly to a hotel. That happens. We would love for them to come to us first and we continue to try and create something that is a better reason for them to come to us or just want to go directly to one of our hotel partners. That will probably happen in LLM world too. Some people will do that, too. I wouldn't be surprised. But this idea that, that is going to cause this giant shift, I just think that that's not the way the world is going to work. And again, proof is that it hasn't happened in the old day of Google. And so far, we're seeing that I don't think it's going to happen in an LLM model. One of the things, again, comes into what do we bring to the table, why the customers still continue to come to us and they come to us direct. That's the point Ewout made about that mid-60% number of people into us direct in the B2C area, and it continues to grow. It continues to increase. Why is that happening? It's happening because we do a lot of things for the customer that they feel is the best way for them to execute their travel needs. And really, a lot of it comes down to trust is giving more value, is making sure that they get the best way to do it. And of course, having our Genius program, which Ewout also talked about and think about that. More than 30% of our active customers in Genius levels 2 and 3, mid 50% of the room nights at Booking.com. This is a program that really gives incredible value, which is why somebody instead of going direct, they come to us. And as we continue to build that out and are able to provide the exact perfect, perfect offer to that traveler, working with the partner to make sure it's going to be incremental to them. That's a win, win, win. Win for the traveler, win for the partner, win for us. Now think about trying to do that in OpenAI or any of the large language models, that didn't happen. So obviously, I don't disagree. Some people are going to go to a large language model. You'll see a hotel to go directly there. Sure. But I think that is an overblown threat at this time. Operator: And our next question comes from the line of Mark Mahaney with Evercore ISI. Mark Stephen Mahaney: I wanted to ask 2 topics, please. First is social media, I think you mentioned kind of leaning into social media marketing. I think you've been talking about this for a year and maybe to -- could you spend a little bit more time on that? Has that now become a material, let's say, a double-digit percent of your performance marketing coming from there? And do you find that the returns have been continually improving. And then Asia, you [ ripped ] on Asia in the opening comments. So could you peel that back a little bit? Are there particular parts within Asia that have really started to perform better for you. You've been -- I know that the region as a whole has got the world's highest travel growth rates. But do you feel like with the Agoda and Booking that you've been particularly able to penetrate certain markets better than others? Ewout Steenbergen: Mark, this is Ewout. First, on the social media. We continue to experiment and invest and with the social media channels whilst we also continue to stay very disciplined with respect to ROIs, which is really important because these channels, the ROIs can really fluctuate a lot. So we are very much focused on really being able to measure incremental ROIs in a very clear way. We see different stages of where the social media channels are. Some are more leaning in than others. So changes will happen there over time with all the different channels. I prefer not to go too much in detail which ones are really better working for us than others because, obviously, I don't want to make others smarter than they are at this point in time. But what we like is really diversifying our multiple social media platforms because expanding our performance marketing channels overall is a positive. In terms of spend, you should think about that it is a couple of hundreds of millions, which is meaningful, of course, a total number, but if you look at the total marketing spend for us, it's, of course, still a smaller percentage of the overall spend. In terms of Asia, very clearly, we are very happy with the growth we're seeing in Asia. We have 2 strong brands, 2 different strategies. Agoda is very much focused on localization and they really present themselves as a Korean company in Korea and a Japanese company in Japan. Booking has far more the global reach, the global model, the global optimization that they bring to the region. We're making a lot of investments in terms of our product, in terms of our marketing, in terms of our supply. And overall, we are happy with the growth we are seeing, and we're really -- despite, of course, always healthy competition we're having in Asia, we're really holding up very well in that overall environment. Asia is, of course, from a medium and long-term perspective, the most important market. That is where we will see over the next few decades, the largest growth in the world because the GDP growth is going to be the highest there. There will be very large parts of the population that will start to travel and travel more in the future. So the fact that we are already the market leader outside of Mainland China and being able to be focused to hold that position is going to be positioning us very well for the next couple of years. Operator: And our next question comes from the line of Ronald Josey with Citi. Ronald Josey: I have 2, please. Glenn, as entry points to the web and booking involved here given just newer tools and OpenAI being one of them, can you talk to us how maybe this evolves or changes your strategy to attract to call it 30%, 35% or so traffic that's not direct. So a question about how the front end is changing and sort of thoughts there. And then on the product side, look, seeing tons of innovation with AI Trip Planner, Penny, hotel search, AI Mode, concierge. I think you talked about the homepage is unique now per user. Talk to us about the impacts this might be having on either cancellation rates, conversion rates, things along those lines. Glenn Fogel: Ronald, I'll let Ewout talk your second question. Your first question, you want to hear -- and I make sure I understand your question right, you want to hear more about how are we going to deal with trying to get that last 35% to come direct. Is that kind of the question, will you give me a little more sense of what you're asking. Ronald Josey: That's exactly right. I guess I'm wondering how much -- how more important brands are going forward as OpenAI goes through the app strategy and has users front end of the web evolves. Glenn Fogel: Yes. So that's -- that is a good question. And of course, as we all know, you don't want to go to 100% direct because you may be missing a lot of customers who may come from a different channel. There is a -- there's some sort of optimization that we should be doing. And obviously, right now, we still enjoy getting a higher direct coming to us. And how do you do that? Again, it goes back to the simple things is all people who deal with retail type services should is giving more value to that customer. And it's not just having a better travel service is, as I said earlier, is you got to make people aware of it. And I know I just got some interesting advertising brand data recently. And in certain areas of the world, U.S., for example, our brand awareness is still not where I want it to be. And as I've talked many times in the past on these calls about how certainly in the homes area in the U.S., we are not where I'd like to be in terms of brand awareness. So it's not only improving the products, it's also making people aware of it. That is something that is not something that is impossible. It's actually very possible. It just requires us to continue to do what we've been doing, which is why we've been grinding it out and increasing albeit not as fast as I'd like but it hasn't happened. That's increasing the service and putting more brand power behind this. There's nothing really secret about this. There's nothing unique about this is just continue to do the work, so to speak. And that, we've been doing it for -- I've been here now 25 years, and that's how we've gone from nothing company to now many, many hundreds of millions of satisfied customers. That's basically all we can really say without giving away. Here's what we're going to do next quarter, and that's another thing. I don't want to tell my competitors what that's going to be, but we're going to keep on doing it, and I am pleased with the progress we've made. Ewout, you want to give on his second question. Ewout Steenbergen: Sure. Ron, we're seeing a couple of things. First, conversion, definitely with all the new tools that we're having, we're seeing that people have an opportunity to find easier what they are looking for can be more targeted, have a faster path to ultimately get to a booking and that is helping conversion levels. Then also what we are seeing at the same time is that cancellation rates are a bit lower. Every period, if you look at it, it's slightly lower than in the comparable period 1 year ago. And that's also a positive. And we believe that this is not a coincidence. This is also because people can find exactly what they are looking for. So they don't need to continue to search and ultimately cancel one booking and book somewhere else or book something else with us. So they are satisfied with what they have booked, so cancellation rates slowly coming down, also clearly a huge economic effect. And then if something goes wrong, what we're also seeing is that customer service is seeing a huge benefit in what we can deliver, reduced contact rates, faster handling time and higher customer satisfaction. I think it's actually remarkable. If you look at our results this quarter, our customer service costs are down year-over-year, are down year-over-year in absolute terms despite volume growth of close to 10%. So the average cost per booking is coming down very rapidly and the satisfaction scores are going up. So all of these things are interrelated. It's interrelated with all the elements that Glenn said, people come more direct to us, are booking more often with us, are booking more across multiple verticals, are canceling less, are having higher satisfaction and like to come back and book more direct. So all of these things are interrelated and really strengthening each other. Operator: And our next question comes from the line of Justin Post with Bank of America. Justin Post: Great. A couple. First, I'd like to dive into the U.S. It really seems like the OTA industry is maybe taking some share here. Just wondering if it's the loyalty program, leisure growing faster than business, what's helping the industry take share and you specifically take some share? And then on the algorithm, just wondering, there's a lot of stuff going on with Connected Trip. Obviously, payments and more air. Just could you help us think about how both bookings could grow relative to nights and also how you're thinking about revenue take rates over the next couple of years? Glenn Fogel: Sure, Justin. I'll talk about first of one, I'll let Ewout talk what kind of specifics he wants to give about the numbers regarding Connected Trip and et cetera, the questions you asked. So on the U.S., we talked a little bit about this already, how pleased we are with those numbers. And I did mention brand is obviously important, improving the service that's important. You asked about consumer versus business. Obviously, we get both, but we do tilt much more to consumer. So clearly, we are doing well in that area. Now as you know, there's a lot of debate about what's going on in the U.S. economy right now. People -- some people are saying, well, we have a 2-speed economy where the higher ends of the economic strata are doing very well, and they're spending a lot of money and the bottom part of the economic strata are suffering a little bit more, not being able to purchase as many services perhaps they wanted to, et cetera. It's interesting because we play the entire gamut of the economy. We are able to sell at the top, we sell more economy products and services, too. So clearly, for us, we are able to benefit whether it's a strong economy or not a strong economy, we're doing well. Look, I can't say anything that's more specific than the fact that we continue to execute well making sure the service is good, make sure all the things that we talked about are working well, making sure we're getting that brand in front of people, making sure if anything goes wrong, we fix it. That's how we do a good job. And it adds on itself and Ewout used that word flywheel. More people become aware of it, they've had a good experience. They come back. Yes, the awareness is not where I'd like it to be, but it is improving. This is the way we do it. And we -- I've been talking about this Justin, we talked about this for many, many years. I said I want to be bigger in the U.S. and that we're growing, here's how we're going to do it, and we're doing it. It's blocking and tackling, day by day, improving it. No, as I said already once, I said there are no silver bullets in this business. It's just continue to execute day after day after day. Ewout, talk about numbers you did on the Connected Trip stuff. Ewout Steenbergen: Justin, when we speak about Connected Trip, I would like to make a distinction between what we're seeing now and then really where we are heading to in the future. So what are we seeing now? We're seeing a lot of our other verticals growing in a very healthy way, flights 32%; traction 90%. We see our payment-related bookings going up in the mid-20%. We see our Connected Trip transaction, so where someone books more than 1 vertical for the same trip going up mid-20s. Of course, the direct element is a part of that. So all of these metrics look really in the direction that customers like to really bring those elements together because it's peace of mind, it's all-in-one platform, and we deliver a lot of value for them as a consequence. But if you think about generative AI this is really the opportunity for us. We can make the real Connected Trip come to life over the next couple of years. And what I mean with that is building an intelligence layer that all these elements of the trip naturally fit together are interrelated, all personalized based on what we know and what you like to do and how you like to travel and where you like to dine. If something happens, everything can automatically be updated. It means that people will be more frequently using our app, we can become more proactive in what we offer to you and more and more value can be created as a consequence. So actually, that is our big opportunity around generative AI. And I think the value we can generate in that way is really going to be even more than what we are seeing today. So that's why I am perfectly really excited about. Justin Post: Maybe one quick follow-up. Do you think the gap between bookings growth and room night growth can grow? Ewout Steenbergen: Yes. There's, of course, always a few things that go in the mix, take FX aside, what our ADR is doing. That is, of course, one element there. It's the growth in other verticals that is going in there. But generally, we would say, yes, because if we take room nights plus ADRs plus other verticals, we would like to, of course, to see that total gross bookings will grow faster than room nights on average over time. Operator: And our next question comes from the line of Trevor Young with Barclays. Trevor Young: Glenn, maybe a bigger picture one for you. From a competitive standpoint, do you foresee competitive intensity picking up over the next 2 to 3 years? It seems as though a major Asia player has aspirations in Europe while an accommodation competitor is making a big push into traditional hotels and adjacencies. Meanwhile, consumers will have a new channel via AI tools to make travel all that much more accessible. And if you do see competitive intensity picking up, how are you evolving your strategy to better position Booking for that environment? Glenn Fogel: Yes. It's a good question, Trevor. But I have to say that this business, this industry, and I take to the regulators all the time in Europe, has always been one of the most competitive of any industry than I've ever experienced. And sure, there are new things to look at now. And there are old competitors in the past, and they're no longer there. I remember once upon time everybody talked about, what about TripAdvisor? Well, where is TripAdvisor now? No offense to them, but they're not the threat they were at one point. Or what's going to happen with Meta? And I can go through over -- given things that we have had to face, incredible competition time after time after time. So sure, there's a lot of competition right now. And I know you're alluding to Trip.com, Ctrip in China. Yes, a very good competitor. And sure, now we have AI as a competitive threat, but also in that one a little different because that gives us incredible benefits too. Incredible power because of the incredible scale we have and the incredible engineering talent, et cetera, in AI, this is actually a competitive advantage I would say, a net, net situation. But in the long run, I believe it's the same way it's always been. We just have to keep on grinding out better things for our services. But there's a time there is no such thing as mobile. Mobile comes in, we had to immediately create a great mobile site for our customers, which we did. Well, now we have AI and lots of great things working there that can make even better. One of the really good things about being the scale that we are and the data we have, that proprietary data that we have and the incredible number of customers and partners and all these new things we've already begun to do in all the different verticals. And in addition to things that we don't talk about a lot of things like insurance, for example, we don't talk about that a lot. Where the things we're doing in terms of providing advertising opportunities for our partner. We don't talk about that one too. There are so many things that we are just beginning to really put together and putting it all together, using, as I said before, the data, the science, being able to build these things in a way that's much better that smaller players cannot constantly do. That's an advantage we have. So I see actually, yes, it's extremely competitive, but I said this I don't know which quarter recently, I said about, I find this is the most exciting time for us ever. I actually see us in a much better position than we were years ago, decades ago. I see this is an opportunity for us to create as Ewout was just talking about bringing it all together in a way that we could really accelerate the growth factor here if we do it right over, and you pointed out a 5-year type horizon. That's what we want to do. And I believe we can do it, and it's up to us to make sure it does happen. Operator: And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Mr. Glenn Fogel for closing remarks. Glenn Fogel: Thank you. I'm glad to end it on that. I think of the future, it's so great. So I want to express my gratitude to our partners, our customers, our dedicated employees and our stockholders. We truly appreciate your support as we continue advancing our long-term vision. Thank you, and good night. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to today's Clearwater Paper Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Sloan Bohlen, Investor Relations. Sloan? Sloan Bohlen: Thank you, Greg. Good afternoon, and thank you for joining Clearwater Paper's Third Quarter 2025 Earnings Conference Call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Sherri Baker, Senior Vice President and Chief Financial Officer. Financial results for the third quarter of 2025 were released shortly after today's market close. You will find a presentation of supplemental information, including a slide providing the company's current outlook posted on our Investor Relations page at our website at clearwaterpaper.com. Additionally, we will be providing certain non-GAAP financial information in this afternoon's discussion. A reconciliation of the non-GAAP financial information to comparable GAAP information is included in the press release and in the supplemental information provided on our website. Please note Slide 2 of our supplemental information covering forward-looking statements. Rather than reading this slide, we'll incorporate it by reference into our prepared remarks. And with that, let me turn the call over to Arsen. Arsen Kitch: Thank you, and good afternoon, everyone. Let me begin with a summary of our third quarter performance highlights. We delivered adjusted EBITDA of $18 million, which is towards the high end of our guidance range of $10 million to $20 million. Year-to-date adjusted EBITDA from continuing operations stands at $87 million, up from $26 million during the same period last year. This increase is driven mostly by our efforts to reduce fixed costs and 4 incremental months of Augusta results included in our P&L. Net sales grew by 2% versus the prior quarter, driven by a 6% increase in shipment volumes, partly offset by lower market-driven pricing. We successfully completed all 3 of our planned major maintenance outages for 2025. The Lewiston outage was completed in August at a direct cost of $24 million. The Augusta outage was completed in October at a direct cost of $16 million. I'm pleased to report that the execution of our planned major maintenance outages was significantly improved versus prior year. This confirms our belief that an annual cadence delivers generally more manageable and predictable outages. We've also largely captured the run rate benefits of our fixed cost reduction initiatives. These are now tracking to around $50 million in savings for the year, which would exceed our original estimate of $30 million to $40 million. These savings are helping us offset some of the margin pressure that we're facing during this industry down cycle. Let's now turn to some commentary on the industry and our key strategic initiatives. While the latest third quarter AF&PA report is not yet available, the trends that we saw in Q2 have largely persisted into Q3. We believe a competitor is continuing to ramp new SBS capacity, which may add up to 10% of additional supply to the industry. Without other changes, this level of new capacity would result in utilization rates in the low 80% range by year-end. This will be well below the normalized cross-cycle average of 90% to 95% and would result in supply exceeding demand by more than 500,000 tons. These low utilization rates have led to margin pressure, resulting in returns that can support investments into our capital-intensive industry. This is simply not a sustainable position to be in for the industry, which is why we believe that the industry will rebalance supply with demand in the medium to long term. As we previously discussed, there are several potential paths to this recovery. First, RISI is forecasting an approximately 350,000 ton net capacity reduction in the first half of 2026, which would drive utilization rates to above 90%. Second, tariffs and a weakening dollar may put pressure on the price of some of the more than 700,000 tons of imports into the U.S., encouraging customers to seek domestic suppliers. And lastly, industry participants may choose to swing capacity to other grades such as CUK, white top or other non-bleached applications. This could help absorb excess SBS capacity. Without a combination of these supply changes, we believe that it will take more than 5 years of demand growth to fully absorb the excess capacity that exists today. While the current industry oversupplies primarily limited to SBS, we believe that it is having an impact on the other 2 paperboard substrates. Each substrate has its own strengths and applications, but there's meaningful overlap between them, presenting substitution opportunities to customers. This is why we believe that pricing has been historically correlated between SBS, CUK and CRB. Today, CUK has priced $50 per ton higher than SBS according to RISI, which is not intuitive given SBS' superior print quality and higher bleaching costs. If you look at the 30-year history of this market, it is only in recent years that CUK pricing has exceeded SBS. CRB today is priced $120 per ton lower than SBS according to RISI, which is a narrower gap than we've seen historically. SBS has superior performance characteristics versus CRB with a higher production cost of more than $200 per ton due to the use of virgin fiber and bleaching. Buying decisions and packaging are driven by several factors, including performance, cost and sustainability. Most importantly, customers by paperboard by area or square feet and not tons. To match the strength performance characteristics of SBS, a customer would need to use a heavier weight of CRB, resulting in a price that we estimate to be equal to or higher on a per square foot basis than SBS in today's market. If these trends persist, we believe that CPG and retail customers will look closely at substitutions, which would support higher SBS demand, put a ceiling on CUK and CRB and return to historical pricing correlations between the 3 substrates. Let me now shift to some comments on potential CUK investment that we previously discussed. As a reminder, we're exploring adding CUK swing capability to one of our SBS machines. We have nearly completed the engineering work, and now I can share some additional details on the project. The estimated capital required for the investment is approximately $50 million with a 12- to 18-month lead time to complete. At today's prices, the project return is estimated to be more than 20%, largely based on trading up lower end SBS volume to CUK. The returns will be considerably higher if we assume that we're filling up open SBS capacity. Our mill in Cypress Bed, Arkansas is best positioned for this project, given its proximity to customers and access to low-cost softwood fiber required for CUK. We estimate that open market demand for CUK is around 300,000 to 400,000 tons with potential upside if independent converters had reliable domestic supply. Our goal will be to capture around 100,000 tons of this volume, utilizing about 1/3 of Cypress Bend's capacity. The remaining 2/3 of the capacity would remain in SBS. We see 2 upsides to this project. First, there is a strategic benefit to expanding our product portfolio to better serve our converter customers. Second, it would enable us to more fully utilize our network capacity during an SBS industry downturn. We may conclude in the future that this is a good investment, but we're putting a final decision on hold at this time. We remain focused on running all 3 of our SBS mills, vigorously defending our SBS market share and preserving the strength of our balance sheet. With that, I'll turn the call over to Sherri to discuss our Q3 financial results in more detail as well as provide an outlook for Q4 and some additional thought -- some initial thoughts on 2026. Sherri Baker: Thank you, Arsen. Let's start by reviewing our financial performance in the third quarter in more detail. Net sales were at $399 million, up 1% year-over-year, driven by a 3% increase in paperboard shipment volumes partially offset by lower market pricing. Net loss from continuing operations was $54 million or $3.34 per diluted share, primarily due to a $48 million noncash impairment of goodwill. This noncash impairment represents all of our remaining goodwill. Most of this goodwill was accumulated through the acquisition of Manchester Industries in 2016. The impairment was driven by the decline in our market capitalization as compared to the increase in our book value, which was driven by the gain from divestiture of our tissue business late last year. Adjusted EBITDA was at $18 million towards the higher end of our guidance range of $10 million to $20 million. We saw improved cost performance due to our fixed cost reduction initiative, which more than offset lower pricing and higher input costs. SG&A as a percent of sales was at 6.2% at the lower end of our targeted range of 6% to 7% of net sales. We believe that this is at the lower end of our industry benchmark, demonstrating our commitment to running a lean, cost-effective company. Let's now turn to our balance sheet and capital allocation. We generated $34 million in cash from operations during the quarter and approximately $3.5 million in free cash flows. Our net leverage ratio is at 2.7x, and we have ample available liquidity of $455 million. While our leverage ratio has increased due to the current industry down cycle, our aggregate debt level has remained stable as we continue our focus on maintaining a strong balance sheet. We also repurchased $2 million of shares, bringing our total to $20 million against our $100 million authorization. We will consider additional share repurchases when we have a line of sight to free cash flow generation in the near to medium term. Turning now to our outlook for the fourth quarter. We expect adjusted EBITDA of $13 million to $23 million. We expect slightly lower paperboard shipments versus the third quarter due to seasonality. We expect 3% to 4% lower production volume, driving less cost absorption than during the prior quarter. We have largely captured the benefits from our fixed cost reduction efforts in previous quarters. And while we will maintain those savings, we do not expect significant additional savings between the third and fourth quarters. We expect other input costs to remain relatively stable, and our guidance includes $16 million of major maintenance outage costs at our Augusta mill, which was completed in October. And lastly, let me provide you with some of our initial assumptions for 2026. We expect revenue of around $1.45 billion to $1.55 billion and a capacity utilization rate in the mid-80% range. We are also assuming that we'll see the carryover impact from 2025 market-driven price changes into 2026. We expect to generate enough productivity and cost reductions to offset 2% to 3% of cost inflation. We expect capital expenditures of $65 million to $75 million. To generate incremental cash flow, we will target more than $20 million in working capital improvements, primarily in inventory. And lastly, given newly enacted tax legislation, we do not expect to be a net cash taxpayer next year. The biggest variable that is difficult for us to predict is price changes in 2026. Currently, RISI is forecasting an increase in SBS folding carton price of $30 per ton and cup stock of $40 per ton in the first half of next year. This corresponds to their assumption that utilization rates will improve to over 90% with a net industry capacity reduction of approximately 350,000 tons. Regardless of industry conditions, we remain focused on operating effectively, reducing our costs and maintaining a strong balance sheet. I'll now turn the call back to Arsen for closing remarks. Arsen Kitch: Thank you, Sherri. While we're navigating a challenging industry environment, we remain confident in the long-term fundamentals of the paperboard market and our ability to generate strong returns. We have high-quality assets that are geographically well positioned to serve independent customers, and we intend to maintain our market share. We believe that paperboard packaging has strong demand fundamentals as consumers and customers continue to seek sustainable and renewable packaging solutions. We have a strong balance sheet with manageable debt levels and more than $450 million in liquidity, positioning us to weather this current downturn. In an environment where utilization rates returned to 90% to 95%, we expect to achieve cross-cycle adjusted EBITDA margins of 13% to 14%, resulting in free cash flow conversion of 40% to 50% or over $100 million in free cash flow per year, assuming $1.8 billion to $1.9 billion in net sales. Let me conclude my remarks by thanking our people for their efforts to remain focused on operating safely and providing excellent service to our customers. I would also like to thank our customers for putting their trust in us and our shareholders for their continued interest. With that, we'll open it up to your questions. Operator: [Operator Instructions] And it looks like our first question today comes from the line of Sean Steuart with TD Cowen. Sean Steuart: Arsen, I want to start with the decision to hold the CUK swing capacity project. I gather, given a pretty strong return profile for that project, this is more around wanting to hit balance sheet targets. Assuming that's correct, can you give us a sense of where you would like to see leverage ratios get to or free cash flow profile for the overall company improved to before you would greenlight that project? Arsen Kitch: Yes. Good question. So you're right. I think it's a good -- it's likely a good project but we're putting that decision on hold. It would take more than 2 years for us to deliver cash flow from this project, which means we'd have to finance it through debt. And right now, we need to prioritize maintaining a strong balance sheet and focusing on running our SBS mills and defending our market share. We said previously, we're targeting a leverage ratio in the 1% to 2% range. EBITDA margins cross cycle 13%, 14%. So we'll revisit this decision later. In today's market environment at today's prices, it is a very attractive return, but we have to revisit it in the future and see what those conditions look like and see if we need to update our assumptions. Sean Steuart: Okay. Understood on that front. And then with respect to your view on the market outlook for SBS, I gather a lot of this is based on what RISI is forecasting in terms of forthcoming capacity closures. According to their forecast, we would need to see those announcements soon. I guess I'm wondering on your perspective of industry willingness to make these -- to take these initiatives to rebalance the market and the extent to which you're seeing any import relief at this point as tariffs take hold and if that's helping at the margin at all? Arsen Kitch: Yes, listen, we're not going to comment on what our competitors may or may not do. You're right, RISI is forecasting a first half net capacity reduction of 350,000 tons. So they're assuming a turn in the market. We're certainly hoping for that, but we're planning for tomorrow looking like today. From an import perspective, it's still a bit early to tell. But as we look at European imports July year-to-date, they're down, I believe, approximately 10%. So I think you're starting to see some cracks in the import balance into North America between a 15% tariff and a weakening dollar, absorbing 20% or 30% of additional costs for an importer into North America, I think, is getting harder and harder. And for domestic customers, I think they're looking for more reliable, stable domestic supply. So we're optimistic that this will be a tailwind for us as we head into 2026. Sean Steuart: Okay. Just one last one, maybe for Sherri. You went through a bunch of 2026 metrics that you're targeting. Do you have an initial view on what the maintenance schedule is going to look like? And I appreciate you're smoothing this out now with a more regular schedule across the mill platform. Can you give us a perspective on the cadence of anticipated closures in 2026? And are we safe to assume that the overall expense that you're targeting would be similar to 2025 levels? Sherri Baker: Yes. So I'll answer the second part first. You should expect the cost to look very similar to what we see in '25. So I would start there. We're still finalizing the schedules for next year, so we'll be able to come out and tell you exactly which facilities and which quarters probably by our February call. And then we'll highlight if there's any overlap in consistencies if we change the quarters. Arsen Kitch: Sean, maybe one more comment on that. We had our Lewiston outage in late Q2. So it was in August with Augusta in October. Doing an outage in the middle of summer is pretty challenging from just a heat perspective. So we are looking at potentially moving out that outage into earlier in the summer, maybe late Q2 just to make it a safer, more manageable outage. So we're still finalizing those details, but that is the potential for us to have the Lewiston outage a bit earlier in the year, which would mean that we would have 2 Lewiston outages within a 12-month period potentially. But we'll share that with you in February. Operator: Our next question comes from the line of Matthew McKellar at RBC. Matthew McKellar: First, shipments in the quarter were solidly ahead of where you sort of guided to. It looks like food service sales are pretty healthy, but could you provide some maybe additional perspective on where you saw the incremental strength versus your expectations as of late July? And if you could provide any other broader commentary around relative strength or weakness you're seeing conditions across liquid packaging, folding carton, food service, that would be great. Arsen Kitch: I think summertime is normal seasonality uptick for food service. We certainly saw some nice strength in food service. And our team is doing a really nice job of competing vigorously in the market and filling out our capacity. I think we've had some optimism from some of our food service customers. I think you may be seeing some import relief helping on things like paper plates that is helping some of our paper plate customers see stronger demand. So I think those are some of the -- I think those are some of the variables that came into play in Q3. Matthew McKellar: Okay. That's great. And I guess just following up on the second part of that, any other comments around kind of weakness you're seeing into Q4 or strength relatively between those kind of product categories? Arsen Kitch: I think Q4 is seasonally a little weaker than Q3, and it's typically in food service. Just the seas of the summer season is over. So we're expecting A little bit of seasonality decline as we head into Q4. And I think, as Sherri mentioned, we'll also see a few percentage points less of production as we head into Q4 versus Q3 that we will have some absorption impact in that, as we stated in the last earnings call, absorption is a meaningful component of our P&L. And if you do the math, it could be upwards of $500 a ton of absorption with production changes. So I think that's part of the reason why Q4 is flat versus Q3 as I think it's -- we'll see some impact of absorption. Matthew McKellar: Okay. And just kind of pulling on that string. It's a fairly large range for guidance on EBITDA in Q4, considering you're through the maintenance. Is it mostly seasonality of demand and maybe energy costs that would take you to the top or the bottom of that range? Do you maybe even see any risks around I guess, the government shutdown and the supplemental nutrition assistance program? What else would you be watching for in terms of variability within that range? Arsen Kitch: I think energy is right. We did bake in some energy into Q4 versus Q3, but it's very much weather dependent. And some of our -- one of our mills at least is more susceptible to bigger swings in energy prices than the other mills just due to its location. So I think part of it is energy, part of it is just production. 1,000 tons of production is worth upwards of $500,000. And for those folks that spend time in paper mills know that 1,000 tons plus or minus in any given week or given month is a rounding error, but it has a pretty substantial impact on our earnings. So I think it's the nature of being a paperboard focused business with 3 mills. Matthew McKellar: Okay. Fair enough. And last for me. Just the working capital improvement of $20 million to $26 million. Can you just share a little bit more about how you plan to achieve that? It sounds like it's mostly inventory, but also the timing of when you'd expect to reach that target? Sherri Baker: Yes. It will be primarily in inventory. I think you'll see us start to work those pieces down in the second half of next year. So that would be the timing of when I would be looking to achieve those estimates. Arsen Kitch: And I think back to the production comment, this year, I think we probably built a little bit of inventory and we'll be reducing inventory next year to free up some working capital. So there will be a trade-off between fixed cost absorption and just cash coming off the balance sheet. So there'll be some trade-off as we head into next year. And we'll provide a bit more context on this in the coming quarters. Operator: [Operator Instructions] All right. Ladies and gentlemen, that does conclude today's call. Thank you so much for joining us today, and you may now disconnect.
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. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Repligen Corporation Earnings Release Third Quarter of 2025. [Operator Instructions] I would now like to turn the call over to Jacob Johnson, VP of Investor Relations. You may begin. Jacob Johnson: Thank you, operator, and welcome, everyone, to our 2025 third quarter report. On this call, we will cover business highlights and financial performance for the 3-month period ended September 30, 2025, and we'll provide financial guidance for the full year 2025. Joining us on the call today are Repligen's President and Chief Executive Officer, Olivier Loeillot; and our Chief Financial Officer, Jason Garland. As a reminder, the forward-looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risks related to our business is included in our quarterly reports on Form 10-Q, our annual report on Form 10-K for the fiscal year ended December 31, 2024, and our current reports, including the Form 8-K that we are filing today and other filings that we make with the Securities and Exchange Commission. Today's comments reflect management's current views, which could change as a result of new information, future events or otherwise. The company does not oblige or commit itself to update forward-looking statements, except as required by law. During this call, we are providing non-GAAP financial results and guidance, unless otherwise noted. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning, which is posted to Repligen's website and on sec.gov. Adjusted non-GAAP figures in today's report include the following: non-COVID and organic revenue and/or revenue growth, cost of goods sold, gross profit and gross margin; operating expenses, including R&D and SG&A, income from operations and operating margin, tax rate on pretax income, net income, diluted earnings per share, EBITDA, adjusted EBITDA and adjusted EBITDA margin. These adjusted financial measures should not be viewed as an alternative to GAAP measures but are intended to best reflect the performance of our ongoing operations. With that, I'll turn the call over to Olivier. Olivier Loeillot: Thank you, Jacob. Good morning, everyone, and welcome to our 2025 third quarter call. We had another outstanding quarter in quarter 3 with 18% organic growth. This quarter, every franchise grew double digits, which is a testament to our differentiated broad portfolio and diversified customer base. Our portfolio of products enables us to sell one of the most comprehensive suite of innovative solutions across the bioprocessing workflow. We saw strength across our extensive customer base as both biopharma and CDMOs grew over 20% and all geographies grew double digits. The continued growth from CDMOs is very encouraging as it reflects the health of the ecosystem. From a franchise perspective, analytics led the way with over 50% growth, including more than 30% growth at CTech, while Filtration grew over 20%. Consumable demand remained very robust with greater than 20% growth in the quarter, while capital equipment had another strong quarter with over 20% growth. The better-than-expected performance in analytics and proteins this quarter underscores that growth opportunities exist across our entire portfolio, driven by our innovation engine. In particular, analytics revenue growth was aided by the launch of SoloVPE PLUS earlier this year. This new generation of at-line protein concentration analytics offers customers increased data collection speed and enhanced sensitivity and reproducibility with a streamlined workflow. This has started to drive an upgrade cycle that will last for several years as we have a sizable installed base. Transitioning to orders. Total company orders grew sequentially for the sixth straight quarter and grew over 20% year-over-year, including double-digit order growth across all of our franchises. With customer ordering patterns back to historical trends, we believe quarterly orders are a less relevant metric and plan to provide less detail around orders going forward. We will remain transparent around the trends we are seeing in our business and within the industry as we have always been. We think our Q3 results highlight the broad strength we are seeing across our franchises, customers and geographies and our 18% organic growth continues to outpace industry growth. In fact, this marks the fourth straight quarter of 14% or better organic non-COVID growth. Both our Q3 and year-to-date overall performance was not based on a single customer or product line, but rather the totality of our portfolio. We think this is a testament to our commercial execution as our team capitalizes on the growth strategies for each of our franchises. As a result, we are again raising the midpoint of our organic growth guidance for 2025. Unpacking our performance by end market, Q3 '25 biopharma revenues grew over 20% year-over-year with broad growth across all biopharma customers. Emerging biotech revenue was at the highest level in nearly 3 years. While we're hesitant to call this a trend as growth benefited from some specific opportunities in the quarter, we are encouraged by the recent funding trends we have seen. CDMO revenues also grew over 20%, driven by outperformance from our larger CDMO customers in the quarter. From a geographical point of view, we saw particular strength in Asia Pacific with approximately 50% growth, while the Americas grew 20% and EMEA was up low double digit. New modalities revenue was consistent with our expectation for a muted back half. We saw growth in cell therapy, while AAV and mRNA trends were fairly consistent with last quarter. Turning to strategy. We mentioned last quarter that digitization is a key pillar of our strategic plan. Our analytics franchise is the foundation of this strategy, so we wanted to expand on this effort and provide more detail on the very strong performance in Q3. Digitization will be a multistep and a multiyear journey. Currently, we enable measurement of protein concentration in downstream processes using our innovative solution from C Technologies, then glucose, lactate and biomass upstream with the acquisition of the 908 bioprocessing assets. With the successful in-line integration of CTech FlowVPX into our downstream TFF systems, we can provide real-time monitoring and process control. These are key enablers of continuous manufacturing, which is still in its early days, particularly in downstream applications. We're actively working to develop additional PAC-enabled solutions. Beyond this, we are looking at opportunities to leverage digital twins to utilize this real-time process data with advanced modeling to optimize process development and manufacturing. As a step in this direction, we announced a partnership with Novasign during the third quarter to integrate our system with Novasign's digital twin capability, starting with our bench scale TFF. We aim to deliver solutions that significantly reduce process development time and cost and support a more efficient and reliable scale-up for our customers. We also saw strong growth in overall service revenue in quarter 3. Services currently represents 5% of our consolidated revenue. We have a particularly high attachment rate in analytics, so we benefit from both new installations and annual maintenance. Commercially, a strong service organization allows us to best serve and delight our customers while bringing us to be closer to them. There is a sizable opportunity for us to grow this business in coming years as we expand our services offerings across our entire capital equipment portfolio. Our strategic account strategy initiative launched 3 years ago is a real success story. We are now covering 20 large pharma and CDMO accounts. The focus of our key account team is to engage with key decision-makers at our customers to better understand their needs while demonstrating the breadth of our capabilities. We are seeing great traction here with more of these customers buying multiple products from Repligen. And as a result, many of these strategic accounts are accretive to our growth. In addition to our strategic account strategy, our commercial team is also incentivized to cross-sell products across the entire portfolio. As it pertains to tariffs, we continue to evaluate opportunities to better leverage our global footprint. We are working to have dual manufacturing for the vast majority of our portfolio by the end of next year. This includes a focus on ensuring we have the right footprint to benefit from capital equipment opportunities in coming years, including potential U.S. onshoring projects. Before I turn the call over to Jason, I'll provide some more detail on our franchise level performance. Filtration revenue grew over 20% in the quarter. Flagship cassettes, fluid management, Flow Path along with ATF, all contributed meaningfully to growth this quarter. We continue to see a long runway of growth in ATF, but we think it's important to highlight that multiple products have been key drivers of year-to-date filtration growth. This highlights the breadth of our filtration franchise, which is our largest and most diverse. In addition, we have a strong backlog for fluid management, so we continue to expect robust growth from this product line in coming quarters. After a record Q2, chromatography revenue grew mid-teens in Q3 as resin mix returned to more normal levels. This was mostly driven by continued strength in large column demand from key CDMOs and pharma accounts globally. Protein revenue grew low double digits in quarter 3, driven by chromatography resin. This franchise outperformed our expectation in the quarter and is an area where we are making additional investments to drive future growth. We have several innovative solutions for the new modality market with our Avitide [indiscernible] assets and for the monoclonal antibody market by our Protein A ligand capabilities. We plan to launch additional innovative solutions across this portfolio in coming years. While it will take some time for this opportunity to grow into more meaningful revenues, we think the investment we are making today will position us well for growth in this higher-margin franchise for years to come. Finally, and as already mentioned, Process Analytics had a standout Q3 with more than 50% growth, including $3 million of revenue from the 908 bioprocessing acquisition and over 30% growth at CTech. This was driven by strength across consumables, equipment and services. With strong orders in the quarter, we are encouraged by the momentum in our analytics franchise. As it relates to the 908 bioprocessing assets, we remain on plan with the integration. To wrap up, while the last several years have been a unique period for the bioprocessing market, we believe the dynamics of this year have created additional opportunities for Repligen. Customers are looking for products that enable them to improve yield and productivity. Our product portfolio and customer centricity have opened a number of doors in recent years, and we believe the results we are seeing this year are a testament to our strategy. We remain focused on capitalizing on our growing funnel. Given the opportunities we see across our portfolio, we will continue to invest as needed to ensure we have the right foundation to support sustainable future growth. This includes planned investment in application labs to better serve our customers with differentiated solutions, investments in technology to increase productivity and investment across our business to ensure we have robust processes and tools to continue to delight customers and scale our growing business. We'll balance these initiatives with a commitment to driving margin expansion over the medium term. We're excited about the customer traction across our business as highlighted by our year-to-date performance, which demonstrates the differentiated nature of Repligen. It also reflects the execution on the 5 strategic priorities we outlined at the beginning of the year. We remain focused on closing out a very strong 2025. Now I'll turn the call over to Jason for the financial highlights. Jason Garland: Thank you, Olivier, and good morning, everyone. Today, we are reporting our financial results for the third quarter of 2025 and providing an update to our financial guidance for the full year. Unless otherwise noted, all financial measures discussed reflect adjusted non-GAAP measures. As shared in our press release this morning, we delivered third quarter revenue of $189 million, a reported year-over-year increase of 22%. This is 18% organic growth, excluding the impact of acquisitions and currency. Acquisitions contributed approximately 2 points of the reported growth, while foreign currency was also a 2-point tailwind. As Olivier offered details on our product franchise performance, I'll provide more color on our regional performance. Starting with quarterly revenue. North America represented approximately 50% of our total, Europe represented 30% and Asia Pacific and the rest of the world represented approximately 20%. Asia Pacific grew nearly 50% year-over-year, driven by Fluid Management, Analytics and ATS. Americas grew 20% with strength across the portfolio and EMEA grew low double digits driven by OPUS and TangenX. After strong orders in Q2, we saw China revenue return to growth in Q3, though not a key driver for the overall strength in Asia Pacific, it was encouraging to see growth even off a low prior year base. We remain optimistic that China will return to growth in 2026, but we still expect China to be slightly down this year as orders declined in the quarter after the order acceleration in Q2. Transitioning to profit and margin. Adjusted gross profit was $101 million, up 28% year-over-year or 25% excluding foreign currency and acquisitions. Adjusted gross margin of 53.3% increased 260 basis points year-over-year and 210 basis points sequentially. The year-over-year increase was driven by volume leverage, price and productivity. The sequential increase benefited primarily from improved mix as Repligen procured resin for OPUS columns were at more normal levels and from revenue growth of proteins in the quarter. This dynamic of gross margin fluctuation being driven by changes in sales mix is to be expected quarter-to-quarter. We are more focused on full year trends. Year-to-date, gross margin is 52.7%, which shows 230 basis points of margin expansion over the same period in the prior year and is in line with our gross margin outlook of 52% to 53% for 2025. FX was a benefit to margin in the quarter, while tariffs remained a slight headwind. Continuing through the P&L, our adjusted income from operations was $27 million in the third quarter, up 16% year-over-year on a reported basis and up about 20%, excluding the impact from foreign currency and M&A. This growth was driven by a $22 million increase in gross profit on higher volume and margin improvement, offset by $18 million higher OpEx. Q3 represented our lowest OpEx quarter last year and growth this quarter included $3 million from M&A, $1 million from foreign currency. It also includes about $2 million of onetime expenses in SG&A that will not repeat in the fourth quarter. The remaining increase includes strategic investments, which we will continue to make to support future growth. Year-to-date, OpEx has grown 14%, excluding the impact of M&A and foreign exchange versus our 16% organic non-COVID revenue growth. This translated to an adjusted operating margin of 14.2%. Margins declined 70 bps year-over-year, largely due to M&A. Our third quarter adjusted EBITDA margin was 19%, a year-over-year decline of 160 basis points, which also included a $1 million headwind from foreign currency transaction losses. Adjusted net income was $26 million, a $2 million year-over-year increase. Higher adjusted operating income was offset by $3 million of lower interest income. Our third quarter adjusted effective tax rate was 17%, which benefited from actions executed within our tax planning strategy. We now expect to see an adjusted effective tax rate between 21% to 22% for the year, about 100 basis points lower than our previous guidance. Adjusted fully diluted earnings per share for the third quarter were $0.46 compared to $0.43 in the same period in 2024. Finally, our cash position at the end of the third quarter was $749 million, up $40 million sequentially from the second quarter. This was driven by incredibly strong operating cash flow performance in the quarter, driven mostly by improved working capital. We are very happy with our strong year-to-date results, delivering above-market revenue growth and margin expansion, which positions us to deliver upon our updated outlook. I'll speak to adjusted financial guidance, but please note that our GAAP to non-GAAP reconciliations for our 2025 guidance are included in the reconciliation tables in today's earnings press release. Our guidance includes tariffs and our latest foreign currency assumptions. As highlighted earlier by Olivier and on the strength of our portfolio, we are increasing the midpoint of our revenue growth guidance as we narrow towards the high end of the guidance range. We now see 14% to 15.5% organic non-COVID growth or 12% to 13.5% organic revenue growth with the midpoint of both increasing 75 basis points from our prior guidance. Our new guidance assumes just over a 1 point tailwind from foreign exchange, while our M&A assumptions are unchanged. Putting this together, we are increasing our 2025 revenue guidance to $729 million to $737 million, up from $715 million to $735 million or an increase of $8 million at the midpoint. To summarize the update clearly, of the $8 million increase, $6 million is due to overall portfolio strength and $2 million is from foreign currency benefit. Our guidance implies 4Q revenue will grow low double digits organically at the midpoint while overcoming the headwind from a gene therapy platform mentioned last quarter. In terms of growth by franchise, we now expect the following reported growth rates: Filtration growth of approximately 10% versus our prior expectation of 10% to 12%. This represents approximately 13.5% non-COVID growth. Chromatography growth of approximately 25% versus our prior estimate of 20%. Proteins growth of 15% to 20% versus 10% to 15% previously. And finally, Analytics will grow north of 30% versus our prior guidance of 25%. This includes the 908 bioprocessing acquisition. We continue to expect adjusted gross margins in the range of 52% to 53%, which represents 210 basis points of year-over-year margin expansion at the midpoint, driven by volume leverage, price and manufacturing productivity, offset primarily by inflation and some 2024 COVID sales drag. We assume a slight headwind from tariff charges, offset by benefit from foreign currency. We expect fourth quarter gross margin to be closer to the second quarter following the impact of sales mix fluctuations discussed earlier. The fourth quarter includes a mix shift to products that are below our corporate average. We now expect our adjusted income from operations to be between $98 million to $100 million. This assumes a roughly 13.5% operating margin. As Olivier mentioned earlier, given the strength and traction we are seeing across our portfolio, we continue to make strategic investments today to support tomorrow's growth. This includes investments in specific product lines and geographies like Asia Pacific. In addition, we continue our Fit for Growth journey, and we'll invest to ensure we have the right infrastructure to deliver on these opportunities for our customers, stakeholders and shareholders. These include investments in operations and support functions. They also include investments in digital capabilities that will help drive efficiencies in the future. We will continue to balance cost efficiency and margin expansion with investments that are critical to support future growth. Continuing through the P&L, we are updating our adjusted other income guidance to $21 million, down from $22 million to $23 million due to lower interest income assumptions, along with some impact from foreign currency. As we explained earlier, our 2025 adjusted effective tax rate expectation is now 21% to 22%, a point lower than our prior guidance. Given these dynamics, we now expect our adjusted fully diluted earnings per share to be between $1.65 and $1.68. Our balance sheet remains strong as we ended the third quarter with $749 million of cash, as mentioned earlier. We will remain prudent in our spending while maintaining flexible dry powder for potential acquisitions. We still expect CapEx to be down 20% to 25% versus 2024 with our spending below pre-COVID levels. As we wrap, we are encouraged by our strong year-to-date results, especially considering the headwinds and new modalities that we overcame. We believe this performance reflects solid execution on our growth strategy and broader portfolio. Olivier and I would like to thank our Repligen teammates for helping us to deliver above-market growth yet again. With that, I will turn the call back to the operator to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Dan Arias with Stifel. Daniel Arias: Olivier, can you maybe just talk about the cadence of order momentum across the quarter and out of the quarter? I mean, obviously, positive industry developments recently. Jason mentioned the China trajectory coming in as maybe a bit of an offset. So how would you sum up purchasing activity here? To what extent does the organic midpoint capture what you're seeing? And then how do you feel like that positions you into next year, just given where expectations seem to be? Olivier Loeillot: Yes. I hope I heard you well enough, Dan. I think you were asking about cadencing of orders in quarter 3 here. So I mean, you've heard like orders went really well for us again in quarter 3. I mean we grew our orders more than 20%, which is the second quarter in a row like our orders are growing more than 20%. In fact, it's sixth quarter in a row that we've seen sequencing order growth. And what I really like among others is every single franchises really grew double digit in the quarter. So -- and then there was no real change between July, August, September. I mean, it was pretty same type of growth during the entire quarter. And then I think I heard a question about what's going on in the industry globally and with a question specifically on China. I mean, yes, we think we are back to really operating that business in a very normal environment. I mean it started with biopharma maybe 1.5 years ago, then CDMOs maybe 3, 4 quarters ago. What was really interesting to see for this quarter was a very nice recovery of small biotech, certainly too early to celebrate, but to see the small biotech business at the highest level for the last 3 years was very encouraging. And then talking about geographies, also very strong across the board. China grew nicely, which was one of the first time for several quarters, grew in terms of sales. Orders were a little bit softer. But as we all know, we're at the beginning of really full -- what we expect to be full recovery, and we do expect to be back to growth in China next year. So that's kind of the overall situation here. Operator: And your next question comes from the line of Dan Leonard with UBS. Daniel Leonard: A lot of moving parts on the margin side. Jason, I was hoping you could better help me reconcile the sales guidance increase versus narrowing your EBIT margin to the bottom end of prior guide. And wondering also if you can make a comment on what's the right level of operating margin expansion for a high teens revenue growth rate in the Repligen model? Jason Garland: Yes. Look, I mean, first, I'd say we're overall happy with our margin performance in the quarter. And to your point as well, seeing the trends in margin expansion. Gross margin, as we highlighted, are going to move a little bit with the mix of business that we have in the quarter. We are quite favorable in 3Q. And when you look more importantly at the year-to-date, we're up 230 basis points. Kind of rolling that down to operating income. In the quarter, we were up about 20% if you exclude the impact of M&A and currency, that's the dollars of operating income versus about 18% of nonorganic. So again, continuing to get some of that leverage. Look, I know for operating margin overall for the year, again, I put it in that same context, if you look at our overall guide, operating income will be up about 25% if you exclude M&A and FX impact on, again, about a 16% non-COVID organic revenue growth. So again, a lot of good leverage there. If you look specifically, okay, why didn't some of the same sales or that sales drop all the way through. We highlighted about $2 million of onetime operating expenses that we saw in the quarter, primarily driven by some leadership changes that we've been making in our Fit for Growth journey. So those -- that is a hit there. A little bit of FX pressure as well. And then finally, again, we will continue to make investments in the infrastructure and as well as in operations to make sure that we have the right way to support future growth. And we're taking really a long view here, Dan, right? It's -- at the total guide, we dropped our EPS by about $0.01, right, when you look at the midpoint. And when we're thinking about that versus the investments we can make today to keep driving future growth, we're taking a really balanced view. Operator: And your next question comes from the line of Matt Larew with William Blair. Matthew Larew: Olivier, maybe following up on Dan's question relative to potential onshoring activity or certainly a pickup in the equipment opportunity over the next couple of years. Obviously, it's still recent since some of the pharma tariff and MFN has come out. But what do you make of any change in cadence or nature of customer conversations? And how would you evaluate Repligen's ability today to potentially participate in larger-scale projects relative to certainly before you joined, but maybe 5 years ago when there was a resurgence in capital equipment related to COVID? Olivier Loeillot: Yes, really good question. Obviously, we're all very encouraged to see a couple of recent announcements that were taking place agreement between those 2 pharma companies and the administration. You nailed it down very well. I mean the big difference for Repligen today versus where we were 2 to 3 years ago. So we have become a real broad actor in the field of hardware solutions, and we are now receiving RFPs for a lot of these big hardware investments that are happening around the world. So obviously, these onshoring projects are going to represent a huge opportunity for all of us in the industry and for us in particular, with our very differentiated hardware portfolio that is, as you know, very well, combined with our PAT technology, which is a huge differentiator. So yes, we are starting to hear more about it. We would expect probably first orders to come towards the second half of 2026 and probably sales from '27, '28 onwards, and we're definitely going to be playing a big role in that exercise here for sure. Operator: And your next question comes from the line of Doug Schenkel with Wolfe Research. Douglas Schenkel: Really just a couple on guidance. So first, as I look back over the past 4 years, recognizing it's been a weird period. But if I just average things, revenue has been, I think, about 9% higher in Q4 versus Q3 on average. I think guidance implies revenue is only about 2% to 3% higher in Q4 this year versus Q3. I'm guessing this is just conservatism given the environment we continue to be in, but there's a lot of positive commentary here. You're coming off a good quarter. It's been a series of good quarters. So I just want to make sure there's no timing dynamics that we should be contemplating. So that's the first question. The second is, in your prepared remarks, I think you noted that we should expect filtration revenue growth at the lower end of the range. And I just want to make sure I heard that right. If so, one, can you delineate between ATF and non-ATF? And two, what does that mean about product mix more broadly? Specifically, are resins tracking stronger than expected? And again, I may have just heard it wrong. Olivier Loeillot: So I think your 2 questions are somewhat linked to each other, so which is going to make it an easier answer here. If you look at seasonality this year, you're absolutely right, like we are seeing much less of it than we were seeing before COVID. And probably with that very strong quarter 3, which is very unusual because we've hardly ever seen a Q3 higher than Q2 in the last 10 to 15 years. I mean this means like, obviously, there will be less seasonality also between Q3 and Q4. And our midpoint -- sorry, our guidance now implies 18% to 13% organic growth in Q4. And keep in mind, we have about 3% headwind coming from that gene therapy customer that was reporting really high sales for us in quarter 4 of last year. So that's really one of the main explanation. And by the way, this is purely filtration, which is why I was saying this is kind of also linked to the second part of your question here. But the other 2 things to take into consideration here as well is the comp was much, much tougher -- is much tougher in quarter 4 than it was in quarter 3 because comp is 9 points more difficult sequentially than it was in quarter 3. So that's another reason why you would imagine indeed that organic growth in Q4 would probably be more towards the 8% to 13% that we just talked about here. And then back to filtration more specifically, we mentioned about that blockbuster ATF project we signed about a year ago. We delivered the hardware towards the end of quarter 3. So this does play a little bit as well of a role why there is a little bit less seasonality between Q3 and Q4 here. Operator: And your next question comes from the line of Puneet Souda with Leerink Partners. Puneet Souda: So I appreciate the momentum you're seeing here now. It seems like 6 quarters of continued order growth even sequentially and the momentum you have here. But just trying to capture that for 2026, I think The Street is close to about 13% organic growth here. Given what you're seeing, is that a sort of right number to think about? And then on the gene therapy side, you pointed out the headwinds for the second half this year. There was some more news on that yesterday, not necessarily that this is an in vivo product, so maybe it doesn't affect you from CRISPR products. But just trying to understand how are you thinking about that piece of the modality overall for you? And how should we expect that to trend in 2026? Olivier Loeillot: Thanks, Puneet. Yes. So starting with the first question, as usual, we'll provide 2026 guidance on our Q4 call as we typically do, meaning towards the end of February. But what we said and obviously, with the order growth we've seen now sequentially indeed for the last 6 quarters and being, again, growing more than 20% year-over-year, we were obviously very pleased with the situation we're expecting this year, and we are still aiming to outpace industry growth by 5% over the medium term. So this year, we're probably going to be a bit higher than that 5%. We know that next year, indeed, we'll have a 200 basis point headwind from that specific gene therapy customer. So that's where we are. But again, we're going to give guidance really end of February. And then in terms of new modality, I mean, it's really playing out pretty much as we expected so far this year. I mean -- and this is where the beauty of having a very diversified portfolio with more than 80% of our product going into monoclonal antibodies is a perfect sign of us being able to grow somewhere if for whatever reason, we've got headwind somewhere else. But outside of that specific gene therapy project, I mean, we've been experiencing a pretty good year. I mean -- and yes, sometimes you get some bad news on one specific program, but then you're getting a couple of great news on some other programs. And even on the gene therapy side, beyond that specific program, there have been several announcements made over the last few months of significant funding of some of these programs, and we are enjoying great opportunities with those different programs. So what we've been doing really well this year, among others is to diversify our focus on all the type of new modalities. And indeed, we've been a bit heavier on cell therapy and also on antibody drug conjugate since the beginning of this year, and we've had numerous successes on both sides, which is something we're also very happy about here. Operator: And your next question comes from the line of Mac Etoch with Stephens Inc. Steven Etoch: Maybe just a few for me. But as you look towards your geographical performance, specifically Asia Pacific, up 50% this quarter. Maybe I'd like to get a sense of how your recent investments in the region are trending? What variables are driving that performance? And then given the long-term strategic focus here, do you intend on investing additional resources in the region? Olivier Loeillot: Yes, great question. I mean Asia Pac is representing approximately 15% of our sales on a full year basis, which is definitely too low. I mean we know if you look at the benchmark from competition is anywhere between 20% and 25%. So being of this year, we all realize we have to start investing much more into the region. And it's really -- I like to separate China from the rest of Asia Pac because China has been a very specific market. So we decided to onboard a global leader for all of Asia, but also a new leader for China. And we are really in the middle of implementing a pretty new and unique strategy on both sides. And without entering into details for China, really, it's about rebuilding our team and also making sure we now tackle the much stronger local competition that exists today versus what was the situation before COVID, where on the other side, on the rest of Asia, it's really about building infrastructure. And I say infrastructure is from the different part of our business organization, but also adding more people on the field to be able to deal more directly with customers where in some of these geographies, we are mostly going through distributors still. So the 2 strategies we are developing are pretty different. We are enjoying very nice growth for already several quarters outside of China. It's pretty good to see China being back to growth in terms of sales this quarter, but we still have a lot of homework to do down there. And yes, you're right, investment is on the list. We just literally opened our office -- first office in Singapore, yesterday. We're opening a new office in Japan in the next couple of weeks, and we are looking at some further investments across all of Asia over the next few quarters. Operator: And your next question comes from the line of Casey Woodring with JPMorgan. Casey Woodring: I wanted to follow up on some of the ATF comments. So you said you delivered hardware for the second blockbuster towards the end of 3Q. Just want to understand if you would expect revenue to fall in 4Q or in 1, '26 -- 1Q '26 there. And then my second question would just be, you called out emerging biotech revenue was the highest level you've seen in 3 years. Just talk towards trends there in terms of orders. You said you didn't really want to call out a trend there, but obviously, significant improvement. So just any further color there. Olivier Loeillot: Yes. No, on ATF, I'll start with the blockbuster first. Yes. So the answer is we don't know yet for sure here, Casey. I mean we are -- we have now delivered the equipment now it's going to be about how long it takes them to really commission the line and have it up and running. And then depending from one customer to the other, they might decide to buy consumable earlier or later. So at this stage, we just don't know. I wouldn't think it's going to come as early as quarter 4, but maybe sometime mid of next year or so would sound like a reasonable time frame. And just before I move to small biotech, maybe just to add about ATF, because I know everybody is very focused on that specific blockbuster. We continue to win a lot of late-stage commercial customers. And we have a really very diversified customer base on ATF. I mean we are probably designing in more than 50 late-stage and commercial drugs today. And every quarter, we are winning more. So we've got a really long runway for growth on ATF which is very well supported by the order trends we've seen in the last few quarters. And then going to small biotech, that was really the great surprise of the quarter. I mean, obviously, it's not a big part of our sales. It's less than 10%. But to see it rebounding as much as we have seen it rebounding in quarter 3 was a really good surprise. And we obviously connect the dot immediately with biotech funding, where biotech funding went from USD 9 billion in quarter 2 to USD 13 billion in quarter 3. So we've seen finally some turnaround in terms of biotech funding. I would like to pair it as well to a lot of M&A activities. You've seen a lot of pharma company acquiring some of these small midsized biotech company over the last 2 quarters. I think that's also going to be a tailwind for the industry because that means probably more cash to be able to accelerate on some of these very promising early phase projects, which we are very, very eager to see progressing. So that's another factor that we are very happy to see happening right now here. Operator: And your next question comes from the line of Daniel Markowitz with Evercore ISI. Daniel Markowitz: I had a quick 2-parter. First, I wanted to ask on the equipment strength. It was another quarter of really strong results, especially when you compare versus peers. I know there were some ATF equipment placements. Is that what explains the better equipment trends versus peers? Or would you say it's more broad-based across different product lines as well? And then the second part related, can you just remind us roughly the revenue contribution from these placements in 3Q? And as we look forward to 2026, how should we think about the consumable pull-through and what this means for broader momentum in the ATF product line? Olivier Loeillot: Yes. So I will spend more time on the first question because I won't answer the second one. So just, I mean, our capital equipment performance was obviously very encouraging. I mean our revenue grew more than 20%, but our orders also grew high teens in the quarter. So we were very happy about that. You're right, the main contributors of growth in quarter 3 were both ATF, but also our analytical equipment. So -- but honestly, the performance so far this year is really across the board. I mean -- so maybe in quarter 3, downstream hardware was a little bit lower than both ATF and analytics. But year-to-date, it's really across the board that our orders have been doing really well, including downstream hardware as well. I'd like to repeat like we are seeing that hardware market from a very different angle than others. First of all, we are very small. I mean we are one of the newcomer in the field. I mean, almost now where we are today 2 years, 3 years ago or so. So we are seeing it definitely from a different angle. But also keep in mind where we are differentiating ourselves a lot is that now we are also pairing our system with our PAT technologies. And so far this year for downstream, 1 system out of 4 is now being paired with our PAT technologies. In fact, customers who bought hardware from competitors in the last few years are now coming to us asking us to enable them to get access to our PAT technologies as well. But it's fair to say like peer, we haven't seen capital equipment spending return to historical level yet globally. So that's why I think all of us are very excited to see those onshoring projects coming in the next couple of years because that should accelerate overall market growth and for us be an extra opportunity to even grow further and faster than we do right now. And then as far as the specific ATF project is concerned, I won't give any specific numbers, but it's only really a small part of the reason why we saw that very nice growth in the quarter. So it's not -- it wouldn't have changed the overall picture like hardware performed very well for us in quarter 3. Operator: And your next question comes from the line of Brendan Smith with TD Cowen. Brendan Smith: Congrats [on the quarter], good to see. So I actually wanted to just follow up quickly on some of the process analytics commentary and specifically what you've actually said reclaim about integrating the MAVERICK device from 908 into ATF, for example. Can you maybe just give us a little bit more color on where some of that stands? Maybe just thoughts on timing to that and to what extent that may be playing into how you're thinking about growth opportunities across the franchises, whether or not that kind of works out as expected? Olivier Loeillot: Yes, obviously, you heard us talking a lot about analytics. I mean, again, because it's a perfect showcase of the breadth of the portfolio we have. But really, I have to say this year, one of the most important launch we had was the SoloVPE PLUS, which is a real new generation of our at-line protein concentration piece of hardware. And in quarter 3, this has just enabled us to sell the highest amount of units we've ever sold in the history of CTech. And what's very encouraging is we have a very, very important installed base, and it's probably only less than a couple of portions of that installed base that has been upgraded to the new SoloVPE PLUS. So you would think like this is going to be a real big tailwind for us for the next several years here, which we are very excited about. And then the only other stuff I would add on the CTech side is the first 2 quarters where we saw a huge rebound on both consumable and services as well. And then we will start to have a lot of focus on services with the successes we are seeing here. But it was great to see hardware now being back to this very high growth that we are expecting and with a very strong funnel. As far as the 908 is concerned, I mean, the integration is running as expected. So we've merged now the 2 sales organization, and we start to see a really nice growing funnel for the 908 part of the portfolio. And yes, we are progressing on the R&D side to combine ATF with MAVERICK. So you'll hear us talking more about it in a quarter from now. But at this stage, it looks absolutely promising. Operator: And your next question comes from the line of Anna Snopkowski with KeyBanc Capital Markets. Anna Snopkowski: Congrats on the quarter. This is Anna on for Paul Knight, and I have 2 questions. So maybe first, I think at recent conferences in your last quarter, you mentioned strength in CD and maybe more muted activity with those midsized CDMOs. So I was wondering if we could get an update around midsized CDMOs and if you're seeing activity progressing there? And then my second question is on the protein side. I was wondering how the recent launches have been for your own resins. And I think you mentioned some launching in the second half of this year. So maybe an update there. Olivier Loeillot: Yes. No, I mean, on CDMOs, again, a really great quarter for us, both from a sales and an order point of view. We did mention like the strength was particularly visible on the large-scale CDMOs. So I have to tell you, openly, I didn't really specifically look at the midsized ones, so I can't answer you very specifically. But I know this quarter, really large-scale CDMOs were the one driving that more than 20% growth we had on the CDMO side. As far as protein is concerned, that was really one of the great surprise in the quarter because we expected protein growth to be pretty muted in quarter 3. And in fact, it grew double digits. And for me, that was a great testimony of a very successful strategy that we started developing now 2 to 3 years ago, where we had to switch from being a pure OEM partner delivering protein ligands to start developing custom ligand and custom resin with the acquisition of Tantti Lab. And I mean, the traction we're having on that side is absolutely great. I mean the reason why we delivered more than expected in quarter 3 on the protein side was because of chromatography resins. We know that's a business that can still be lumpy from quarter-to-quarter, but we are working on so many custom projects right now, like we know that's going to become a huge tailwind for us over the next several years. And just to close on product launches, yes, we are still aiming to launch 2 to 3 new resin before the end of this year, and then we're going to make this announcement probably in the next couple of months now. But we are also having a pretty ambitious plan to launch several new resins in 2026. So we really want to have both a broader catalog of products for new modalities, but also working more and more on custom projects on different type of applications for big pharma customers as well here. Operator: And your next question comes from the line of Tom DeBourcy with Nephron Research. Tom DeBourcy: You mentioned the strategic accounts and 20 key CDMO and pharma accounts. I just was wondering what trends in particular, you're seeing at those accounts? Are you seeing similar strong equipment growth? And anything that, I guess, maybe differentiates those larger strategic accounts versus, I guess, the portfolio as a whole? Olivier Loeillot: Tom, great question. I mean strategic accounts have been an incredible success story for us, I have to say. I mean it has really enabled us to really cross-sell our portfolio better and better. And equipment that you just mentioned is a perfect example. I mean these accounts didn't really have a clue about what our capabilities were in terms of hardware probably a couple of years ago. They knew us for ATF. They knew us for prepack column. Now I mean, the vast majority of these people now have either bought a couple of pieces of equipment, if not more than that, or at least had a chance to get trained on how to use our equipment and are sending us RFPs for the big expansion they are working on. But across the board, the strategic accounts have been really, really accretive to growth both from a top line and from an order point of view as well on the quarter. So we are really delighted by the successes we've had. And I know we mentioned several times for a company like ours, which is very focused on innovation, we absolutely need to get access to the key decision makers, and this is what this team of key account management has brought us over the last couple of years. So really delighted about the progress here. Operator: And your next question comes from the line of Luke Sergott with Barclays. Luke Sergott: So I wanted to talk about the order between the new modalities versus the mAbs, especially as we're thinking into next year. And then for a second question, I want to think about, all right, if you guys are doing about 13% core and given the -- all the moving pieces from investments and M&A and FX and tariffs, like should we think about margin expansion opportunity next year, something like between like 100 and 150 basis points versus something north of that in a more normalized environment? Olivier Loeillot: Sorry, what was the first question? Luke Sergott: Orders for new modalities versus mAbs. Olivier Loeillot: Yes. No, I mean new modalities, I think we mentioned earlier, new modality really played out pretty much as expected in quarter 3. I mean, meaning we expected muted demand, and that's more or less what we experienced. But obviously, we've got now a significant headwind in the second half of this year because of that gene therapy program. Outside of that one, I mean, we've been doing pretty well. I mean, year-to-date sales are growing mid-single digit. And year-to-date revenue of new modality is about 17% of our total portfolio. So it's down a little bit versus last year, but still pretty much on par. And then in terms of margin, I'll let Jason comment here. Jason Garland: Yes. And again, we'll provide more guidance in our 4Q call as we normally do. But again, I'd expect our gross margin to continue to expand at the rate that we've been talking about, and then we'll drive to get additional operating leverage at the EBIT level as well. So again, with this constant balance of driving margin expansion while investing for the growth that we see ahead of us. So I think a well-rounded view on that. Operator: And your next question comes from the line of Brandon Couillard with Wells Fargo. Brandon Couillard: Jason, just real quick. Could you quantify what's embedded in the guide for net pricing this year? And just kind of quantify the tariff surcharges and whether or not those may or may not recur in '26? Jason Garland: Yes. Price has been pretty consistent at this low single digit. We've seen that through the year and expect that to wrap up in 4Q as well embedded in the overall guide and really kind of see that as we move forward. For tariffs, again, minimal impact in '25, a couple of million or so from a surcharge side in terms of, hey, I see the sales, but I'm going to have an equal amount of cost. And again, from what we see today, I don't think that changes much next year. Every day, we see new headlines. So we'll continue to watch that, but still see a little bit of, I'll say, marginal dilution at the profit level with tariffs as surcharges will remain. Operator: And I would now like to turn the call back over to Olivier Loeillot. Olivier Loeillot: Well, many thanks for joining our call today. I really want to congratulate our Repligen team for executing brilliantly in the quarter 3. We are really looking forward to meeting you all at upcoming conference. Have a great day today. Operator: And this concludes today's conference call. You may now disconnect.
Operator: Good afternoon, everyone. Welcome to Ares Capital Corporation's Third Quarter Ended September 30, 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded on Tuesday, October 28, 2025. I will now turn the call over to Mr. John Stilmar, a partner on Ares Public Markets Investor Relations team. Please go ahead, sir. John Stilmar: Great. Thank you, and good afternoon, everyone. Let me start with some important reminders. Comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and results of operations. A reconciliation of GAAP net income per share, the most directly comparable GAAP financial measure to core EPS can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information discussed on this conference call and the accompanying slide presentation, including information relating to portfolio companies, was derived from third-party sources and has not been independently verified. And accordingly, the company makes no representation or warranties with respect to this information. The company's third quarter ended September 30, 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Third Quarter 2025 Earnings Presentation link of the homepage of the Investor Resources section of our web page. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I will now turn the call over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort? Kort Schnabel: Thanks, John, and hello, everyone, and thanks for joining our earnings call today. I'm joined by Jim Miller, our President; Jana Markowicz, our Chief Operating Officer; Scott Lem, our Chief Financial Officer; and other members of the management team who will be available during our Q&A session. I'd like to start by highlighting our third quarter results, and we'll follow that with some thoughts on current market conditions and our positioning. This morning, we reported strong third quarter results with stable core earnings of $0.50 per share, exceeding our regular quarterly dividend and generating an annualized return on equity of 10%. GAAP earnings of $0.57 per share increased almost 10% sequentially and included robust net realized gains from the exit of a previously restructured portfolio company as well as several equity co-investments. These outcomes led to another quarter of NAV growth, marking the ninth NAV increase in the past 10 quarters and underscoring our position as one of the few BDCs with consistent and growing dividends and cumulative NAV per share growth over the last 10 years. Let me start with our views on the market environment and how we are positioned. New issue transaction volumes are returning to a more normalized pace, driven by greater clarity on tariffs and the direction of short-term interest rates and narrowing bid-ask spreads on buyouts. With this healthier market backdrop, we saw a noticeable acceleration in the volume of transactions under review, both sequentially and compared to the prior year, with more deals reviewed in September than in any month this year. We also received an increase in requests from advisers who are running sale processes and looking for our indicative terms and pricing. Amid a firming market for M&A and Ares's leading presence in U.S. and global direct lending, we reviewed more than $875 billion in estimated transactions over the last 12 months, which was a record for us and supports our view that the market continues to expand. As a reminder, we view our origination scale, which enables us to be highly selective as a critical driver of our long-term credit performance. The breadth of our origination platform provides the opportunity to pass on transactions when we cannot find acceptable documentation, terms or pricing. Our scale and sector specialization enhances our market knowledge and underwriting capabilities while also providing us a real-time view of relative value in the market. These factors contributed to net deployment for ARCC of $1.3 billion in the third quarter, more than double the prior quarter, while remaining highly selective on the transactions we pursued. Our focus on investing in the highest quality credits continues to support strong fundamental credit metrics. The last 12 months organic EBITDA growth for our portfolio companies remains in the low double digits, which is well in excess of market growth rates. Our interest coverage increased further to over 2x and weighted average loan to values continue to be in the low 40% range. Our strong credit quality is also evidenced by our declining nonaccruals on a quarter-over-quarter basis, along with net realized and unrealized gains and growth in NAV per share for the third quarter. We also take comfort in our portfolio's focus on domestic service-oriented businesses, which mitigates risks associated with tariffs, shifts in government spending and other recent policy changes. Our third quarter net realized gains reinforced our long-term track record of generating over $1 billion of net realized gains in excess of realized losses since our inception over 2 decades ago. Our differentiated results stem from our extensive origination capabilities, allowing for selectivity and strong underwriting as well as our large and experienced portfolio management team, which focuses not just on minimizing losses, but also on maximizing returns when situations don't go as planned. We also benefit from our deliberate equity co-investment strategy that has generated attractive returns over time. Our third quarter results illustrate the value we provide to our shareholders from realized equity gains. Most notably, we recognized a $262 million realized gain on the sale of Potomac Energy Center, a previously underperforming investment that was on nonaccrual in the past and was then restructured and ultimately owned by ARCC. With the restructuring of Potomac's balance sheet, the incremental capital we invested, our proactive management of the company and patience, we were able to achieve an IRR of approximately 15% on our investment rather than incurring a loss. We also generated net realized gains from the exit of 3 equity co-investments, generating over $30 million in realized proceeds and representing a 2.5x multiple on our original invested capital and an average gross IRR in excess of 30%. This supports our track record of generating an average gross IRR on our equity co-investment portfolio that was more than double the S&P 500 total return over the last 10 years. Collectively, our net realized gain performance, both this quarter and cumulatively underscores the strength of our investment strategy and deep portfolio management capabilities that drive differentiated results for our investors. As I noted earlier, we believe our portfolio remains healthy and demonstrates solid underlying credit trends. With respect to risks recently in the headlines, we have no exposure to First Brands or Tricolor nor do we have any exposure to non-prime consumer finance firms like Tricolor. Following the recent events at First Brands, we have been asked about whether our portfolio companies use receivables financing and if such financing poses any hidden risks for us. We do not believe there are hidden risks in our portfolio from the small number of portfolio companies that may use receivables financing. Additionally, as part of a normal ordinary course business practice, our team thoroughly diligences any receivables financing arrangement, along with vetting the broader capital structure of the business during the underwriting process. If such financing remains in place post close, it is typically subject to strict parameters and is monitored during the life of our investment. These structural safeguards are a core part of our documentation standards and in our view, represent one of the strengths in our documentation, especially in comparison to the broadly syndicated market. Like First Brands and Tricolor, another topic that has been in the headlines recently is software and the potential risks posed by AI. Let me make a few comments on how we have carefully constructed our software portfolio over 2 decades of investing in this sector and why we believe AI is much more of an opportunity than a risk for our software borrowers. As a starting point, our software loans are financed at what we believe are conservative leverage levels with an average loan-to-value ratio of only 36% and none of our software loans are currently on nonaccrual. Our focus is on financing large, market-leading and well-capitalized software companies with strong growth prospects. As an example, our software portfolio companies have a weighted average EBITDA of over $350 million, and they continue to demonstrate strong double-digit EBITDA growth over the last 12 months. Our borrowers are generally backed by leading sponsors in the software industry who not only have substantial capital resources, but are also proactively investing in their platforms to embrace the changes and potential prompted by AI. While we believe AI excels at analyzing data and generating high-quality content, it typically does not provide the foundational infrastructure required for critical business operations or systems of record. These functions still rely heavily on traditional software systems that can securely store data and facilitate complex transactions. We have, therefore, historically focused almost entirely on financing software companies that operate B2B platforms and typically serve highly regulated industries, leverage proprietary data or deliver repeatable, consistent results core to business operations. Importantly, these companies are deeply embedded within customer operations and also benefit from high switching costs given the risk of business disruption from moving to alternative vendors, which, in our view, provides additional layers of durability and resilience against potential AI disruption. While we believe AI poses minimal risk to our software loans, advancements in AI remain an important component to future value creation for these businesses. For example, insights generated by AI can enhance these foundational systems by improving analytics, user experience and operational efficiencies while serving as a valuable complement and not typically a replacement for mission-critical software. Importantly, these views reflect Ares's ongoing collaboration among our highly experienced software investment team, our in-house software analysts and Ares' in-house AI experts at BootstrapLabs, a leading AI-focused venture capital investment team that joined the Ares platform a few years ago. We leverage our entire platform to drive credit decisions on each software transaction we consider as well as in our quarterly valuation and risk assessment processes led by our portfolio management team. Now before turning the call over to Scott, let me address our outlook on our future earnings potential and dividend levels in light of market expectations for further declines in short-term interest rates. We believe there are distinct competitive and financial factors that position ARCC to maintain its current dividend level for the foreseeable future despite the potential headwinds to earnings posed by lower short-term interest rates. As a starting point, in the third quarter of 2025, our core earnings continued to exceed our dividend. Second, during the last period of rising short-term interest rates in 2022 to '23, we intentionally set our dividend at a level equivalent to a 9% to 10% ROE, which is a level we have historically achieved through different interest rate cycles over the last 20 years. We set the dividend at this level because we believe we can sustain this level of profitability through market cycles. The third point worth highlighting on this topic is what we view as our unique financial position with multiple levers to expand earnings or offset headwinds solely from falling market rates. Notably, our balance sheet leverage remains around 1x, which is well below the upper end of our target range of 1.25x, giving us ample flexibility to drive higher earnings by supporting prudent growth using our efficient sources of capital. We also believe there is growth potential to capitalize on higher-yielding opportunities within our 30% nonqualifying asset basket, including through strategic investments like Ivy Hill and SDLP. Additionally, given the prospects for a more active environment alongside our origination scale, we believe there is potential for increased velocity of capital, which could drive additional capital structuring fees to further support our earnings. Lastly, the historical strength of our earnings and credit performance has provided us with $1.26 per share in spillover income, which is equivalent to more than 2 quarters of our current dividends. We believe this level of spillover income gives further visibility to our investors since it provides a cushion to support our quarterly dividends in the event of temporary shortfalls in our quarterly earnings. In summary, we had a strong quarter with healthy credit performance and financial results that demonstrate our enduring competitive advantages. And with that, I'll turn the call over to Scott to walk us through our financial results and the continued progress we're making on our strong balance sheet. Scott Lem: Thanks, Kort. This morning, we reported GAAP net income per share of $0.57 for the third quarter of 2025 compared to $0.52 in the prior quarter and $0.62 in the third quarter of 2024. We also reported core earnings per share of $0.50 compared to $0.50 in the prior quarter and $0.58 for the same period a year ago. This is the 20th consecutive quarter of our core earnings exceeding our regular dividend, demonstrating our ability to consistently cover our dividends. Drilling a bit more into the net realized gains that Kort highlighted earlier, we generated $247 million of net realized gains on investments during the third quarter, which represents our second highest net realized gain quarter since our inception and brings our cumulative net realized gains on investments since inception to approximately $1.1 billion. Similar to last quarter, we incurred capital gains taxes related to certain of the net realized gains, which amounted to $72 million in the third quarter. While we do not typically pay taxes on the annual income we generate, we occasionally incur taxes on certain gross realized gains. Even net of these taxes, our net realized gains on investments remained a healthy $175 million for the third quarter. Turning to the balance sheet. Our total portfolio at fair value at the end of the quarter was $28.7 billion, which increased from $27.9 billion at the end of the second quarter and $25.9 billion a year ago. Shifting to our funding and capital position. We have remained active in adding capacity, extending our debt maturities and reducing costs in our committed facilities. In July, we added nearly $500 million of additional capacity across our credit facilities. We also reduced the drawn spreads on 2 of our credit facilities by 20 basis points each to 180 basis points over SOFR and extended the maturities on both to July 2030. We continue to benefit from our long-standing banking relationships, which are supported by our scale as well as our long-term track record through cycles. The significant diversification of our overall portfolio also has direct benefits for our credit facilities, enhancing the attractiveness of the collateral pool that supports the facilities. For context, our asset-based bank credit facility advance rates are generally similar to the AA-rated tranche of a typical middle market CLO. It is important to highlight that a AA middle market CLO tranche has never defaulted. With this low level of risk, the current bank capital framework supports a return on capital for our banks that is significantly more attractive than if the banks held the individual loans directly on their own balance sheets. Beyond the systemic benefits that this type of lending provides, the banking system as a whole, the strength of our relationships and economics that we can provide to our banks further strengthens our ability to be an investor through all cycles. In addition to our continued engagement with our banking partners, we also further expanded our nonbank capital sources in September by issuing $650 million of unsecured notes priced at 5.1% and maturing in January 2031. These notes were issued at a spread inside of our previous notes issuance in June. Consistent with our recent offerings, we swapped this issuance to floating rate, therefore, positioning our funding costs to decrease with expected declines in SOFR. As a reminder, ARCC remains the highest rated BDC across the 3 major rating agencies. In addition to the strategic advantages embedded in our funding, our overall liquidity position remains strong, totaling $6.2 billion, including available cash. In terms of our leverage, we ended the first quarter with a debt-to-equity ratio net of available cash of 1.02x. We believe our significant amount of dry powder positions us well to actively support both our existing and new portfolio companies. Finally, our fourth quarter 2025 dividend of $0.48 per share is payable on December 30 to stockholders of record on December 15. ARCC has been paying stable or increasing regular quarterly dividends for 65 consecutive quarters. In terms of our taxable income spillover, we finalized our 2024 tax returns and determined that we carried forward $878 million or $1.26 per share available for distribution to stockholders in 2025. As Kort stated, we believe our meaningful taxable income spillover provides further support for the long-term stability of our dividends and continues to be one of our significant differentiators. I will now turn the call over to Jim to walk through our investment activities. James Miller: Thank you, Scott. I will now provide some additional details on our investment activity, our portfolio performance and our positioning. In the third quarter, our team originated over $3.9 billion in new investment commitments, an increase of more than 50% from the previous quarter. About half of our originations supported M&A-driven transactions such as LBOs and add-on acquisitions, which highlights our ability to benefit from the early signs of a more active and M&A-driven market environment. Further reflecting this broader trend of growing M&A, approximately 60% of our third quarter originations were with new borrowers, a shift from the past few quarters where the majority of our originations were from incumbent borrowers. We believe the shift reflected an influx of high-quality companies coming to market in the early part of a potential M&A cycle. Our origination activity continues to underscore our broad market coverage. About 1/4 of our new investments were made in companies with EBITDA below $50 million, which highlights our strong presence in the core middle market and lower middle market as well as the more visible upper middle market. On the upper end of the market, we led the $5.5 billion financing for the take-private transaction of Dun & Bradstreet, the largest private credit LBO recorded to date. This well-established, high-quality company with strong recurring cash flows chose Ares to lead their financing as an alternative to the syndicated markets due to our flexibility and execution certainty. Alongside this increased activity, our credit spreads remained stable. Our new first lien commitments in the third quarter were completed at spreads that were consistent with the prior quarter and actually 20 basis points higher than the prior 12-month average. We achieved these pricing results with attractive risk profiles as well as the spread per unit of leverage on first lien loans completed in the third quarter was the highest in more than a year. Our broad origination team and flexible approach continue to drive our ability to source opportunities with differentiated yield profiles, including the selective use of PIK preferred investments. In the third quarter, we generated an IRR in excess of 20% on the exit of 3 preferred PIK investments. These PIK preferred securities are invested in large established companies with an average EBITDA of roughly $480 million. Our PIK preferred investments have a low double-digit fixed rate yield and implied loan-to-value ratios in the 50% to 60% range. On average, we value these investments at 98% of cost at the end of the third quarter. Reflecting a more active market environment, we experienced increased repayments through change of control transactions, including from investments that were accruing PIK income. As a result, and as disclosed in our cash flow statement, these full repayments generated PIK collections that were actually greater than the aggregate amount of PIK income we accrued for the third quarter. Shifting to our portfolio. Our $28.7 billion portfolio at fair value increased nearly 3% quarter-over-quarter and over 10% year-over-year, further underscoring the extent of our origination scale at ARCC, even during the slower transaction environment experienced in the market over the past year. Our portfolio continues to be highly diversified across 587 companies and 25 different industries. This means that a single investment accounts for just 0.2% of the portfolio on average and our largest investment in any single company, excluding our investments in SDLP and Ivy Hill is less than 2% of the portfolio. We believe our emphasis on portfolio diversification and industry selection reduces the frequency and impact of negative credit events on the company. As Kort mentioned, the credit quality of our portfolio continued to demonstrate strength and resilience in the quarter. Our nonaccruals at cost ended the quarter at 1.8%, down 20 basis points from the prior quarter. This remains well below our 2.8% historical average since the great financial crisis and the BDC industry historical average of 3.8% over the same time frame. Our nonaccrual rate at fair value also decreased by 20 basis points to 1%. Finally, on credit, our Grade 1 and 2 investments representing our lowest 2 rating buckets in the aggregate declined from 4.5% to 3.6% of the portfolio at fair value quarter-over-quarter and our portfolio companies' average leverage levels and interest coverage ratios both improved when compared to last quarter and the prior year. The health of our portfolio is also reflected in the profitability and growth profile of our borrowers. In the third quarter, the weighted average organic LTM EBITDA growth of our portfolio companies was again over 10%. Importantly, this EBITDA growth rate was more than double that of the broadly syndicated market based on a second quarter analysis done by JPMorgan. Additionally, both our sponsored and nonsponsored companies are growing EBITDA at consistent rates. As a reminder, we believe our industry specialization has allowed us to further penetrate the nonsponsored market as well as service the sponsored market in a differentiated way. Further to my earlier point on our extensive market coverage and its role in attracting strong, high-performing companies within the middle market, we continue to see healthy growth across the lower core and upper middle market segments of our portfolio. Importantly, size is not a distinguishing factor of performance in our portfolio as companies with EBITDA of less than $25 million had EBITDA growth that was modestly higher than the rest of our portfolio. Looking ahead, we are seeing healthy transaction activity levels so far in the fourth quarter. Our total commitments for the fourth quarter to date through October 23, 2025, were $735 million, and our backlog reached a new record of $3 billion as of October 23, 2025. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close or we may sell a portion of these investments post closing. In closing, our strong earnings this quarter are underpinned by many durable advantages that we believe continue to drive differentiated results for our investors. In today's environment, we remain focused on leveraging our origination scale to see as wide an opportunity set as possible, maintaining our rigorous credit standards, negotiating appropriate documentation and being highly selective around deal flow. We remain confident that sticking to our long-standing principles will support our ability to continue to capitalize on new opportunities and build on our track record of strong performance. We are proud that our declared fourth quarter dividend of $0.48 per share extends a record of over 16 straight years of stable or increasing regular dividends for our shareholders. As always, we appreciate you joining today, and we look forward to speaking with you in the future. With that, operator, please open the line for questions. Operator: [Operator Instructions]. Additionally, the Investor Relations team will be available to address any further questions at the conclusion of today's call. With that, we'll go first this afternoon to Finian O'Shea with Wells Fargo. Finian O'Shea: Kort, I just want to hit on a couple of your inputs on dividend coverage. One, with the sort of traditional levers, more on-balance sheet leverage, more perhaps junior or alpha laden opportunities. Can you remind us if on an allocable capital framework, ARCC is different to have more of this stuff tilt toward it versus ACIF as the market opens up for this kind of opportunity? Or should the 2 vehicles continue to become essentially the same going forward? Kort Schnabel: Yes. Thanks, Fin. Yes, both vehicles will get allocated any kind of deal based on the available capital math, and that is an allocation policy that we've had in place for a very long time and has not changed. Obviously, those types of transactions have been more muted of late, but I do think as we see overall transaction activity increase and in particular, changes in control activity and even potentially as rates do decline further, that hopefully will create more junior capital opportunities. We've seen that be a product of those kinds of trends in the past. And ARCC will certainly get its fair share of those transactions. Finian O'Shea: I appreciate that. And just to be clear, like that -- maybe I could have worded it better. That math is the same overall for a percentage of allocation to the more junior or plus 700 or sports equity and so forth? Scott Lem: Yes. I would also just say that ACIF has a different yield profile than ARCC. So that's also part of the decision-making in terms of the assets that may go into those funds as well. Kort Schnabel: But yes, if you're talking about different types of assets, whether it's sports and media or infrastructure assets or any kind of assets, it's all based on mandate of the fund, of which ARCC obviously has an extremely diverse and flexible mandate and then available capital. And so that's how those deals get allocated. And ARCC, obviously, being our most flexible vehicle gets a sliver, gets a piece of almost everything we do. Finian O'Shea: I appreciate that. And if I could do one on the spillover component. Can you give us color on how big of an input that would be to support the base dividend? Would you run it all the way down before cutting the base dividend or halfway down? Is there sort of a target or threshold there as to how much support that would be? And that's all for me. Kort Schnabel: Yes, Fin, I mean, I don't -- look, first of all, we have a lot of confidence as we talked about in prepared remarks of covering the dividend in the foreseeable future. And we're running lots of different modeling scenarios, including base rate declines as forecasted in the curve or further declines, all different kinds of scenarios, obviously, liability costs. And we just feel very confident. So I don't know that I really want to speculate in terms of where we would be in the instance well into the future that, that doesn't hold up. But I think the reason why we talk about the spillover income is because it does provide additional stability to the dividend if needed, if core earnings temporarily drops below the dividend level. We have rarely seen that in the course of our history. But the amount of spillover hopefully just provides a lot of comfort for shareholders. But I don't think it's worth speculating as to all the different scenarios that could occur and how much of that spillover we might need to use. Operator: We'll go next now to John Hecht at Jefferies. John Hecht: You guys gave a lot of information about the market and your sustainable competitive advantages in the call. But if you kind of step higher level, I'm wondering how you -- thinking more about broadly in the industry, how would you describe competition in light of the fact that spreads are fairly narrow, there's a lot out there, but also over the last few weeks as there's been a couple of [indiscernible] that have probably caused some disruption or reverberations industry-wide. Kind of how do you -- the 1-minute kind of explanation of your perspective of industry competition? Kort Schnabel: Yes. Look, I think it's a competitive environment as it's always been over our 21-year history. It's just sometimes new competitors come in, some competitors leave. Obviously, we've seen as the industry has matured and we've moved upmarket, certain competitors compete upmarket with us. We have a different set of competitors that compete in the middle market and in the lower middle market. We've talked a lot about how we believe we are the only scaled direct lender that competes across lots and lots of different markets. And then when we go into our non-sponsored origination in the various industry verticals, we see a whole another set of competitors. So it's really hard to generalize. The events of the last few weeks, I would say it's a little too early to say. But so far, there's been no real significant impact to the competitive landscape. If you're talking about just the news around Tricolor and First Brands and a few of these issues that are cropping up in the broadly syndicated market. It's not really impacting our market that much so far. And again, I think it probably does highlight that our documents and protections and our credit selection is differentiated relative to the broadly syndicated market. So long-winded answer of saying a little too early to say and no real impact so far. James Miller: I'll add one thing, Kort. We also get the benefit when the broadly syndicated market does see [ reberations ], as you said, that's a great time for private credit. Those are moments in time where we can take market share from the broadly syndicated market and people are looking for that certainty. So those moments and sometimes they're short a week or 2, sometimes they're a month or longer. Those moments tend to be quite favorable for us. John Hecht: Yes, that makes sense. And second, a nonrelated question, I'm just curious if there's an update on some of the, call it, regulatory opportunities like AFFE. Just I haven't heard much about that for a few months, and I'm wondering if there's anything to discuss there. Kort Schnabel: Nothing all that meaningful, John. I mean there was some temporary excitement around progress that had occurred down in Washington on that front. But it's hard for us to get too excited because we've seen it kind of go up and down in its momentum over the last few decades, frankly. So we try not to read in too much to the movements kind of month-to-month or even year-to-year. Operator: We'll go next now to Arren Cyganovich at Truist Securities. Arren Cyganovich: Just following on the line of questioning about where are we in the cycle? Is it a late cycle where it got tight credit spreads. You laid out a lot of reasons why things continue to go well for you with EBITDA is rising at your portfolio companies, a lot of activity. What are some of the guideposts that you're looking for that would maybe cause you to be a little bit more strict in terms of your underwriting? And what are some of those things that we might be able to monitor from afar? Kort Schnabel: Yes, it's not too complicated. I mean, certainly, underlying EBITDA growth or potential reductions in that growth would be something we would look at. We're always looking sector by sector as well. We talk about the overall portfolio average EBITDA growth, which again remains double-digit growth and bounces around here and there, but still remains really strong. But we're looking underneath the hood there at all the individual industries that are driving that growth, and we're not really seeing any trends in certain industries that would lead us to believe that there are points of weakness in any kind of individual sector. So if we did see those, we would certainly point those out. But that would be #1 on the list. Obviously, overall access to capital, the flow of credit in the markets. Historically, when you see credit start to seize up, that can also then flow through and create problems for businesses and lead to downturns. Again, we're seeing that actually go the other way now in terms of increased activity in the M&A market. Our transaction volume and opportunities remain really strong. So that would be something else to look for. But again, no signs on the horizon there. So I don't -- there's nothing we're seeing here at Ares Capital that would tell us that we're nearing the end of any kind of cycle. Certainly, from an M&A standpoint, the M&A cycle, I think we feel like we're at sort of an early end of a new cycle that's beginning. And you can see that in our origination numbers this quarter, which tilted toward 60% new borrowers for the first time in a long time, usually trending around 50% or even more in the last year or 2, 30%, 40%, went up to 60%. Change of control transactions were over half of our originations. So I think the M&A market really is picking up. And I think that's also a sign that people feel good about the stability of the economy, where we're going, underlying businesses, and we're seeing that reflected in that transaction volume. So that would be my answer to your question. Arren Cyganovich: Yes. No, that's very helpful and largely what I would have expected, but it's good to hear you said. And the second question is kind of a quicker one, but the -- you had commented on September being one of the busiest months, but spreads on first lien for your investments in the third quarter actually rose a little bit. It seems a little bit backwards. Obviously, not a big amount. I think you said 20 basis points, but just curious as to those dynamics. Kort Schnabel: I think the dynamics are that it reflects the broad origination funnel that we are able to capitalize on here by virtue of being managed by Ares Management and all the different deals that we're able to see come into the platform and originate. I mean it's -- yes, I'm glad you pointed it out. Look, we put out $3.9 billion of gross originations in the third quarter at an average spread of SOFR plus 560 and that went into borrowers at an average leverage of 4.8x. So we certainly feel like it is a good investing environment to be in despite the fact that it is competitive like we talked about before. We think we have meaningful competitive advantages in terms of the types of deals we see, and it will be interesting to compare our originations and those metrics that I just put out relative to our competitors as we see people put out earnings over the coming weeks. Operator: We'll go next now to Melissa Wedel at JPMorgan. Melissa Wedel: I think from our conversations, it seems like what's been driving some of the price action in the industry the last few months has been concerns about 2 things. One is earnings power and the second would be credit. I think you've addressed the credit, you're not seeing anything thematic and certainly showing up in the nonaccrual rates. I was hoping to dig in a little bit more on the earnings power and follow up on some of the levers that you talked about earlier that you could pull. One of the things you talked about was being a bit below the top end of your target range in terms of portfolio leverage of 1.25. Given that you have bandwidth there to increase leverage at the portfolio level, I'm curious how you're thinking about using the at-the-market program, especially as share prices have declined. Kort Schnabel: Yes, sure. Thanks for the question. So I think as you probably can see, we've been reducing the amount of at-the-market issuances over the last 3 quarters. So we went from $400 million to $500 million a quarter down to, I think it's $300 million last quarter, down to $200 million this quarter. So that's been influenced by a view that we are operating slightly below the midpoint of the range on leverage, that 0.9 to 1.25x range and our desire to get a little bit more into leverage here over time. Again, we do like the position that we're in at 1x. It's a conservative place to be. It positions us well to capitalize on opportunities in the market. As Jim mentioned earlier, maybe there's an opportunity the broadly syndicated market seizes up. We want to be in a position to have that kind of financial flexibility. But we do think it's appropriate to potentially start moderating that ATM, which is what we've done over the last several quarters, not to say what the future will hold, but that's been our view. So I don't know too much more to say on that topic, Melissa, but hopefully, that's helpful. Melissa Wedel: It is, and I appreciate that. And then in terms of further optimizing the nonqualifying asset bucket, I'm curious if there's anything in particular or forthcoming in the near term on that? And if not, maybe more generally, would you think about additional assets there that would be similar to your current exposures in IHAM or SDLP? Or would it be a different type of exposure? And just how you're thinking about that sort of longer term? Kort Schnabel: Sure. Yes, sure. One good piece of news that we certainly are happy to report is on the SDLP joint venture, which is that we did recently amend the documents in that joint venture and our relationship with our liability providers or the joint ventures liability providers to lower the cost of capital on those liabilities, which did result in a 100 basis point increase in the yield on the SDLP that you can see in our numbers on a go-forward basis. So I think that will provide a nice boost to the return on that program. I think our ability to increase the utilization of SDLP and to help IHAM hopefully achieve more growth as well will partially be based on the overall transaction volume in the market and our ability to originate, which again has been increasing. So that gives us confidence that we should be able to better utilize some of those joint ventures and structures within our 30% basket. I think, Melissa, that's probably -- hopefully, does that answer your question? Or is there something else you were getting at there? Melissa Wedel: No, that is helpful. Operator: We'll go next now to Casey Alexander at Compass Point. Casey Alexander: My first question, and it might sound a little convoluted, but we've gone through this mini hysteria created by the wet blanket of the words private credit thrown over the entire arena as if it's all encompassing. So first of all, you should change the name of what you do and take the words private credit out of it. But I'm wondering if this mini hysteria, did you notice any even temporary stall in the market? There's so much over the last couple of quarters of there were more loans leaving the directly originated private credit arena for the broadly syndicated market. Have you felt some relief from that because clearly, the banks have been twisting themselves into knots over this. And also, spreads have been at all-time tights, which, again, doesn't presuppose a real credit crisis. Does it feel like you might see new origination spreads in the broadly syndicated market widen out a little bit, which would also allow you some more spread relief? Kort Schnabel: Sure. Thanks, Casey. So a few things in there. I think, first of all, yes, much -- too much noise made about the banks and private credit and fighting over assets. I really think that, that is way overstated. We, as an industry, have been both working together with banks and competing with banks on transactions for decades. This is really nothing new. It's just that I think the dollar amount of the transactions as an industry that we're now providing have gotten to the point where it's starting to get more attention. But the dynamic is really nothing all that new. Banks are great partners for us. They provide leverage facilities on a lot of our funds, including obviously ARCC. And there are movements in the market from time to time where borrowers are more apt to lean toward broadly syndicated transactions, sometimes borrowers more apt to lean toward private credit transactions. The longer-term trend is obviously borrowers moving more toward private credit transactions because of the value of certainty knowing that the capital is going to be there in all market environments. And every time we go through a period of volatility where the broadly syndicated market gets choppy and maybe can't support its borrowers or banks get hung on transactions that they're looking to syndicate that just reinforces that long-term trend and makes it so that borrowers are more apt to consider private credit even when banks are back in the broadly syndicated markets back. So the banks broadly syndicated market this year. But on the whole, more transactions were still done in the private credit market than the broadly syndicated market. So I think on that, not much more there to add, Casey, but we can get more into it if there's something specific that I missed there in that part. I guess on the question about spread widening, I think you were -- sorry, maybe restate the spread question again. Casey Alexander: Well, just before we had this mini hysteria over private credit driven by 2 loans that went bad, spreads were at all-time tights. So I'm just wondering if you've seen -- and a lot of that driven by really aggressive bidding in the broadly syndicated market, have you seen any deals in the broadly syndicated market that might indicate that they're widening out a little bit because you guys do, to a certain extent, price against that market. Kort Schnabel: Yes. Well, I think Jim actually made that point, which is it could create that opportunity. It's a little early. I just think it's a little early. I'm not going to say that we've really seen that cause an effect exactly yet where all of a sudden, we're seeing deals chip our way because of that. But certainly, that would -- could potentially be an outcome. I think what really matters is how long and sustained the sort of concern or dislocation or spread widening in the broadly syndicated market lasts because our market one of the benefits of our market, I think, certainly for borrowers is that we don't move in lockstep with the broadly syndicated market, right? We lag a little bit. We're a little bit more stable. We take a longer-term view because we're holding these assets. We're not looking to sell the assets. So we're not going to move up and down 25, 50 basis points in line with the broadly syndicated market when it moves. So I think time will tell. We'll just have to wait and see. Casey Alexander: All right. And I do have one follow-on. I think that's a great answer, though. In the recent developments, you pointed out that in your exits, you recognized total net realized losses of $67 million. Can you tell us where that was relative to their third quarter marks? I mean is there likely to be an unrealized offset to that because they were close to the marks? Or is there some difference in there? Kort Schnabel: They're pretty much right at the marks. Casey Alexander: That's what I assume since it was so close after the end of the quarter. Operator: We'll go next now to Doug Harter with UBS. Douglas Harter: Hoping you could talk about your expected pace of exits in the near term and how that might influence the kind of the velocity of portfolio turnover and fee income you can generate? Kort Schnabel: It usually moves kind of in lockstep with overall transaction volume in the market and new originations. So we've talked about that in the past, too. People get sometimes a little concerned when transaction volume declines like we saw in the second quarter of this year, but then exits decline as well. So they kind of move together and the net number really is, I think, a more important number to look at. Obviously, this quarter was very strong on a net basis as well, over $1 billion, even though the exits did increase. So I don't know that I can provide anything super insightful there other than just to say it kind of moves together with overall transaction volume. Operator: We'll go next now to Robert Dodd with Raymond James. Robert Dodd: In talking about supporting earnings power, et cetera, I mean one thing that stood out to me this quarter is other income looked quite high. I mean, by any historic standards. I mean that's not usually where the origination fees go, but it could be amendments, can be consulting. Can you give us any idea like what drove that? And is that now going to be more geared to just what activity is rather than -- which obviously drives the capital structuring fees? Or has there been more of an effort to seek out like consulting kind of fee arrangements? And maybe is that going to be an ongoing story in terms of one of the tools to support earnings power? Scott Lem: Yes. Thanks, Robert. That's mainly typically like transaction or like amendment type fees. So I would not necessarily say that's replicatable every quarter. So really more onetime in nature. The capital structure fees are really more indicative of the origination volume. Robert Dodd: Yes. Got it. On the AI question, I mean, like you mentioned, you have the in-house think tank for lack of a better term from several years back. How has that changed over the last couple of years. How you go about underwriting software? I mean you laid out in the prepared remarks all the ways you do it currently. But I mean, is that fundamentally in any way different today because of the in-house AI expertise? Or is it just always been that way? Kort Schnabel: Yes. No, great question. Look, I think multipart answer. Number one, it's always been that way in terms of our desire to provide capital to software that is foundational and infrastructure-like in its business model, i.e., software that is highly ingrained in the workflows of its customer base that powers off of -- and a key part of its value prop is off of a proprietary database. And in a lot of times, software that is provided into highly regulated end markets that are extremely reliant on high-quality data and accuracy of data and auditability of data. So that has always been our strategy in software for decades. And so that really hasn't changed. I think what -- over the last few years, when -- with the rise of AI and obviously, our focus -- our focus on making sure that our portfolio is defensively positioned and certainly, any new investment we make is defensively positioned. Obviously, we're spending a lot more time thinking now about what AI is good at and what it's not good at to ensure that we continue to build a portfolio that is resistant to disruption. And when you think about what AI is good at, it's really good at creating content, can create amazing content so much faster than humans can. It is very good at analyzing and synthesizing lots of data. It doesn't actually house the data. It's not a database, but it can synthesize lots of data. And so you want to make sure that you're not investing in software companies that are simply providing content, learning modules delivered over software that can be disrupted. So those are the kind of areas we're trying to make sure that we're staying away from or software companies that are just analyzing third-party data. That would be something to stay away from. I think we want to make sure we're still very focused on providing software to companies that are actually powering businesses and are entrenched in businesses and are infrastructure like in their nature. Operator: We'll go next now to Paul Johnson with KBW. Paul Johnson: Just one a little bit further on Doug's questions for exits, but I'm just wondering if you have any sort of updated outlook, I guess, in terms of monetizations and sort of further gains from realizations this year or if the Potomac intermediate kind of represents more of the meaningful opportunity there near term? Kort Schnabel: Yes. Look, I think, obviously, our strategy is to leverage our portfolio management team to make sure, as I said in the prepared remarks, we are not only avoiding losses, but capitalizing on potential opportunities to make big gains. Potomac is a great example, but it's not the only example over our history, and I can certainly guess that it's not going to be the only example going forward into the future. I can't give forward-looking guidance or remarks about what might be the next big gain, obviously. But I guess what I would say is we provide a lot of disclosure for all of our investors in our SOI, in our 10-Q and 10-K, and you could see every investment we have, the nature of that investment, you can see the investments we have that are restructured where we own equity or own the businesses outright via those restructurings. And that could provide some clues as to what might be sitting in the portfolio that could provide future gains. But I'd venture a guess that, that will not be the last one that you guys will see. Paul Johnson: Appreciate that. Very helpful. And then last one is just kind of higher level I had. But we see like a mega financing deal like the EA SPORTS JPMorgan-led deal there, LBO financing. Does the deal of that size do enough, I guess, to kind of soak up any sort of oversupply of capital in the financing markets? Or is kind of the reality we would need to see a number of those to really accelerate sort of a balance of the supply and demand of capital in the private credit market. Kort Schnabel: Yes, I think it helps. I mean I don't know if that one deal alone is going to move markets. You probably need several, but that's a lot of capital. So I think if we start to see -- and again, it's just emblematic of what I said earlier, the markets are functioning very well. The credit market money is flowing, buyouts, new buyouts are happening. And if we start to see a number of these larger buyouts, I do think actually that will start to potentially widen spreads, soak up demand in the broadly syndicated market, move deals back our way. So every deal like that, I think, helps. James Miller: In the market, we're seeing a fair amount of the regular way activity, but we're also seeing a regular cadence of larger transactions, right? That's becoming more common. Records are broken over and over again, but it's really more about the regular cadence of large transactions that helps absorb the capital into the market. Operator: We'll go next now to Kenneth Lee at RBC Capital Markets. Kenneth Lee: Just one for me. And you touched upon this in your prepared remarks around receivables financing and more broadly, I guess, when you look at any kind of off-balance sheet financing, I wonder if you could just remind us how does Ares Capital avoid such situations? And more specifically, how are they flagged during the due diligence process when you're making new investments? Kort Schnabel: Yes. Well, so they're flagged during the due diligence process by an exhaustive analysis of all of the company's liabilities on balance sheet and off balance sheet. We obviously have in almost every transaction, we do new transaction. We have a quality of learnings provider that's coming in and doing a third-party report, scrubbing numbers, asking lots and lots of questions. Companies are required to disclose their liabilities to us as part of the reps and warranties. So it is [indiscernible] at the outset and at the underwriting of the transaction. And then on a go-forward basis, we have protections in the document. We have baskets that limit securitization facilities, which includes factoring of receivables and all different sorts of off-balance sheet liabilities, and those baskets are tight. And we talk a lot about the baskets in the private credit market or the documents in the private credit market being tighter than the documents in the broadly syndicated market. And this is just one very good public example of something where the broadly syndicated market documents were a little bit looser. And I don't expect that you would see that occur in one of our transactions. Operator: We'll go next now to Sean-Paul Adams at B. Riley Securities. Sean-Paul Adams: Most of my questions have already been asked and answered. But on the portfolio grade, the weighting improved quarter-over-quarter and the median nonaccruals declined. Do you view any general improvements in the economic environment? Or is it just a reflection of the runoff of nonaccruals from the portfolio? Kort Schnabel: I think the economic environment is pretty stable. So I think it's just the runoff of a couple of the nonaccruals. The number obviously bounces around a little bit quarter-to-quarter. The movement wasn't anything extreme. So I don't think there's much to read into there. Sean-Paul Adams: Got it. And as a quick follow-up, on spreads, you guys talked about this pretty in depth, but there is a race towards the bottom. Is there a kind of a bottom that you're envisioning as far as spread level declines just among the general economic environment for deal flow? Kort Schnabel: Yes. I mean it's just hard to prognosticate and look forward and say where everything is going to go. I guess I'd just point to you a couple of things. Number one, spreads for the last 3 quarters now have been stable in the market. So it feels like we've found a bottom for now. And I think that's due to just overall transaction activity starting to come back. I think it's also due to just the fact that private credit managers have dividends to pay, and we sort of found where this floor seems to be at least now for the last 3 or 4 quarters. So that's one important point to look at. Again, I would probably just remind people, our third quarter originations showed spread widening, modest, but some spread widening. I talked about it already. We put out $3.9 billion at [indiscernible] 560 at 4.8x leverage. So that feels like a pretty good environment to be investing into and doesn't really suggest that we are in a race to the bottom type environment. But like I said, not going to sit here and really try to predict too much what's going to happen in the future. Operator: We'll go next now to Ethan Kay at Lucid Capital Markets. Unknown Analyst: Maybe nitpicking here a little bit given very solid results, but dividend income came in a tad bit softer quarter-over-quarter. It looks like the distribution from Ivy Hill was stable. There were some exits of equity positions that you guys talked about, which ostensibly is a factor there. But can you talk about if there was maybe anything else that might have contributed to that kind of evolution in dividend income? And then as a quick follow-up, can you kind of remind us of the sensitivity of IHAM dividend to changes in interest rates given the fact that it's largely underlying -- the underlying is largely floating rate debt. Scott Lem: Yes. On the dividend, yes, you hit it. There's a couple of things there. There were some nonrecurring dividends that we got last quarter, but we also just saw some of the exits of our preferred yielding preferred equity that exited the quarter. And so the dividend income came down with those 2 factors. I will note that most of those preferred investments that paid off were picking. So it certainly helped the collection of our PIK, which I know has been a hot topic with investors as of late. Kort Schnabel: Yes, we didn't even really hit that, but we had a great PIK collections quarter. I knew we do get a lot of questions about that, and that obviously just occurred with pickup in transaction volume. And I think on the Ivy Hill question, I think you're asking about sustainability of Ivy Hill dividends and interest rate sensitivity. I mean, obviously, yes, Ivy Hill invests in floating rate assets. They have floating rate liabilities as well. And we think about the Ivy Hill dividend very similarly to the ARCC dividend, where we think there are reasons why we think it's very sustainable. One thing I'll point out is like the ARCC dividend, Ivy Hill is currently outearning its dividend pretty materially in the third quarter, we were about 107% dividend coverage at Ivy Hill. And there also exists $130 million of retained earnings down at Ivy Hill as well. So we feel like there's a lot of reasons why that dividend should be sustainable in all different kinds of environments. Operator: [Operator Instructions]. We'll go next now to Brian McKenna at Citizens. Brian Mckenna: So credit quality remains resilient. And as you mentioned, nonaccruals still well below that historical 3% average. But why do you think credit has been so resilient outside of any broader macro reasons? Is it where your exposure sit from a sector perspective, how you structure deals and price risk? Or is it being driven by greater levels of scale? And as your platform gets bigger and bigger, it's really just driving better outcomes for all stakeholders through the cycle. Kort Schnabel: Yes. Thanks, Brian. All of the above for sure. I think as a reminder, one of the benefits of running a BDC is we don't have to manage to an index. So we can select industries that are defensive and that work well for credit investing. So we've avoided a lot of industries that have been showing softness of late. And we've been leaning into industries that are very consistent growers. And so I think certainly, industry selection and industry diversification as well have been really important drivers of our outperformance on credit. And then certainly, look, you mentioned scale. So I have to take the opportunity to hit on that. The scale of our platform is unmatched and our ability to originate an incredibly broad amount of deals into our system allows us to be very, very selective, right? The more opportunities we can see, the more selective we can be and the better able we are to find the market-leading companies, the best companies in all of these different industries and then choose to invest in those companies and then pass on the other opportunities. If your funnel is more narrow, obviously, our job is to put money to work. And so you're going to put money to work into lower quality companies. So that larger funnel, I think, is a huge advantage comes from our scale, comes from our size of our team, the tenure of our team as well, the fact that we've all been working together for such a long time. And I think just the DNA in our system around underwriting and credit has been passed down and just continues to get reinforced throughout the year. So I think you hit on all the reasons, Brian, but thanks for giving me the opportunity to talk more about them. Brian Mckenna: Yes, sure thing. I appreciate the context as always. And then just one quick one, if I may. And you touched on this a little bit, but looking back historically at periods of volatility, really when liquidity dries up, how much incremental spread on average have you been able to capture in those environments? I appreciate every period of volatility is a little bit different, but I'm trying to figure out, is there a way to quantify this dynamic? And ultimately, how much incremental ROE is generated from these types of situations through the cycle for ARCC? Kort Schnabel: I don't know there's a way to really quantify it just because everything is so different. It all depends on so many different factors, right? It's what's the broadly syndicated market doing, what are base rates doing? How bad do people feel about the dislocation? I mean a couple of examples just to point to recently with the Liberation Day and the tariffs back in April, there was probably a multi-week period where we were able to capture 50 basis points of increased spread and maybe another 50 basis points of increased upfront fee. So call it, maybe 75 basis points or so of total yield. But that wasn't very long lasting, but there were certainly a couple of transactions that were going into signing that we were able to move terms on and rightly so because it was an uncomfortable and a difficult period to be investing in for most people. And then you look back in the period in 2022, late 2022 and early 2023, I think we saw spreads widen by 150 basis points back then and fees probably widened by 100 basis points upfront fees, and that was more driven just by banks exiting the market, the broadly syndicated market shutting down entirely because banks were hung on transactions as rates rose and they couldn't sell them. And so that just created a huge imbalance in the competitive landscape and the supply of capital. So really, it's just -- those are 2 recent examples of very different movements in spread and for different reasons, and it's just really hard to generalize. Operator: Mr. Schnabel, it appears we have no further questions this afternoon. Sir, I'd like to turn the conference back to you for any closing comments. Kort Schnabel: Okay. Great. Thank you all for joining us today and for all your continued support, and we look forward to seeing you on our next quarterly call. Operator: Thank you, Mr. Schnabel. Again, ladies and gentlemen, that will conclude today's conference call. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to today's Welltower Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Matt McQueen, Chief Legal Officer and General Counsel. Matt? Matthew McQueen: Thank you, and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. And with that, I'll hand the call over to Shankh for his remarks. Shankh Mitra: Thank you, Matt, and good morning, everyone. Given the sheer volume of announcements last evening, we'll keep our Q3 related comments concise, but I'm pleased to report that it was another record quarter with occupancy, margins and net operating income, all exceeding our already very high expectations. However, it was a watershed period in our company's history from 2 important perspectives: capital allocation and people. After I walk you through our significant capital allocation-related activities, the team will provide details of Q3 results. Then I'll return to discuss my favorite topics of people, culture, incentive design and beginning of a new era of our firm, Welltower 3.0. Let's start with acknowledging luck. Many of yesterday's transaction announcements started 6 months ago at the height of uncertainty post Liberation Day. We always believed that life is not about predicting. It is about positioning. So when the luck knocked on our door in April and May, we are positioned with our balance sheet, exceptional team, technology platform and perhaps most importantly, courage to run towards this uncertainty and chaos. This positioning drove more than $23 billion in incremental transactions, resulting in year-to-date activity over $33 billion and bringing us closer to ever realizing our decade-long ambition of transforming Welltower into a pure-play rental housing platform for the rapidly aging population. At the core of our offering will always be systems, process, technology and data-driven insights to enhance the experience of our customers and site level employees, not capital, which is ultimately a commodity. Every capital allocation decision made at Welltower is viewed through an opportunity cost prism, evaluating the value foregone by pursuing a specific course of action while considering all implication of those decisions well into the future. And that opportunity cost prism allow us to narrow our focus on technology-driven transformation of our niche housing business. There is always room in organizations to boost performance by amping up their pace and intensity. And the fastest way to move the dial is to narrow the focus in a maximum growth, maximum gain war. This is why we're exiting our Outpatient Property Management business. While we'll continue to own some outpatient medical assets, it will consume little management time and effort due to triple net nature of the retained properties. This is not to say a B2B business like OM is not a good business, but the intensity that is needed to achieve our audacious dream of transforming a tech for TAM-rich B2C industry like senior housing requires the laser focus of a hedgehog and the discipline to say no to hundreds of good ideas. While our motivation to go all-in on senior living with focus and opportunity to enhance the enterprise growth rate, we recognize that the direction of asset prices for what we are giving up is uncertain. Hence, we structured our large OM sale with significant participating profit interest while the deal structure reflects a degree of heightened creativity, it is by no means a novel approach within our firm. We applied a similar idea nearly 5 years ago when we wrote a participating senior credit note on HC-One assets in the U.K. with warrants and equity kicker at the height of Brexit and COVID uncertainty. I am delighted to inform you that the significant downside protected structure has generated a nearly 14% unlevered IRR at exit while providing us an opportunity for the seat at the table in a bilateral negotiation for this recap. This recapitalization transaction marks the beginning of new chapter of new operating income growth as our long-duration strategy unfolds for HC-One assets. Speaking of the U.K., I'm delighted to announce that after 6 years of conversations, negotiation and a near transaction, we're finally the proud owner of Barchester Senior Living portfolio. We recognize that buying highly successful family-owned businesses requires patience, finance and a commitment to excellence that their legacy deserves. While a large checkbook that no counterparty ever question is necessary, it is by no means a sufficient condition. We have carefully studied many transactions that Warren and Charlie have completed over the years with family-owned businesses. And I'm delighted to inform you that this $7 billion negotiation was done during a single sitting resulting into a firm handshake. Our years of conversation and close familiarity with the Barchester assets and management was certainly helpful as preparation. Equally important with the integrity and professionalism demonstrated by our counterparty. We're proud to welcome Pete and Barchester management team to Welltower operating partner family. Despite giving up in-place yield in HC-One and other loans and initial dilution incurred from 170 assets that are in lease-up from our recent acquisitions, together, the dispositions and acquisitions are expected to be accretive to FFO per share in 2026. To be clear, we would have completed these deals even if they are collectively near-term dilutive because of the significant opportunity of earnings and cash flow growth in '27 and beyond and due to the long duration aspect of the transactions. These capital allocation decisions together are expected to change the near- and long-term growth rate of our firm despite the significant size of our asset base. This speaks to the level of excitement and high expectations we have from this year's $33 billion of transformative capital allocation activity. With that, I'll pass it on to John. John Burkart: Good morning, everyone. I'll keep my comments relatively brief this morning. But as Shankh mentioned, we reported another fantastic quarter with no let-up in the strong momentum experienced in the first half of the year. While uncertainty persists for the direction of the broader economy, our business continues to gain strength given the needs-based and private pay nature of our business, while our asset management initiatives through the Welltower Business System, or WBS, continue to bear fruit. Our strong results this quarter were once again driven by the exceptional performance from our senior housing portfolio. In fact, Q3 marked the 12th consecutive quarter in which SHO portfolio same-store NOI growth exceeded 20%. Attaining 20% plus NOI growth for any sector is an incredible achievement, but 12 consecutive quarters is truly exceptional and likely unprecedented. Year-over-year organic revenue growth remains at approximately 10%, driven by a 400 basis point occupancy gain and strong pricing power. Our solid top line results were led by our U.K. portfolio as a 550 basis point year-over-year ramp in occupancy drove a 10.4% increase in revenue. Operating margins across the same-store portfolio took another step higher, rising 260 basis points as growth in RevPOR or unit revenue continues to solidly outpace growth in ExpPOR or unit expense. And while we've experienced a substantial recovery in margins over the past few years, we have a long runway for further expansion due to the scaling benefits achieved through higher occupancy, i.e., greater operating leverage, which will be further amplified by our far-reaching WBS initiatives aimed at transforming the Senior Housing business. The backdrop for growth in 2026 and well beyond remains favorable as senior housing demand is expected to grow even stronger while supply remains dormant. The beta of the sector remains attractive. But what truly sets us apart are our efforts to generate outsized alpha through operational excellence. And with the exit of our Outpatient Medical Property Management business, we are doubling down our efforts, attention and resources to our Senior Housing business with a singular focus of operational excellence through digital transformation. This includes the appointment of Russ Simon, as EVP of Operations. Russ has created tremendous value for Welltower shareholders as Co-Head of U.S. Investments as well as partnering with me on asset management. Going forward, Russ will shift his focus to overseeing our asset management, capital planning and experiential solutions initiatives. Additionally, as Shankh will describe in greater detail, we are in the midst of a complete reimagination of our technology ecosystem. We're delighted to have Jeff Stott join us from Extra Space Storage as our Chief Technology Officer. While Logan Grizzel and Tucker Joseph have been appointed Chief Innovation Officer and Chief Information Officer, respectively. I'll conclude by saying that we've never been more excited as we are today about the prospects for our company. The Welltower team continues to work tirelessly alongside our best-in-class operating partners to reinvent our business through WBS and to elevate the experience of senior housing residents, their families and the site level employees. While I'm thrilled about the progress we've made to date, our excitement truly lies in what's to come as we enter Welltower 3.0, which will be defined by operations first. With that, I'll turn it over to Nikhil. Nikhil Chaudhri: Thanks, John, and good morning, everyone. Since our last call 3 months ago, we have expanded our year-to-date transaction activity by $23 billion, including $14 billion of acquisitions and $9 billion of dispositions and loan payoffs. With today's announcements, our year-to-date investment activity now totals $23.2 billion, up from the $9.2 billion announced on the second quarter call. Of this $23.2 billion, $5.4 billion closed through the end of the third quarter and nearly another $11 billion has closed since, with the remaining $7 billion expected to close later this year and in the first half of next year. On the disposition front, we are under contract to sell an additional -- to sell an 18 million square foot outpatient medical portfolio for $7.2 billion, resulting in a $1.9 billion gain on sale. We structured this investment to retain a $1.2 billion preferred equity stake accompanied by a profits interest, giving us 25% of upside while protecting our downside through the buyer's subordinated equity. We closed on the first $2 billion tranche of this transaction last week with subsequent closings expected through next summer. Additionally, we will exit the OM Property Management business with over 160 of our colleagues transitioning to Remedy Medical properties, allowing them to continue their career growth. Following this transaction, our residual OM portfolio will essentially consist of premium net lease assets to high-quality investment-grade tenants. The long-term absolute net nature of these leases require minimal management intensity. Turning to acquisitions. We are pleased to announce the GBP 1.2 billion acquisition of the HC-One portfolio in the U.K. Many of you will recall our courageous GBP 540 million first mortgage investment in HC-One's recapitalization at the height of COVID and Brexit uncertainty. That investment was structured with downside protection through a claim on HC-One's real estate portfolio at a last pound basis of approximately 40,000 a bed and upside participation through warrants and equity kickers. We have enjoyed a close working relationship with the company's management and ownership and have supported the company's growth through modest additional capital support. This investment has now delivered a profit of greater than GBP 350 million and over the last 4-plus years with an unlevered IRR of nearly 14% and a 1.6x equity multiple. While the payoff of this high-yield loan is modestly dilutive near term, the equity ownership of these assets adds significant duration to our returns. By deploying significant value-add capital and leveraging Welltower business systems and the best practices from our broader U.K. business, we expect this transaction to generate an unlevered IRR in the low teens. Moving on to our GBP 5.2 billion acquisition of Barchester which spans 3 buckets. First, 111 assets under a highly aligned RIDEA 6.0 structure. These high-growth assets rank in the top quartile within the U.K. and have in-place occupancy in the high 70s due to 39 newly delivered assets. Second, 152 mature assets in a triple net structure. These mature assets are 90% occupied with strong coverage, 3.5% annual rent escalators and the ability for Welltower to reset rent every 5 years to capture additional upside. Third, 21 assets that are currently being developed. In addition, through several other transactions, we are acquiring an additional 9 assets under construction in the U.K. Given the significant nonpurpose-built stock and negative net supply growth over the last 10 years in the U.K., we are ecstatic about the significant growth opportunity embedded within this portfolio. While I have highlighted our larger transactions, our focus on granular activity remains unabated. The $14 billion of new investments announced today span more than 46,000 units across 700-plus communities across 50 different transactions. Our team spent the last few months walking every single one of these communities, conducting their diligence and establishing business plans with our operating partners. 91% of this activity was sourced off market. 16 of these transactions were in the U.K., 2 in Canada and the remaining 32 in the U.S. I expect that with our narrower focus and relentless pursuit of better outcomes, the transactions announced today will fundamentally enhance the long-term growth potential of our company's earnings. With yesterday's announcement, we have added over 170 senior housing communities to our investment pipeline that are under development or still in lease-up. These communities will be a drag on near-term results, but as we detailed in our letter to our future shareholders, we will not hesitate to make capital allocation decisions, which are a drag today, but have the potential to create significant value tomorrow. I'll now turn the call over to Tim to walk through our financial results and updated earnings guidance. Tim McHugh: Thank you, Nikhil. My comments today will focus on our third quarter 2025 results, the performance of our triple-net investment segments, our capital activity, a balance sheet and liquidity update and finally, an update to our full year 2025 outlook. Welltower reported third quarter net income attributable to common stockholders of $0.41 per diluted share and normalized funds from operations of $1.34 per diluted share, representing 20.7% year-over-year growth. We also reported year-over-year total portfolio same-store NOI growth of 14.5%. Now turning to the performance of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage stats are reported a quarter in arrears. So these statistics reflect the trailing 12 months ending 6/30/2025. In our senior housing triple-net portfolio, same-store NOI increased 3.1% year-over-year and trailing 12-month EBITDAR coverage increased to 1.21x. Next, same-store NOI in our long-term post-acute portfolio grew 2.7% year-over-year and trailing 12-month EBITDAR coverage was 2.02x. Moving on to capital activity. We continue to capitalize our investment activity with predominantly equity, raising $2.9 billion of gross proceeds in the third quarter. Additionally, in August, we completed a follow-on issuance of $1 billion in senior unsecured notes across 2 tranches for a blended coupon of 4.875%. This capital, along with retained cash flow, allowed us to fund $1.7 billion in net investment activity and end the quarter with $7 billion of cash and restricted cash on the balance sheet, while driving net debt to adjusted EBITDA to 2.36x, representing yet another record low leverage level for the company. With our current capital position, near-term liquidity profile and expected proceeds from asset sales and loan payoffs, we are fully funded for the entirety of our acquisition pipeline, including the $14 billion of new acquisition activity, which we announced last night. And we expect run rate net debt to adjusted EBITDA to tick modestly higher by approximately 1 turn on a run rate basis for all of our announced transaction activity. Lastly, as I turn to our updated 2025 guidance, I want to remind you that we have not included any investment activity in our outlook beyond what has been closed or publicly announced to date. Last night, we updated our full year 2025 outlook for net income attributable to common stockholders of $0.82 to $0.88 per diluted share and normalized FFO of $5.24 to $5.30 per diluted share or $5.27 at the midpoint. There are 2 items I want to highlight in last night's net income guidance that relate to fourth quarter activity and beyond. The first is our medical office portfolio sale, which, as Nikhil detailed earlier, is expected to have a total gain on sale of approximately $1.9 billion, $400 million of which is expected to be reflected in net income in the fourth quarter with the remaining $1.5 billion expected in 2026. The second item relates to the 2035 10-year executive continuity alignment program. We expect approximately $1.1 billion of upfront costs associated with the initiation of the plan to impact net income in the fourth quarter, which will be adjusted out of normalized FFO. In addition, the program will result in a recurring amortization expense stream that will flow through normalized earnings over the next decade, alongside the ongoing impact of the increased diluted share count. Now turning to our normalized FFO guidance. Last night's increased range represents a $0.17 increase at the midpoint from our prior normalized FFO range. This increase is composed of a $0.045 increase from higher NOI in our senior housing operating portfolio, $0.105 from accretive capital allocation activity and a $0.02 increase from FX and income tax benefits. Underlying this FFO guidance is an estimate of total portfolio year-over-year same-store NOI growth of 13.2% to 14.5%, driven by subsegment growth of outpatient medical, 2% to 3%; long-term post-acute, 2% to 3%; senior housing triple net, 3.5% to 4.5%; and finally, senior housing operating growth of 20.5% to 22%. This is driven by the following midpoints in their respective ranges. Revenue growth of 9.6%, driven by increased expectations for occupancy growth of 390 basis points and RevPOR growth of 5.1% and expense growth of 5.25%. And with that, I will hand the call back over to Shankh. Shankh Mitra: Thank you, Tim. Before we start Q&A, I want to highlight the most important announcements we made last night, the launch of Welltower 3.0, an operations and technology-first platform. This is the third iteration of our company after refounding our firm from a deal shop called Healthcare REIT. We took HCN down to its studs and built Welltower 1.0 with a goal of being a great capital allocator. We turned over half of the assets, majority of the operators and 95% of the people. And we launched a data science platform that in words of a CIO from a leading private equity firm has become synonymous with the category, much like Band-Aid or Kleenex. Then came COVID. And with Charlie's prodding, I realized we needed to recruit individuals from industries of high standards or equivalent of short-haul trucking executives to address the challenges of the railroad industry decades ago. The hiring of John Burkart from multifamily industry and subsequent hiring of hundreds of our colleagues who are focused on operations and asset management to delight customers and site-level employees marked the beginning of Welltower 2.0, a well-oiled capital allocation machine with high-performance compute power to sort through trillions of data points to buy one asset at a time. We brought in best-in-class operators under aligned contracts and provided them with an end-to-end asset management and technology platform while also building regional density. Things have been going on well in recent years, which -- with performance, which I would describe as being somewhat satisfactory. And yet again, we are disrupting our own firm from within, which we believe will create a leaping emergent effect culminating into Welltower 3.0, an operating company in a real estate wrapper. This new era places operations and technology first with a singular focus on delighting customers and prioritizing site-level employee satisfaction with complementary capital allocation actions to go deeper in our markets with a narrower focus. This phase starts with a complete retooling of our organization, not writing a manifesto. Many organizations hire management consultants, create pretty PowerPoint decks, announce new mission and vision statement, but ultimately change nothing about how they go about doing business. There is no place for consultants, [ Silverton ] bankers or managerial layers at our shop, only leaders who are willing to get their hands dirty by actually doing the work and building the business, laying one airtight brick at a time. We're taking the best from our capital allocation side of our house, including Tim McHugh and Russ Simon to lead the next phase of our journey focused on operations, technology and innovation. Additionally, we are once again bringing in significant talent from industries with higher standards, which includes proven tech executives such as Jeff, Logan and Tucker to join Swagat to form a tech quad, which will serve at the core of Welltower 3.0's growth engine. I'm convinced you will see a new wave of talent from -- will follow these leaders, similar to what we have witnessed in recent years on the capital allocation side of the house, which has become the envy of the real estate industry. This newly established tech quad will be key to reduce latency in a complex adaptive system like our business. As latency shrinks materially, the network effect will kick in high gear, creating a new paradigm of maximum growth and maximum gain that simply does not occur in an industry like ours with changes at glacial pace. Lastly, today, I will describe a dramatic change, which strikes at the heart of this company's incentive structure. From my first day in this business, I've been bothered by the misalignment of the incentives between our company, the owner of our assets and our operating partners, the manager of the community. I wish I could have said better things about the alignment between management and forever owners of a company like ours. Hence, you have seen a decade-long effort from us to fix and align external and internal incentives. And Charlie would constantly tell us, show me the incentives, and I'll show you the outcome. Following years of deep structural changes in this area, I'm delighted to inform you that my utopian idea of everyone swimming or sinking together is finally taking shape, an ecosystem of internal and external participants where everybody is fully aligned and everybody is all in. I would urge you to read our press release from last night carefully to fully grasp the changes that are taking place in 3 distinct steps to achieve the same goal of alignment and ownership. One, elimination of compensation for Welltower management and making them owners through performance-oriented Welltower stock; two, introduction of RIDEA 6.0 construct where the operator wealth creation is now irrevocably tied to Welltower stock; and three, a $10 million annual grant for site-level employees for the 10 best performing senior housing communities also in Welltower stock. All of them capture the 5 key tenets of the incentive design that we have previously laid out to you. Simple, significant, nongamable, earned as a team and duration matched with the immediacy of a role's impact, 10 years to forever for Welltower management, 5 to 7 years for operating partners and 1 year for site level employees. I would underscore that my colleagues are betting their prime years of their career on this idea, and so are many of my operating partners, Dan Hughes at StoryPoint, Matthew Duguay at Cogir and Courtney Siegel at Oakmont. While we are embarking on -- what we are embarking on embodies a unity of purpose, shared sacrifice and perhaps some share dilution, woven in a seamless wave of deserved trust and mirrored reciprocation by a group of random employee people from different walks of life. And they share 2 rare genetic qualities, a fiduciary gene representing their innate desire to put the interest of our owners ahead of their own and a delayed gratification gene, which refers to their instinctive bias towards sacrificing an immediate reward for a much larger gain tomorrow. While a long-winded person like me with long attention span is perfectly capable of spending hours detailing every part of this plan, let's focus on my favorite, the Welltower grant for site-level employees to honor the memory of Charlie Munger. And let's start by inverting. Our ultimate goal is to delight customers and their family. And of course, they want a digital experience, the ability to find us easily in a crowded and rapidly changing digital world and so on and so forth. But more than anything, residents want a consistent and happy pace who cares for them. Imagine a world where our site level employee work in beautiful and inviting communities equipped with most advanced and easy-to-use digital tools, freeing them from paperwork and administrative burdens. Not to mention meaningful career advancement opportunities in sister communities with only regionally dense portfolio of scale in this business and they get paid more than they otherwise would in a competitive community, sometimes in a significant and life-changing way due to Welltower grant. Why would they leave? Costco's experience many -- over many decades suggest perhaps they won't. Instead, they will continue to delight our customers. Our reputation of happy customers will further attract even more customers who are willing to pay for that level of service in an industry where usually half of the phone calls go unanswered. That's network effect, pure and simple. And the fruits of this network effect will silently compound over many years and decades to come. Charlie often said, take a simple idea and take it seriously. He would be happy to know today that we have taken the simple idea of Berkshire-style stewardship, along with Costco-style customer obsession very, very seriously and betting our life on it. And with that, I'll open the call up for questions. Operator: [Operator Instructions] All right, it looks like our first question today comes from the line of Vikram Malhotra with Mizuho. Vikram Malhotra: Congrats on the strong results, all the transactions. I guess just, Shankh, you've outlined a lot of changes, portfolio, personnel, comp plan, et cetera. And I'm just trying to understand like you talked about Welltower 3.0, but things have been going really well for a while. The industry is -- you've got leading results, stock 2x, 3x depending on when you measure it. So I'm just trying to get a sense of like ultimately, 2 things. One, in general, is there a goal? Is there something you're trying to prove? And kind of how should we think about the growth engine from a cash flow standpoint from here on? Shankh Mitra: Thank you, Vikram. We're not trying to prove anything. We fundamentally believe -- I personally fundamentally believe that we're here to contribute. We have really nothing to prove. Fundamentally, what we are trying to do is to take away if you just think about agency problem from the system across the board and try to align people to be owners, right? So align interest with our owners across the way through the whole ecosystem. That's all we are trying to do. And bringing sort of the second question you asked, which is a very important one, which is how do we elongate the growth curve well into the future. Making real money is all about duration. And duration of growth is all that it matters. We're too focused on near term. We're too short term in this world. And if you think about -- think through how real value creation works. It's all about duration. So part of your question was why things are going well, why are we again disrupting it? Think about things were going well -- very well for Netflix when they're killing it by sending people DVDs. And what would -- where would they be if that's what they're still doing today, right? If you don't disrupt your organization from within, somebody else will do it for you. And so that's what we are trying to do, thinking through what the future of this business will look like, and we have taken it on ourselves to transform this business digitally to get to a better outcome for our customers and site level employees. That's all we are doing, and we hope that will generate very significant growth and compounding of cash flow over a period of time for our owners. And frankly speaking, that's the journey we're in. Operator: My apologies for the delay. I had a network hiccup there. And our next question comes from the line of Jonathan Hughes with Raymond James. Jonathan Hughes: And congrats on the announcements. A lot to talk about, but hoping you can share more details on this new comp plan. Was that presented by the Board as a team package as an all or nothing proposal? Did it evolve into that? And then the 3 operators that are now similarly changing their incentive fee to take units, is that structure being offered to other partners as part of RIDEA 6.0 to further align them with shareholders, now management and extend the duration of hopeful outperformance? Shankh Mitra: Okay. So let me answer the first question, and then we'll go to your second question. So our Board has spent enormous amount of time with leading comp consultants, several law firms and many, many consultants and advisers for months at this point and spend hundreds and hundreds of hours to come up with what they consider is the right plan, which you saw. So I have really nothing to add to that other than the fact that it aligns with the 5 tenets of the incentive design that we have always talked about, right? Simple, significant, earned as a team, duration matched and nongamable, right? That's really what it is. As I said, the first 3 operators that we mentioned, they're the founding class, they don't necessarily have to be the only ones, right? We are trying to simply align the interest of our operating partners with our owners. And obviously, as you know, that regional density is very important to us. So if there will be opportunities to bring in other operating partners into the fold, we'll consider it. But at this point in time, we only have the 3 partners who are the founding class of this new program, and we'll see where future gets us. Operator: And our next question comes from the line of John Kilichowski with Wells Fargo. William John Kilichowski: Shankh, in the past, you've talked about the various source of capital available to the company. In the case of the acquisitions you announced yesterday, why not issue equity to fund some of those investments instead of the asset sales? Shankh Mitra: Very, very good question. So if you go to John, the first call I did as CEO, I laid out my belief of how capital allocation works. Most people think of capital allocation as a function of where capital goes or what you buy in a very simplistic term. It's actually so much more intricate than that. And then you have to think about your source of capital and you have to think about relative cost of that capital. And so as you can think about what we are doing, if you fix aside, which is the buy and just purely consider the sell, you're right, correct. We could have done it through equity. And frankly speaking, the spot cost of that equity is lower than the spot cost of that asset sales, which is like $9 billion of asset sales that Nikhil talked about. So it would have generated a higher near-term accretion and it would have created a disaster for the long-term value creation of this company. So in other words, if you think about our assessment of what we are giving up, you have to think about these things from an opportunity cost standpoint. What we are giving up by definition that we are not doing it through equity tells you that our view, which is a view you don't have to agree with, our view of our cost of equity is higher than the cost of the capital of the asset sales. So you can come to the decision, obviously, why is that? Because we have a higher view of growth and the duration of growth of that equity. It is an incredibly important question. I have seen so many companies and their management get sucked into near-term FFO accretion math and dilute their shareholders without thinking through how long-term value creation works. Thank you for the question. Operator: And our next question comes from the line of Michael Carroll with RBC Capital Markets. Michael Carroll: Shankh, I wanted to circle up on the recent Care Home deals, the Barchester and HC-One. I mean how do these portfolios compare to Welltower's current portfolio in terms of asset quality and maybe the private pay percentage? And does that impact the growth outlook of those assets at all? Or is it very similar to the current portfolio? Nikhil Chaudhri: Yes. On a cumulative basis, it's very, very similar. It's similar quality assets on a blended basis, similar metrics. So yes, really no change there. Operator: And our next question comes from the line of Farrell Granath with Bank of America. Farrell Granath: I know in the opening remarks, you outlined a lot of the aspects of the MOB disposition. But I was wondering if you could discuss your decision why for the structure. Shankh Mitra: Yes. So let me repeat, Farrell, what I said. If you just think about it, we are making an opportunity cost decision of 2 things. First, refocusing and entirely have a singular focus of management's time and attention into this digital transformation of an industry called senior living. That's what we are focusing on. So that's sort of one aspect of a strategic move that's behind this. The second, obviously, is the cost of capital conversation we just had. Now remember, at the end of the day, we have no idea what the future looks like. We don't have a crystal ball. It is entirely possible that the value of these assets tomorrow is significantly higher, right? We obviously have a view that the next 10 years is in a deglobalized world. It is going to look, obviously, relative to the last 10 years when we had 0 inflation, 0 rates, it's going to be different. But we have no idea we're right or not. So the structure reflects that if values go up significantly, right, or value goes up at all, we -- our shareholders will still reap the benefit of that value accretion that we are leaving behind today. That's what the whole structure is about, is how do we sort of do what we are trying to do and focus that capital into high-growth opportunities at the same time. We think very highly of Remedy as an operator. All our colleagues are going there. We think they will continue to create a lot of value. It is entirely possible that cap rates come down, interest rates come down. We're totally wrong about our macro views. And if all of those things happen, you have to sort of think about, okay, did I sell these assets in the wrong time in the cycle, right? So it's just sort of think about an opportunity cost from a strategic standpoint, also an opportunity cost from a capital standpoint, and that's how we came to this conclusion. Operator: And our next question comes from the line of Nick Yulico with Scotiabank. Nicholas Yulico: Just following back up on the outpatient medical sale. Just a few questions there. I mean you guys in the sub give that held-for-sale NOI. I just want to make sure that, that's sort of apples-to-apples to apply that to the sale of the $7.2 billion, and that looks like it's a 6.25% cap rate. And I just want to see if that's right. And then also on the preferred, if you could just talk about what the yield is you're getting on the preferred and then also if you guys are offering any seller financing as part of the transaction? Nikhil Chaudhri: Sure. So I'll start kind of backwards. On the preferred, the coupon is 8% and it's $1.2 billion, and that's really all we're leaving behind. That's why the $7.2 billion transaction results in net proceeds of $6 billion. So no seller financing. This will be financed through bank financing. Then secondly, to answer your question about the yield, that 6.25% is in the right ballpark. That includes some property management and profitability as well. The real estate yield is a little bit lower. But then obviously, if you think about the net yield once you factor in the reinvestment of the pref, that's closer to 6%. Operator: And our next question comes from the line of Omotayo Okusanya. Omotayo Okusanya: More high-level question for you guys. When your numerous press releases hit last night, I couldn't help but go back to Shankh's annual letter where you really kind of doubled down on this idea that you can actually grow faster at a bigger size and that because of various network effects you would get. And you also kind of talked a lot about doubling down on data design because of just kind of improved latency and how it will just kind of help you do business with better operational efficiency. Could you talk a little bit about just again, Welltower 3.0 and everything that's going on, whether it's RIDEA 6.0, all this alignment with management compensation, how do you kind of just see all that fitting together? And exactly what does that set you up for going forward? Shankh Mitra: Yes. Very, very good question. So tell -- think about -- let's take it simplistically, let's talk about, obviously, we laid out in our -- in my annual letter, how sort of a growth curve for an organization works, right? We sort of talked about first to get a team of people together in close proximity, which is obviously -- I talked about how that works according to Newton's law of gravitation. So you got it, obviously, that force is proportional to the -- inversely proportional to the square of the distance. So it's a very important factor that you bring this team as tight and close as possible. Why? Because the tight team is where you have very, very little latency. But let's think about that a little bit more about how that reflects, right? You think about, okay, let's just take easy example, dumb examples, right? This is a business John talked a lot about like if you call a community, there is a pretty good chance that -- 50% of the chance that you will not hear back. And if you do hear back, there's a pretty good chance that you will hear back in 2 business days. Now think about where Welltower business system has been deployed? Our customers, prospective customers are hearing back in single-digit minutes, which is still not acceptable to me. But at least that's we're hearing back in single-digit minutes instead of 2 days. That's significantly reducing latency. Think about historically, this business room turned happened in 37 days. Now it's happening in 11, still significantly higher than what John did or Jerry did, which was 3 to 5 days, but we're getting there. That's latency. That's you are taking latency out of the system, right? You think about -- we just talked about, right, in our company, I'll give you a third corporate level example. In our company, there is no management layer. It's not like things flow through layers from A to B to C to D and finally, it comes to the executive, and we make decisions. That's not how this organization works. We actually do the work with the bare hands sitting down and make decisions on the spot, right? So you think about that's taking latency out of the system and you make decisions fast, right? That's how you get these kind of results. When latency comes down in the system, that's when network effect kicks into gear, high gear and you get into a world of maximum gain, maximum growth. In otherwise, what is a glacially moving pace of doing business. That's what we are trying to do. We have done that, as I have talked about on my annual letter on the transaction side, deal side of the house, right? Think about how many people have. Think about the comment Nikhil made, we have bought 700 communities. And I'm going to repeat what he said. We have walked every single one of these communities. That is not given. How do we do that, right? Sort of that how do we take the latency out of the system is a lot of technology initiative, a lot of decade of effort. So that's kind of what we do. And on the other hand, if you just think about it, the hiring of Jeff and Tucker and Logan and what is the next step of that is to do that in the operations. I expect someday that no calls will go unanswered. And every call, if it goes, it will be returned immediately. That will be taking latency to 0. And those days of operations are coming. Operator: And our next question comes from the line of Michael Goldsmith with UBS. Michael Goldsmith: Lots of exciting news today, so I'll ask something maybe more holistic in that how do you go about managing the execution risk of everything announced today, including acquisitions, dispositions, new leaders? Where are you focused from an operational perspective to ensure these changes are implemented successfully? And what could go wrong here? Shankh Mitra: That's a very, very broad question. So look, the fact of the matter is how do we manage risk on -- on the deal side of the house, we have a very, very large team, which obviously has more experience in doing transaction than pretty much any team in this business, right? That doesn't require an asterisk. It does. So you think about it, that's -- obviously that happens. That team has done even during COVID, incredible execution when you couldn't fly, you couldn't do all of those things, so that sort of it. And that team is Tim's and Nikhil's team, deal tax, deal accounting and deal law sort of on the legal side. So there's a very, very strong team combined whether it's U.S., Canada and U.K. On the operations side, the reducing risk and operations is a purely function of what we've talked about building out Welltower Business Systems and trying to put that into high gear. And we are constantly evolving that, right? We're bringing in executives from industries of high standards. We obviously talked about a few. And that process is evolving. Our view of what the opportunity is, we're getting more and more and more excited about it every day. And we're bringing people who are looking at ourselves and say who -- what kind of skills we're missing. And we're bringing in people to complement that and take this thing forward. That's really what it is, and that's what we are doing. Remember, business is all about people. Spreadsheets don't do business with spreadsheets, legal documents don't do business with legal documents, right? It is entirely a people-driven business. Most business, I believe, are people-driven business. And for us, it is all about bringing and attracting the best talent and retaining the best talent. That's all we are trying to do. That's your ultimate risk mitigation through building a real vibrant culture where people, everybody is all in and they behave like owners. Operator: And our next question comes from the line of Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Great. Quick 2-parter for me. So on the incentive structure for Welltower 3.0, the presentation mentioned the 5 named executive officers, but far down in the release, it also notes that management is working with the Board on long-term incentive and retention for 2 existing and 5 newly promoted EVPs. So I guess my first question is, was it possible for all 12 to go all in on the incentive structure? And then my quick follow-up is just on competition over the next 10 years, whether it's talent, whether it's technology, as more capital comes to the space, how do you think about protecting Welltower's moat over that time period? Shankh Mitra: Thank you, Ron. Those 2 questions are actually fairly correlated. So let's start with your first question. As we said, that we are working with our Board to come up with a strategy to retain our colleagues who are actually doing all the work. We're absolutely doing all these things and hopefully, that you guys are pleased with our execution. That's not because of me or Tim or Nikhil, that's our group of team. This is a team game. We're all putting tremendous amount of effort 24/7, and this has been 10 years in a row. So this has been obviously for us that retaining that group of people that you mentioned is extremely important. How we go about it, it's a broad process. As I mentioned in the previous question that our Board has gone through enormous amount of effort with their lawyers and bankers and comp consultants to come up with a process that has been satisfactory for us. And we'll hope that, that same process will unfold, and we'll get to the satisfactory answer for our rest of our colleagues here that you mentioned. But as far as I'm concerned, as you know, I only believe in one way of living, go all in and do it in that manner, right? Do very few things. The only things I'd like to do is to go absolute all in. So that will be my hope. And think about it, the second point of your question, as more capital comes in, there's a structural element to that question. As you think about it, a lot of capital is structured in GP/LP style. Frankly speaking, LPs don't pay GP enough to spend the hundreds of millions of dollars that we spend on technology to get there because there's no way to get that money back, frankly speaking. So we shall see how that happens. It needs to be done by permanent capital. And from a permanent capital standpoint, you need a mindset. It's not a question of money. You just need a mindset to say, how do I transform a business? How do I invest today where I may or may not see the benefits of which for a long time to come. That's the question of long attention span. You guys don't remember, but when we went after this sort of the data science approach where in those days, we did was not called AI or something, we call machine learning, supervised learning, unsupervised learning. We got nothing out of it for 3 years. And we keep investing, right, and kept going around and seeing if we can get there. Ultimately, it's exciting to talk about after 5 years, we got something out of it and what has done to today for latency in our firm. But it requires years of investment and that sort of evolves the needs of the organization, the talent of the organization. We are constantly trying to move the ball forward. And we welcome other people to do, most people so that we want to see what is out of the possible looks like. And if other people come up with good stuff, we have no problem to copy. But unfortunately, in this world, most people don't have long attention span. Instant gratification is how most of the companies work. And as I said, GP/LP structure is actually not very amenable to long-term innovations. It needs to come from forever capital. Operator: And our next question comes from the line of [ Seth Berge with Citi. ] Nicholas Joseph: It's Nick Joseph here for [ Seth. ] Shankh, just one question, obviously, on the strategy change. Curious if you could touch on the balance between going more all in on senior housing versus the earnings volatility as Welltower becomes less diversified going forward. Shankh Mitra: Very good question. So Nick, I would refer you to sort of understand how we think about this topic starting from our foundational document, which is called the letter to future shareholders. You will see that there's a whole section I wrote about this topic of volatility versus risk. We are not concerned about volatility. We're concerned about risk. And risk is the probability of losing permanent capital. So for your first question, if you just think about how we behave, let's take an example of the last 5 years. What are the 2 periods of volatility? One was COVID, right, and sort of what happened subsequent to that COVID, whether it's labor and other inflation issue all. What did we do? We ran towards it, not ran from it. So we like volatility. What happened 6 months ago, liberation, the exact same thing. So if you think about where we built our organization, we built through the bouts of volatility. We love volatility. But on the other hand, risk mitigation, that's why you are seeing we're running a balance sheet impossibly low leveraged, right? So risk management is not just you have to think through, you can do it from the asset size, asset mix, or you can do it through the liability side. So that sort of thing I sort of -- I would like you to sort of think about that, some kind of belts and suspenders we have built into it. Second is operational. And think about what we are doing in this business from an operational standpoint to reduce -- meaningfully reduce risk to get into to understand how this business works, right? It's -- obviously, it is a business where it's a complex adaptive system. Different people got, obviously -- results are almost always on the tails. I wrote about that [indiscernible] for many years in my annual letters. And so we know how to manage that tail risk, and that's what we are doing. Everything we are doing to build out our operating systems, Welltower Business System is to manage that risk. We like volatility. We're trying to manage risk. And that comes in both forms. One is to managing the risk through balance sheet and managing operational risk throughout our business system, which is where we're putting all the efforts. Hopefully, that answers your question. Operator: And our next question comes from the line of Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just on the investment side, curious on your thoughts on both single-family and manufactured housing and opportunities or lack thereof in that -- in those 2 good groups relative to the seniors and active adults. Shankh Mitra: Very, very good question. Finally, somebody gave me an easy question to answer. I remain within my circle of competence. I don't comment on things that I don't know anything about. So that's one of our key tenets of our business that we are very much focused on what we know and our cycle of competence, what do I know about manufactured housing and nothing. So we'll remain within our cycle of competence, keep doing what we do. Operator: And our next question comes from the line of Richard Anderson with Cantor Fitzgerald. Richard Anderson: So the investments in hard assets is real interesting and headline grabbing and all that. But I think you would agree the most important investments you're making are -- I don't even know, I don't have to guess in people, but also in operating systems and technology. But -- so I want you to reconcile something for me and how you're approaching this. So your incremental tech investment is requiring a requisite return on that investment for it to be a reasonable investment. And so for all the customer experience that you're talking about and happy customers, happy associates and all that sort of stuff, what do you -- do you have concern about fatigue at the rent level? In other words, everyone's happy, but then they see a 10%, 12% increase in their rent every year. At what point are you kind of watching it to make sure it's not happening and to maybe have to sort of scale back some of these internal investments that are really what are going to sustain you for the next 5, 10 years? I'm just curious how you approach that line of sight. Shankh Mitra: Very, very good question, Rich. So if you just think about the 2 questions inside your question. First is the technology investments, whether it's technology itself or it's people around technology, we almost have an unlimited appetite to do it. And the way we see that returns, it's a significantly higher returns than real estate returns, and you see that returns come through your real estate P&L. I hope you are seeing that. Look at your performance relative to the industry performance or relative to anybody, and you will see that, and this performances are not coming through because we have easy comps. We have very, very hard comps. And despite that, these results are coming through. So you are getting back that ROI, which is significantly higher than, as I said, real estate ROI through the P&L. So that's sort of the first question. Second question is a nuanced question, much more nuanced question. which is if you think about -- I've said this before, we like -- think about how this business works. Obviously, if you have no rooms to sell by nature of demand supply, rents go up. However, we have always kept rents sort of in high single-digit level. We think that's sustainable in that sense, and we have no problem leaving money on the table today for tomorrow, right? Now one of the things that in senior living business, if you think about sort of the how long people stay in the community on average of, say, 20 months, you only get one of those rent increases, right? So from your perspective, I'm thinking people are getting -- first, 10%, 12% is not something we send people. But regardless, if you're thinking, okay, what if somebody gets 10% rent increase for 5 years, that's not really how it works, right? An average duration is, call it, 18 to 24 months, so you usually get one rent increases. So put all of those things together, just know philosophically, if the question is a philosophical question, I've said this that delayed gratification gene is part of this organization's ethos. We will always leave money on the table today for a greater gain tomorrow. That's just how this place works. So we're not in a hurry. We want the duration of that growth and duration of the growth comes from happy customers and happy employees, and that's what we're focused on. Operator: And our next question comes from the line of Jim Kammert with Evercore. James Kammert: Apologies, a bit of a pedestrian question, but maybe for Tim, how was the $1.1 billion noncash charge for the comp plan calculated? Just trying to understand some of the accounting mechanics here, please. Tim McHugh: Yes, Jim. So the plan is as highlighted in our 10-Q, the plan is essentially broken up into 2 pieces. There's an upfront expense piece of it, which is the $1.1 billion that you're alluding to. And then there's another $200 million that will be amortized over the following 10 years of the plan. Operator: And our next question comes from the line of Wes Golladay with Baird. Wesley Golladay: Do you see similar opportunities for the Welltower business system in the U.K. as you do in the U.S.? Is it pretty much plug and play? Shankh Mitra: It is nothing but plug and play. But yes, we do enormous opportunity. Just think about, generally speaking, there's a tremendous amount of opportunity overall in this business from an operations and operations sophistication perspective, and that same opportunity exists in U.K. as well and very much so. And our operating partners are welcoming us to bring in new ideas, new technology, new process. Business systems is about business first, systems later. It's about process first, technology later. But still all of those things, we're enormously excited about that opportunity. Nikhil, do you want to add anything to that or John? Nikhil Chaudhri: No, I think that covers it. It's really the same opportunity. Shankh Mitra: One of the things I'll just mention from a U.K. standpoint, as you have seen, hopefully, in the quote on our press release that the U.K. government is meaningfully welcoming us to bring that technology, that operational sophistication to the care sector. So that's also very much of a strong angle that we have been working with the government. Operator: And our next question comes from the line of John Pawlowski with Green Street. John Pawlowski: Can you help frame how NOI is performing on the 2024 vintage of senior housing acquisitions versus expectations at underwriting? Shankh Mitra: John, generally speaking, we have -- let's just talk about where it's not performed. We were hit obviously very big in holiday, right? Other than holiday, I would say most -- not just as an individual, but also as an aggregate, acquisitions have performed in line to higher than what we underwrote. Nikhil, would you say that? Nikhil Chaudhri: Yes, absolutely correct, yes. Operator: And our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Just curious what percent of the SHO NOI the 3 operators under RIDEA 6.0 represent? And I guess as you continue to grow, how do you keep a large percentage of the SHO NOI under that new alignment? And just curious if there are hurdles to adding other operators to the structure in the near term? Shankh Mitra: Yes. So I don't really have that information... Nikhil Chaudhri: I don't have the number on top of my head. Tim McHugh: 20%. Shankh Mitra: So that's the -- Austin, that's the answer 20%. But remember, as I answered in the previous question that this doesn't have to be -- that was the founding class. This doesn't have to be only those 3 operating partners. And what we are trying to do is to run a regional density of a business, bring in our operators, operating partners to focus on what they do. This is a business that has unremoval complexity at the customer level, which our operating partners do an exceptional job of providing their care and handling that complexity. On the other hand, we are only focused on where scalability creates a strategic advantage, right? So that's sort of how the responsibilities are being divided. And we're both, as I know, as I mentioned times -- several times, our interests are aligned, and we're all trying to get to the same place, right? So if that's the case, we don't see a lot of issues to get there. As operational issues come up, we're obviously solving it together. And we'll see where we get to. Operator: And our final question today comes from the line of Mike Mueller with JPMorgan. Michael Mueller: Just a quick one on the announced investments. You've talked about IRRs, but can you just give a sense as to the overall initial blended yield on the $14 billion and maybe parameters for how wide the range was between the different components? Nikhil Chaudhri: Yes, Mike, we never really disclose yields until the transaction is closed and then it shows up in the sub. But in general, the activity is not that dissimilar to our activity in the last couple of years. Operator: All right. Thank you, Mike, and thank you all for your questions today. Ladies and gentlemen, this does conclude today's call. So again, thanks for joining in. You may now disconnect. Have a great day, everyone.
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.
Operator: Good day, everyone, and welcome to today's Neurocrine Biosciences Third Quarter 2025 Results Call. [Operator Instructions] Please note, this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Vice President of Investor Relations, Todd Tushla. Todd Tushla: Hi, everybody, and a very pleasant good afternoon to you wherever you may be. Welcome to Neurocrine Biosciences Third Quarter 2025 Earnings Call. I'm joined today by Kyle Gano, Chief Executive Officer; Matt Abernethy, Chief Financial Officer; Eric Benevich, Chief Commercial Officer; and Sanjay Keswani, Chief Medical Officer. During our call, we will be making forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to review the risk factors discussed in our latest SEC filings. After prepared remarks and as is our standard practice, we will try to address all your questions. With that, I turn the call over to Kyle. Kyle Gano: Thank you, Todd. Good afternoon, everyone. Our third quarter results reflect Neurocrine's exceptional execution and the strength of our enterprise-wide momentum as we continue to deliver across our commercial, clinical and operational objectives. From a commercial perspective, for INGREZZA, the recent investments to expand our sales force and improve patient access drove yet another record quarter for both new patient starts and total prescriptions. Highlighting the persistent unmet need for patients with tardive dyskinesia and Huntington's chorea. With CRENESSITY, the strong launch highlights its role as a first-in-class therapy, redefining the standard of care for patients with classical congenital adrenal hyperplasia or CAH. While there is still much to learn, we are encouraged by the early response from the CAH community and the potential to make a lasting impact for patients. Momentum for both INGREZZA and CRENESSITY is strong and we believe continued targeted investments in these commercial assets will accelerate growth into 2026 and beyond. In our clinical portfolio, I am pleased with the study enrollment progress in our Phase III studies of osavampator in major depressive disorder in direclidinein schizophrenia. We remain on track to meet enrollment objectives for the year. Beyond these late-stage programs, we continue to advance a robust early and mid-stage as expanding through high-quality preclinical programs emerging from Neurocrine's internal discovery efforts. To this end, I'm also happy to report that we are on track to achieve our R&D productivity goals for the year, specifically 4 new Phase I study initiations and 2 new Phase II initiations. Advancing 2 potentially standard of care changing medicines until the final phase of development, while simultaneously driving early and mid-stage innovation represents a record level of productivity for us and positions Neurocrine exceptionally well for the future. As I reflect on my more than 20 years at Neurocrine and just over 1 year as CEO, I'm deeply proud of how far we've come. Yet as we continue to evolve, I'm even more inspired of what lies ahead. Neurocrine is poised into a new chapter of sustained long-term growth, driven by our science, our people and our unwavering commitment to the patients we serve and investors to support our mission. With that, I'll turn the call over to Matt. Matthew Abernethy: Thank you, Kyle, and good afternoon, everyone. The third quarter was strong across the board for Neurocrine, with $790 million in net product sales, reflecting 28% year-over-year growth. Driven by continued progress both from CRENESSITY and INGREZZA, congrats to all involved in the performance of these 2 medicines. CRENESSITY grew sequentially from $53 million in Q2 to $98 million in Q3, reflecting strong early adoption and persistency rates. In addition, 80% of dispensed prescriptions are now being reimbursed. Feedback from patients and KOLs remains quite favorable in terms of CRENESSITY's efficacy, safety and tolerability profile. We look forward to continuing to add patients to therapy and to further establishing CRENESSITY as a standard of care treatment for patients with CAH. Momentum for INGREZZA also continues to build with our third consecutive quarter of record new patient additions in Q3, resulting in net sales of $687 million. Of note, as you consider modeling Q4, the third quarter benefited from a 14th ordering week. Outside of this ordering dynamic, the combination of improved access and our sales force expansion, are resulting in double-digit TRx growth, record NRx and market share gains through the first 9 months of the year. On the heels of this momentum and strength of the TD market, we have decided to pursue an additional sales force expansion with 3 goals in mind. First, accelerate the development of the TD market between now and 2029, strengthening our position as we navigate the potential impacts of the Inflation Reduction Act. Second is to maximize INGREZZA patient share during this window of time. And third, set the foundation of an expanded psychiatry portfolio, anticipating one or more of our late-stage clinical programs will have successful top line data in 2027. From a financial perspective, the expanded investment in both INGREZZA and CRENESSITY will result in an SG&A expense increase of around $150 million in 2026. We will, of course, provide a fuller financial picture for Neurocrine in February next year, but I wanted to give you this insight for now. To close, our capital allocation priority is to remain intact. Number one, drive revenue growth; number two, advance our R&D programs; number three, enable business development; and number four, return capital to shareholders. Our top line growth and financial profile of over $2.1 billion in cash is the foundation for continued investment in our internal pipeline, which will position Neurocrine for sustained growth and enable us to deliver new innovative therapies to patients with unmet needs in the years ahead. With that, I will now hand the call over to Eric Benevich, our Chief Commercial Officer. Eric? Eric Benevich: Thanks, Matt. Q3 was another banner quarter for our brands. Our commercial and medical teams continued to deliver with a record quarter for both INGREZZA and CRENESSITY with combined net sales of $785 million. Starting with INGREZZA, performance through the first 9 months of 2025 has been exceptional, reflecting both the strong clinical profile and the continued significant unmet need for people living with tardive dyskinesia or Huntington's chorea. Past strategic investments to expand the sales force and improve access have been positive, yielding a third consecutive quarter of record new patient starts and total prescriptions. Today, of a population exceeding 800,000, we estimate only about half of those living with TD have received a diagnosis for their uncontrolled movements, and only about 10% are currently being treated with the VMAT2 Inhibitor. With exclusivity out to 2038, there remains a significant organic growth opportunity ahead. Our INGREZZA prescriber base continues to expand, particularly in psychiatry, where advanced practice providers, such as nurse practitioners and physician associates now account for the majority of psychiatric patient care in the United States. As an example, our INGREZZA prescriber base is 30% larger today than it was 2 years ago at this time. In addition, TD prevalence continues to increase in conjunction with broader use of antipsychotic medications. In light of our strong momentum and the significant growth opportunity, we've made the decision to further scale up our INGREZZA sales force to meet this growing demand. Going forward, we will be expanding and restructuring our INGREZZA sales organization to create 2 dedicated teams, 1 combined neuropsych team and our existing Long-Term Care team. Both the Neuropsych and LTC teams will be expanded to enable us to engage more VMAT2 prescribers than ever before and deepen relationships across our current base of prescribers. Consistent with prior expansions, success will be measured by growth in new patient starts and total prescriptions, metrics, which typically show the full impact of field expansion several quarters after deployment. The expansion of the sales teams set INGREZZA up well for 2026 and beyond. Will also help position us for the anticipated launches of our next wave of investigational psychiatric medicines currently in Phase III development. Now turning to CRENESSITY. Our launch mantra of So Far, So Great, remains well deserved with Q3 net sales reaching $98 million in just the third full quarter on the market. During the third quarter, 540 new patients initiated therapy, bringing the total number of classic CAH patients on therapy since launch to more than 1,600. As we've said from the outset, this is a new market we are building, and therefore, this is a learning launch. With CRENESSITY representing the first therapy developed and approved specifically for patients with classic CAH we continue to gain important insights into prescriber behavior, patient dynamics and potential seasonality trends. We continue to see steady adoption. And while the pace of new patient starts may vary from quarter-to-quarter, the strong persistence and adherence rates observed to date give us confidence in continued volume growth going forward. In the third quarter, patient demand modestly favored the pediatric population versus adults, and skewed towards female patients. Prescriptions continue to be written by a range of endocrinology providers, including those practicing in multidisciplinary centers of excellence, pediatric endocrinologists and community-based adult endocrinologists. On the payer front, we continue to see strong reimbursement. Launch to date, 9 out of 10 people taking CRENESSITY have received approval for their insurance, and CRENESSITY is affordable with 9 out of 10 people paying $10 or less per month out of pocket, most pay 0. So far, insurance reimbursement has not been a barrier to treatment. As the first and only FDA-approved treatment specifically for classic CAH, CRENESSITY delivers a compelling combination of efficacy, safety and tolerability. Our ongoing open-label extension studies continue to generate valuable data on quality of life, long-term safety and differentiating outcomes, which will further strengthen an already robust data set. We estimate approximately 20,000 people in the U.S. live with classic CAH. Based on the very favorable receptivity from the CAH community and the opportunity to bring relief to more people with CAH we've made the decision to also expand our CRENESSITY sales team. As I said in my opening comments, we're executing very well from a commercial perspective. Both our products are fast-growing, innovative first-in- disease medicines. Given the significant growth potential for each, it was a straightforward decision to expand both the INGREZZA and CRENESSITY sales teams. This is an investment in growth and an investment in our future. Both sales team expansions will be fully completed by the end of Q1, and we can give further color on our progress as we get into 2026. These are very exciting times here at Neurocrine as we make good on our promise to deliver brave science. So with that, I'll hand the call over to Dr. Sanjay Keswani, our Chief Medical Officer. Sanjay Keswani: Thanks, Eric, and good afternoon to everyone. My prepared remarks for today will be brief as we remain on track for all our clinical programs. We anticipate top line results in the fourth quarter for valbenazine in Dyskinetic Cerebral Palsy as well as for the Phase II proof-of-concept and dose finding study of NBI-'770, that's our NR2B NAM as an adjunctive treatment in major depressor disorder. As a reminder, positive results from NBI-'770 could support a confirmatory Phase II study or the initiation of a Phase III trial in MDD. As Kyle mentioned earlier, the Phase III studies for Osavampator in major depressive disorder and [ direclidineine or NBI-'568 in schizophrenia continue to enroll well, alongside solid progress for the rest of our early to mid-stage pipeline. You've heard us talk about our upcoming R&D day throughout today's call. As my colleagues alluded to, we are excited to welcome the Wall Street community to our San Diego campus where we'll have an opportunity to provide greater detail into our long-term vision, much of which stems from enthusiasm around our clinical and early-stage programs, plans and recent progress. To provide a bit more detail on the agenda, I will provide an overview of our neuropsychiatry programs with a spotlight on Osavampator and our broad Muscarinic Agonist portfolio. Following my presentation, Dr. John Krystal, a leading psychiatrists from Yale University will join me for a moderated Q&A session. Afterwards, Jude Onyia, our Chief Scientific Officer, will discuss Neurocrine's ongoing R&D transformation efforts and preview a few of the next-generation programs expected to enter clinical development. We look forward to seeing many of you there as we unveil the foundation for Neurocrine's next chapter. With that, I will hand the call back to Kyle. Kyle Gano: Thanks, Sanjay. I think we're ready to take questions now. Operator: [Operator Instructions] We'll take our first question from Phil Nadeau with TD Cowen. Philip Nadeau: Congratulations on a really strong quarter and great commercial performance. I wanted to just ask about the patient dynamics and patient starts for CRENESSITY. It did seem like enrollment forms were a little bit lower in Q3 than Q2. Was this seasonality or a sign of maybe an early launch bonus? Any insights you can give us on those trends would be helpful as we look to model the next several quarters of CRENESSITY? Eric Benevich: Hi Phil, this is Eric. So Obviously, we're really pretty pleased with the overall adoption of CRENESSITY launch to date and with 540 new treatment forms in Q3. And we saw that as a continuation to the strong adoption that we saw earlier in the year in the first half. We said at the beginning, we expected this to be a steady or measured launch. And so far, it really has borne out that way. The weekly adoption has been really consistent over the course of the summer. We don't think that there's necessarily any kind of quarterly dynamics going on or seasonality. We are still early in the launch, and we'll have to see how things bear out after we've gone through a few cycles. But ultimately, we're really pleased with the enrollment. And with over 1,600 treatment forms through Q3, we're really optimistic and expect to see this accumulation of patients as we go forward. Matthew Abernethy: Phil, thanks for setting the tone also and asking just one question. So just hygiene purposes, we'll stick to the answering the first question that gets asked. Operator: And we'll go next to Paul Matteis with Stifel. Paul Matteis: Let me add my congrats on the quarter. I wanted to ask a question, I guess, about the IRA and I hope you bear with me as it has 2 subparts for this where I got is really only one question. Just can you help us set up how you guys are thinking about the upcoming AUSTEDO price that we'll learn about? And just what are the sort of implications for Neurocrine? And then for INGREZZA, given the increased discounting and now that we're looking at a gross net that's getting up into the mid- to high 30s. Should we think that the worst-case scenario for you has now changed given that the small biotech exemption has the discounting to a level that is actually potentially going to be below where your gross to net ends up? Kyle Gano: Paul. A lot to unpack there. Maybe I'll start with the first question and see how far we get on that. I think when it comes to AUSTEDO, our view of this is that we'll learn its pricing across both the current immediate release and XR formulations in November. You should hear from CMS late November, if not sooner than that, but that's what we're planning on currently. In terms of our expectations, how it might affect INGREZZA. I think where we stand right now is we're trying to understand what the plans might do in reaction to AUSTEDO's pricing. Our view at this point is both the health plans and the PBMs will use a variety of strategies for medicines that go through the IRA as well as those medicines that are not going through an IRA type of moment. And for us, there are things that we know and don't know. And ultimately, where we stand right now is that INGREZZA is an incredibly sticky medicine. Once patients start INGREZZA, they tend to stay on it, which really means we're looking at -- looking at new patient starts during a 2-year period of '27 to '29 when we reach our own IRA year. So we'll look to contract here over the next, say, 12 to 14 months. As we approach 2027, we'll look to maximize the number of patients that are INGREZZA between now and the end of '26. And that will help us negate any headwinds on NRx's which to date, it's only about 5% of our total TRx. So on a quarterly basis, that number is quite small. We'll look also to see if there's any learnings from those medicines that are negotiated and become implemented next year. And then I think most importantly here, we'll control what we can across INGREZZA, but across the portfolio, we'll look to build the company as strong as we can. Eric Benevich: Paul, this is Eric. I just want to chime in and kind of reinforce a couple of points. One is that we do believe that there's room on formularies for MFP adjacent products. We think that PBMs and health plans will behave differently. There's not going to be sort of a uniform approach that they take. And kind of tying in with our prepared remarks, it's really important that we maximize patient share going into '27 and beyond. And currently, that's what we're doing and that's part of the rationale for the sales force expansion for INGREZZA. Operator: And we'll take our next question from Tazeen Ahmad with Bank of America. Tazeen Ahmad: Mine is going to be on CRENESSITY. So is it too early to know this, but are payers already looking for a certain level of steroid tapering in order to continue covering therapy? And just in terms of number of days in 3Q versus 4Q, we're heading into holiday season. So how should we be thinking about the potential for seasonal impact for CRENESSITY sales in 4Q? Matthew Abernethy: Thanks for the question, Tazeen. This is Matt. We're not really anticipating seasonality outside of just the pace and cadence of patient visits into the clinician's office. So nothing on the seasonality front. In terms of reimbursement, really has not been a requirement for patients to titrate down steroids to a specific extent. It's really looking at do they have the underlying disease and do they have treatment with hydrocortisone? And if that's the case, reimbursement has been quite smooth. I just give a shout out to the team working on this, advocating on behalf of patients. And I'd say the insurance providers can understand the benefit of this new medicine for these patients. Operator: And we'll go next to Akash Tewari with Jefferies. Unknown Analyst: This is Steve on for Akash. On INGREZZA, given that you mean sort of AUSTEDO [indiscernible] already much more expensive than regular AUSTEDO. Is there any changes in payer preferences you've seen thus far? And then just in terms of the IRA negotiated pricing upcoming, how are you able to lock in INGREZZA's pricing through 2026 ahead of this announcement? Eric Benevich: Yes. No, thank you for the question. So I think the health plans are seeing that part of what Teva is doing is trying to push patients to higher dose strengths of both the BID and the XR formulation of Deutetrabenazine and since that product has a per-milligram pricing structure, higher doses mean more revenue per patient. Health plans are catching on to that. And we have seen examples of health plans that would, for example, cover the BID formulation, but not the XR. So I think that the fact that we've seen this dose creep dynamic and/or patients transitioning to the XR formulation being more expensive to the plan that they've been more willing to engage with us. And I think it partly explains the ability that we've had this year midyear to expand our formulary coverage. The coverage that we have now, we expect to carry through 2026. And so in terms of expectation setting for next year, we should expect at least the same level of formulary coverage that we have now. Matthew Abernethy: But in most instances, we're seeing -- we're at parity from a formulary perspective. And that's always been our goal is to take an approach to give clinicians a choice as to what medicine they prefer. And that's going to be our strategy also going forward. Operator: We'll go next to Mohit Bansal with Wells Fargo. Mohit Bansal: Great. And would love to touch upon the 10-Q filing and the talks about DOJ investigation. Any color you can provide on that? And how should we think about the next time line from this one? Kyle Gano: Hi, Mohit. This is Kyle. I appreciate the question here on this. In August, we received a CID, a Civil Investigative Demand from the DOJ requesting certain documents and information attached to sales, marketing and promotion of INGREZZA. Of course, we're fully cooperating with the DOJ. And I think right now, there's not much more to say on that. We'd certainly keep the external community updated when there's material information to share on that. The only piece I would conclude with is that we have an extremely robust compliance program here at Neurocrine. We take compliance seriously and the responsibility that comes with that. And as we move forward here, we'll continue business as usual because we think that's the right thing to do. Again, we'll keep folks updated as we learn more. Operator: We'll go next to Cory Kasimov with Evercore. Cory Kasimov: Mine is on CRENESSITY. I guess I'm wondering if you can speak to where you are with getting CRENESSITY up and running at this point at the centers of excellence and then the progress that's also being made in the community setting where doc see fewer patients. Are you more or less at every COE at this point? And do you see that opportunity on the community level? Eric Benevich: Yes. And just to recap, we estimate there's around 20 centers of excellence out there that care for roughly 15% of the classic CAH patient community. Yes. I mean, all the COEs have now started adopting though, I would say, a different pace. And I think that reflects the sort of the different ways that they work, the level of bureaucracy, the level of access, et cetera. But for the most part, our view is that the rate of adoption that we're seeing in the COEs is mostly a function of the rate at which patients are flowing through. We've also been surprised -- very pleasantly surprised, I think, by the rate of adoption with community endocrinologists that treat the adults. Most of these practices, as you rightly call out, only have 1 or 2 patients. And so that's where you get into a much wider pool of HCPs to reach. And kind of tying back to our prepared comments as part of the rationale for expanding our field sales team to go a little bit deeper into our call universe and to be able to reach some of these practices that we haven't yet tapped into. Operator: We'll go next to Anupam Rama with JPMorgan. Anupam Rama: Congrats on the quarter. Could you provide a little bit more color and maybe some quantification around the sales force expansion for both products in terms of the segments that are going to be targeted here for INGREZZA. Is its psychiatry, neurology, long term or for CRENESSITY, general endos versus pediatric endos? Eric Benevich: Yes. So in terms of scale, I would characterize it as about a 30% increase in terms of our overall sales footprint across both products. Obviously, INGREZZA is a bigger product. So most of the incremental headcount are going to be going to INGREZZA. I said in my prepared remarks that we were going to be both restructuring and expanding. And what we're doing with INGREZZA is essentially combining our existing psychiatry and neurology teams, and then expanding the headcount there because what we've seen is that we could do a better job, I think, of covering our psychiatry and neurology customers who, in many ways, are more similar than they are different by having a cohesive team versus having multiple different teams with different reporting structures. So I think that this simplifies things substantially for us going forward. We're going to keep the LTC team separate and we are expanding that group as well. There's been a continuing fast-growing segment for us. So we're excited about increasing our coverage of high-potential psych providers and neurology providers with the Neuropsych team and then adding more headcount into LTC. The expansion with CRENESSITY is obviously smaller in scale. Our existing team is less than 50. So this is going to be a relatively smaller expansion, but it does allow us to go deeper especially in those community endocrinology practices and ultimately to accelerate adoption in classic CAH and help more patients faster. Matthew Abernethy: This is really a reflection of our belief in the TD market, an opportunity that we have ahead. Eric's track record here, this is probably our fourth expansion. Every time we've done it, we've seen a tremendous response and the team has done a great job driving more patients onto therapy. So I would look at this investment as clearly being to accelerate the market development and to maximize the number of patients on therapy, and we feel fortunate to have 2 great medicines to do this with. Operator: And we'll go next to Jay Olson with Oppenheimer. Jay Olson: Congrats on the quarter. We have a pipeline question related to direclidine. As you look at potential indications beyond schizophrenia and bipolar, are you considering Alzheimer's psychosis? And are there any particular lessons you expect to learn from the Cobenfy Phase III study in Alzheimer's when that study reads out and any potential read across to direclidine? Sanjay Keswani: Yes. Thank you so much for the question. So as you mentioned, with 568 or direclidine, we're targeting our Phase III program, schizophrenia. We have initiated a Phase II bipolar mania study, that's this year. We're also very interested in Alzheimer's disease psychosis. We do have a pretty robust muscarinic portfolio, and indeed, we'll unveil that at R&D Day in December. But we have a lot of options in terms of which molecule we use, M1 preferring, M4 preferring, dual agonist for various indications. So at the moment, we're thinking about AD psychosis for one of our follow-on molecules, which has particular advantages with respect to safety considerations in the elderly. Yes, we'll be watching BMS' Cobenfy data very closely. Our understanding is that their ADEPT Phase III study will be reading out relatively soon. They're going to be lessons learned, I think, for the whole field. Operator: We'll go next to David Amsellem with Piper Sandler. David Amsellem: So I wanted to come back to the sales force expansion for INGREZZA. So you've had a number of sales force expansions over the years over the commercial life of the product. So I guess with that in mind, at what point do you think this commercial organization is going to be rightsized? And also at what point do you think the level of DTC spend is going to be rightsized? In other words, when do we start to see more aggressive margin expansion associated with the product? Matthew Abernethy: So on the margin expansion, we've made tremendous progress over the last 5 years being in the low 50% range all the way down to this year, we should be in the low 40% range. And growing revenue to almost $800 million this quarter is just a testament to the investments as well as the markets that we're playing in. So when will we be 100% rightsized? We always invest as much as we can to pull as much revenue forward in any of these situations, and we're learning a lot as we go with the TD market. But overall, from a margin expansion perspective, we look into the last part of this decade as being in a place where we'll continue to drive leverage, albeit maybe not as much as what had been anticipated in '26, but it's really with an eye to maximize the number of patients on therapy heading into the '27 to '29 window. Kyle Gano: Maybe I'll just add there to that. I think we touched on this already, but the INGREZZA market as it relates to TD is an incredibly robust growth engine for the company. And as much as we lean on the performance of the medicine, we're still only treating 10% of the 800,000 patients that are out there. And that was with the backdrop of the TD prevalence continuing to increase at the rate of growth of the antipsychotics, which is 3% to 4% per year, which is 3 to 4x greater than the general population. You put all those pieces together, the number of prescribers increases year-to-year as well. It's increasing faster than we've expanded the sales force over the years. In fact, I believe the past 2 years, the prescriber base has increased by 30%. So as much as we have looked at ways of reaching all of these patients and prescribers over time, the current structure of our sales organization is actually smaller than some of the companies out there with products just within schizophrenia. So we like where we're headed to right now, but it's still an organization that is rightsized for tardive dyskinesia and not so much for some of these larger psychiatry indications. And I think this is a step that not only helps us with INGREZZA, but as Eric said in his opening remarks, sets the stage quite well for us as we look at osavampator and direclidine in Phase III and their potential launch in the second half of this decade. Operator: We'll go next to Brian Skorney with Baird. Luke Herrmann: This is Luke on for Brian. On the upcoming 770 readout, can you talk about your expectations for the data? And what type of result in your view would support a confirmatory Phase II as compared to moving right into pivotal? Sanjay Keswani: Yes. So we are expecting the results of the Phase II study for 770, that's an NR2B NAM, this quarter. Just a context, the Phase II is a relatively small signal finding study, so 72 patients total, with 3 active arms as well as placebo. So I think the likelihood is that we would go into confirmatory Phase IIb if the results we see are encouraging. But we won't discount going to Phase III at this moment. In terms of, frankly, what we'd like to see, we would like to see esketamine-like efficacy, not too dissimilar from SPRAVATO, but without the baggage of some of the associated side effects, which mandate a 2-hour in-house observation period post dose. But I guess we'll see what we see later this quarter. Operator: We'll go next to Brian Abrams with RBC Capital Markets. Brian Abrahams: Congrats on the quarter. I was wondering if you could talk a little bit more about CRENESSITY persistence, just now that you're several quarters in. Can you be any more specific on in terms of what you're seeing there? And then just the overall KOL feedback around patients who started on the drug early in the launch and the glucocorticoid equilibration at this point now that patients have been on drug for many months. Eric Benevich: Yes. I mean the way that I would characterize it is that CRENESSITY's persistence and compliance has been really strong. And certainly, we were hopeful going into the launch that we would see this kind of overall adherence to medication based on our experience in the double-blind studies and the open-label extensions. But the vast majority of people that are starting treatment are -- in the earlier parts of the year are still on treatment. In terms of the feedback on the reduction of GCs, obviously, you all have done your doc calls, you're probably hearing the same kind of thing that we're hearing. Patients are on treatment for a period of time. Doctors want to see how they can reduce the androgens and then they start the process of tapering down the GCs and it varies a little bit from provider to provider and also, I think, is dependent on the particular situation of the patient. But overall, we're seeing really good feedback in terms of both disease control with the androgen reductions and also the opportunity to really bring down those GCs to more physiologic or near physiologic levels. Operator: We'll go next to Marc Goodman with Leerink Partners. Marc Goodman: Yes. Matt, at the beginning of the year, you were pretty conservative with respect to the CRENESSITY launch. I think your main issue, if I remember, was just reimbursement concerns and how quickly that would be adopted. Obviously, that's been adopted way better than anybody could have expected, I suppose. So how do we think about gross to nets now? I mean they clearly have come down a lot, just working through the numbers. Are we continuing to move lower quite a bit outside of maybe the first quarter next year just because first quarter is unusual? But if you think about the next 3, 4 quarters, are they just going to continue to come down and ramp down to more normalized levels for what we consider an orphan product like this? Matthew Abernethy: Marc, that's quite fair. In terms of a guide for gross to net, I would just characterize it as being less than a 20% gross to net discount and that's something that -- in the foreseeable future, that's something we would be anticipating. Part of the gross to net dynamics has to do with the nature of the patients. They're primarily commercial, but we also have a base of Medicaid patients, so you pay the statutory rebate. But overall, the rate of reimbursement, as you mentioned, it's above 80%. As Eric said, 9 out of 10 patients have ultimately ended up with an adjudicated claim. So I feel quite strong with where we're at and reaching a pretty darn good level in terms of how we think about the future. Operator: We'll go next to Sean Laaman with Morgan Stanley. Sean Laaman: Maybe just circling back on INGREZZA. But can you comment on neurology versus the psych split? And is it a focus on psych to the expense of neurology? I think I heard AUSTEDO had a strong uptake in neurology, especially during COVID? And what are your plans for neurology? Eric Benevich: Yes. Neurology represents about 15% of our total volume. Obviously, all of the business segments, neurology, psychiatry and LTC have been growing like gangbusters this year, in particular. But on a relative basis, it's now the smallest segment that we have. And we view it as important, but it doesn't have the same kind of patient potential that we see in psychiatry. As I said in my prepared remarks, the fastest-growing segment is really advanced practice providers that are in behavioral health. And so this reorganization and kind of combining our teams across psychiatry and neurology sort of puts our resources where we see the highest growth potential. And behaviorally, the psychiatry segment and the neurology segment are more similar to each other than LTC. And so we're keeping LTC separate, expanding that team. We're combining our psych and neurology teams and then expanding that team. And ultimately, we want to make sure that we can keep up with the pace of this market that's very fast growing and continue to drive new patient starts. This is an investment in growth, as we said, and we really like the trajectory that we're on now. Kyle Gano: Maybe just to add to that real quickly on the neuro piece. Just keep in mind, a lot of interest has come from the side of the chorea side of the indication opportunity with INGREZZA. For HD chorea, there are about 30,000 patients in the U.S., about 90% have chorea. So that 20,000 number is about a 40:1 ratio to the TD patients that we see out there today. So I think that speaks to some of the volume flow that we see across the neuro and psych piece and that's something that we keep in mind as we look at for their investments down the road. Operator: We'll go next to Yigal Nochomovitz with Citi. Yigal Nochomovitz: I had one on capital management. You mentioned, obviously, the increase in SG&A of about $150 million to expand both sales forces. So with that in mind, I'm just curious how are you thinking about the continuation of the buyback at the pace of that buyback related to the new $500 million buyback allocation? Matthew Abernethy: Yes. So we have $2.1 billion in cash right now, no debt. We're profitable. Where we're putting the capital right now is prioritizing top line growth as well as investing in R&D at 35% is what our target range is. We, of course, have flexibility to do share buyback. But I would say that our bias is to utilize our capital to -- for business development activities. But right now, focused on driving our own internal initiatives. Operator: We'll go next to Corinne Johnson with Goldman Sachs. Corinne Jenkins: Maybe a question for us. Can you talk about where you stand with respect to share of kind of new to category or new to class patients with INGREZZA versus AUSTEDO? And where do you think that could go? Maybe contextualize that versus where we were a year ago and where you think we could go with the expanded sales force over kind of the next year? Eric Benevich: Yes. As Matt mentioned, the new patient starts or NRx in any given week or month are single-digit percent of total TRx. But they're critically important because of the persistency and compliance that these patients have on INGREZZA, that they represent a significant number of likely refills. And what we've seen really since the beginning of the year with the prior expansion of our field sales team and then the investment that we've made in increasing formulary coverage, particularly in the Medicare segment is that we're getting the majority of new patient starts, and that's really what's driving increased total market share from a patient perspective and that's really an important part of our strategy going forward. This momentum that we're carrying through '25 into '26, we want to make sure that we continue that into that critical time period of '27 and beyond. So the way I would look at it is we're gaining the majority of new patient starts now, and we intend to continue doing that going forward. Operator: We'll go next to Ash Verma with UBS. Ashwani Verma: I'm just trying to understand the medium-term growth outlook for INGREZZA given the sales force investment and the contracts that you've done. For the years before IRA impact, do you believe that you can grow at a higher pace versus where you've guided to this year? Eric Benevich: Yes. I guess the way that I would characterize that is that this year, the VMAT2 market is experiencing double-digit growth. And our brand is growing faster than the market. So we're really pleased with the growth trajectory that we're on. In fact, as we mentioned earlier, for Q3, that was -- that represented 12% year-over-year growth. So the goal is to continue and carry that forward into 2026 and beyond, and to maximize our patient share. We'll be able to give more color as we get closer to our Q4 earnings call and talk about the projections for 2026. But at this point, it looks like we'll be able to see a continuing strong, robust growing market for VMAT2s and INGREZZA in particular, next year and beyond. Operator: We'll go next to Ami Fadia with Needham. Ami Fadia: It's on NBI-'770. Given that this study is not necessarily powered for statistical significance, just on an absolute basis, what is the level of change in the primary endpoint that you're looking to see as you think about some of the other drugs, such as SPRAVATO or rather psychedelics in the space? And eventually, are you thinking of studying this in TRD or MDD? Just sort of current thoughts. Sanjay Keswani: Yes, really good question. So yes, it's a relatively small study. So I'm hesitant to give an effect size that, frankly, we would be considered as successful versus not because I think there's a huge amount of unmet need in this population. As you mentioned, there are potentially 2 populations that we could target with 770. And one is adjunctive treatment in MDD, which is currently where the program is headed. But we clearly could go down the SPRAVATO route with respect to TRD as well with this mechanism. So we have a couple of options. We will decide that, I think, based on the data that we'll receive later this quarter. Operator: We'll go next to Sumant Kulkarni with Canaccord. Sumant Kulkarni: As the Inflation Reduction Act kicks in for your competitor, could you comment on where you might see the most impact on INGREZZA, either in terms of profile of patients or by prescriber type? And on the neuropsych side specifically, what might be the maximum number of products that you might be able to leverage the situation of your expanded neuropsych sales team? Eric Benevich: Yes, let me take the second part of your question here. We'd love to have the challenge of having 3 products into psychiatry and long-term care at the same time. Obviously, we're really excited about the late-stage pipeline with both direclidine and osavampator in Phase III trials. And as Kyle said in his prepared remarks, data and potential launches later in the latter half of this decade. This expansion that we're in the midst of now, I think sets us up well for being able to move and launch with either of those 2 products or potentially both. So I would say that it's not sufficient, meaning, for example, if we end up having the opportunity to launch osavampator, we won't have the coverage of the primary care -- future primary care prescribers that we would need to reach. So this gets us partly the way there, but not fully. And so I do think it reduces the amount of changes that we would have to make to prepare for either of those 2 launches down the road. Matthew Abernethy: In terms of impact from the IRA and the negotiation, our view is that patients are -- existing patients are ultimately going to stay on therapy during this window of time. So you're thinking about a 2-year window when you're dealing with new patients and where do they go. So a lot of what we're doing right now is to maximize the number of patients on therapy between now and 2027. And we're going to control every single thing that we can to maximize that number, and we think we'll be successful during that window of time. But we will learn more in terms of what the MFP is for AUSTEDO as well as payer behavior over the coming months. But for what we can control, we're doing everything we can possible. We have a great market with a great medicine here. Operator: And we'll go next to Yatin Suneja with Guggenheim. Yatin Suneja: One clarification, the 14-week dynamic or one extra week dynamic, that is just specific to INGREZZA? And then if you can just comment also on the inventory, if you can, for CRENESSITY. Matthew Abernethy: Yes. CRENESSITY inventory build was about $7 million for the quarter. And then as it relates to the 14 week, that does pertain to INGREZZA primarily. And you can assume that was almost a full week of impact on the quarter. So when you want to normalize Q3 to think about trajectory into Q4, I think it's safe to assume remove the week and then you can grow off of that base from there. Operator: And we'll go next to Myles Minter with William Blair. Myles Minter: This one is just on CRENESSITY new starts. I think in the second quarter, you had 664. You got 540 this quarter. So some sort of warehousing effect that's bleeding out of those patients. Can we expect that sort of trajectory for the next quarter and maybe a return to growth when you get that sales force expansion hitting into the new year? Eric Benevich: Yes. The way I would characterize the adoption in Q3 was that very consistent and steady. We said this would be a measured launch. And so far, it has played out that way. Although the overall rate of adoption, I think, since day 1 has been a little bit quicker than what we anticipated prior to the launch. We were helped out a little bit in Q2 by the wind down of the adult open-label study. And so there were some patients that transitioned towards the end of Q2 to commercial drug that bumped up numbers a little bit. But overall, I'd say that the rate of weekly enrollments has been pretty consistent across both Q2 and Q3. Kyle Gano: Maybe I'll just add here quickly. The launch continues to exceed our expectations, and that's across the board, enrollment forms, persistence, compliance and that's played out here ultimately. As time moves along, the combination of the steady adoption of CRENESSITY as well as the persistency is going to stack volume over time and gives us all the confidence that we have a need for this to be our next blockbuster here. Operator: We'll go next to Danielle Brill with Truist. Alexander Nackenoff: This is Alex on for Danielle. Another one on CRENESSITY. Just curious if you're seeing any new -- any shift in the new prescription breakdown between pediatrics and adult? And additionally, any trends in the usage of the free drug program? Eric Benevich: No major shifts from the demographic perspective. It still is skewing towards younger patients and primarily towards female patients. That pattern kind of kicked in after about a quarter or so on the market, and it's been pretty steady ever since. And then what was the second half of your question, I'm sorry? Alexander Nackenoff: Just on... Eric Benevich: That was on the drug part? Alexander Nackenoff: Yes. Eric Benevich: Yes. It's actually continues to be less than what we had anticipated it would be. The idea being that if insurance hadn't approved the claim after about a week, that we would be able to offer a month supply of CRENESSITY to get someone started pretty quickly. And as I mentioned earlier, 9 out of 10 patients that are on CRENESSITY have gotten their prescription approved through their insurance. And so not that many people end up on the free drug program, to be honest with you. Operator: We'll go next to Laura Chico with Wedbush Securities. Laura Chico: One of the pipeline with respect to valbenazine and dyskinetic cerebral palsy. The data coming up here. Can you talk a little bit more about what will constitute a meaningful change in chorea score in a CP population? But also, I guess, against the backdrop of the INGREZZA field force expansion, how should we think about the size of the opportunity and overlap with existing INGREZZA prescribers? Sanjay Keswani: Yes, I'll do the first question really quickly, and I'll hand on for the second. So this population of dyskinetic cerebral palsy doesn't have a priori-validated scale. So essentially, we're borrowing from the UHDRS, Huntington's scale. That's a total maximum chorea scale. Our assumption is that typically a significant effect in that would be meaningful enough. Clearly, we'll be seeing the totality of the data later this quarter. Kyle Gano: And maybe -- this is Kyle. Just to add to next steps on this. We would take a data set if it was robust to the agency and ensure that there's a path forward for an NDA submission. And with the current size and composition of the sales force, we would be covered there in case that was an sNDA. Eric Benevich: This is Eric. The last thing, I'll chime in here. The DCP population is larger than the Huntington's chorea population, but still substantially smaller than the TD population. And the expanded sales team, if this turned into an indication down the road, would be able to cover all the potential prescribers. Operator: We'll go next to David Hoang with Deutsche Bank. David Hoang: So again, congrats on a strong quarter. I saw you have reiterated but not raised guidance. So I guess you mentioned the extra week in Q3 for ordering, but we think about the -- what the Q4 number may look like, I think the guide implies something to like down mid-single digits to flattish. Anything else to think about in there in terms of maybe whether you envision seasonal dynamics or perhaps there's some degree of embedded conservatism? Matthew Abernethy: Yes. If you back out the 14th week, I think it gets you into a place to grow off of. And then sequentially, what you've seen over the last handful of years is the fourth quarter typically will have a range of $15 million to $20 million of sequential growth. So my recommendation, David, is to normalize Q3 to a 13-week and then think about that type of a growth trajectory. Price should be pretty consistent. It was down 6% to 7% year-over-year in the third quarter. That should be something that you would experience in Q4 as well. So nothing abnormal on the pricing side. Operator: And our final question comes from Evan Seigerman with BMO Capital Markets. Evan Seigerman: In your 10-Q filed today, there was a disclosure about the Make America Healthy Again commission issuing warning letters regarding DTC advertisements. You indicated that you got one for INGREZZA. Can you talk about what was in that letter and what you might need to correct given that, that is pretty important when it comes to the commercial plan for that asset? Kyle Gano: Yes, I'll take this question. This is Kyle. I think many of us in the industry received a similar letter with similar types of contents in there. I think what a good view to have on this as a pharma member is we're committed to conducting responsible advertising for us. It is an important part of our business. We think it's a good opportunity for us to reach patients and also educate out there. We'll continue to look at that as an opportunity. But rest assured, we continue to do this in a responsible way, and we'll look to continue doing that moving forward. Operator: And this does conclude today's question-and-answer session. I will now turn the call over to Kyle Gano for any additional or closing remarks. Kyle Gano: Thank you, and thanks, everyone, for the good discussion and call this afternoon. Looking ahead, we are confident in the company's direction and momentum. We hope you can see here today that we're executing with clarity and discipline.,, Expanding 2 commercial franchises in INGREZZA and CRENESSITY, advancing a robust and growing pipeline. We talked about some of our mid- to late-stage assets today and investing in the next generation of innovation. This is what Neurocrine is about today and in the future. It goes without saying we look forward to meeting with many of you at the upcoming and remaining conferences this year and certainly at our R&D Day on December 16. Thanks again. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Welcome to Visa's Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Ms. Jennifer Como, Senior Vice President and Global Head of Investor Relations. Ms. Como, you may begin. Jennifer Como: Thank you. Good afternoon, everyone, and welcome to Visa's Fiscal Fourth Quarter and Full Year 2025 Earnings Call. Joining us today are Ryan McInerney, Visa's Chief Executive Officer; and Chris Suh, Visa's Chief Financial Officer. This call is being webcast on the Investor Relations section of our website at investor.visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and 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. Our comments today regarding our financial results will reflect revenue on a GAAP basis and all other results on a non-GAAP nominal basis unless otherwise noted. The related GAAP measures and reconciliation are available in today's earnings release and related materials available on our IR website. And with that, let me turn the call over to Ryan. Ryan McInerney: Thanks, Jennifer. We finished fiscal full year 2025 with strong financial performance, an ever-growing obsession for our clients and a sharp focus on innovation as we build the future of payments. Fiscal fourth quarter net revenue grew 12% year-over-year to $10.7 billion, and EPS was up 10%, resulting in full year net revenue and EPS year-over-year growth of 11% and 14%, respectively. Total full year payments volume was $14 trillion, up 8% year-over-year in constant dollars, and process transactions totaled $258 billion, up 10% year-over-year. Our financial performance and growth demonstrate how Visa has become a hyperscaler, enabling anyone that wants to be in the money movement or payments business to build on top of the Visa as a Service stack. You may recall the layers of the stack, the foundation layer, the services layer, the solutions layer and the access layer. Throughout 2025 and most recently in Q4, we have intensified our investment in innovation. Today, I want to highlight Visa's progress with our clients and the ecosystem at large across the Visa as a Service stack, starting with the foundation layer. At the foundation of the stack is our global connectivity, our network and our network of networks that enable global commerce and money movement. In full year 2025, we expanded our network of networks in 3 important ways: first, more connection points, visa's network of networks now has approximately 12 billion end points. That's about 4 billion cards, bank accounts and digital wallets each; second, more settlement currencies, we are adding support for 4 stablecoins running on 4 unique blockchains representing 2 currencies that we can accept and convert to over 25 traditional fiat currencies; and third, we have begun deployment of the next generation of VisaNet, the core processing platform in our Visa as a Service stack. It offers a cloud-ready micro services distributed modular architecture that uses open languages and technologies, enabling easier scaling, configuration and faster feature deployment. Over half of the new code base was built with the assistance of generative AI, improving development speed, security and maintainability. We have specific modules in market today with plans to roll out additional modules and markets. The next level of the Visa as a Service stack is our services layer, which encompasses the building blocks of our core capabilities, including credentials, tokens, authentication, risk management, fraud detection and more, which we've turned into discrete modular components. We grew the number of Visa credentials by 270 million this year, and we continue to sign many deals this past quarter to drive further growth. I'll share a few regional highlights. We are pleased to have renewed our nearly 60-year relationship with Barclays in the U.K. and the U.S. across their millions of customers in consumer and commercial issuing and acquiring, and enabling increased focus on value-added services utilization. In the U.S., Visa continues to be the exclusive payment network for the Southwest Airlines co-brand program, and we will soon be expanding our relationship into a co-brand debit offering, providing customers a new way to earn Rapid Rewards points on everyday purchases. In Latin America, We won the new Scotiabank wealth management credit card issuance with our Visa Infinite product across 7 countries. And in Mainland China, one of our largest clients, China Merchants Bank, has renewed their long-standing relationship with us as we continue to upgrade China's magstripe dual-branded cards to contactless EMV chip cards. Moving to tokens. We now have over 16 billion Visa tokens, up from 10 billion just in May of 2024. We continue to increase the amount of Visa tokens globally in pursuit of our ultimate goal of 100% of e-commerce transactions tokenized. We continue to enhance our risk management capabilities, including Visa scam disruption, which proactively detects scam activity at the network level that no single issuer, acquirer or a merchant could see alone and leverages AI-enhanced merchant monitoring external intelligence feeds and our global expertise. Just a year since launch, we have worked closely with our clients and law enforcement to dismantle more than 25,000 scam merchants representing more than $1 billion in fraud attempts. Our stablecoin platform is another key component of our services layer. Since 2020, we facilitated over $140 billion in crypto and stablecoin flows, including Visa users purchasing more than $100 billion of crypto and stablecoin assets using their Visa credentials and spending more than $35 billion in crypto and stablecoin assets using Visa credentials. Within this, we see particular momentum with stablecoins. We now have more than 130 stablecoin-linked card issuing programs in over 40 countries. And in Q4, stablecoin-linked Visa card spend quadrupled versus a year ago. We expanded the number of stablecoins and blockchains available for settlement, and monthly volume has now passed a $2.5 billion annualized run rate. We are starting to enable banks to mint and burn their own stablecoins with the Visa Tokenized Asset Platform, and we are adding stablecoin capabilities to enhance cross-border money movement with Visa Direct. In September 2025, we announced a stablecoin prefunding Visa Direct pilot targeting banks, remitters and financial institutions seeking faster, more flexible ways to manage liquidity, and there is much more to come in this space. The next level of the Visa as a Service stack is our solutions layer, a comprehensive portfolio of solutions where we have taken the componentized capabilities from the services layer and invested in and enhanced them to create new features and capabilities we deliver to a broader array of customers and partners. If we look across our growth levers in this layer, I would note progress in a number of areas. In consumer payments, Visa Intelligent Commerce integrates Visa's token technology with authentication and predictive analytics empowering partners to deploy secure, personalized digital commerce experiences. And I'm pleased to announce that we are now powering live agentic transactions and recently released a merchant agent toolkit to make it easy for developers to embed our solutions into workflows and agentic processes. Just 2 weeks ago, we announced the Visa Trusted Agent Protocol, a framework that enables safer agent-driven checkout by helping merchants verify agents and avoid malicious bots. And since it's built on existing messaging standards, minimal integration is required for merchants. Next, our Visa Flex Credential continues to gain momentum, enabling consumers to access many underlying funding sources with a single credential powered by Visa token technology, for example, the Klarna card launched in 15 European markets, building on its success in the U.S. where it had over 1 million sign-ups in less than 3 months, and they will expand to even more markets soon. Our Visa Flex pipeline is strong, and we now have more than 20 signed clients in more than 20 countries across all regions, including our first Visa Flex announcement in LAC with [ Niko ]. Our Visa Accept Solution enables even the smallest of sellers to accept card payments with just a Visa debit card and an NFC capable smartphone. Our first live launch of Visa Accept was in Sri Lanka, which represents an opportunity to bring an estimated 7 million sellers onto the Visa network, most of which are informal sellers who primarily transact in cash today. And this is just our first launch. We are targeting 25 countries across several regions where we expect to launch Visa Accept soon with even more expansion to follow. Our Visa Pay solution connects any participating wallet to any Visa accepting seller worldwide, local or international, in-store or online. We are pleased to now be processing live Visa Pay transactions in 4 markets across AP and CEMEA, including our recently announced market launch in the Democratic Republic of Congo. In addition, we have a pipeline with more than 70 clients to expand across more markets in 2026 and beyond. Rounding out consumer payments is tapped to everything. 79% of all face-to-face transactions are taps, up 8 percentage points this year with the U.S. at 66%. Our transit initiatives contributed to this expansion, and this year, we enabled more than 100 new transit systems to now total approximately 1,000 systems globally, delivering 19% year-over-year growth in transactions. In Europe, BBVA recently launched BBVA Pay, enabling tapping from an iOS device for all Visa cards within their banking app. They also have enabled customers to use AI to create their own personalized Visa cards starting in Spain. Tap to Phone, which provides an easy, low-cost method for micro sellers to begin accepting card payments or large sellers to add additional mobile terminals, has now passed 20 million transacting devices, more than doubling since last year with strong growth across all regions. And Tap to Add Card launched a little over a year ago, has strong adoption as consumers and our partners see the value of a simplified, more secure customer experience where a simple card tap to a mobile device can add a Visa credential to a digital wallet. Since Q3, we have doubled the count of issuers participating globally to more than 600 across all regions resulting in the service being live for more than 1.4 billion Visa credit and debit cards around the world. Shifting to CMS and starting with Visa Commercial Solutions. Our full year 2025 commercial payments volume grew 7% in constant dollars to $1.8 trillion. This was helped by targeting specific segments including business owners and online travel agencies. In the premium card segment, we supported Chase with the launch of Chase Sapphire Reserve for Business on Visa Infinite, an expansion of the Sapphire Reserve product line. The Sapphire Reserve for Business card is designed to meet the needs of business owners by elevating their travel experience and offering premium benefits and value toward business services to help fuel their growth. And also in the U.S., we are excited to have partnered with Truist to launch the Truist Business Premium Visa Infinite card, a premium credit card designed for small businesses with meaningful annual spend. They are the first super regional to do so in this country. Our purpose-built travel solution offers virtual card credentials, automated reconciliation and rich data. We recently won Trip.com's global virtual travel card issuing business, which will be issued through their fintech, TripLink. In our traditional carded business, our global network agnostic enhanced spend management capabilities have helped us to expand our partnership with BMO. We recently won new commercial issuance, and BMO will offer our Spend Clarity for Enterprise tool to their corporates in the U.S. and Canada. Our unique FX capabilities enabled us to win a de novo issuing relationship with ICICI Bank for India's first corporate ForEx prepaid card, targeting both SMBs and large corporates to meet foreign exchange payment needs for business travel. In fact, in India, Visa SMB cards have doubled since 2020 and now total more than 10 million, helping us to grow total commercial cards to 340 million worldwide. Moving on to Visa Direct, which reached 12.6 billion transactions in full year 2025, up 27% year-over-year. Our push to account and wallet funding capabilities continue to help us to expand cross-border payouts. We signed with KCB in East Africa, where they will use Visa Direct to account for 8 corridors across their more than 30 million individual and business customers. Touch 'n Go eWallet, the largest wallet in Malaysia with more than 24 million users, will leverage Visa Direct to enable tourists to fund their wallets across 8 corridors. And Al Rajhi, a leading remitter with the largest branch network in the Kingdom of Saudi Arabia, expanded on its Visa Direct to card usage to now include Visa Direct to account. And our interoperability capabilities unlocked through our YellowPepper acquisition enabled us to renew with Yape and Plin, securing our position as the leader for interoperable transactions in Peru. Now moving to value-added services, where we have seen our innovations across issuing, acceptance, risk and advisory continue to power our growth. We have achieved our goal to expand Pismo's offerings to clients in more than 5 countries across 4 regions in 2025. In the fourth quarter, we signed our first Pismo deal for a stablecoin-linked card with Gnosis Pay in Europe. In Acceptance Solutions, our Token Management Service, or TMS, provides a single network and payment service provider agnostic integration to simplify token adoption, access and management for merchants and acquiring clients. This quarter, we signed with Booking.com for TMS and account updater across more than 65 markets, deepening our presence in the online travel platform space. Many of our risk and security solutions are also network agnostic. Let me highlight a few points of progress. Visa Advanced Authorization evaluates more than 400 unique attributes in a few milliseconds, and this quarter, Banco Diners in Ecuador deployed our network agnostic solution to score both Visa and non-Visa transactions, the first bank in LAC to do so. Our award-winning product, Visa Protect for A2A, is delivering value with AI. Our pilot in Brazil scored nearly $500 billion of our bank partner's, Pix, volume over a 6-month period and identified over $90 million of fraud, which could have been prevented with a detection rate of more than 80%. We believe Visa Protect for A2A can play an important role in Brazil by providing real-time fraud monitoring on Pix, helping to reduce fraud for our bank partners and ensure a safer payment experience for buyers and sellers. Our most recently acquired risk capabilities from Featurespace are being sought after by our clients with more than 100 closed client deals since January. And our advisory services continued to deliver revenue and deepen our client relationships across Visa. In consulting, we estimate that we helped clients realize over $6.5 billion of incremental revenue as a result of delivering almost 4,500 engagements during the year, including GenAI and stablecoin engagements. In marketing services, our flagship sponsorships include the FIFA World Cup 2026 in the U.S., Canada and Mexico as well as the Olympic and Paralympic Winter Games in Milano Cortina. We are already seeing significant interest from our clients as they seek to offer unique cardholder experiences and build their brand in addition to helping drive issuance, acceptance and engagement. One Olympic and Paralympic related marketing example was our first large-scale campaign created using generative AI tools for Intesa Sanpaolo, which showcased a ski race down the streets of Italy's seaside villages. We already have over 35 clients engaged with us for marketing services for the 2026 Olympic and Paralympic Games and more than 70 for the FIFA World Cup 2026 with more than 100 already in our pipeline. The fourth and final layer of the Visa as a Service stack on top of the foundation layer, the services layer and the solutions layer is the access layer, the client entry point to access Visa solutions. We take an open partnership approach and seek to provide value by enabling access to our Visa as a Service stack through multiple integration methods, including custom integrations, programmatic access via APIs and structured data exchange through our Model Context Protocol, or MCP, server. We remain the payments platform of choice in full year 2025 with more than 700 billion API calls across our more than 3,700 end points. And we recently launched our MCP server, providing access for AI systems to interface with our Visa Intelligent Commerce APIs. Our open, flexible access layer enables anyone, whether a small business, a tech partner or a global bank, to build on top of the Visa as a Service stack and operate at scale instantly. In conclusion, you can see our intense focus on innovation is delivering results for Visa and our clients. The Visa as a Service stack has positioned Visa to be a hyperscaler for the payments ecosystem. Our strong fiscal year 2025 performance is a result of our products resonating in the market and our commitment to our clients every day. I want to thank our more than 34,000 employees around the world who will continue to obsess about our clients and work tirelessly in 2026 and beyond to deliver value through the Visa as a Service stack to our clients and across our partner ecosystem. We live in remarkable times in payments as technologies are converging to reshape commerce. And at Visa, with our clients, partners, sellers and consumers, we are keeping our focus on innovation and product development, positioning Visa to lead this transformation. Now to Chris, where he will discuss our financial performance and outlook for 2026. Christopher Suh: Thanks, Ryan, and good afternoon, everyone. Building on the momentum we saw through the first 3 quarters, we had a very good Q4 to finish the year with continued strong and stable business drivers. In constant dollars, global payments volume was up 9% year-over-year, improving slightly from Q3. Cross-border volume excluding intra Europe, was up 11% and total processed transactions grew 10%, both relatively stable to Q3. Fiscal fourth quarter net revenue was up 12% year-over-year, better than expected, primarily due to value-added services revenue, commercial and money movement solutions revenue, and a benefit from FX. Fourth quarter net revenue was up 11% in constant dollars. EPS was up 10% year-over-year in both nominal and constant dollars, better than expected -- primarily due to better-than-expected net revenue. Let's go into the details. Total international payments volume was up 10% year-over-year in constant dollars in Q4, generally consistent with Q3. Of note, we saw acceleration in Asia Pacific of approximately 2.5 points on a constant dollar basis, driven by timing effects and a modest improvement in Mainland China. U.S. payments volume was up 8%, slightly above Q3 with e-commerce growing faster than face-to-face spend. Credit and debit were both up 8%, reflecting resilience in consumer spending. When we look at quarterly spend category data in the U.S., we saw broad-based strength, including improvements in retail services and goods, travel and fuel. Both discretionary and nondiscretionary spend were up from Q3. And growth across consumer spend bands remained relatively consistent with Q3 with the highest spend band continuing to grow the fastest. Now to cross-border volume, which I'll speak to in constant dollars and excluding intra-Europe transactions. Q4 total cross-border volume was up 11% year-over-year relatively stable to last quarter, with e-commerce up 13%, and travel improving sequentially to 10%. eCommerce remains strong as it has for the last 8 quarters now and still represented about 40% of our total cross-border volume. Travel spend continued to grow above pre-COVID levels. The slight step-up from Q3 was led by a combination of factors, including increased commercial volumes, helped by our efforts in virtual card and some improvement in CEMEA outbound due to holiday timing. With that as a backdrop, I'll move to discuss our financial results. Starting with the revenue components. Service revenue grew 10% year-over-year versus the 8% growth in Q3 constant dollars payments volume, primarily due to card benefits and pricing. Data processing revenue grew 17% versus the 10% growth in process transactions, primarily due to pricing and higher cross-border transaction mix. International transaction revenue was up 10%, below the 11% increase in constant dollar cross-border volume growth, excluding intra Europe, primarily due to mix, partially offset by exchange rates. Other revenue grew 21%, primarily driven by growth in advisory and other value-added services and pricing. Client incentives grew 17%, in line with our expectations as we lapped onetime adjustments from Q4 of fiscal '24. Now to our 3 growth engines. Consumer payments revenue was driven by strong payments volume, cross-border volume and process transaction growth. Commercial and money movement solutions revenue grew 14% year-over-year in constant dollars as we lap the onetime adjustment we saw in Q4 FY '24. CMS revenue was better than expected, driven primarily by our Commercial Solutions business. Commercial payments volume grew 10% in constant dollars, 3 points above Q3 growth and faster than Visa's overall payments volume growth primarily due to new portfolio wins and the lapping of certain portfolio losses with strong client performance, especially in cross-border. Visa Direct transactions grew 23% to 3.4 billion transactions with strength in both domestic and cross-border. Value-added services revenue grew 25% in constant dollars to $3 billion, driven by issuing solutions, advisory and other services, and pricing. Value-added services revenue growth was better than expected, primarily due to issuing solutions, both in network products and card benefits. Operating expenses grew 13%, above our expectations due to a larger-than-expected FX impact and higher-than-expected personnel expenses as a result of deferred compensation mark to market, which, as a reminder, is EPS neutral. Excluding those 2 factors, adjusted operating expense growth would have been as expected. Nonoperating income was $29 million, higher than expected due to investment income from the deferred compensation mark-to-market benefit that offsets the expense I just mentioned and higher returns on our investments. Our tax rate for the quarter was 18.8%, in line with expectations. EPS was $2.98, up 10% year-over-year with minimal impacts from exchange rates and acquisitions. In Q4, we bought back approximately $4.9 billion in stock and distributed $1.1 billion in dividends to our shareholders. We also funded the litigation escrow account by $500 million, which has the same effect on EPS as a stock buyback. At the end of September, we had $24.9 billion remaining in our buyback authorization. With a strong finish to the fiscal year, our full year net revenue grew 11% to $40 billion, and EPS grew 14% to $11.47. Full year 2025 CMS revenue growth was 15%, and value-added services revenue growth was 23% on a constant dollar basis. In a year marked by a significant step-up in uncertainty around the globe, we delivered strong results above our expectations. As we think about 2026, our guidance philosophy holds. We give you our best perspective based on current information. So let's get into the guidance details and a quick note, when I reference 2025 and 2026, I am referring to our fiscal years. First, let's cover our underlying assumptions for net revenue growth. As we regularly say, we are not economic forecasters, so we're assuming the macroeconomic environment stays generally where it is today and consumer spending remains resilient. On key business drivers, we are assuming no material change from the Q4 2025 growth levels in 2026. On pricing, for 2026, we expect the benefits of new pricing to be similar in magnitude and timing as in 2025, with the majority going into effect in the back half. When you combine that with the 2025 pricing timing, this implies a relatively uniform contribution each quarter with Q1 seeing the largest contribution. On incentives, we expect around 20% of our payments volume to be impacted by renewals this year, which implies incentive growth generally similar to 2025, with Q3 having the toughest comparable to 2025. On volatility, we expect volatility throughout the year to be generally consistent to where we exited Q4, which implies a drag for the first 3 quarters, with Q3 having the toughest comparable to 2025. We pull these assumptions together on an adjusted basis defined as non-GAAP results in constant dollars and excluding acquisition impacts. You can review these disclosures in our earnings presentation for more detail. In 2026, we expect full year adjusted net revenue growth to be in the low double digits. On a nominal basis, we expect an approximately 0.5 point benefit from FX, which implies nominal net revenue growth that is generally consistent with fiscal 2025, which was 11%. We have an exciting year with the Olympic and Paralympic Games in Q2 and the FIFA World Cup in Q3 and Q4. I'll speak to expense in a moment, but as far as net revenue impacts, we expect the benefit from value-added services to be spread throughout the year as our clients will utilize our solutions in the buildup to and during the events. In terms of quarterly variability of net revenue, 2 items I would call out. First, we expect Q1 to have the highest year-over-year net revenue growth rate, primarily due to the timing impact of our FY '25 pricing actions. Second, we expect Q3 to have the lowest year-over-year net revenue growth rate, primarily due to the lapping impacts of strong volatility and lower-than-expected incentives in Q3 of 2025. Now moving to expenses. We expect to continue our significant investments in our Visa as a Service stack across consumer payments, commercial and money movement solutions and value-added services in FY '26. Let me share a few examples. Within consumer payments, we will enhance our cross-border and affluent offerings, scale recently launched products and expand our stablecoin capabilities, in addition to utilizing our marketing dollars for both the Olympics and FIFA to amplify the Visa brand. Within CMS, we'll focus our investments in specific commercial vertical opportunities and build out new Visa Direct product capabilities focused on cross-border money movement. And within VAS, we'll invest in our product development as well as our sales engineering teams to deepen customer engagement and shortened deal cycles. In addition, we're also investing in our AI efforts. In fact, every leader at the company has AI targets to drive efficiencies that we intend to invest back in the business to further our differentiation, competitive advantage and drive long-term growth. We currently expect to grow adjusted operating expense in the low double digits, consistent with our net revenue growth. As we think about the cadence of spend, we expect Q2 and Q3 to have the largest year-over-year growth rates as a result of marketing expense related to the Olympics and FIFA. Now moving to nonoperating income. The nonoperating income we've had for the past 3 years has been a function of cash balances, interest rates and onetime items. In 2026, based on current interest rate forward curves, we now expect nonoperating expense of $125 million to $175 million. Now to our non-GAAP tax rate. You may recall that we've historically estimated our long-term tax rate to be between 19% and 20%, and this remains unchanged. In both fiscal 2024 and 2025, our actual tax rate was below 18%, helped primarily by our geographic mix of earnings and certain onetime benefits, such as the resolution of tax matters and positions taken on certain taxes. In 2026, we still expect to be below our long-term tax rate. When we incorporate our current tax planning strategies, we expect the tax rate to be between 18.5% and 19%, up from 2024 and 2025, primarily due to the absence of onetime benefits. On capital return, the Board has declared an increase to our quarterly dividend by 14%, and we intend to return excess free cash flow to shareholders through buybacks. All of this results in our adjusted EPS growth to be in the low double digits. Moving to Q1. Through October 21, with volume growth in constant dollars, U.S. payments volume was up 7%, with credit and debit both up 7%. Process transactions grew 9% year-over-year. For constant dollar cross-border volume, excluding transactions within Europe, total volume grew 12% year-over-year, with eCommerce up 14% and travel up 11%. Now on to our financial expectations. We expect Q1 adjusted net revenue growth in the high end of low double digits. We expect adjusted operating expense growth in the low double digits. Nonoperating expense is expected to be about $15 million. And our tax rate in the first quarter is expected to be around 18%. As a result, we expect adjusted first quarter EPS growth to be in the low teens. When we look on a nominal basis for net revenue growth in Q1, we expect an approximately 0.5 point benefit from FX. And for our expense growth, we expect an approximately 0.5 point drag from FX and a 1 point impact from acquisitions, which, taken together, result in nominal net revenue and expense growth that are more matched at the high end of low double digits. As always, if the environment changes and there are events that impact our business, we will remain flexible and thoughtful on balancing short- and long-term considerations. Visa's underlying business continues to be healthy and the growth opportunities are significant, together giving us conviction as we make investment decisions to build the future payments to drive compelling net revenue and earnings per share growth. And now, Jennifer, I'll hand it back to you. Jennifer Como: Thanks, Chris. And with that, we're ready to take questions. Operator: [Operator Instructions] Our first question comes from Sanjay Sakhrani with KBW. Sanjay Sakhrani: Like the outlook. It's very strong. I guess when I think through some of the assumptions that are embedded in it, I know, Chris, you talked about assuming the macro is stable. But we've heard some of your competitors talk about choppiness in the economy, different spending habits, especially for consumers as they've been trading down on discretionary items. I mean have you guys seen anything like that? And sort of how does that factor into your outlook? Christopher Suh: Sanjay, yes, we have great momentum exiting FY '25, and that's the underlying assumption as we go into '26 for another strong year. But let me address some of the specific points you've made about questions you had around sort of, I guess, spend and the strength of the macro economy. I mean if I just zoom out a little bit, really, one of the real strengths of our business here, Visa is the diversification of our business. And so we have the broadest exposure to credit, to debit. Our volumes are comprised of everyday spend, the special occasion spend, nondiscretionary like fuel and groceries and discretionary items like travel or holidays, goods, services, consumer, commercial and so really some of the broadest spend categories that you can imagine. And what we do is we remain data-driven and across this broad and diverse set, the growth across our spend bands has remained quite consistent all year. And it was again, in Q4, with higher spending cardholders driving more of the growth, and that's consistent with what we see across the U.S. economy. And so that all gives us good reason over that data to say that consumer has remained resilient. That is our -- that is what we saw in FY '25, and that is our assumption going into FY '26. Operator: James Faucette with Morgan Stanley. James Faucette: Great. Really appreciate all the work that you guys are doing on new initiatives, et cetera. One that's quite topical, obviously, is all things agentic commerce. And I know you've had some recent announcements on that topic. Can you paint a picture for us like the role that you expect Visa to play in agentic commerce transactions and ramp and kind of milestones we should expect to see in its development? Ryan McInerney: We see considerable opportunity in agentic commerce. But just to put it in context, when we had the first wave of digital commerce with eCommerce, we set the standards. We led the product development, and Visa was a significant beneficiary. Then you saw a second wave of commerce, which was mobile commerce. And again, Visa was the leader in terms of standards, in terms of product innovation, in terms of the capabilities enabling that to happen. And we've been a big beneficiary. You've seen that both in people buying things on their phones but also using their phones to buy things, especially with Tap to Pay. And now in this third wave of agentic commerce, we've been leading in terms of our role of setting the standards. I think one great example of that is Visa Intelligent Commerce, where we put out a set of capabilities for AI-ready cards, leveraging tokenization, AI-powered personalization, leveraging our data token service. We put out a set of standards with payment instructions that are going to allow customers like you and I to easily set spending limits and conditions to provide clear guidance for agent transactions and also our payment signals, which are going to share those data payloads in real time with Visa, enabling us to help set transaction controls, manage disputes and Chargebacks and those types of things. So I think that's a great example of the leadership role that we're taking in agentic commerce. And then just 2 weeks ago, we announced the Visa Trusted Agent Protocol. The Visa Trusted Agent Protocol is meant to really ensure that merchants know when an agent is coming to buy something on my behalf, it is actually a real agent that I have authorized to make purchases on my behalf. And I think what differentiates the Visa Trusted Agent Protocol is 2 things. One is it's open. It's an open set of standards, and we think that an open framework is critical to drive mass adoption in the way that's needed for agentic commerce. And the second is it's easy to integrate. We built it on existing web infrastructure so that it's going to be easy for merchants to integrate into existing messaging standards and get up and running quickly. So those would be 2 examples. We're very excited about it. We think it's a significant opportunity for Visa and for everyone involved in the ecosystem. Operator: Jason Kupferberg, your line is open, from Wells Fargo. Jason Kupferberg: I actually wanted to ask a follow-up on agentic. Seems to be topic of the day. I'm just curious to get your perspective on when do you think we start seeing material volumes across the industry from agentic commerce. Obviously, there's still some important security considerations to be addressed. And would also love your perspective on to what extent you see agentic as more of a substitute for traditional e-commerce versus being additive to the TAM of the overall payments industry. Ryan McInerney: Jason, let me address the second part of your question first and then the first part. On the second part of your question, I think the base case is it continues to accelerate the adoption of e-commerce and mobile commerce as we all know it. I think there's an upside case on that where you could actually see users buying from a much larger and more diverse set of merchants than they do today in traditional e-commerce given the power of these agents and their ability to go out and search the world's inventory based on whatever it is that you prefer for your agent. That might be value. That might be price. That might be inventory. That might be speed of delivery and so on and so forth. I think that could ultimately result in consumers buying more things from more merchants, which ultimately means more transactions on Visa. I also think there's a significant upside in the delivery and the relevance of our portfolio of value-added services for the entire ecosystem, especially as you said, they have to work through a number of things that involve potential fraud and disputes and chargebacks and things like that. Right. Back to the first part of your question. Listen, it's still early days. And I think what you're likely to see in the evolution of agentic commerce is not different or dissimilar to what we saw in e-commerce. I think early on, you're seeing consumers use these agents and these platforms for discovery. They're shopping. They're looking for what might be available for any given gift I'm trying to buy or any clothing item that I might try to buy. But then I might jump to the actual merchant site to make the purchase. Then the next step of what you're starting to see is the integration of the buy capabilities into that shopping journey. We're just starting to see that in the marketplace today. We've been working on that for many, many months with the ecosystem. And then I think the ultimate kind of user experience and the promise of agentic commerce will be truly empowering agents to go out to search for things on our behalf and ultimately make purchases and buy things without human intervention. That, we haven't really seen in the marketplace today, but we're working very hard with the platform players to ensure that the capabilities are in place to enable that. Operator: David Koning with Baird. David Koning: Great job. The data processing yield was up a lot, and I know that was explained somewhat. But I'm wondering, is some of that due to VAS, the biggest part of VAS outside of others probably in data processing? And I guess the question is, is there a sustainability to big yield growth in DP given VAS just keeps building. I guess that's the question. Christopher Suh: David, I'll take this one. So yes, as you pointed out, data processing revenue, 17% versus the 10% underlying transaction growth. The factors I called out in my prepared comments was around pricing and mix. And those were the 2 biggest variables. As you know, we implemented new pricing in FY '25 in the second half of the year. That's really benefiting in Q3 and Q4, and that will benefit into Q1, as I talked about as well. In terms of mix, now what does mix mean? Mix does -- across our business, different products and services, different clients in different regions can have different varying yields. And obviously, through the course of any quarter, we see different growth performance across any of those particular elements that will drive different yield outcomes. So in this particular quarter, with data processing, we did see faster growth in higher-yielding cross-border regions, and that's what contributed to the acceleration that you saw in between transactions and revenue in data processing. Operator: Darrin Peller with Wolfe Research. Darrin Peller: I just want to follow up one more time on AI and then a bigger question on the new VisaNet rollout. So first, just to be clear on AI, I mean, do you see your suite of services as a big part of what's being offered by other payments ecosystem partners? And how much are you going to participate in some of those VAS in terms of fraud versus others? And then just I know we talked -- Ryan, you talked about VisaNet rollout, the new rollout. And just help us understand what that can mean for product development or velocity and how it positions the network for things like agentic commerce or stablecoins going forward. Ryan McInerney: Darrin, short answer, long answer. Short answer is yes and yes, but let me dive into both of those. On kind of agentic commerce, I think you've seen from us, really over the course of the year, is Visa doing what we do, which is when there's new technology, new platforms emerging, take a leadership role in establishing kind of the way that payments can work most efficiently and most effectively for buyers and sellers, and we're doing that in the agentic commerce space today. And I think to the first part of your first question, yes, you should assume that we're doing the work to build the infrastructure, the operating regulations and rules, the processes to enable a lot of the things that you're seeing kind of in the marketplace today. As I said on the earlier question, I think it was Jason, it's still very early days. You're going to see a lot of announcements. You're going to see a lot of things coming out. What ultimately is going to help kind of agentic commerce achieve its promise is collaboration, collaboration among all of these various ecosystem partners that make e-commerce and mobile commerce and all of these things work today, and you should expect us to take a leadership role that we're taking. On the next generation of VisaNet, so this has been something we've been focused on as we continue to invest in our stack. We've deployed the next generation of VisaNet, which is our core processing platform at the base of our stack. And the answer to your second question is yes as well. It allows us to ship product more quickly. It allows us to adapt to ecosystem changes more quickly. It allows us to adapt to regional and country-specific requirements more quickly. Here, too, it's early days. We've just begun the deployment of it, but it's a very exciting milestone for us, and ultimately, we think it will be great for the ecosystem and our partners. Operator: Rayna Kumar with Oppenheimer. Rayna Kumar: I noticed in Latin America, there was a slight deceleration in volume versus last quarter. Anything you can call out there? Christopher Suh: Sure. Yes. In Latin America, we did see a bit of a slowdown. It still grew strong, but it was slower than we saw in Q3. And the biggest single contributor I would point to is the moderating inflation that we've seen in Argentina. But overall, across Latin America, it remains a high-growth region, and we're very pleased with the performance. Operator: Ken Suchoski with Autonomous Research. Kenneth Suchoski: Maybe just one more on agentic commerce. I was wondering if you could talk about some of the differences and similarities between Visa's Trusted Agent Protocol and Stripe's Agentic Commerce Protocol. I mean, anything you could talk about in terms of what layer is the value chain you're tackling and how your offering is differentiated versus theirs? And then maybe just talk about the broader tokenization opportunity and your leadership there with over 16 billion tokens and just how the agentic commerce ecosystem will leverage that. Ryan McInerney: Yes. Thanks, Ken. On the second part of your question, tokenization, I think, is the critical building block that ultimately will help Agentic commerce reach its promise. And if you go back -- I know you asked about the Trusted Agent Protocol, but if you go back to the Visa Intelligent Commerce set of products and standards that we put out, tokenization as a platform is what enables the bulk of that functionality and ultimately is what's going to enable us all to have safe, secure, trusted transactions with agents on our behalf. So tokenization, critical building block of that. And as you noted, with kind of 16 billion Visa tokens embedded across the ecosystem, the technology, the standards are well known, well adopted globally in countries all around the world, both on the seller side of the ecosystem and the issuer side of the ecosystem, which is ultimately why it will help scale our standards. As it relates to the Trusted Agent Protocol -- and I'll go back a moment to what I said to a couple of questions ago. Ultimately, what's going to make this all work is collaboration. And so I think you're seeing a lot of different players across the ecosystem, whether it's Visa or other networks or acquirers or PSPs or platforms start to put out their capabilities and standards. And again, here, too, I think it's where the Visa Trusted Agent Protocol can form a base layer for everyone to build on and everyone to ultimately leverage. And what we're -- the reason we're excited about the Trusted Agent Protocol scaling is the 2 things I mentioned. One is it's an open standard; and two, it is designed to be inherently lightweight and easy for merchants especially to integrate to. Operator: Bryan Keane with Citi. Bryan Keane: Just kind of a 2 quick parter. Just thinking about holiday sales growth rate this year versus last, there's some expectation that maybe holiday sales will be a little bit weaker in terms of growth rate. Just how is Visa thinking about that? And then secondly, just cross-border growth versus e-comm versus travel, any differentiation kind of what we've seen on trend line as we go through this fiscal year? Christopher Suh: Okay. I'll take both of those. In terms of upcoming holiday quarter, I've provided our guidance for Q1. It is for a strong Q1, carrying the momentum that we saw coming out of Q4 with strong and stable underlying drivers as well as benefiting from the pricing from a year ago. And so when you add that all up, it makes for a resilient consumer, a stable macro environment and the resiliency that I talked about across spend bands as well. And so we are anticipating a strong quarter going into the holiday -- our fiscal Q1, the holiday quarter that we see. In terms of cross-border, your second question was really around sort of the mix. At the total level, we shared our numbers. It's been stable. It's been a good, strong number, 11% growth in Q3, 11% growth again in Q4. As we click down into the categories of e-commerce and travel, e-commerce has been strong, continued to be strong and steady, 13% in Q3 and 13% in Q4. Travel did improve a point from Q3 as we talked about previously as well. So the thing that I would call out, though, is that when you add that all up, total cross-border growth continues to be above the trend that we saw pre-COVID. And part of the reason for that is that the e-commerce part of the mix of the volume is bigger. It was about 1/3 of the business pre-COVID. It's about 40% now and continue to grow at a faster clip than travel. And so should that trend continue, we'll continue to see a bigger weight toward the e-commerce side of the business. But all in all, again, if you zoom out, strong and stable cross-border trends, and we'll continue to see how they perform through the rest of the year. Operator: Harshita Rawat with Bernstein. Harshita Rawat: I want to ask about stablecoins. As the dust is settling a bit with the passage of the GENIUS Act, it increasingly appears that what was initially thought of as a risk to Visa could, in fact, be an opportunity in cross-border money movement, merchant acceptance in certain markets and services. Ryan, you talked about the momentum in stablecoin-linked cards. This quarter, Visa Direct kind of announced a new stablecoin prefunding option, a number of things you're doing here. I guess my question is what are the most tangible areas of opportunities as it relates to stablecoins in the coming years, maybe in cards, VAS, [ Niko ], et cetera? Ryan McInerney: Harshita, we've seen it as an opportunity for a while now. And the short answer to your question is we see opportunities in issuance, in modernizing our settlement network. I think I talked about some of the opportunities we've captured with our Pismo platform. As you said, we're leveraging stablecoins and cross-border money movement. We announced the Visa Direct prefunding work. We're minting and burning on behalf of our clients with the Visa Tokenized Asset Platform. We've been working with our clients in our consulting business with stablecoins. I mean the list goes on and on. But just stepping back, as I've said, the areas where there's product market fit for stablecoins in the world are the areas where there's significant TAMs and largely where we're underpenetrated. And that's emerging markets and that's cross-border money movement. And we are -- we have a deep product pipeline focused on putting products to market against both of those areas of opportunity and cross-border money movement broadly, whether that's remittances or B2B or gig economy payouts or the like. So we definitely see it as an opportunity. We have targeted a significant portion of our product road map to capture that opportunity and hope to talk to you more about some products that we're bringing to market in the future. Jennifer Como: We're going to take a few more questions, so we are going to go a little over. Just want to try to get in a few more. Operator: Andrew Schmidt with KeyBanc Capital Markets. Andrew Schmidt: Appreciate the Visa stack discussion. That was a good one. Maybe I could ask about the Asia Pac improvement. Chris, I know you mentioned timing in China improvement, but if we could peel back the layers there and maybe talk a little bit more about what's going on and whether that improvement is sustainable, that would be great. Christopher Suh: Yes. Thanks, Andrew. As I talked about in my prepared comments, we did -- we were pleased to see the improved results, 2.5 points, and the things that I noted, improvement in Mainland China and some smaller but idiosyncratic sorts of things around timing, those will normalize its way out. All in all, we're pleased with the momentum in China and in -- across AP in general and think that, that is going to continue to be an important growth opportunity for us. And so when we zoom out from all of that, I think AP is on a directionally a good track. Operator: Tim Chiodo with UBS. Timothy Chiodo: Great. I want to talk a little bit about the evolution of the growth algorithm. Just looking at it numerically, it looks like the biggest change really is, a few years ago, not too long ago, value-added services was about 20% of revenue, growing in the high teens. And now it's approaching 30% of revenue and growing in the mid-20s, so the growth contribution has stepped up at least 200 basis points, if not, closer to 300 basis points. And part of that has been we've seen the RPO tick up over the years. And even this year, the RPO has been up roughly, give or take, 30%. And I was hoping you could talk a little bit about that RPO. What's been driving that roughly 30% growth? I appreciate part of that is valuing timed incentives, but maybe dig into that and other drivers of the RPO. Ryan McInerney: Yes. Why don't I take the first part of the question, and then, Chris, you can take the second part of the question. Tim, I think you summarized it very well. And I think if you go back to Investor Day and you look at kind of the growth framework that we laid out and the strategies that we laid out -- by the way, both for VAS and for CMS -- and you jump forward to today, we're delivering in market those strategies, and we're delivering the results that I think we laid out in that framework that come with those strategies, and you summarized it pretty well on the VAS side of things. Do you want to talk about the... Christopher Suh: Sure, sure. Tim, I think you know this. Obviously, the RPO constitutes many things, but included in that is what you've asked about previously, which is value in kind. This is an important lever for us. It -- when we are able -- it represents a form of incentive that the clients can then use to drive value for themselves, and it's good for our client engagement and continues to drive value to Visa, sometimes in value-added services but in other parts of the business. Now it doesn't drive sort of the majority of value-added services, but it is an important lever. And I think it's an area where we'll continue to see clients really take advantage of it. Operator: Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: All right. Let's close it out. I got -- I'll ask about investments and OpEx if that's okay. Just thinking about growth and OpEx being in line with revenue, I'm curious if there's anything to share on that. Is Visa just being opportunistic with spending or perhaps it's a structural issue as you scale different layers in your service stack and some of those are less mature? Just trying to better understand incremental margins and how that might be changing. Christopher Suh: Sure. Tien-Tsin, as you know, as we've said in the past, explicitly, we don't manage our company to a margin target, at least not in the classical sense, but we do focus on many things. We focus on growing volumes with our clients. We focus on driving revenue across consumer payments, VAS and CMS, and we also focus on running our business as efficiently and as effectively as we can. And part of that is balancing the investments that we make for short-, medium- and long-term return. And when we do this well, as we have, we continue to deliver the financial performance that you've seen, which is strong growth at margins that lead the industry. So I would say in terms of where we're investing now as we talk about '26, we -- I would point you back to actually our Investor Day back in February. We laid out a pretty extensive view of the, a, the big opportunity that we're going after, the massive addressable opportunity; and two, the clear strategies, the things that we're going to go do to go capture that opportunity. And so across our industry as things continue to move as fast as they are, you've heard a lot of the conversation even today around agentic and stablecoin. We think it's important that we continue to invest in these opportunities from our position. And if we do so, we'll continue to deliver on the growth framework that we outlined at Investor Day, which means we'll deliver compelling profit growth and drive strong shareholder returns. Ryan McInerney: And Tien-Tsin, the only thing I would add on what Chris said is I don't ever recall being so excited about the opportunities ahead of this company. And I don't ever recall being so pleased with how well our teams have lined up our product pipeline, our go-to-market sales motions, our client teams, the things that we talked about today, whether it's agentic, stablecoins, Visa Pay, Visa Accept, tap to everything, the great momentum in the VAS business, the great momentum in Visa Direct, the great momentum and results we're seeing in Visa Commercial. It's just an extraordinarily exciting time for the company, and I'm just super proud of the investments that everybody is making across the place. So appreciate that question. I appreciate everybody's questions. Jennifer, back to you to close. Jennifer Como: Yes. And with that, we'd like to thank you for joining us today. If you have any additional questions, please feel free to call or e-mail our Investor Relations team. Thanks again, and have a great day. Operator: Thank you all for participating in Visa's Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call. That concludes today's call. You may disconnect at this time, and please enjoy the rest of your day.
Operator: Good day, and welcome to the Sensata Technologies Third Quarter 2025 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. James Entwistle, Senior Director of Investor Relations. Please go ahead, sir. James Entwistle: Thank you, operator, and good afternoon, everyone. I'm James Entwistle, Senior Director of Investor Relations for Sensata, and I would like to welcome you to Sensata's Third Quarter 2025 Financial Results Conference Call. Joining me on today's call are Stephan Von Schuckmann, Sensata's Chief Executive Officer; and Andrew Lynch, Sensata's Chief Financial Officer. In addition to the financial results press release we issued earlier today, we will be referencing a slide presentation during today's conference call. The PDF of this presentation can be downloaded from Sensata's Investor Relations website. This conference call is being recorded, and we will post a replay on our Investor Relations website shortly after the conclusion of today's call. As we begin, I would like to reference Sensata's safe harbor statement on Slide 2. During this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that can involve certain risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K as well as other filings with the SEC. We encourage you to review our GAAP financial statements in addition to today's presentation. Much of the information that we will discuss during today's call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations, are included in our earnings release, in the appendices of our presentation materials and in our SEC filings. Stephan will begin the call today with comments on the overall business. Andrew will cover our detailed results for the third quarter of 2025 and our financial outlook for the fourth quarter of 2025. Stephan will then return for closing remarks. We will then take your questions. Now I would like to turn the call over to Sensata's Chief Executive Officer, Stephan Von Schuckmann. Stephan Von Schuckmann: Thank you, James, and good afternoon, everyone. Let's begin on Slide 3. Before we get into the third quarter results, I'd like to start today by briefly reflecting on what we have accomplished so far this year and where we are in our transformation journey. In our first earnings call after I joined Sensata at the beginning of 2025, I outlined the transformation ahead of us built around 3 key pillars: operational excellence, capital allocation and a return to growth. In each of our subsequent earnings calls, we provided updates on our transformational journey framed around these 3 pillars. I've been pleased with the incremental progress in each of these quarterly updates. With the Q3 results we are reporting today, we have reached a significant milestone in our transformation journey. While we have more work to do and plenty of challenges ahead, our exceptionally strong Q3 results give me confidence that we have meaningfully improved our core business. Our emphasis on operational excellence and margin resilience has positioned us to overcome challenges such as tariffs and end market volatility. Our laser focus on free cash flow and optimizing capital allocation to reduce net leverage has been successful, and we are now well ahead of our net leverage and cash conversion targets. As a result, earlier today, we commenced cash tender offers to purchase $350 million of our long-term debt. And finally, with respect to growth, we've conducted a thorough assessment of our product portfolio, production capacity and growth investments and we are taking action to position our business to maximize the benefit from secular tailwinds. I'll now share some additional color on the third quarter through the lens of our key pillars. Our Q3 results represent a compelling proof point in the progress we have made on operational excellence. The third consecutive quarter, we delivered on expectations, reporting results at or above guidance ranges. Third quarter adjusted operating margins and adjusted EPS both expanded sequentially from Q2 despite seasonally lower revenues. We're now on path to expand the full year adjusted operating margins on a year-over-year basis, excluding the dilutive impact of pass-through revenue, this is yet another compelling proof point in the progress our team has made with our 2025 full year outlook standing in sharp contrast to the preceding 3 years when our business experienced year-over-year contraction in adjusted operating margin. Now let's turn to Slide 4, and I will discuss cash flow and capital allocation. Our near-term capital allocation strategy is simple. We're focused on rapidly deleveraging our business. While we are comfortable with our balance sheet, we believe that reducing leverage to a level more consistent with our peers removes a potential barrier from -- for some investors, making Sensata a more compelling investment. Our operational excellence pillar has been a key enabler of this strategy as we optimize working capital and improve free cash flow conversion. After converting free cash flow at above 90% of adjusted net income last quarter, we made more progress in the third quarter with conversion now exceeding 100%. As a result of our strong free cash flow generation and strong cash position with $791 million of cash on the balance sheet as of September 30, we're taking decisive action to deploy capital and retire debt. Today, as I mentioned, we commenced cash tender offers to purchase $350 million of our long-term debt. More information about these cash tender offers can be found in the press release that we issued on this transaction earlier today. Discipline around our capital expenditures and reducing the capital intensity of our business has been a key driver of our progress toward improving cash flow conversion, and we are acting on these priorities without compromising on growth. In fact, as we look ahead towards growth, we have studied past capital allocation to ensure we are making the right investments going forward. On our July earnings call, we defined a 3-part framework through which we would evaluate growth. Allow me to recap that again here today. First, we will stick to our core product technologies with sensing and electrical protection. Second, we'll prioritize platform-driven applications with an emphasis on regulated or mission-critical sockets. And third, we'll focus on our key markets, prioritizing those with secular tailwinds and ensuring appropriate diversification. We will continuously evaluate our product portfolio using this framework and where we identify areas where it is necessary to shift our strategy, we will be decisive. In our Dynapower business, which provides microgrid power inversion and rectification, it has become clear that the investment thesis and strategic plan around clean energy no longer offers the most compelling growth vector for this business as government policies have shifted and investment has slowed. That said, we do see other areas where Dynapower aligns to our growth framework, specifically in applications where grid stabilization and redundant power supply are mission-critical, such as defense and data center power delivery. Accordingly, we have recast our growth plans for this business, enabled by a more focused strategy. We believe this provides more compelling long-term growth with higher certainty of outcome. However, due to recent changes in clean energy policy and the anticipated slowdown in the clean energy sector, it was necessary to reevaluate the book value of this business today. As a result, we recorded a noncash goodwill impairment charge in the third quarter, which Andrew will discuss in more detail in a few minutes. Now let's turn to Slide 5, and I'd like to take a moment to highlight some of the recent additions to our executive leadership team as we embark on the next phase of our transformation journey. I'm pleased with the momentum we have built in our business through our operational excellence pillar. Not only have we delivered on our quarterly targets, we have done so with demonstratable margin resilience as we continue to perform in the face of multiple challenges in our end markets. Given the relatively short period of time in which we have made this progress, it is clear that our most significant opportunities are ahead of us. At this juncture, it is imperative that we install the right leadership to ensure that we continuously unlock value by optimizing our cost structure, streamlining our production network and serving our customers well. In the Form 8-K that we issued along with our earnings press release today, we announced that Nicolas Bardot will join Sociata effective November 1 as Chief Operations Officer. Nicolas has more than 20 years of operations leadership experience, including supply chain optimization, manufacturing excellence and leading transformations, which will be a tremendous asset to Sensata as we strengthen our global operations footprint to meet the needs of changing and dynamic markets. Most recently, Nicolas served as Division Operations Officer at ZF Commercial Vehicle Solutions. Previously, he held leadership roles at WABCO, including Chief Supply Chain Officer and Vice President of Sourcing and Purchasing. His accomplishments include leading several organizational transformations and applying innovative technologies to achieve measurable productivity and quality gains. With operations on solid footing and with accelerated progress on our capital allocation pillar, we are now ratcheting up the intensity of our focus on our third pillar, returning Sensata to growth. This, too, requires experienced leadership. Earlier this quarter, we announced that Patrick Hertzke joined Sensata as our Chief Growth and Transformation Officer. Patrick has extensive automotive and industrial experience, both in industry as well as at McKinsey & Company, where he was a partner in the automotive practice. During Patrick's 13 years at McKinsey, he led projects, including go-to-market strategy, enterprise transformations and AI technology strategy. We also announced today that Jackie Chen has been promoted to Executive Vice President and President of Sensata China effective January 1, 2026. Jackie joined Sensata in January 2024 as Vice President and General Manager, China Automotive and has been instrumental in positioning Sensata to rewin market share and increase the localization of our business and supply chain. In his expanded role, Jackie will have P&L responsibility and primary management oversight of all of Sensata's business in China. Jackie's promotion underlines the importance of succeeding in China and he has demonstrated that he is the right leader. Under Jackie's leadership, our automotive business in China has returned to outgrowth with double-digit growth over market in the third quarter and 90% of our new business wins this year have been with local OEMs. Now let's turn to Slide 6, and I will discuss some recent product innovations that will drive growth across multiple end markets. We previously mentioned that we are first to market with a tire burst detection solution for a vehicle stability control application. We continue to make progress here, and we have now secured business with 2 leading Chinese OEMs. We're proud to see our tire burst alert feature gaining traction in the market and becoming a trusted component in vehicle safety strategies. These wins highlight a common theme. As vehicles become more intelligent, so must the systems that support them, giving us a clear road map for how to expand content and win new business. Looking ahead toward the medium term, it's clear that our path to expanding content will be driven by meeting the global shift towards sustainable mobility with smart, impactful solutions. One such example is our high-efficiency contactor, which simplifies EV charging by enabling vehicles to work seamlessly with both 400- and 800-volt architectures. As 800-volt vehicles launch in markets where the charging infrastructure is predominantly 400 volts, our contactor enables a switch architecture. This product was recently recognized as a finalist for EV charging innovation at the 2025 Battery Show in North America. As we have discussed on past earnings calls, global regulations are requiring more sustainable refrigerants in HVAC systems. And with that, demand for reliable gas leak detection is accelerating. Our A2L sensor is helping customers across key markets detect and manage refrigerant leaks with speed and precision. By supporting compliance and improving system performance, this solution is becoming a trusted part of HVA platforms. We have recently secured 2 customer agreements, solidifying our market leadership position for the next several years. As additional customer programs are awarded in the coming months, we foresee this business accelerating to more than $100 million of revenue in the near future, and we see expanded opportunities outside of the United States in the years ahead, making this product a potential growth driver for many years to come. Finally, as we look more broadly at secular trends, we expect our aerospace business to emerge as a meaningful growth engine for Sensata going forward. Sensata's proven capability in this space and a clear right to win as we have been selling into the defense sector since the 1940s. Looking ahead over the next decade, U.S. and allied nations defense spending is expected to increase significantly from $1.7 trillion in 2025 to $2.8 trillion in 2035. The vast majority of this spend is expected outside of the U.S., primarily driven by EU defense spending. Given our global footprint and deep business relationships in Europe, we are focused on winning our share of this growth. While I'm excited by the additions to our leadership team, I would also like to acknowledge the exceptional progress from the whole Sensata team. Collectively, we embrace our 3 pillars approach and ready to bring forward and build initiatives around these pillars. We have worked relentlessly in pursuit of value creation, guided by the pillars and enabled by the initiatives that underpin them, and we're getting results. We have turned a corner on financial performance, consistently meeting or exceeding our plan and delivering on our commitments. We have unlocked free cash flow and meaningfully accelerated our capital allocation strategy and net leverage is improving. And we returned to market outgrowth in the third quarter with our automotive business outgrowing global vehicle production by approximately 1%, HVOR outgrowing its end market by approximately 5% and our Sensing Solutions business delivering organic revenue growth of 2.5% with approximately 1% outgrowth in industrials, while Aerospace grew approximately 2%, roughly in line with the market. With that, I'll turn the call over to Andrew to provide greater detail on Q3 financial results, market outlook and our guidance for the fourth quarter. Andrew Lynch: Thank you, Stephan, and good afternoon, everyone. Let's turn to Slide 8. We delivered another strong quarter in Q3, once again achieving results that exceeded our expectations across all of our key metrics. We reported revenue of $932 million for the third quarter of 2025, which exceeded our expectations due to stronger global auto production, amplified by our return to outgrowth. Third quarter revenue of $932 million represented a decrease of $51 million or 5.2% as compared to $983 million for the third quarter of 2024, primarily due to our previously discussed divestitures and product life cycle management actions. On an organic basis, revenue increased approximately 3% year-over-year. We delivered adjusted operating income of $180 million and adjusted operating margins of 19.3%, which is up 30 basis points sequentially from the second quarter of 2025 and up 10 basis points year-over-year. Our adjusted operating margins were diluted by approximately 20 basis points due to $12 million of 0 margin pass-through revenues related to tariff recovery. Excluding the dilutive impact of tariff pass-through, third quarter adjusted operating margins increased by 30 basis points year-over-year. Tariff pass-through revenues did not meaningfully impact sequential performance as we recorded approximately equal levels of tariff costs and pass-through revenues in both the second and third quarter of 2025. Adjusted earnings per share of $0.89 in the third quarter of 2025 increased by $0.02 sequentially from the second quarter of 2025 despite seasonally lower revenues as we delivered on our margin expansion plans. Adjusted earnings per share was flat with the third quarter of 2024 on lower revenue. Free cash flow generation has been a primary focus for us this year, and our improvements accelerate our capital allocation objectives. I am pleased to report that we delivered free cash flow of $136 million in the third quarter, which was an increase of approximately 49% year-over-year. This represents an exceptionally strong conversion rate of 105% of adjusted net income an increase of 14 percentage points compared to the second quarter of 2025 and 37 percentage points compared to the third quarter of 2024. Now let's turn to Slide 9, and I will discuss capital deployment. With our strong free cash flow, we reduced net leverage to 2.9x trailing 12 months adjusted EBITDA compared to 3.0x at the end of June. Last quarter, we indicated that our capital allocation strategy would prioritize deleveraging. Today, we took initiative to deploy capital in furtherance of this priority as we commenced cash tender offers to purchase $350 million of our long-term debt. Our capital allocation strategy, combined with the performance of our business is delivering returns with return on invested capital increasing to 10.2%, which is an improvement of 10 basis points sequentially from the second quarter of 2025 and 20 basis points year-over-year compared to the third quarter of 2024. In the third quarter, we returned $17 million to shareholders through our regular quarterly dividend. Last week, we announced our fourth quarter dividend of $0.12 per share payable on November 26 to shareholders of record as of November 12. Turning to Slide 10. I'll talk through the results for our segments. Performance Sensing revenue in the third quarter of 2025 was $657 million, approximately flat year-over-year on a reported basis. Organically, revenue increased 3.6% year-over-year as we outgrew our end markets in both automotive and HVOR, consistent with the expected return to outgrowth in the second half of 2025 that we had communicated earlier this year. Performance Sensing adjusted operating income was $156 million or 23.7% of Performance Sensing revenue, representing year-over-year margin expansion of 160 basis points, inclusive of any dilutive impact from tariffs. Sensing Solutions revenue in the third quarter of 2025 was $275 million, which was approximately flat year-over-year. Organically, revenue increased 2.5% year-over-year, driven by new content in our Industrials business and growth in our Aerospace business. This marks our third straight quarter of year-over-year organic growth. Sensing Solutions adjusted operating income was $85 million or 30.9% of Sensing Solutions revenue, representing year-over-year margin expansion of 150 basis points, again, inclusive of any dilutive impact from tariffs. The margin expansion in both our Performance Sensing and Sensing Solutions segments represents the significant strides our teams have made in the last year in unlocking productivity, and I want to echo Stephan's comments regarding the great work being done by team Sensata. Corporate and other adjusted operating expenses increased by $12 million compared to the third quarter of 2024, primarily driven by higher variable compensation due to better underlying performance. Finally, just a brief follow-up on the Dynapower topic that Stephan mentioned earlier. In the third quarter, we recorded $259 million in noncash charges as a result of changes in clean energy policy and emissions regulations. This included a goodwill impairment charge of approximately $226 million related to the Dynapower business as well as certain other noncash charges, primarily due to excess capacity related to electrification. These costs were excluded from adjusted operating income as they are noncash and nonrecurring in nature. More detail regarding the reconciliation of our GAAP to non-GAAP financial metrics is available in our SEC filings, in the appendix to today's earnings presentation and on our Investor Relations website. Turning briefly to Slide 11. I will share some high-level thoughts on our markets. Within Performance Sensing, we have been pleased with the durability of automotive demand. We are encouraged by the growth in China, where we continue to increase our share. And in North America, despite concerns around end market demand, production has lagged SAAR and inventory levels remain relatively normal, indicating further durability. The HVOR end market has been soft, particularly with on-road trucks in North America, though we have been pleased with our ability to expand margins overall despite weakening end market demand in this high-margin business. In Sensing Solutions, gas leak detection has provided meaningful growth against an end market that has not yet fully recovered. Given our exposure to HVAC and appliance, we look at housing recovery and interest rates as the likely catalysts for this end market. And lastly, in our Aerospace business, we have seen reliable market growth in the low to mid-single-digit range all year, and we expect that to continue with strong order books across the sector. Before I discuss our fourth quarter expectations, let's turn to Slide 12 for a brief update on tariffs. In the third quarter of 2025, we recorded approximately $12 million of tariff costs and associated pass-through revenues. This was approximately flat with the second quarter of 2025. And looking ahead, we expect the same exposures in the fourth quarter based on trade policies currently in effect. The vast majority of our imports into the United States are from Mexico and over 80% of those imports are USMCA qualified. We do not expect any meaningful changes in our USMCA qualification levels moving forward. Additionally, Sensata is not directly exposed to either the automotive parts nor heavy truck parts tariffs as the products we produce are not included within the scope of these tariffs. And finally, just a brief reminder on our operating posture regarding tariffs. Sensata will produce to customer demand signals and will make product available to our customers at our production locations or deliver to any appropriate destination of our customers choosing. Should our customers require that we import materials into any jurisdiction that applies the tariff to such imports, we will only do so with a reimbursement agreement in place. We are grateful to our customers and suppliers for their continued support in this process. Their partnership and collaboration has been invaluable. With that, let's turn to Slide 13, and I will walk through our expectations for the fourth quarter of 2025. We expect fourth quarter revenue of $890 million to $920 million, adjusted operating income of $172 million to $179 million, adjusted operating margins of 19.3% to 19.5% adjusted net income of $121 million to $127 million and adjusted earnings per share of $0.83 to $0.87. Our revenue guidance range reflects a cautious outlook in light of recent idiosyncratic events such as the Novelis factory fire and the potential supply disruptions related to Nexperia. To be clear, we have not projected any major disruptions to our business in connection with these events. However, we are taking a more cautious view on the market and our order book. At the midpoint of our guidance range, we expect approximately 10 basis points of sequential margin expansion, and we have assumed the same level of tariff costs and pass-through revenues to what we incurred in the third quarter. As noted in our press release and earnings materials, our guidance and tariff assumptions are based on trade policies and tariff rates in effect as of October 28 and do not incorporate any impacts from proposed changes to trade policies. Finally, while we are not yet providing 2026 guidance, I would like to share initial thoughts on 2026. We are reasonably comfortable with consensus estimates for the full year. However, as we look at the quarters within 2026, we see a wider range of estimates, particularly in the first quarter. As a reminder, Q4 to Q1 margin seasonality is driven by pricing dynamics in our automotive business. Specifically, contractual price downs to our customers typically take effect at the beginning of the year as do our supplier price reductions. However, with approximately 90 days of inventory on hand, the majority of our first quarter sales reflect higher cost inventory. As we progress into the second quarter, margins normalize and each quarter thereafter, we typically see margin expansion driven by productivity in our factories. This trend was observed in the years preceding the pandemic and the inflation that followed and was observed again in 2025 as pricing returned to pre-pandemic norms. We expect similar seasonality moving forward. With that, I will turn the call back to Stephan. Stephan Von Schuckmann: Thank you, Andrew. As we look ahead, I'd like to leave you with a few parting thoughts. Over the last 9 months, we have executed with consistency, laying a solid foundation on which to build. Beyond significantly improving our say-do ratio, we have also improved underlying performance in our business and our free cash flow conversion is a compelling proof point. Additionally, we have demonstrated a return to market outgrowth, beginning with our industrial and aerospace business earlier in the year and with our third quarter results also in our automotive and heavy vehicle businesses. And lastly, we're acting decisively to set ourselves up for long-term shareholder value creation by installing the right leadership team, adjusting course on strategy as end markets change and deploying capital to retire debt. Look forward to continuing to update you on our progress as we transition towards the next phase of our transformation. I'll now turn the call back to James for Q&A. James Entwistle: Thank you, Stephan and Andrew. We will now move to Q&A. Operator, please introduce the first question. Operator: Your first question today will come from Wamsi Mohan with Bank of America. Ashley Wallace: This is Ashley on for Wamsi. Congrats on the results. Just one question for me. On the tire burst detection, last quarter, I believe it was mentioned that wins might be able to help contribute to revenues relatively quickly. Just can you help us think through quantifying this revenue impact in China from these additional wins? Andrew Lynch: Thank you, Ashley. Yes. So in China, the design cycle tends to be much shorter than in the West. It can be as quick as sort of 6 to 9 months from a design win to start of production. With respect to individual wins, given that these are only at a couple of OEMs so far, we're unable to disclose the actual value of these wins. What I can say is that we expect to -- we returned to outgrowth in China in the third quarter, and we expect to continue to outgrow the market moving forward. And these wins and other wins with local OEMs in China are a big reason why. We'd expect our outgrowth to be in the low single-digit market -- low single digits above market range initially. Operator: And your next question today will come from Mark Delaney with Goldman Sachs. Mark Delaney: I also was hoping to better understand what the company has seen in terms of its ability to outgrow the auto market. So just recognize you outgrew globally in the third quarter. I think you said double digits in China. And your comments, Andrew, about outgrowth going forward is really where I was hoping to focus. So as you look into 2026 and you think about the auto business more generally, both in Asia and on a global perspective, based on the wins you have and your discussions with customers, do you think your overall auto business can outgrow auto production next year? Stephan Von Schuckmann: So Mark, nice to hear you. Let me answer that question for you. So yes, I mean, you're absolutely right. We've had like double-digit outgrowth in China. We've won a fantastic business. I just -- as you heard in my script, we have a new President in China with Jackie, and he has really done a great job to win new business on the contactor side, but as also just mentioned on the tire burst system. And that has enabled us to outgrowth in that market and given us an overall, I would say, modest outgrowth in quarter 3 of this year. And going forward, with those wins and potential further wins that we're currently working on, we're looking at further outgrowth going forward into 2026. Operator: And your next question today will come from Guy Hardwick with Barclays Capital. Guy Drummond Hardwick: I'm just looking at the revenue by end market. Am I reading this correctly that HVAC stepped up very considerably sequentially and quarter-on-quarter at 6% of revenues compared to just over 4% a year ago and 4.6% in Q2. So kind of implies almost 40% growth in the HVAC business. Is something -- has there been some segmental change? Or is that real growth? Stephan Von Schuckmann: That's real growth, definitely real growth. So overall, what's obviously fueling this growth is our so-called HL gas leak detection product. We won new business. We've won 2 new businesses, and we're continuing to gain market share. We've got a substantial market share from today's perspective, and that is basically fueling this growth and then also fuel the growth going forward. That's the main reason for that. Andrew Lynch: And Guy, just for clarity, we presented the gas leak detection revenue in industrial last quarter. We've recast both on a Q3 and on a year-to-date basis into the HVAC segment. So I think that may be what you're seeing in those end market disclosures. Operator: And your next question today will come from Joe Spak with UBS. Joseph Spak: Andrew, there's 3 debt securities listed in the tender offer. Obviously, the 5 and 7 days are the most expensive. Is there any reason to believe you wouldn't go after those first? And just somewhat related, is the lower interest expense considered in your fourth quarter EPS guidance? Andrew Lynch: Yes. So given that the tender is still open, we're sort of limited in how much we can share about what notes we prefer to retire or anything like that. But what I can share on the interest is we're earning roughly at parity between cash on the balance sheet and the interest expense that we're incurring on those 29 notes. And then obviously, the other notes are a little bit more pricey. But on balance, I wouldn't expect it to have a material impact on net interest in the fourth quarter. And so nothing to consider from a guide perspective there. And then beyond that, we'd refer to the tender offer materials that we issued with the press release earlier today. Operator: And your next question today will come from Joe Giordano with TD Cowen. Joseph Giordano: Nice job. As you think through the capital structure here, I think everyone probably likes what you're doing with the charging -- the charges and taking down Dynapower and the debt reduction. But how do you think -- like how do you marry the innovation internally that you're doing with like the desire to ultimately deploy more in the future? So I know now we're talking about retiring debt and paying down and getting leverage down. But what's the target where you start to feel comfortable enough that you can start to take iterative steps outside of the current portfolio again? Andrew Lynch: Sure. Thanks for the question. So I think in the short term, we're very focused on our core business. We believe that we have all the building blocks that we need to grow, succeed in our end markets and return to outgrowth, like Stephan mentioned. So I want to be very clear, that's our core focus right now. A big part of our -- a big part of that involves improving the cash generation in our core business and then prioritizing the deployment of that capital to reduce our leverage. And I think you can look for that to be our primary focus for the near to medium term. Stephan Von Schuckmann: And let me add to that, Joe. So basically, I mean, yes, for now, the story that we've been continuously telling us on the last call is, first want to deleverage the company. We use some excess cash to strengthen our operations. So we've been very busy around smart automation in our factories to increase productivity. And that's proven to be the right investment, as you can see in the results as one effect. Yes. And going forward, obviously, we'll reevaluate if we'll deploy cash somewhere else. But at this point in time, we're sticking very much to what we've been telling you and deleveraging the company and improving performance. And that's the focus for the next quarters ahead. Operator: And your next question today will come from Luke Junk with Baird. Luke Junk: Stephan, hoping you could just double-click on the aerospace portfolio, especially your IP and the innovation cycle in that business relative to your right to win comment in the prepared remarks. I guess if I look, it's been growing low single-digit plus in recent years. It seems like the market has been growing a little bit faster in aggregate, just the levers that you see to growing that business more quickly into the future, too. Stephan Von Schuckmann: So first of all, let me reflect back on the growth. We've had steady growth, like you say, mid-single digit. And this has basically been both in commercial and defense markets. in quarter 3 of this year, this was actually a record revenue result. And I think as mentioned -- Andrew mentioned in his script, it was basically the fifth straight quarter of positive outgrowth. Now I think one topic is well known, but I'd like to repeat it. We still have high customer backlogs. They still persist. They're still there. And this is basically in -- basically, this persists, but recent information that we received, FAA is now approved with our biggest customer, one of our biggest customers, an increase to 42 aircraft per month. And as you can remember, back since January 2024, that was roughly 38 aircraft per month. So basically, that's going to increase our part of that growth. And the other part of it is our exposure to defense business, and that will be the other area we'll be growing in this business unit. Operator: And your next question today will come from Shreyas Patil with Wolfe Research. Shreyas Patil: I wanted to better understand the strategic positioning of Dynapower at this point. You talked a little bit about the potential for applications related to data centers. I wanted to maybe see if you could expand on that a little bit more. And are you seeing engagements from customers in some of those end markets, either grid storage, utility or grid applications or then even data center? Stephan Von Schuckmann: Basically, the main focus for now around data power, high energy requirements, which for us create use cases around grid stabilization. That is the major use case around data centers from today's perspective. Operator: Your next question today will come from Konsta Teslas with Wells Fargo. Konstandinos Tasoulis: I think you guided organic growth over the next 12 to 18 months to be in the 2% to 4% range. I think the commentary last quarter was a lot of that was being helped by the non-light vehicle business. But I think H4 housing still looks kind of challenged. Can you just parse out how you're thinking about that now? Andrew Lynch: Sure. Happy to. So I think, first, so obviously, we've seen a slowdown in some of our non-auto businesses this year, HVOR and specifically on-road truck in North America has slowed. And so while we're outgrowing that end market, the ability to grow with it is hampered by the lower levels of production that's impacted organic growth a little bit this year. I think we're still on track for about 1%-ish organic growth if you look at where third parties are for the fourth quarter and then -- where the midpoint of our revenue guide is. And admittedly, that was a cautious guide given some of the risks that we see in the fourth quarter. So we'll see how that all settles in terms of production levels, et cetera. I think as you look forward beyond the fourth quarter, so certainly, again, we're not giving 2026 guidance, but we -- the biggest outgrowth headwind we've had this year, which has challenged our organic growth rate has been the China market. And we turned the corner here in the third quarter where we're now outgrowing production in China. So if end markets hold up and we continue to deliver the level of outgrowth that we've had here in the third quarter, we'd have very high confidence in our ability to grow organically low single digits moving forward. Operator: And your next question today will come from William Stein with Truist. William Stein: I'm hoping you can remind us of your longer-term margin outlook. I forget what you've targeted in the past, and I forget if it's a single year or expansion view or multiyear. Can you just catch us up on that, please? Andrew Lynch: Thanks for the question, Will. So you may recall on the last call, we talked about a margin floor of 19%. We're still committed to that floor. The reason that was an important data point for us is because there's obviously a lot of end market volatility and challenges we're dealing with. Mix matters in our business, certainly. We feel very comfortable in our ability to defend that floor on a full year basis. And then beyond that, I would point to -- we've demonstrated an ability to sequentially expand margins throughout the year as we've done this year. And lastly, I would just point out that our 2 of our higher-margin businesses, HVOR and industrial are both in markets that are relatively soft right now. So if and when those markets recover, certainly, there's some margin help that we get with that. But without clarity on that and without having guided 2026, where we stand today is that we're very comfortable defending a margin floor of 19%. Operator: And your next question today will come from Rob Jamieson with Vertical Research Partners. Robert Jamieson: Nice results tonight. Just had a couple on free cash flow. Just a really strong conversion this quarter again. I just wonder if you could walk through some of the details on working capital improvements, cash discipline that's driving this performance. And then just kind of your thoughts around the sustainability of this level. And then, Stephan, just on the of the benchmarking initiatives that you talked about in terms of getting different manufacturing facilities to kind of get to best-in-class internally. Just wanted to see what you're starting to see there in terms of early improvement. Stephan Von Schuckmann: Let me start with the second question. Thanks for the question. Look, we've continued with our -- with benchmarking progress. First of all, the idea was to benchmark ourselves internally. So from a product family perspective, we would take the best-in-class product from a cost perspective and then benchmark that against all the other factories where that product is produced. And we've made good progress. So we've reduced our cost significantly on each and every product, but we still have some way to go. And then the other view is obviously outside of Sensata. So if we can obtain benchmarks where we find products being produced better than our factories, we'll take that benchmark and work off against -- work ourselves off against that target, which we also do for certain product families. So it's continuous progress. I think we've improved a lot, but still ongoing. Andrew Lynch: Yes. And on the cash flow question, so the biggest lever there has been lower capital expenditures in our business. And I think that's really reflective of the level of discipline we're applying to CapEx. We're certainly looking at things like the certainty of the production outlook on the programs that we're investing in as well as the timing, and that's driven a lower level of CapEx in our business. I'm comfortable that we can continue to convert free cash flow at a relatively healthy level. And the number that we've committed to is greater than 80%. I don't think that our relatively low level of CapEx this year is a benchmark for where we're going to be indefinitely. But certainly, as we're looking at EV production outlook that's a little bit uncertain, volumes that are maybe softer than where they were expected to be a few years ago, we're applying a lot more rigor on the CapEx that we're improving, and that's showing up in our free cash flow conversion. So I'm comfortable that we'll continue to convert at a high level. And I think the year-to-date result has been reflective of CapEx discipline. Operator: And your next question today will come from Samik Chatterjee with JPMorgan. Manmohanpreet Singh: This is MP on for Samik Chatterjee. I just wanted to double-click on your return to growth pillar of the overall strategy. Just wanted to understand in terms of end markets, which end markets are strategically of higher importance in terms of returning to growth? Or like where do you expect the growth will be more skewed in terms of the overall end markets? Stephan Von Schuckmann: From an end market perspective, I think Andrew has given some highlights on that, having we see from Sensata's perspective, strong market outgrowth on the HVOR sector that is mainly driven due to construction and agricultural business, and that's basically offsetting the softness in that market. And we also see, as I've mentioned earlier, with very, very strong order books in the aerospace area, we'll see a potential of growth going forward there as well. That is another area of high growth. Automotive, I would say, is rather soft with a slight outgrowth going forward. So the 2 strong ones being aerospace and HVOR. And industrial -- sorry, Industrial was a third one that I also wanted to mention, especially with our gas leak detection product that's enabling us to outgrow the market. And going forward, that will also be pushing growth. Operator: That concludes our question-and-answer session. I would like to turn the conference back over to Andrew Lynch for any closing remarks. Andrew Lynch: Thank you, operator, and thank you all for joining today's presentation. We look forward to seeing you at various investor events later this quarter. We are currently expected to participate in the following events: the R.W. Baird Global Industrial Conference in Chicago on November 12, the UBS Global Industrials & Transportation Conference in West Palm Beach on December 3; and the Oppenheimer Winter Industrial Summit, which is a virtual conference on December 11. This concludes our third quarter earnings conference call. Operator, you may now end the call. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stride First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Timothy Casey, Vice President, Investor Relations. Sir, please go ahead. Timothy Casey: Thank you, and good afternoon. Welcome to Stride's First Quarter Earnings Call for Fiscal Year 2026. With me on today's call are James Rhyu, Chief Executive Officer; and Donna Blackman, Chief Financial Officer. As a reminder, today's conference call and webcast are accompanied by a presentation that can be found on the Stride Investor Relations website. Please be advised that today's discussion of our financial results may include certain non-GAAP financial measures. A reconciliation of these measures is provided in the earnings release issued this afternoon and can also be found on our Investor Relations website. In addition to historical information, this call will also involve forward-looking statements. The company's actual results could differ materially from any forward-looking statements due to several important factors as described in the company's earnings release and latest SEC filings, including our most recent annual report on Form 10-K and subsequent filings. These statements are made on the basis of our views and assumptions regarding future events and business performance at the time we make them, and the company assumes no obligation to update any forward-looking statements. Following our prepared remarks, we'll answer any questions you may have. Now I'll turn the call over to James. James? James Rhyu: Thanks, Tim, and good afternoon, everyone. Demand for our products and services remain strong. In fact, we believe industry demand and trends around online education continue to grow. We indicated in August that we believe we would grow enrollment between 10% to 15%. And while we achieved enrollment growth in that range, we still fell short of our internal expectations. While demand as indicated by application volumes remains healthy, overall growth was tempered. Well, what happened? Well, we made a couple of strategic decisions that we believe will pay dividends over the longer term, but limited our growth in the short term. First, we invested in upgrading our learning and technology platforms with third-party industry-leading platforms. We continue to believe the investment is the right long-term decision to ensure we are deploying industry-leading technologies and systems. However, the implementations did not go as smoothly as we anticipated. We are actively engaged with our vendors to improve the situation. We heard from our customers that their engagement with these platforms detracted from their overall experience. This poor customer experience has resulted in some higher withdrawal rates and lower conversion rates than we expected. Secondly, we wanted to focus on running high-quality programs. And in some instances, the best approach to achieve that is to limit enrollment growth while we improve our execution. We estimate that the combination of these factors resulted in approximately 10,000 to 15,000 fewer enrollments than we otherwise could have achieved. We also believe that these challenges will likely restrict our in-year enrollment growth. While demand continues to remain strong, we do not anticipate the same in-year enrollment increases that we have seen over the past few years. So our outlook for this year compared to last year is a bit muted. However, our outlook for this business over the longer term remains bullish, and these investments should help us achieve our longer-term goals. Our mission and our path are clear to me than ever. Families want and deserve educational choice. Meeting the demands of families in this country is an increasingly diverse task that is challenging to meet with a one-size-fits-all model. So for many families, we are providing the only real affordable alternative in meeting their needs. And the trends just continue to move in that direction. Whether it be safety issues like bullying or neighborhood violence or health issues or special needs that cannot be met by local schools, we are providing a service that is both increasingly in demand and increasingly necessary. And we are investing in areas that will help enable us to meet the needs of the families we serve. One simple example is the rollout this year offering every second and third grader free ELA tutoring. We know that in order for kids to continue learning, they need to be able to read, write and communicate. Therefore, we are investing to ensure the youngest students in our programs can do just that. We are tomorrow's education today. We meet the diverse needs of families that want flexible, personalized career forward and tech-enabled education at an affordable cost. This fall has proven challenging for us, and I want to thank our customer-facing employees, the teachers, administrators and other staff who have worked tirelessly to help us overcome those challenges to serve the students. I also want to thank all our corporate employees who never forget who our customers are and how impactful what we do is in the lives of so many families. Thank you. With that, I'll turn the call over to Donna. Donna Blackman: Thanks, James, and good afternoon. As James mentioned, our results this quarter reflect the continued demand for our core offering. Families are seeking alternative options for their students to solve ongoing challenges within the existing education system. However, we also had some internal challenges this quarter as we implemented new platforms for our students. While this caused some disruption, I believe these changes are important for the long-term growth of the business. As always, I am incredibly grateful to all of the Stride employees for their commitment to the families we serve, it is an opportunity and a privilege to influence the lives of so many students each and every year. Turning to a few highlights from our quarterly results. Revenue for the quarter was $620.9 million, up 13% from the first quarter of last year. Adjusted operating income was $81.1 million, an increase of almost $23 million or 39%. Adjusted earnings per share were $1.52 up $0.43 from last year. And capital expenditures were $21.7 million, up $6.9 million. As I mentioned, our quarterly results were strong demand for our core offerings. Our total enrollments for the quarter were up 11.3% from last year. Once again, setting a record for the number of students we will serve as families continue to seek out educational alternatives. Career Learning and middle and high school revenue for the quarter was $241.5 million, up more than 21% from last year. Career learning enrollments grew 20% to 110,000. General Education revenue grew over 10% to $363.1 million on enrollment growth of 5.2% to 137,700 students. Total revenue per enrollment across both lines of revenues was $2,388, up 3.7% from last year. As we mentioned in August, we are seeing a positive funding environment, but we do expect some impact from state mix and timing. And as such, we now believe we will finish the year flattish in revenue per enrollment compared to FY '25. Gross margin for the quarter was 39%, down 20 basis points from last year. I mentioned last quarter that we are continuing to invest in the business, which will have some impact on gross margin. Additionally, given the challenges we had this quarter, we expect to incur some additional expenses related to the platform rollout. As a result, we now expect full year gross margins will be down from FY '25 but still above what we saw in FY '24. Selling, general and administrative expenses totaled $173.1 million, up 3% from last year. We still expect SG&A as a percent of revenue to decrease compared to last year. Stock-based compensation for the quarter was $10.2 million, an increase of $1.8 million compared to last year. We expect to see an increase in stock-based compensation this year, largely due to the impact of a long-term performance grant. And therefore, full year stock-based compensation will likely be in the range of $41 million to $44 million. As I mentioned earlier, adjusted operating income for the quarter was $81.1 million, up 39% compared to FY '25. Adjusted EBITDA was $108.4 million, up roughly 29%. Adjusted earnings per share, a new metric we introduced last quarter was $1.52, up 39.4% from last year. Our profitability strength was driven by the enrollment growth in the quarter and improvements in operating margins. Capital expenditures in the quarter were $21.7 million, up $6.9 million from last year. Free cash flow, defined as cash from operations less CapEx was a negative $217.5 million compared to negative $156.8 million in the prior year period. Cash flow followed our typical seasonality related to school launch and the onboarding of students in the first quarter. As in years past, we expect to see positive cash flow for the next 3 quarters. We finished the quarter with cash, cash equivalents and marketable securities of $749.6 million. Turning to our guidance. As James mentioned, we do not expect in-year enrollment to be nearly as strong as they have been for the past years. However, despite the short-term impacts we are seeing, our guidance this year keeps us firmly on track to achieve our FY '28 financial goals. For the second quarter of 2026, we expect to see revenue in the range of $620 million to $640 million, adjusted operating income between $135 million and $145 million; and capital expenditures between $15 million and $18 million. For the full year, we expect revenue in the range of $2.480 billion to $2.555 billion; adjusted operating income between $475 million and $500 million. Capital expenditure between $70 million and $80 million and an effective tax rate between 24% and 25%. While any new technology can bring challenges, we are committed to delivering a quality experience for all of our families and our partners. And we will make the investments needed this year to ensure we are set up for long-term success. Thank you for your time today. Now I'll turn the call back over to the operator for your questions. Operator? Operator: [Operator Instructions] Your first question comes from Jeff Silber with BMO Capital Markets. Jeffrey Silber: I obviously want to focus on the guidance for the year. And forgive me, did you give enrollment guidance for the year? I think you had said 10% to 15% on the prior call. I'm just wondering where you're coming out now. Donna Blackman: With did not give guidance for the full year. We gave the guidance that we gave for the count date was 10% to 15% for the count date, we came in at 11.3%. But we do not anticipate that we will see the same level of in-year enrollment growth that we've seen over the past 3 years. So based upon that assumption, the 11.3% growth that we saw from October to October, we don't expect to see that same year-over-year increase by the end of the year. Jeffrey Silber: Okay. And then you did call out about 10,000 to 15,000 weaker enrollments. And you cited 2 items. One was, I guess, a bad systems implementation and other was limiting enrollment growth to focus on high-quality programs. Can we parse out what each one had that impact on that 10,000 to 15,000. And if you can give a little bit more color on each of those items, I think that would be helpful. James Rhyu: Yes. I mean I think -- so the -- it's difficult to say exactly. I'll for say that first. So again, anything I say is going to be based on the data that we can see and estimate. But certainly, we believe that the majority was due to the system implementation issues. It impacted the overall customer experience. We had a higher level of withdrawals as a result. And we attribute the higher level withdrawals directly to the system issues that we're having. So I think that's definitely the predominance of them. It's also the area that we think is most resolvable. We're working very furiously with our partners to fix those issues. And I think that the ability for us to run quality programs is tied intimately with the platform issues that we discussed because we don't want to do is to really exacerbate a problem by having more students come on to a platform that is not meeting our expectations. Operator: our next question comes from the line of Jason Tilchen with Canaccord Genuity. Jason Tilchen: Great. A little bit of a follow-up on the last question. I'm wondering if you could just share a little bit more about, a, the rationale and the timing for this tech implementation and then a little bit more about exactly what went wrong. James Rhyu: Yes. I think -- so the first thing is the rationale for the implementation is actually pretty simple. As we have scaled and we have more than doubled in the past 5 years. And that level of scale requires platforms that are large enough and robust enough to meet the demands of our scale and our anticipated additional growth. And so we operated a number of platforms that were either in-house proprietary platforms or with third parties where we didn't have the confidence that they were going to be at a scale to the extent we needed them to. And so investing in a new set of platforms for the long term, we believe, and we still believe execution issues aside, is the right for our business long term. And so the idea of investing in upgrading our platforms continues to be, we think, the right approach. The timing, there's one real window of timing that you have to fall into for most of these types of upgrades where you have, in theory, the least disruption to your customers. And that is in the summer between the end of one school year and the beginning of the next school year. So we sort of have to execute in that sort of delicate window. And clearly, what we thought we were going to achieve in terms of an execution in that window, we did not achieve. Demand continues to be very strong. And so we're confident that we're going to overcome this, but the timing for this implementation sort of has to occur really in that summer period. And you really only get that window of chance, and we didn't execute as well as we should have and our partners didn't execute as well as they should have, and we're going to spend the year making sure that we get it fixed. Jason Tilchen: Great. And just a follow-up to that. I just want to make sure I understand. Was it essentially the implementation took longer than expected to complete and sort of blend at the beginning of the school year? Or was there something else that went wrong? And then the other sort of question, the dynamic between the 2 programs Gen Ed and Career Learning, it seems like Career Learning, the enrollment remained very strong there, while we saw a sequential decline for Gen Ed. So wondering if this sort of tech upgrade had any sort of impact on one program more than the other? James Rhyu: Yes. So not a material impact on one program versus the other. So I wouldn't sort of read too much into that split. The implementation again, there was a couple of platforms there. The main platform implementation took a little bit longer than we expected. Also, we encountered more problems on the rollout than we anticipated. So even when it did roll out for the new semester, the number of problems we experienced during the rollout that impacted directly to customers' abilities to log on the resiliency of the platform, the performance of the platform, all impacted the customer trajectory and the customer experience. So I would say it did take longer, and it continues into the year to have issues that we're continuing to fix. So I think that's sort of the thing that we're dealing with is that we're now in the year, and we have been now for a couple of months and we're continuing to ensure that we're improving the platforms in here as well. Operator: Your next question comes from the line of Greg Parrish with Morgan Stanley. Gregory Parrish: I was hoping to get a little more color on the decision to limit in your enrollment growth. With the platform implementation issues, is that impacting in-year enrollment growth? Or is that not the case? Is this more of a permanent structural decision to just improve the quality of your programs? James Rhyu: So I think it's a little bit of both. Clearly, we want to limit the exposure that the platform issues are having. So just sort of limiting the intake during a period when we want to make sure that the platform gets stabilized is important. So -- and that directly correlates to the quality of the program, you can't have high-quality program, if you're having customer experience issues. So I think they sort of go hand in glove. Gregory Parrish: Okay. So would you say that this is just a 1-year sort of in-year impact and then next year, it would probably -- and there's only been a couple of years that has been happening. Or is this -- next year, we're going to kind of -- it could go back to the way it has been in the last few years? James Rhyu: Yes. I think all things being equal, meaning that assuming we fix all the issues in this year, which we do anticipate, we have a clear road map that this year, the issues will, in fact, be fixed. Assuming that demand continues to be strong as we have seen it. Yes, we would believe that next year we would be able to return to growth in year. Now obviously, a lot of variables included there, certainly not guidance of what next year is going to be. But if the demand were to maintain at the high levels that we've been seeing it and all other things being equal to, say, a last year type of performance, then yes, I mean that's what the math would suggest. But we're really focused on making sure we get it fixed this year. So that is really the #1 priority. And again, I think we have a clear path of getting these resolved in this fiscal year. Gregory Parrish: Yes. Okay. That's helpful color. I know there's a lot of moving parts there. And then maybe just one last question here. I just wanted to talk about competitive landscape. And I say that with you have double-digit enrollment growth here to start the year. So very healthy. But with your success over the last couple of years, there's -- other programs are going to try to copy some of your very successful strategies. I think your biggest competitor had a great start to the year. I think following your playbook in many ways. And I know you're for lifting all boats in the industry, but maybe just help us with what you're seeing out there in the competitive environment? Any changes? Just anything you're seeing on that front? James Rhyu: Yes. I mean I have said pretty consistently that I want all players in the space to be successful. I want to make sure that the industry is healthy and that the industry has high-quality players. I think a healthy industry promotes higher quality players in the industry. I think that's important. I mean, congratulations to our competitors who are doing well. I think that's great for them. I think if you just look at the raw numbers, forget about percentages for a second. If you look at raw numbers, I still think our growth year-over-year outpaced our largest competitor's raw growth numbers by a large margin. When you start at a lower base, the percentage is, obviously, that's just math. But I think what we can see is demand remains strong, and we welcome healthy competition. And I think we're going do everything we can to tee ourselves up for strong next year. Operator: Your next question comes from the line of Stephen Sheldon with William Blair. Matthew Filek: You have Matt Filek for Stephen Sheldon. I wanted to start with a clarification question. Are these platform issues solely related to the classroom and learning experience? Or are these platforms also used for processing enrollments and other administrative like functions? James Rhyu: Yes. It's a really straight question. It's actually both. So they are the -- what you would consider to be the more traditional customer-facing side of the equation. The platform that serves up the courses and get the people -- get the students engaged with the program, if you will, as well as the more back office administrative side you just referenced. Matthew Filek: Okay. That's helpful. And then what inning do you feel you're in for rectifying these platform issues? And then can you also tell us when exactly these issues started? And then one more thing as well. Would you kind of call this 2 separate platform issues? Or is it one thing? How should we think about all of that, especially timing of fixing the issues? James Rhyu: Yes. So they are distinct platforms. So it is, in this case, specific to your question, 2 distinct platforms that we're talking about in terms of back office, front office. We did not really have an indication of the impact of these issues until we got well into August. And unfortunately, the timing wasn't great because it happened to be after our last earnings call where it was more funnel activity of demand that we were seeing that was very strong. And then subsequent to that, we started seeing the withdrawal issues as the platform issues became apparent. So the timing was unfortunate that it was after our last earnings call. And I think that when we think about sort of the road map to getting these issues fixed. We're working every day on them. We believe that over the course of the year. It's not a onetime fix that we're implementing, it is a series of fixes. We think that the biggest ones happen here in the next few months, but they will persist throughout the entire year. And in fact, we are engaged with our partners to ensure that there -- it doesn't end just when we think that have the issue fixed. But that we signed up with these partners to ensure that there was a robust ongoing set of improvements to the platforms and innovation curve that we would drive with them that they would invest behind. And so while the immediate issues, we expect to get fixed in the next few months with the biggest issues and then sort of throughout the year with the remaining issues, we still expect to be investing in improving this platform and improving the experience for our customers well into the future. It's not just a 1-year deal in terms of the expectation we have on improvement. But the most pressing issues we expect to be fixed in this year. Operator: [Operator Instructions] Your next question comes from Alex Paris with Barrington Research. Alexander Paris: I just have a couple of clarification type of questions. So at count date, you had 247,700 students, up 11.3% year-over-year. You said that it could have been 10,000 to 15,000 higher if it were not for these issues with the platform rollout. I guess the first question I have is, did those withdrawals occur before the count date or after the count date because the Q2 guidance calls for revenue at the midpoint of up 7.3%. So fall term enrollment was up 11.3%. And if it's flat revenue per enrollment, I don't know why revenue would be up only 7% unless these withdrawals continue to occur beyond the count date. James Rhyu: Yes. So let me try to maybe clarify how you're looking at this first and then sort of circle back maybe on sort of how these withdrawals are manifesting themselves. The comp in each of our subsequent quarters from last year is on a rising set of enrollment and rising set of revenue. And so if what we did was we remain stable, i.e., flat you still have a deterioration on the year-over-year growth mathematically because you're talking about last year when in the course of the year, you were rising, and we do not expect sort of the same dynamic of growth that we saw last year. And so I think that's the first point. Just mathematically, I think, you have to look at it from each quarter sequentially last year that was growing. And now we're not sort of indicating that same growth. The second piece circling back, I think, is that largely speaking, the vast majority of the growth that we think we could have, the indication of the 10,000 to 15,000 occurred in the first fiscal quarter, meaning everything in that estimate statistically is a calculation estimate through September 30. So said a different way, if we did not have those problems, and our estimates were correct. We actually would have anticipated that our count date, our September 30 only number would have likely exceeded the upper range of our guidance, mathematically. Now a lot of assumptions built in there around how we're calculating higher withdrawal rates and things like that. But I think to your question, the predominance of it that we're indicating in that number is falling between sort of middle of August through end of September. Alexander Paris: Okay. And then when we talk about in-year enrollment, I guess I was sort of thinking about the January enrollment. But implicit in your guidance is rather than sequential rise in raw enrollment from quarter to quarter to quarter like we saw through Q1, Q2 and Q3 last year. It would be a decline in the second. The second quarter raw number for enrollment will be less than the first quarter raw number enrollment. And third quarter will be less than the second quarter and presumably, the fourth quarter will be less. And then next year, once all these problems are fixed, we can presumably return to growth. Is that the way to think about it? James Rhyu: Yes. So I think we're not giving exact enrollment guidance per se exactly. But I think we should probably not presume growth beginning of the year to the end of the year in enrollments. We will handle some backfills. We have some attrition during the course of the year. We -- there's likely some backfills that we will do. But yes, I think beginning of the year to end of the year, we should not anticipate growth. And we do, again, assuming the conditions remain strong as we've seen, the demand conditions remain as strong as we've seen and we can revert back to the prior retention characteristics that we had prior to this issue. We do think that we could resume to in-year growth in subsequent years. Alexander Paris: Got you. And then the last question and related is revenue per enrollment. You previously said positive funding environment, probably up a bit, and now you're saying flat. Is that the delta? Donna Blackman: As I said in my prepared remarks, we are still seeing a positive funding environment. We will see some impact from the mix and from timing. And as you may recall, one of the things that we did last year was that we had some adjustments throughout the course of the year, given the in-year enrollment growth that we had throughout the course of the year. We're not anticipating having that same level of in-year enrollment growth. So we won't have that catch-up that we had last year. And then we also had that higher funding catch-up and Q4 funding adjustment, I should say, in Q4. From the back half of the year, the comps are a little bit tougher. And then again, to the point, we don't expect to have that level of in-year enrollment growth that we saw last year that we adjusted the revenue per enrollment throughout the course of the year... Alexander Paris: So has anything really changed on -- has anything really changed on the funding environment outlook? You said you still view it as a positive funding environment. But has the mix changed relative to your expectations a few months ago? The expected mix, like by state? Donna Blackman: I'm sorry, when I talk about mix, the mix is depending upon where we grow, where the withdrawals come from during the course of the year, that's the mix we talked about. So the point that James made, we won't have any end year enrollment growth, right? The reality will happen is that we'll have some -- prior to the last 3 years. We would have in-year enrollment growth. Our withdrawals exceeded that in-year enrollment growth, right? And so we'll still continue to have that mix that will happen. And so it depends on where that mix happens, that will drive the variability that we might see in our revenue per enrollment, whether it be a higher general ed or Career Learning. But in terms of the pure funding environment, the sentiment is the same today as it was in August. Alexander Paris: Got you. All right. I appreciate the extra color and I'll ask other questions as we follow up. Operator: Ladies and gentlemen, this concludes the Stride First Quarter Fiscal Year 2026 Earnings Call. On behalf of Stride, I would like to thank you all for joining. You may now disconnect.
Operator: Good evening. We welcome you to The Navigator Company Third Quarter 2025 Results Presentation. [Operator Instructions] I'll now hand the conference over to Ana Canha. Please go ahead, madam. Ana Canha: Ladies and gentlemen, welcome to The Navigator Company conference call and webcast for the third quarter and nine-months results. Joining us today are the following directors, Antonio Redondo, Fernando de Araujo, Nuno Santos, and Antonio Quirino Soares. As usual, we will start with a brief presentation, and we will have Q&A session at the end. The presentation can be accessed through the links available on the website, and questions may also be submitted using the webcast platform. Antonio will start by commenting on the main highlights of the quarter. I will now hand over to Antonio. Antonio Redondo: Good afternoon, and thank you for joining us today. I'm pleased to share the results for our third quarter and first nine months of 2025. As you will see in today's presentation, Navigator once again demonstrated its ability to adapt swiftly to very challenging market conditions while maintaining its strong competitive position in Europe. We continue to focus on creating value and protecting margins while investing in diversification and reinforcing the foundations for sustainable growth. I will begin with Slide 4 with an overview of the key highlights. The first nine months of 2025 were marked by very significant volatility driven by geopolitical tensions and rising protectionism, adding to macroeconomic risks. Like others in global trade, Navigator felt the impact of slower demand in key markets. The pulp and paper sector has faced severe pressure visible in the sharp downturn in pulp prices in China since April, which also significantly impact Europe. As anticipated, the third quarter marked the lowest point in this downward cycle. Faced with falling prices across its markets, Navigator succeeded in positioning itself competitively. We are firmly established around the globe, which enabled us to seize opportunities, grow our sales volumes in all paper segments and increase our market shares. Focused on operational excellence, the company implemented initiatives to optimize its variable costs and streamline its operations. The downward course of production costs is already visible despite the temporary impact of cost categories such as energy and chemicals, the effect of which has tended to be diluted as the nine-months period progressed. Pulp and tissue cash costs dropped to near the lowest since mid-2021, with while paper cash cost reached a two-year low. As a result, the pulp and tissue cash costs fell at the end of third quarter to the second lowest level since mid-2021. The paper cash costs were the lowest of the last two years. Despite significant market volatility across all segments, our packaging and tissue businesses delivered solid year-on-year growth and already account for 32% of the EBITDA and 29% of the turnover. In tissue, we are successfully scaling up operations and following recent acquisitions, namely Navigator Tissue U.K. In packaging, our sales continues to show positive momentum with growth in volume, value and strategic positioning in lower basis points. We maintained a strong financial position after dividends and strong CapEx, keeping our net debt-to-EBITDA ratio at 1.85x. Now turning to Slide 5, please, with the main financial figures. Turnover totaled EUR 1,489 million. EBITDA stood at EUR 300 million with an EBITDA margin of 20.2%. Fernando will highlight the main impact on the period. The successful execution of our diversification strategy has strength resilience amid market volatility with tissue and packaging segments helping to offset the impact of subdued pulp and paper prices. In an uncertain macroeconomic environment, our EBITDA margin remains among the strongest in the industry, namely amongst those exposed to pulp, although below our historical average. I will now hand over to my colleagues, who will walk you through the results in more detail and share some insights on how our different business areas have been doing. Fernando will start by the main impacts on EBITDA. Fernando, please go ahead. Jose de Araujo: Thank you, Antonio. Turning to Slide 6. We can take a closer look at the main impacts on EBITDA in the year-on-year comparison. As already mentioned, EBITDA stood at EUR 300 million, down 30% year-on-year with an EBITDA margin of 20%. Year-to-date results were below last year's due to lower sales price and rising cash costs, mainly for energy and chemicals in the beginning of the year, which, as I mentioned, has since started to reduce. The downward trend in uncoated woodfree and pulp sales price were pressured by falling benchmark index. Change in our product mix also influenced our average sales price. Apart from pulp sales, all paper and tissue products saw a significant increase in sales volume over the nine months period. Turning to Slide 7 with a quarter-on-quarter EBITDA analysis. In this quarter, EBITDA stood at EUR 84 million, down 17% quarter-on-quarter, reflecting EBITDA margin of 18%. Quarter-on-quarter, the EBITDA decreased mainly due to the sharp price reductions, partially offset by strong volumes and variable and fixed cost savings. Navigator sales price fell across all segments quarter-on-quarter, following the drop in key benchmark index. We witnessed a strong rebound in pulp sales versus Q2, plus 31,000 tonnes, driven by the market recovery in Europe and overseas despite our selective sales strategy amid sharp price drops. In uncoated woodfree and packaging, we sustained volumes, offsetting the typical seasonality of the third quarter. We saw a good trend regarding production costs. Wood costs were down due to lower prices and lower extra Iberian purchase. Energy and chemical costs also decreased due to lower prices. External fibers were also down as a result of lower market prices. As Antonio already mentioned, pulp and tissue cash cost dropped this quarter to near their lowest since mid-2021, while paper cash costs reached a two-year low. Turning to Slide 8 with debt maturity and liquidity. During the first nine months, we repaid close to EUR 400 million in debt, including EUR 275 million early repayment, strengthening our debt profile and increasing the share of sustainability linked instruments. We also secured EUR 365 million in long-term facilities with EUR 140 million still available, including an European Investment Bank loan, EUR 40 million to support the decarbonization projects with no significant payments due in the next five years. We raised EUR 225 million new debt with a seven-year maturity, extending our average debt maturity to 5.2 years from 3.5 years in December. We also raised the weight of sustainability-linked debt to 79%. After this debt renegotiation cycle, Navigator reduced its debt repayment commitments to very low volumes over the next five years, hence ensuring the reduction of its average credit spreads and increasing the weight of the debt raise and the ESG requirements. At the end of the period, 78% of our debt was on a fixed rate basis. It should be noted that despite the rising interest rates in relation to our last financing cycle, our average cost of financing at the end of September remained low at around 2.6%. The unused long-term credit facilities currently totaled EUR 140 million. Turning to Slide 9 with an overview on CapEx. The high strategic CapEx cycle start in 2023, boosted by the NextGenerationEU and innovation funds is coming to an end and expect to be phased by mid-2026. In the first nine months of 2025, CapEx totaled EUR 160 million, of which approximately 61% of total corresponds to value creating environmental or sustainable investments. NextGenerationEU projects advancing on schedule, reflecting our strategic discipline and focus on delivering results with 77% is secured by the end of September in time within the PRR calendar and in budget. Moving to Slide 10, which presents key performance indicators. Let me highlight our ongoing commitment to operational excellence and long-term value creation with a strong focus on decarbonizing our industrial process and investing in innovative technologies that improve resource circularity and cost efficiency. This quarter, we achieved a significant milestone in our decarbonization road map, namely with two biomass power lime kilns in the operation at our Aveiro and Setúbal sites and the third biomass power kiln at Figueira da Foz is now in the start-up phase. These projects are designed to reduce both greenhouse gas emissions from pulp mills and the dependence on fossil fuels. Notably, the new lime kiln in Figueira da Foz will also make a very significant contribution to simpler use of resource by enabling reclamation of carbonate sludge, reducing the quantity of this waste sent to landfill by around 90%. Thanks to this investment, the Aveiro and Figueira da Foz mill will operate in 2026, producing around 9% renewable energy. The conversion of lime kilns from fossil fuels to sustainable biomass will open the door to the innovative use of Eucalyptus globulus, a byproduct from wood preparation operation as a renewable fuel. At the Setúbal mill, the conversion of lime kiln to biomass as this energy source will lead to a reduction in carbon emissions of around 17,000 tonnes CO2 emission license per year. In Aveiro and in Figueira da Foz, the project will allow a reduction of approximately 10,000 tonnes CO2 per year in each site. In Setúbal, this groundbreaking project has attracted support from the Innovation Fund, the European Union Fund for climate policy, geared especially to energy and industry and working to bring to the market solutions for decarbonizing the European industry and helping it make the transition to climate neutrality. The Aveiro project and the new lime kiln in Figueira da Foz have been partially financed by the NextGenerationEU funds. Together, these three projects represent a total investment of approximately EUR 60 million. This innovation substitution of fossil fuels will improve the cost base of the pulp production process. It once again demonstrates Navigator commitment to operational efficiency and underlines how its actions are aligned with the principles of sustainability in transforming waste into value and taking real steps to consolidate the group's circular economy strategy. Antonio Quirino will now comment on pulp and paper price. António Soares: Thank you, Fernando. Turning to Slide 12 with pulp and paper prices. Between April and August this year, the hardwood kraft pulp price index in China sharply decreased, strongly influenced by overcapacity in the pulp and paper sector in view of the current situation of severe tensions in international trade and the reduction in demand in several paper segments in Western markets. The price dropping cycle bottomed out at a price of $493 per tonne, which is down by 18%, the lowest since 2021. Although this downward cycle has been shorter than previous cycles, it started from a significantly lower peak, reflecting a structurally weaker base than in preceding cycles. In Europe, the benchmark index for hardwood pulp, the peaks hardwood kraft pulp in dollars rallied to $1,218 per tonne in April, up 22%, only to lose ground again in the months that followed, returning to $1,000 per tonne in August, down by 18% as well and remaining at that level until the end of September. In both regions, China and Europe, prices ended the third quarter on an upward trajectory. Moving to paper. The benchmark index of office paper in Europe, PIX A4 B-copy stood at an average of EUR 1,023 per tonne in the first nine months, which is 8% down on the same period last year, but 21% above the pre-pandemic average of EUR 847 per tonne in the period of 2015 to 2019, but below 25% from the 2022 peak. As we review Navigator's performance in Europe, I would like to highlight our approach to sales pricing, which closely track the evolution of benchmark indices. We pursued two different strategies. First, we placed greater emphasis on economy products. So this allowed us to increase our sales volumes, though it did have some impact on our overall product mix. This strategy enabled us to offset the decline in imports into Europe by offering products with superior quality and stronger environmental credentials compared to typically typical imported papers into Europe, particularly those from Asia, while maintaining a price point above imports, but below our premium and standard ranges. At the same time, it allowed us to continue supporting our most loyal premium customers with this economy offerings. Second, we maintained price premiums on our value-added product. This strategy ensured that our pricing on premium and standard products remained favorable compared to the market index and specifically for A4 B-copy PIX. It's important to note that in international markets, our prices were affected by two other factors, namely the weaker dollar and the decline in the pulp markets in China. This dual approach has helped us remain competitive and responsive to market dynamics, balancing volume growth with value retention. Moving to Slide 13 on printing and writing paper market, we see that the global apparent demand for these papers fell by 2.7% until August. Specifically, uncoated woodfree paper remained the most resilient, falling 1.6% this year, which is aligned with historical average market decline, and this compares with 5.1% decrease in coated woodfree papers and 4.2% decrease in mechanical fibers papers. In Europe, the apparent demand for uncoated woodfree paper fell by 6.4% until August, driven specifically by a reduction in imports that were 11% below the same period of last year. In the United States, demand slipped by just 1%, while the closure of a major mill drove import reliance at 31% year-on-year, leveraged by tariff expectations. With capacity cuts and duties adding pressure, prices have climbed and are likely to remain strong with more increases forecast through 2026. In the first nine months of 2025, Navigator grew its share of total deliveries from European mills by 1.2 percentage points year-on-year, reaching about 26%. This was driven by strong gains in international markets at 6 percentage points, while our European share remained steady at over 18%. Navigator's operating rate rose to 87% in the first nine months of the year, 7 percentage points above the same period last year. Meanwhile, the industry rate as a whole recovered slightly from 80% to 81%. These developments enabled Navigator to strengthen its order intake market share by 3 percentage points globally to 27% and by 2 percentage points in the European market to reach 19% year-on-year. Now moving to Slide 14 to discuss pulp market. As Antonio mentioned previously, from April through August, there was a steep downward adjustment in pulp prices. In terms of demand, global demand for hardwood pulp grew by 8% year-on-year until August. China remaining the main engine of growth with an impressive increase of 12% due to the continuous in new paper capacities in several grades followed by the rest of the world with a 9% increase. In contrast, demand in Europe continued to fall following the shrinking consumption of printing paper, as mentioned before, edging down by 1%. In the U.S., demand dropped by 1% as well after heavy restocking over the same period last year. The strongest global growth was for eucalyptus pulp, which was up by more than 10% in the first eight months of the year, with China growing impressive 14% and Europe in line with the same period of last year. This performance has consistently boosted Eucalyptus share in the hardwood reach segment on the chemical pulps. On the supply side, the ramp-up of projects on the pulp side that were brought online in 2024 increased the availability of market pulp in 2025, exerting pressure on operating rates. Even so, factors such as growing consumption, maintenance shutdowns and recently announced cuts in production helped to balance the market and sustain the activity of hardwood producers in the first nine months of the year. The global pulp market will continue to be influenced by China, where growth in domestic consumption and projects for new tissue, paper and board capacity have shaped the market balance. However, a significant proportion of these new lines are still at the initial start-up stage, which could mitigate the impact in the short term. Doubts also mounting as to the region's ability to supply wood sustainably for the new capacity. In Europe, stock levels remained relatively stable. In China, although stocks at ports have been building up since January, analysis of paper production suggests that this growth is proportional to the expansion of their industrial operations and not an anomalous accumulation. The ratio of stock of days of production has been stable in recent months, pointing to a balance between supply and demand. Our sustained competitive advantage is anchored in the uniqueness of Eucalyptus Globulus, eco-efficiency and fiber quality. On a positive note, as Antonio mentioned, our pulp cash costs ended Q3 at the second lowest level since mid-'21, down 20% from January to September and 19% quarter-on-quarter. Moving to Slide 15, covering the tissue market. We see that after a substantial growth of 6.3% in 2024, Western European demand for tissue was up year-on-year by 0.6%. Navigator's tissue sales volume, finished products and mills grew to 177,000 tonnes, a 14% increase compared with the same period of last year, with sales up 17%, boosted by the integration of Navigator Tissue U.K. in May last year. The recent acquisitions in Spain, '23 and the U.K., '24 have enabled us to balance our geographical mix and creating greater resilience in our tissue business. Finished products accounted for 98% of total sales, while wheels accounted for the remaining 2%. The at home or consumer retail segment has grown in importance and currently accounts for around 83% of sales. The away-from-home segment, wholesalers, the Horeca channel and offices accounts for the remaining 17%. The highlight of the quarter in the Tissue segment was the business in Iberia, which recorded its best ever quarter in sales of finished products. We continued with the integration of the U.K. operation with increased collaboration between local and Iberian teams, aiming to boost cross-selling opportunities between markets, optimize the portfolio and identify and implement further cost cutting and efficient opportunities. Navigator also launched a strategic plan to consolidate its U.K. tissue rolled operations, building on an already efficient model to achieve even greater competitiveness and alignment with best practices. Moving to Slide 16 on the Packaging segment, we see that the global market for machine glazed and machine finished kraft papers grew by approximately 11% year-to-date August, reflecting its strong performance. In this segment, Navigator sales were up 7% year-on-year in volume compared to last year, thanks to a rise of 1% in price and a 7% increase in volume with a 10% growth in the area of paper sold due to an increased penetration in low grammage segments according to the strategy. Navigator has been developing and investing in the gKRAFT sustainable packaging segment, offering alternatives to fossil-based plastics and supporting the transition to renewable low-carbon products. gKRAFT brand has won market recognition, achieving a 15% growth in new customers opened during the period of year-to-date September with a presence now in more than 40 countries worldwide. The top performance in the period was the release liner products, together with solutions for food and nonfood packaging, which are strategic priority areas for our business. These segments benefit more significantly from the use of lightweight papers, where the Eucalyptus Globulus offer significant competitive advantages, both economically and technically. MG and MF kraft papers or machine glazed and machine finished kraft papers are used in similar applications such as bags, sachets and several flexible packaging items. Traditionally, machine finished is a slightly lower cost alternative with inferior surface quality in comparison with machine glazed. However, with the conversion of PM3 in Setúbal, production of machine-finished kraft papers in the gKRAFT range will be able to compete with machine glazed on quality. In Europe, machine finished kraft paper for packaging purposes is produced by paper suppliers who typically can only ensure products above 60 grams. The overwhelming majority of the paper machines able to produce below 40 grams are old, small and nonintegrated machines and aimed at the machine-glazed kraft papers. The rebuild of the PM3 machine in Setúbal takes advantage of Navigator's vertical integration and the cost efficiency of the Eucalyptus Globulus fiber for production of distinct top quality kraft papers. As a result of this project, Navigator will move up to fourth place in the European league table of low-grammage flexible packaging manufacturers, strategically consolidating its presence in the segment where demand is surging. In order to ensure that the asset maintains its flexibility and it is adaptable, the project has been designed to allow, if necessary, the production of different grades of uncoated wood-free paper, guaranteeing our capacity to respond to market dynamics and preparing us for future scenarios. I will now hand over to Antonio. Antonio Redondo: Thank you, Quirino. Let's please turn to Slide 17 with a wrap-up of the Q3 and nine months results. Our diversification strategy is paying off. The diversification to higher growth and less cyclical markets such as tissue and packaging, although more dependent on end user consumption, reinforces the company's long-term value creation and resilience. In tissue, we are successfully scaling our operations, expanding into new markets and positioning ourselves to further unlock long-term synergies that will drive sustained growth. In packaging, increased penetration in low-grammage segments confirmed the strong appeal of Eucalyptus Globulus fiber for the same, leading to a 10% increase in paper area sold compared to a 7% increase in sales volume in tonnes. By focusing on efficiency and cost management, we achieved a significant reduction in cash costs across all pulp and paper segment. We kept our focus on core operations, business transformation and innovation. We carried out value-added CapEx of EUR 160 million aimed at sustainable long-term cost efficiency, while keeping consistent conservative financial policies after high level of CapEx and EUR 175 million dividend payout. Let's turn to Slide 19 with a few words about the outlook. Let me now share our perspective on the current market environment and our outlook for the coming months. Globally, we are seeing a reduction in overall uncertainty and still moderate growth prospects. It's important to recognize the continued presence of risks, protectionism, economic fragmentation and financial vulnerabilities in major economies remain a concern. While a recession does not appear imminent, growth is still relatively subdued and ongoing uncertainty continues to weigh on investments and international trade. Despite the challenges and limited visibility, we are cautiously optimistic about short-term market development. We anticipate that conditions will improve, particularly in the pulp, tissue and packaging segments, where the printing and writing paper segment demand is expected to remain under pressure, although with uncoated woodfree presenting most likely again better perspective than other printing and writing papers. Regarding the pulp market, China continues to play a decisive role. Growth in domestic consumption and new capacity projects have shifted the market focus. That said, many of these new lines are still in the early stages, which should moderate the immediate impact. There is also increasing uncertainty regarding the region's ability to source wood sustainably for the expansions. As a result, we have seen pressure on global prices and a change in trade flows with China in growing. Notably, the third quarter of 2025 was the weakest since 2021 with prices averaging USD 500 per tonne in China. We believe this marks the bottom of the current price cycle as both China and Europe saw prices start to recover towards the end of the last quarter. In the printing and writing paper, the overall global outlook remains challenging and need a structural consumption downturn. Europe with strong uncoated woodfree demand contraction, while U.S. and remaining overseas markets with a more moderate fall. Global uncoated woodfree demand with minus 1.6% so far this year is in line with the last 10 years yearly rate. On the supply side, Europe has seen significant capacity reductions with recent closures removing around 430,000 tonnes annually, about 7% of the region's capacity. Another major European player is also facing financial difficulties, which could lead to further capacity cuts. European imports remain stable with no upward pressure. EUDR discussions continue and its implementation is expected to reinforce European pulp and paper market. Meanwhile, the U.S. market has shown great resilience. The closure of the country's largest mill accounting for 8% of total capacity has deepened the market shortfall with North American production estimated to lag 800,000 to 1.1 million tonnes versus North American demand. Another closure announced this quarter will remove 320,000 tonnes of uncoated woodfree capacity by Q3 next year, further increasing U.S. import requirements. Meeting this demand will depend on a select group of countries able to supply products meeting U.S. market stringent specifications, primarily manufacturers in Europe and Latin America. Latin American suppliers, however, are facing the prospect of higher tariffs, both antidumping duties and custom service than those currently imposed on European imports. In response, U.S. producers may focus on their domestic market, potentially creating opportunities for competitors in their existing export market. Despite this complexity, new opportunities are arising in the uncoated woodfree market. For example, Mexico's customs tariffs on Asian imports and Colombian tariffs on imports from Brazil are providing competitive advantage for Navigator in these countries, supporting sales and expanding our footprint. In tissue, demand has increased by an estimated 0.4% so far in 2025, with annual growth expected to hold steady at around 1% through to 2029. The integration of Navigator Tissue U.K. is progressing with stronger collaboration between the local and Nigerian teams, unlocking cross-selling, optimizing the portfolio for higher-margin products. To strengthen our market position and operational resilience, we have launched a strategic plan to consolidate our U.K. tissue roll operations in two sites, Leyland and Leicester, reducing sites from five to two, integrating production and storage for greater efficiency, scalability and cost competitiveness, building on an already efficient model to achieve even greater competitiveness and alignment with best practice. Regarding a new tissue machine, the final investment decision is anticipated by year-end 2025. Packaging continues to perform strongly with growth in sales and price. Our project to convert the PM3 paper machine at Setúbal is progressing as planned. This will elevate Navigator to fourth place among European manufacturers of low-grammage flexible paints, consolidating our presence in a segment with robust demand. Navigator's integrated management, sound financial position and our ability to respond flexibly to market demand from forest to finished products are enabling us to face these challenges and prepare confidently for the future. Continued development and diversification of our business base will further reinforce the resilience and sustainability of our business model. The next slide provides a quick update on our operational excellence initiatives. Amid the ongoing global uncertainty, Navigator is proactively strengthening its resilience through several targeted initiatives under a program called Operational Excellence Initiatives 2025, 2026 as already announced last quarter. Keeping its focus on high operational standards, the company has launched internal programs designed to act on different fronts to protect results. These involve programs for the optimization and reduction of variable costs by streamlining specific consumption of raw and subsidiary materials, seeking strategic negotiation with suppliers as well as logistic cost reductions. The company will also step up its commitment to Iberian wood, promoting local and sustainable fossil fuel. in this first quarter is already visible the impact of some of the measures implemented. As mentioned in our previous call, Navigator is advancing its operational excellence through a robust investment in AI, namely advanced process control solutions aimed at enhancing process stability, efficiency and product quality. The company has successfully deployed third-party APC systems, two in classification processes and value of breaching with two more in the pipeline, while it is also developing proprietary machine learning algorithm solutions internally. These include optimization of precipitated calcium carbonate incorporation and reduction of variability in tissue grammage control and integrated control of thickness, grammage and reference in uncoated woodfree paper production. This multipronged approach reflects Navigator's commitment to innovation and continuous improvement and across its industrial operations. We're also focusing on improving efficiency by cutting fixed costs, mainly freezing headcount and optimizing running costs. We continue to invest in reliability by speeding up implementation of the asset performance management, APM system and executing specific action plans to build up teams and improve systems for asset management, maintenance and reliability. Along CapEx -- alongside this CapEx plans will be subject to careful review, especially as regards to scheduling, seeking to reduce projects in 2025 by approximately EUR 40 million, prioritizing those under the resilience and recovery program and those offering higher rates of return. Lastly, we will address our commercial strategy and market diversification by relaunching economic products, being more aggressive with low-end products in the face of the current economic situation, while protecting the margins and volumes of premium products. With a positive perspective following the decisions of the European Commission on 24th of April 2025, the ERSE, the energy regulator in Portugal on 22nd of July, a revised third-party access tariff for less intensive customers has been set. Navigator installations in high and medium voltage will benefit from rant discussion on those tariffs between May and December '25. In addition, with approval of increased support for indirect CO2 costs in Portugal through the environmental fund. This support, we must say, has been both delayed and very modest, especially when compared to the more substantial measures provided to our competitors in several other European countries, notably in Spain, in France, in Germany, and in Finland. Business diversification and innovation in products remain at the heart of Navigator strategy, especially in the tissue and packaging segment, where there is still great potential for growth. Thank you. Ana Canha: Thank you, Antonio. This ends our presentation. We are now open for the Q&A session. Operator: [Operator Instructions] Our first question comes from Cole Hathorn from Jefferies. Cole Hathorn: I'd just like to follow up on your office paper business. In a challenging demand environment, you've done exceptionally well. So I'm just wondering on your commercial strategy, how did you maintain the stronger operating rates of kind of 87% versus the industry? Was this a real focus on the economic products to keep your operating rate elevated. I'm just wondering commercially how you drove the better operating rates in uncoated woodfree. And then I'm also just wondering, sticking to Europe, was there also something around one of your competitors or some of your competitors dropping the ball commercially? Just wondering if it's a bit of both. Antonio Redondo: Okay. Thank you for your question. And I'm trying to rephrase it just to make sure we fully understand them. I will give some elements to the answer, and then I'll ask Quirino to follow up. Your first question is focused on office papers. And you realize that our results are quite resilient under the present situation, and you would like to understand how this resilience can be explained vis-a-vis our European competitors. Is this right? Cole Hathorn: That's correct. Antonio Redondo: Okay? And the second question is if you believe that some of our European competitors have dropped the ball under the same context, I understand. Cole Hathorn: Yes. Antonio Redondo: Okay. I will give you some elements of answer and then Quirino will follow up with more details. For the first question, I think there is not a silver bullet. We didn't perform one single action that allow us to be significantly more resilient than our competitors. First and probably foremost, we have a unique product quality that is second to none to anybody else in the world. And we have very, very strong brands. And I think, again, this quarter, our quality has proven to be very differentiated from our competitors. And in an environment where people consume less products, they probably can afford to choose better products. At the same time, our brands have a very large recognition in the world, but particularly in the markets where we are in. The second element, I think, is related with our sustainability practices and our sustainability reputation. We didn't saw and we are not seeing any drawback any decrease on sustainability when choosing papers, namely office papers and filling and writing papers. And we have the sustainability credentials that we show, we prove, we demonstrate, again, second to none in the group. The third element is probably related with our geographic spread. We are very much present in the corners of the world, if you will, with a strong presence in Europe and a growing presence outside Europe, which I think also Quirino demonstrated. I will stop here on the first question. I will ask Quirino to complement what I've mentioned. And then we can also explain how economic products has helped us to support the high end. António Soares: Absolutely. Thanks for the question. So I think Antonio mentioned the key points. So we see a strong resilience on our premium and branded offering products in the market. And this is related with the fiber and the quality of the products, which is very appreciated in the market. So I think this is really, as Antonio mentioned, a strong element to the answer. The other one is in geography. Actually, our coverage of around 130 countries in the world provide contrary to some of our smaller competitors in Europe provide an insurance, let's say, because we're covering several regions, we take profit from local regional growth. We did see the Americas, both in North America and Latin America quite positive for us as well. Don't forget that we saw this year also a decrease in imports into Europe, which was also helping the European industry to find some space. But your question relates to our comparison to Europeans. So imports is not an element to answer this, but it helps everyone, I would say. And I would just comment on what I mentioned before on the dual pricing strategy where we continue to protect more the price -- decreasing less the prices on the premium and branded products. But we went more strongly into the economy market with our partners, supporting them on their needs of economy products now that imports are reduced. And so this increased penetration in economy products also boosted our operating rates compared to European mills. Antonio Redondo: Regarding your second question, I think we can -- sorry, regarding your second question, I think we can concur with you. What we have seen so far is exactly in a market where demand is shrinking in some regions more than others. We see a significant amount of competitors leaving this market, either leaving to other markets or just, as you said, dropping the ball. This was the case clearly in the States, as we mentioned, with one large mill announced for this year, actually already stopped and another one preannounced for next year. We had a sale towards the end of last year and early this year in Europe. And without naming competitors, I think we can keep on seeing the same pattern. If you just look to the results and keeping the geography around if you just look to the results of our European competitors in Q2 and Q1 this year, I think it's easy to understand that some of these companies will never be viable. So in a market that is going down in terms of demand and lacking strong elements of competitiveness, I think it's a question of time before we see others keep on reducing capacity. Cole Hathorn: And maybe just as a follow-up, your cash costs, you have on Slide 14, your cash cost going down 19% quarter-on-quarter. That's a very big reduction in cash costs. We've seen some of the Nordic players talk about lower wood costs. We've seen some easing of wood costs after a rally in wood costs, but most people are talking about an easing of costs into 2026. So I was just surprised to see cash costs coming down so much for Navigator. So I'm just wondering if you could give a little bit more color of what drove the lower cash cost. Is it wood? Is it just better operating rates? Is it your own self-help initiatives to reduce chemical energy consumption? Any color would be helpful. Antonio Redondo: Okay. So if I understand correctly, you'd like us to give a bit more color on the cash cost reduction, correct? Cole Hathorn: Yes, please. Antonio Redondo: So the cash cost decreased in all different segments. They have decreased in pulp, they have decreased in uncoated woodfree and packaging and they have decreased in tissue. The ones that you mentioned that are in our Slide 14 are specifically referring to pulp. And let me add the following. I think probably we have a couple of elements here. One, as we have seen, our cash costs are on top at the level of 2021. So it's a significant reduction on 2021. Having said that, we had an increase of cash costs in Q1. So we are comparing Q3 with the Q1 where we had higher cash costs. At the time we explained, this was mainly related with energy and chemicals. So the different elements that we have mentioned, they all play a part here in the reduction. I think we can also say that in between September and January this year, our total cash cost dropped 20%. So you see the big impact that we are trying to have on cash cost control. What are the main elements? For sure, energy and chemicals that have a bigger impact on the first quarter of the year. Also, wood is mainly by managing wood origins by managing the sources of wood. And also, we have managed to keep in control fixed costs. Of course, when your operating rates are improving, you have also an efficiency element on it. I will pass to Fernando if he wants to add something. Jose de Araujo: No. Perhaps on the fixed cost that is on the payroll side, at the beginning of the year, the expectations for the year were higher than the ones that we have now. And part of our payroll expenses are related with the performance of the company. This means it's also some justification for the declining in the cash costs in the period. Related to direct costs, it's like Antonio said, the energy, chemicals and the wood. Part of it is price and part of that is management, the proportion of wood available from different sources and trying to be more efficient on the operational side. Antonio Redondo: Following up the comments from Fernando,, let me just add one thing about HR, which is we took the decision on -- already on the second quarter. We announced it when we present second quarter results as a freeze in recruitment. So we are managing our operations with, I would say, a more limited number of people, which is a challenge because in some areas, we are building new equipment, we are building operations, we are growing. In some other areas, we are not. So we are balancing people between different operations to keep costs under control. Operator: Our next question comes from Bruno Bessa from Caixa Bank BPI. Bruno Bessa: I have three, if I may. The first one, you mentioned an improvement in terms of your backlog for the Q4. Just wondering whether this is a pure seasonal effect or if there is an upturn in terms of demand that is above the usual pattern in Q4. This will be the first question. The second question regarding paper prices. In the last cycle trough, you control quite well the price level because you reduced you and your competitors reduced the average capacity utilization rate. My question is why aren't you doing the same this time around? What has changed in the market for you not to follow the same strategy this time? And the third question, we saw a relatively weak quarter on volumes in the tissue business following on a year-on-year basis. Just trying to understand what is behind this effect, if there is any kind of one-off impact in terms of production? And what are your expectations for the upcoming quarters? Antonio Redondo: Okay. Thank you. Again, for sake of clarity, I'm going to try to rephrase the questions and I will give some elements of answer. I will ask my colleagues to help on replying. So your first question is about the improvement of backlog. I think you are referring to uncoated woodfree and you'd like to understand if this is demand or purely a seasonal effect. Bruno Bessa: Correct. Antonio Redondo: Okay. Thank you. Your second question is that you believe that previously this industry a better discipline on pricing and we try to understand what is happening right now. Bruno Bessa: That's correct. Antonio Redondo: And the third question is about tissue. You saw coming to what you were expecting weaker volumes on Q3. And would like to understand if this is one-off impact or any issue regarding our mills. Bruno Bessa: That's it. Antonio Redondo: Okay. I will give elements over three questions. For the first two, I would then ask Quirino to follow up. And for the third, I will ask Nuno also to comment. So starting with backlog improvement. A very quick comment, and Quirino will detail much more than myself. This is much more than seasonal effects. We are actually conquering, if you will, market share. I think we have shown that in one of the slides. We are conquering market share in order intake. Quirino can elaborate a bit more why we are doing that, but some elements of that have already been given, namely by enlarging our product offer with adding new -- not new, adding products that we didn't have before. On paper prices, I think we agree with you. We see the same. We see that the discipline of the market this time was not at the level that was before. We, as a market leader, try to keep prices and provide actually an umbrella for prices where the majority of our competitors could protect themselves, but they choose not to do. They choose to -- in spite of that to lower prices and, of course, we are also reacting namely with low-end products. Look, I'm not sure if I mentioned this in one of these calls, but I mentioned this very often. There is a very famous sentence from Robert Crandall. Robert Crandall was the CEO of American Airlines after the liberalization. And he said the airline industry was run by the dumbest competitor. And I think this applies also to pulp and paper. I mean no matter the effort that we, as a market leader, do to protect prices, some of our competitors, I guess, out of the aspiration, I go back to the first question that was raised by our colleague from Jefferies. Out of the aspiration, they just give up drop wall, I think was the expression and decreased prices. Nuno, do you want to follow up, please? Nuno de Araújo Dos Santos: Yes. So on the backlog on Q4 is a bit seasonal, but more than seasonal. So we see -- first, we are getting our market share in deliveries, in sales. But what you see in backlog is actually our ability more recently to progress more in market share in order intake, which is a bit more forward-looking because these are orders to be delivered in the next few months. So we are progressing on that. Again, in the Americas, a bit in Europe as well. And in what we call the overseas markets, the North African and Turkish market, which also are picking up a little bit due to the opening of the upward trend on the pulp prices that we mentioned. So this is bringing more activity to the paper market as well. On the prices, only to agree with what Antonio said, I mean, with low pulp prices in -- during the number of months in a row with a portion less now than in the past, but with a portion of players which are nonintegrated, operating on average. Our competitors were, on average, at a lower level. You listened for sure that on average, including us, the uncoated woodfree industry in Europe was operating at 81%, so slightly up from 80% last year, but we increased much more than the market. So our competitors are under severe pressure. So probably that's the explanation over there. Jose de Araujo: Regarding your third question on tissue, also an introductory comment and I'll pass to Nuno. First of all, no, we don't have any issue in our mills, so no operational issue, no one-off impact. The economic situation across Europe is not across the world, but particularly across Europe, and this affects tissue, obviously, that affects other brands, less tissue than other brands that also affects tissue. But also, we have been working on improving profitability and we have decided to net down some sales that we believe are not profitable for our objectives. Nuno, do you want to follow up, please? Nuno de Araújo Dos Santos: Okay. Can you hear me? I hope so. Antonio Redondo: Yes. Nuno de Araújo Dos Santos: Okay. No, basically, you said it all already. The market in tissue this year is slightly slower in terms of growth. I think we've said it versus last year, we were -- we have a 3%, 4% growth rate in the market. This year, European market, Western market has been growing at around 0.3%, 0.4% growth rate, which is relatively small, reflects the economy, some tendency for some consumers to trade a bit on specs. So instead of buying three or four ply products, they might choose a similar product, but with two plies or reduce a bit the kitchen rolls used at homes. But I mean, this reflects the overall economic sentiment on one side. And the second reason that Antonio also mentioned, we want to have sustainable and healthy relationships for both sides, always with our partners and clients and protect the long-term sustainability of the relationship. In some situations, it's better to drop a bit some volumes, but to protect the way we are able to serve those clients, and this is what we've been doing. But nothing that is concerning for others. Bruno Bessa: Okay. If I may, just a follow-up on the first question about the demand for -- and the backlog that you have. From what I understand, the improvement you are seeing is mostly driven by your market share gains more than an effective healthier end demand market at this stage, right? Antonio Redondo: Yes. The market in Europe in the latter part of the nine months is not significantly better than what it was in the beginning of the year. Of course, there is one positive impact is that imports are significantly increasing. And this, of course, also open space for long-term strategic suppliers to our customers. Operator: [Operator Instructions] Our next question comes from António Seladas from A|S Independent Research. António Seladas: I have three. First one is related with the different dynamics between Europe and U.S. regarding the printing and write paper. So U.S. is coming down by 1% and Europe about 6%. So what are the difference why the difference is so large, taking consideration that, I guess, the digitalization and all that stuff is more or less similar. Second question is related with saving costs at your U.K. tissue operation. If you can provide some color on it and when we should start to see the results on the profit and loss account. And last question is related with -- there were some provisions on the third quarter figures that you released last week. So I don't know if you can provide also some insight or explain why were these provisions. Antonio Redondo: António, sorry, I'm so sorry, but I think I can summarize the first two. I didn't at all got the third one. Can you please be so kind to say it again? António Seladas: Sure. There were some provisions on your profit and loss on your third quarter figures in your third quarter results release last week. So if you provide -- if you can explain why were -- what was the reason for the provisions? Antonio Redondo: Okay. I'm going to rephrase the questions just to make sure that we fully understand them. First one, you'd like to understand the different dynamics between U.S. and Europe in terms of the downturn so far this year? António Seladas: Yes, exactly. What explains the difference, so big, so large. Antonio Redondo: Okay. Okay? The second one, if I understood correctly, is about our tissue U.K. operation. And by saving costs, I'm not sure if you were referring about synergies or if you're referring about our project to consolidate into a smaller number of installations. António Seladas: It's the second one, in fact. Antonio Redondo: Second one. And the third one are provisions on the third quarter results. Correct? António Seladas: Correct. Antonio Redondo: I will give a quick comment on the first one and the second one, I'll pass then to Quirino or Nuno and the third one, Fernando will answer you. So the different dynamics. I think most likely, we cannot justify what is happening in the uncoated woodfree market no longer by digitalization because I agree with you, if it was purely digitalization, the conversion will be more or less the same, and it is quite significant. Having said that, let's not forget that the market downturn started in U.S. prior to Europe, a couple of years, three or four years prior to Europe. And in U.S. for probably quite some time, we see more an asymptotic behavior of demand. So I think the main explanation for the difference is the economic dynamics on -- between U.S.A. and Europe. But I will leave to Antonio to comment further. António Soares: I think just the same, if you think on the data between '19 and '25, if you compare 2019 with 25% and you average the average percent will increase in the market, the annual -- the compound annual growth rate is actually quite the same. It's 5.5% in North America per year from '19 to '25 with COVID in the middle and all of that and Europe as well, 5.5%. So as you mentioned, Antonio, there is a matter of timing where U.S. started to decline much before and now it's more an asymptotic with 1% decrease. Antonio Redondo: Regarding the cost savings in tissue by consolidating the operation, and before passing to Nuno, just to remember, we are doing this with an ongoing operation in five sites. and we are not buying new machines. So this process is a process that is relatively slow because we need to make sure that we do not let our customers down. So we can only migrate the machines when we are able to reach production in such a way that we keep on supplying our customers in a continuous way. Also, this implies a reduction of number of people and in some cases, a reduction, which is the most expensive. In some other cases, people moving from one side to the other. So if this takes people into consideration, you have from one side, our concerns with people like a company that is very much concerned with its HR. And also we have consultation processes with the employee representatives. So the process already started. It started around August to take significantly more than one year. Nuno? Nuno de Araújo Dos Santos: Yes. I think it might be worth stating even though that's not exactly the objective of your question, but we are addressing both fixed costs and structural costs, but also variable costs in the U.K. operation. So we have -- since we acquired the company last year, we have been performing a revision and the redesign of all cost items. So our paper costs are going down significantly, but also, let's say, the packaging materials, logistics, et cetera. So that's one big element that we are working on. Second, as Antonio mentioned, we are working on the fixed costs. First, of course, Accrol, as you know, as you remember, was floated in the market. We took out a lot of PLC costs and cost -- excess costs that a company that was independent and directly floating in the U.K. market required. Now we have started as it was announced in the process of restructuring and consolidation of our sites. We've just started. It's planned to last until last year. We will again optimize the cost structure of the company, and we will do this in order to have one of the most competitive and most efficient operations in the U.K. In addition to that, something that we are working also in parallel, let's call it the third element of it is increasing productivity of our lines and our plants for you to have an idea, efficiency when we started and we -- the company joined Navigator one year ago, 1.5 years ago was around the OE of the operation was around 30%, 35%. And since then, we have already improved it to 45%. So this is a technical industrial measure KPI, but it's worth mentioning that productivity on the lines, the production lines has also increased significantly over the last 16 months. So overall, we're working on all of these elements. Jose de Araujo: About the provision, the provision has two elements. One element is the fact that we will dismiss some people at the U.K. and that represents more or less 30% of the value. The remaining value regards different with a supplier in our investment phase that is asking works and things like that, and it starts with process. And despite the fact if you lose this will increase only the amount of investment, we have accounted a provision because we have some tax benefits on that. António Seladas: Okay. Just a follow-up question regarding the different dynamics between U.S. and Europe. Should we expect -- what kind of demand should we expect in Europe for next year? So I don't know if you can share with us your ideas. Antonio Redondo: This is the hundred million dollar question. Again, First of all, we cannot share what we have, but this is competitive information. But I think some of the elements that we gave you as an answer can provide you -- before I can provide you an answer now. If we believe this is very much linked to the economic situation across Europe, if we are positive that the economy next year is going to be significantly better, I think we will see a significantly lower decrease. If we believe that the economy is going to be more or less at the same level, we will probably see more or less the same type of decrease. Operator: Ladies and gentlemen, there are no further questions from the conference call at this time. We will now proceed to read the first question from the webcast. The question comes from Jaume Rey Miró from GVC Gaesco. And the question is, do you expect CapEx linked to ESG projects to keep these high levels we have seen in the last three years until you achieve these CO2 targets in 2035? Can we have a forecast in absolute terms for CapEx in general next year? Antonio Redondo: Okay. I'm going to give an introduction and then Fernando will follow up. ESG is not only decarbonization, but I understand that the main concern and of course, also the main CapEx so far has been decarbonization. If you probably remember the slide in our presentation, Slide #10, and you see that the emissions will be stable from 2026 to 2030. So we will drop vis-a-vis the reference here, which is 2018. In '26, we expect to drop 55% out of 86%, and in 2030, 58% out of 86%. So I'd say the large majority of the emission reduction is done. So purely decarbonization, the large majority of the projects are behind us. is why we are able to keep this level of emissions in the next four to five years. Of course, we are always willing to look to opportunities to speed up the decarbonization provided we find that the projects are value added and they are value added by themselves or Europe makes available funds to increase decarbonization and we increase the value added by using those sites. So, in short, a large majority of the ESG investments dedicated to decarbonization, which is the largest part, I would say that will be concluded by 2026 when we conclude the PRR, the EU Next Generation funds. Jose de Araujo: This means 2026 despite lower than the amount that we are expected to spend in 2025, it's still above our average investment. Antonio Redondo: Our average CapEx is around EUR 100 million and EUR 120 million. This means from 2027 onwards is what we would expect. Of course, without expansion CapEx. So the PM3 expansion, which will mainly in 2026 and using again grants from next-generation funds will be concluded by September 2026, and we hope to be able to take the final investment decision on the tissue machine by the end of this year and also the impact of '26 and '27. Fernando was referring this ballpark EUR 120 million is outside the normal maintenance CapEx without expansion CapEx. Ana Canha: This ends our session. Thank you all for your time. As always, we are available for any additional clarification through our usual contact. Have a great evening.
Operator: Good afternoon, ladies and gentlemen, and welcome to Global Industrial's Third Quarter 2025 Earnings Call. Please note, this event is being recorded. At this time, I would like to turn the call over to Mike Smargiassi of The Plunkett Group. Please go ahead. Mike Smargiassi: Thank you, and welcome to the Global Industrial Third Quarter 2025 Earnings Call. Today's call will include formal remarks from Anesa Chaibi, Chief Executive Officer; and Tex Clark, Senior Vice President and Chief Financial Officer. Formal remarks will be followed by a question-and-answer session. Today's discussion may include certain forward-looking statements. It should be understood that actual results could differ materially from those projected due to a number of factors, including those described under the forward-looking statements caption and under Risk Factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q. I would like to remind everyone that in Q4 this year, our quarter will close on Saturday, January 3, 2026, representing 1 additional week in our quarter compared to the prior year. While we are adding 4 working days to our quarter, this is the period between the Christmas and New Year's holiday, which historically represents the lowest sales week of any given year. The press release is available on the company's website and has been filed with the SEC on a Form 8-K. This call is the property of Global Industrial Company. I will now turn the call over to Anesa. Anesa Chaibi: Thank you, Mike. Good afternoon, everyone, and thank you for joining us. Overall, we were pleased with our performance in the period as we delivered our second consecutive quarter of revenue growth, along with strong year-over-year profitability. We continue to manage the business proactively and have executed well. In the quarter, revenue increased 3.3% to $353.6 million. We grew the top line each month during the period and growth has continued into the early parts of the fourth quarter. Performance was once again driven by our largest strategic accounts, where good momentum and sales progress continues. This was partially offset by a reduction in our smallest and more transactional customers, which is in line with efforts to be more intentional and focused in how we go to market. In addition, I'd like to highlight the results of our Canadian operations. Canada generated a second consecutive quarter of strong top line expansion, which resulted in substantial operating leverage improvements in the local market. Investments made in recent years are delivering upon our expectations. We expanded our distribution capacity, improved supply chain and procurement processes and invested in our people and culture, all strategic steps that bring us closer to our customers and enable us to deliver the enhanced value they've been looking for. Gross margin was 35.6% for the third quarter, an increase of 160 basis points over the third quarter of 2024. Operating income improved over 18% to $26.3 million, and we had strong cash flow generation in the quarter. We continue to advance the transformation of our business model and the placement of the customer at the center of everything that we do. We are reframing our go-to-market strategy to take a more intentional approach to attracting customers, renewing our focus on identifying and targeting key accounts while aligning the organization to better meet and serve our customers' needs. We are working to expand the solutions and products we offer so that we are better positioned to deepen existing relationships and gain greater share of wallet over time. We are also enhancing our ability to serve customers more effectively and with increased efficiency through implementation of our new CRM and reworking our processes, procedures and technology to better serve our customers. We are leaning into these efforts and making steady progress against our strategy. My interactions with national vendor partners and customers at the Global Industrial Trade Show in September reinforced my belief that we are on the right track. The show provided me with the opportunity to meet with a broad cross-section of partners representing national brands as well as specialty products. I also met with customers in both structured meetings and breakouts and more importantly, through spontaneous discussions on the show floor. These interactions highlighted a clear opportunity to become a more meaningful channel partner for our vendors and to broaden the relationships and the support we provide customers. By better showcasing our capabilities and telling our story with greater clarity, we will be well positioned for even greater success with a tremendous runway ahead of us and a unique platform to scale organically. Now I will turn the call over to Tex. Thomas Clark: Thank you, Anesa. Third quarter revenue was $353.6 million, up 3.3% over Q3 of last year. U.S. revenue was up 2.9% and Canada revenue improved 12.3% in local currency. Price was positive mid-single digits in the quarter. This was partially offset by a slight decline in total volume, which was a result of some intentional actions. While we saw order count growth in our largest and most strategic customers, we continue to see volume declines primarily in onetime lower order value transactions. We believe the volume decline headwinds in this transactional segment will begin to wane in the fourth quarter as we start to anniversary prior actions taken near the end of 2024. These new actions include efforts to be more focused in how we go to market and emphasize our highest value potential customers. The quarter also saw some decline in federal government spending due to the timing of awards and budget uncertainty. As of today, we have seen growth continue into October. Gross profit for the quarter was $126 million. Gross margin was 35.6%, up 160 basis points from the third quarter last year. We were very pleased with this margin performance, which reflects price capture and diminishing favorability of pre-tariff inventory that flows through the cost of sales on a FIFO basis. On a sequential basis, as expected, gross margin pulled back from the record level generated in the second quarter of this year. The tariff environment remains highly fluid and the cumulative impact of incremental tariffs remains potentially significant. Since our second quarter earnings report, additional tariffs were both announced and went into effect in early August including reciprocal tariffs and a doubling of duties on steel and aluminum. As a result, we took an additional pricing action in late August, which supported margins to the end of the quarter. We continue to actively monitor the situation and are focused on supplier diversification, price management and strategic cost negotiations. We maintain a healthy inventory position and continue to prioritize availability for our customers. Management of our margin profile remains a key area of focus. As we move through the current cycle, our goal is to manage to price/cost neutral. In addition to tariff uncertainty, I would note that historically, Q4 generates softer margins in part due to product mix and peak season freight surcharges. In the fourth quarter, we expect to see continued year-over-year margin expansion. On a sequential quarter basis, there may be some margin pullback in line with historical performance. Selling, general and administrative spending for the quarter was $99.7 million, an increase of 6% from last year and essentially flat on a sequential quarter basis. As a percentage of net sales, SG&A was 28.2%, up 70 basis points from last year. SG&A reflects strong general and discretionary cost control. This was offset by a year-over-year increase in variable compensation expenses related to performance within both selling commissions and our bonus pool accrual increasing compared to last year. Operating income from continuing operations was $26.3 million, an increase of 18.5% in the third quarter, and operating margin was 7.4%. Operating cash flow from continuing operations was $22.6 million. Total depreciation and amortization expense in the quarter was $2 million, including $0.8 million associated with the amortization of intangible assets, while capital expenditures were $0.7 million. We continue to expect 2025 capital expenditures of approximately $3 million, which primarily reflects maintenance-related investments and equipment within our distribution network. The company's tax rate in 2025 is 26.4% versus 23.7% in 2024. The increased rate in 2025 results from an increase in nondeductible executive compensation. Let me now turn to our balance sheet. We have a strong and liquid balance sheet with a current ratio of 2.2:1. As of September 30, we had $67.2 million in cash, no debt and over $120 million of excess availability under the credit facility. We continue to fund our quarterly dividend, and our Board of Directors declared a quarterly dividend of $0.26 per share of common stock. I will now turn it back to Anesa for some closing remarks. Anesa Chaibi: Thank you, Tex. The team has done a great job executing our strategy throughout the company. We are effectively navigating the market disruption and uncertainty from the current tariff environment through a focus on what we can control. We are taking actions to better position Global Industrial to grow and believe we can open the aperture of the total addressable market that we pursue. We remain well positioned to continue investing in our growth initiatives and to also evaluate strategic M&A. I'm encouraged by the progress we're making throughout the company and look forward to finishing 2025 in a strong position that will set us up for a successful start to 2026. Thank you for your interest in Global Industrial. Operator, please open the call for questions. Operator: [Operator Instructions] Our first question comes from Ryan Merkel with William Blair. Ryan Merkel: I wanted to start off on price. Could you give us a sense for how much price impacted the quarter? And then I think you mentioned an August price increase. Can you give us a sense of what you think price will be in 4Q? Thomas Clark: Ryan, yes, I'll go ahead and take that one. So pricing, as you know, costing environment is fluid. And while we are working to diversify our supply chain and making sure our first goal is inventory availability for our supply chain partners and our customers. Obviously, the cost increases due to the tariffs primarily is a real cost that we're incurring right now. So as you mentioned, in August, we did take some additional pricing actions as we saw that inventory mix change as our cost of goods was mixing into more tariff inventory. As we looked at that cost of goods flow, we saw more of that move in. So again, it was in that mid-single digits range, just over 5% of price in the period that we saw. That would include obviously anything that we took in that mid-August price increase. We would expect that to be pretty consistent or slightly higher in the fourth quarter, just given that timing of that second move. Now we know things are fluid. There are obviously threats in the marketplace of some additional tariffs, but there's also some potential green shoots or bright spots where maybe there's going to be some relaxing of tariffs, and we've seen some of that out there. So we're going to continue to monitor that, and we'll be ready for those actions, and that's what the team is focused upon. Ryan Merkel: Okay. Got it. And then you mentioned the large strategic accounts, there was growth and I guess, the smaller customers with a little bit of a decline. What -- how much did the large strategic customers grow? And do you expect to continue to accelerate that part of the business as we think about the next couple of quarters, just given the initiatives and the focus there? Anesa Chaibi: Yes. I guess -- thanks, Ryan, for the question. Our strategic accounts had continued momentum. We're leaning into those, gaining greater share of wallet and doing more to figure out what their needs are and adding assortment, SKUs, things along those lines so that we can serve that need. As we look at -- we shared that we intentionally pulled back in certain areas, and it was for kind of the long tail, more transactional customers. And I think we're now eclipsing that. But we're also focused on as we look to reposition ourselves and go to market in 2026 and beyond is realigning the org to then serve customers along specific industries and sectors. And we're piloting that right now, but it's just in the very early innings so that we're positioning ourselves for '26 in a positive way. So we've still got some more work to do, but we are seeing some progress there on all fronts. Ryan Merkel: Okay. Perfect. And then just to clean up, you mentioned October, there's continued growth. Should I take that to mean it's at that 3% level? Or you mentioned the government is a little weaker as perhaps the government slowed down the business a little bit in October? Anesa Chaibi: We've seen state and local actually be positive. We've also seen some bounce back recovery on the federal side just based on timing of when some things flow through and actually were booked and billed, if you will. So we're seeing some good momentum, and we're in the process of close to closing the books for the month of October, but we've seen higher growth rates than what we're reporting today. I don't know, Tex, if you'd like to add anything or not. Ryan Merkel: No, I think you covered it perfectly. Operator: And the next question comes from Anthony Lebiedzinski with Sidoti & Company. Anthony Lebiedzinski: So certainly realize that you are being more intentional with your go-to-market strategy and seeing less of the transactional customer. But just wondering if we were to adjust for those transactional customers, what are you seeing from your -- from the rest of your core SMB customers? Just wondering if you could speak to the health of that customer group, what you're seeing there? Anesa Chaibi: Yes, do you want to jump in? Go ahead and take the lead. Go ahead. Thomas Clark: Yes. Thanks, Anesa. So yes, as we talk about -- if you think about some of the -- go back a year ago and when we had a CEO transition, some of the first things that Richard Leeds highlighted in his first public remarks were that we had gotten into some of the activities that may have been a little bit more on the promotional end that they were driving value. They were driving orders, they were driving revenue. But when we look at the lifetime value of those customers, it wasn't the type of customer that fit right for what we were trying to accomplish and who we could best serve in the long run. So those are some of those key changes that we've made. When we look at our broader portfolio of customers and that recurring revenue, the retention within our core business, not only small, medium business, but the public sector and the larger enterprise customers, we believe it's very healthy. We still see good retention rates in that area. And it's an area that -- that's the area that we're continuing to focus on the intentionality on how we service those businesses. So I think we're fairly bullish on the health of that core customer, and it's really been that more transactional customer that we've seen some slowdown. And like we said, we think some of that -- some of those changes we made were about a year ago. They were in the early parts of Q4. So you'll have less headwinds from a year-over-year perspective than we've had so far this year. So that should be a benefit into the fourth quarter. Anthony Lebiedzinski: Got you. Okay. That definitely helps. And then just in terms of your comments about expanding solutions and products, how do we think about your TAM opportunity? I don't know if there's a specific number. I don't know if you're ready to share that. But as we think about next year and beyond that, I mean, how do we think about just the opportunity for Global Industrial to participate from a higher product offering that you guys are planning to have? Anesa Chaibi: Yes, Anthony, that's a great question. I don't have a specific number right off to share with you or communicate today. We -- I have requested that the team look at kind of -- as we look at the go-to-market and the industries that we're going to serve, I think that will help frame up for us, respectively, across each one of those verticals, if you will. And then what we'll do is we'll share what we think that full opportunity is. But as you're well aware, in the industrial space, especially in distribution, industrial distribution, it's double-digit TAMs across different dimensions. And it's -- we're going to be very intentional, and we're going to make some investments across certain industries and lean into others. So I don't have a number today, but my hope is that I'll be in a better position to share with you once we wrap up the full year and what we're positioning and looking to move forward in '26 with. Anthony Lebiedzinski: Understood. Okay. And then my last question, just thinking about your SG&A expenses, is the growth mostly incentive comp accrual. And so as I look at the first quarter, you guys were essentially flat in terms of your expense growth from the prior year. Second quarter, you were up 3.5% and then up 6% in the third quarter. So maybe just help us better understand your expense growth and how do we think about that going forward? Thomas Clark: Yes, Anthony, I'll jump in on that one. So if you think about it, last year, when we reported our third quarter, we were in a position where we're seeing revenue decline and some softness on the bottom line. As you can imagine, that directly correlates to kind of how variable comp is earned both at the selling level of the individual contributor, but also to management and executives kind of how we earn variable compensation and non-equity incentive compensation. So last year, we were in a period where that was actually coming down or being reversed in the third quarter. This year, we're really booking to our plan and thinking about how that's being accomplished. So there is a big year-over-year differential just simply because we're in a point where we're growing our profit this year. Last year, we were seeing some pullback. So just -- it's really the timing of that impact. That is really the almost exclusive driver of the year-over-year change in our SG&A portfolio. Operator: This concludes our question-and-answer session and also concludes our call today. Thank you for joining, and have a nice evening. You may now disconnect.
Operator: Greetings. Welcome to Ecolab's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. At this time, it is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations for Ecolab. Thank you, Andy. You may now begin. Andy Hedberg: Thank you, and hello, everyone. Welcome to Ecolab's third quarter conference call. With me today are Christophe Beck, Ecolab's Chairman and CEO; and Scott Kirkland, our CFO. A discussion of our results along with our earnings release and the slides referencing the quarter's results are available on Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which state that this teleconference and the associated supplement materials include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the Risk Factors section in our most recent Form 10-K and our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. With that, I'd like to turn the call over to Christophe Beck for his comments. Christophe Beck: Thank you, Andy, and welcome to everyone joining us today. And I'd like to start by recognizing the strength and the resilience of Ecolab's team. Because in a year defined by a persistent macro uncertainty that we've all lived through and shifting global dynamics, our team continues to deliver consistent double-digit earnings growth. And they focus on what matters most, our customers, our strategy and our long-term goals, is what enables us to perform at a very high level quarter after quarter. And we've seen that in the third quarter where sales growth improved fueled by accelerating pricing, up to 3% from 2% last quarter, while volumes increased 1%. This momentum was driven by double-digit organic growth in our growth engines, which is remarkable and which includes Pest Elimination, Life Sciences, Global High-Tech and Ecolab Digital. Our core businesses, Institutional & Specialty and the rest of Global Water, delivered solid growth. All of this supported by exceptional total value delivery through best-in-class breakthrough innovation and disciplined execution of our One Ecolab enterprise growth strategy. In total, our growth engines and core businesses represent about 85% of our total sales, and they delivered 4% organic sales growth and mid-teens organic operating income growth. This strong performance more than offset ongoing market softness in our underperforming businesses, Basic Industries and Paper, which together represent the remaining 50% of our global sales. And these 2 businesses declined 3% and had an impact of 1 percentage point of volume in the quarter. So let me briefly expand on each of these drivers before sharing how we're thinking about the remainder of the year and how we're positioned to deliver another strong year of double-digit EPS growth in 2026. Pricing accelerated to 3% this quarter, driven by the full implementation of our trade surcharge and continued value pricing that's working really well. As always, the total value we deliver to customers continue to outpace and by far our total pricing, as our technologies and services help to deliver enhanced business outcomes, operational performance and environmental impact for our customers. Our breakthrough innovation is the strongest it's ever been, delivering significant value for customers and growth for Ecolab. In Institutional & Specialty, breakthrough innovations like the ones you've seen at Investor Day, like DishIQ, AquaIQ and ReadyDose, are growing double digits as these solutions help our customers improve operational performance, optimize the scarce labor resources and reduce total cost. In our Pest Intelligence platform, we've now installed over 400,000 intelligent devices, formerly called mousetraps, on our way to deploying over 1 million devices. With this leading technology, we aim to deliver 99% pest-free outcomes as we harness the power of our ECOLAB3D digital infrastructure and our expert service capabilities. Within Global Water, we recently launched 3D TRASAR for direct-to-chip liquid cooling for next-generation AI data centers, which uniquely monitors and optimizes coolant performance in real time. And when combined with our full portfolio of data center cooling technologies, we're helping to reduce up to 10% of the power used to cool data centers, which can now be utilized for compute power. And this is just the beginning as we build our leadership position in data center cooling and water circularity [ in microelectronics ]. And finally, within Global Life Sciences, we've launched a series of cutting-edge drug purification resins for the bioprocessing industry, which drives the improved product quality and significant operational efficiencies for our customers. When Ecolab focuses its breakthrough innovation on solving critical customer challenges like these, everyone wins. One Ecolab is helping us unlock significant cross-sell opportunities across our customer base. In total, this represents a $65 billion growth opportunity, with $3.5 billion of this sitting with our largest customers. And we're seeing early successes in businesses like Institutional & Specialty and Food & Beverage that are growing very nicely. Talking about that, in Institutional & Specialty where organic sales grew by 4%, outpacing end market trends, and this good performance is being fueled by the exceptional value we are delivering to customers, which we capture through value pricing and growth from One Ecolab. With this, we're working to deliver best-in-class operating performance for customers as they utilize more of our breakthrough technologies across more of their locations. In Food & Beverage, growth continued to accelerate with organic sales up 4% this quarter, once again ahead of market trends. This strong acceleration is being driven by One Ecolab where we bring together our industry-leading cleaning and sanitizing water treatment and digital technologies. This comprehensive offering delivers significant customer value to improve food safety, lower operating cost and optimize water usage, which was always our promise. And of course, our growth engine delivered another quarter of double-digit sales growth. These businesses are gaining momentum and Ecolab is well positioned to capitalize on the strong secular tailwinds driving these markets. So let me unpack them one by one. Pest Elimination delivered 6% organic sales growth. And as mentioned earlier, the Pest Intelligence rollout is going extremely well. Our Pest team has just won another very large retailer here in the U.S., which has thousands of locations which we will be deploying in the coming months. This innovation is transforming our Pest Elimination model as we shift from spending 95% of our time physically checking every device to 95% of our time solving critical customer problems and selling new solutions. Even with ongoing investment in Pest Intelligence, operating income margins improved to nearly 21%, driven by our strong sales growth and the leverage we're generating from Pest Intelligence. Life Sciences sales growth also improved to 6%, led by double-digit growth in biopharma and pharma and personal care. This very strong performance overcame capacity constraints within our water purification business. Looking at the fourth quarter, we expect Life Sciences year-on-year sales growth to moderate a little bit from third quarter's 6% growth as we compare against nearly 70% growth in our bioprocessing business last year, but underlying same trends. Despite this strong comparison, we expect bioprocessing to still grow double digits in the fourth quarter as we continue to gain share in this super-attractive market. Global High-Tech continues to grow rapidly, with sales up 25%. We've built an incredible growth platform where we're uniquely positioned to serve the high-growth data center and microelectronics industries. And the pending acquisition of Ovivo electronics will more than double the size of Ecolab's Global High-Tech business to nearly $900 million, further strengthening this growth engine by bringing together Ovivo's very unique, attractive water technologies with Ecolab's leading water solutions, digital technologies and global service capabilities. The combined technology platform will enable Ecolab to expand our offerings to provide circular water solutions for microelectronics, helping to maximize chip production and quality for this booming industry. Ecolab Digital maintained its strong momentum, delivering 25% sales growth this quarter. Ecolab Digital now has annualized sales of more than $380 million, driven by rapid growth in subscription revenue and digital hardware. Overall, Digital is a $13 billion growth opportunity for Ecolab, with $3 billion of this sitting within our existing customer base. So we remain focused on capturing this high-margin opportunity as we leverage our leading digital technologies and monetize our large and expanding installed base. We're not only leveraging AI to build new fast-growing capabilities in Global High-Tech and Ecolab Digital; we're rapidly leveraging it in our own operations to dramatically improve our customer experience and enterprise performance. With this, I'm very proud to share that Ecolab has ranked #9 on the Fortune AIQ 50 List recognizing the companies most prepared for the age of AI. Our global teams are quickly scaling AI to drive innovation, deliver customer impact through our best-in-class model and deliver significant cost savings. Finally, we remain confident in our team's ability to get our 2 underperforming businesses, Basic Industries and Paper, back to growth. And they're already making meaningful progress. We've shifted resources to support emerging opportunities, like in power and precious metals where they're supporting AI-driven power build-outs. For end markets still facing near-term demand headwinds, like Paper, we're focusing on innovation that can drive significant operational savings for customers. We're also leveraging our One Ecolab growth strategy in these businesses to expand relationships with existing customers. These actions are working as evidenced by our share gains and relative outperformance in these end markets. But we're not satisfied. While we expect these markets to remain soft in the near term with actions well underway, we anticipate these businesses to return to growth during 2026. One of the greatest strengths of Ecolab for decades has been the breadth and diversity of our portfolio. While not every business delivers strong performance at all times, our diverse portfolio is the key reason Ecolab collectively delivers double-digit EPS growth in nearly any environment. With our strong performance, we drove a 110 basis point increase in our organic operating income margin, which reached a record 18.7% this quarter. We continue to expect our operating income margin to expand at steady levels due to growth in high-margin businesses, value price, share gains and productivity improvements reaching a strong 18% for the full year '25. Importantly, our margin expansion also includes significant and ongoing investments in our business. We continue to make these growth investments as they fuel high performance in the quarters and years ahead. As a result, we're increasing our '25 full year adjusted diluted EPS midpoint to $7.53, with a range of $7.48 to $7.58. Beyond this year, we remain firmly on track to achieve a 20% OI margin by '27. And as mentioned during our Investor Day last month, we expect to continue our momentum with 100 to 150 basis points of annual OI margin expansion to 2030. This positions us extremely well to continue to deliver steady 12% to 15% earnings growth in '26 and beyond. In closing, our third quarter results reflect the strength of our business and the power of our strategy. Our pricing discipline, breakthrough innovation and One Ecolab execution continue to drive share gains and margin expansion across our core business. Our growth engines are scaling rapidly and positioned to benefit from long-term secular tailwinds. All of this is enabling us to deliver consistent earnings growth even in a complex and complicated macro environment. With strong and resilient free cash flow and an extremely strong balance sheet, we're very well positioned to capitalize on both organic and inorganic growth opportunities to create significant value for our customers and drive attractive returns for our shareholders. I remain very confident in our ability to deliver sustained strong performance in Q4 this year and beyond. Thanks again for your continued trust and your investment in Ecolab. I look forward to your questions. Andy Hedberg: Thanks, Christophe. That concludes our formal remarks. Operator, would you please begin the question-and-answer period? Operator: [Operator Instructions] And the first question is from the line of Tim Mulrooney with William Blair. Benjamin Luke McFadden: This is Luke McFadden on for Tim. I wanted to ask about the Global High-Tech business. We noticed the slides mentioned some recent market share wins in data centers. Can you talk a bit more about how you're achieving and measuring the gains here? And I know you haven't closed the deal yet, but curious to hear any updated thoughts on the Ovivo acquisition and how you would characterize the growth opportunity in microelectronics post deal close relative to your already strong performance in this end market today. Christophe Beck: Thank you, Luke. Love that field, as you know. So let me step back a bit because it's important. So for all of us to understand, so High-Tech for us is a combination of data centers and microelectronic plants, many call it fabs, which at some point will be 2 businesses focused on different technologies, obviously. But for now, it's really High-Tech, combining data centers and microelectronics. And it's a field that attracts most of the global investments, as we know. And we expect these global investments to continue to drive that growth trend. Even though we don't expect it to be a straight line to heaven, there will be, obviously, some more difficult and some better times ahead, but generally, it's going to be the growth of our times. When we think about some of the facts, talking about metrics, Luke, so 1 data center opens in the world every 1 to 2 weeks, with an investment ranging from $500 million to $3 billion. And there are 10,000 data centers in the world today. So it's showing a hard -- a strong base that's getting even bigger as we speak. On the other hand, you have 1 fab, 1 microelectronics plant, that's opening up roughly every month or so with average investments in the billions. There are 500 fabs today and expected to be 100 more, getting to 600, in the next 10 years. So we can see the pace at which those data centers and fabs are opening up, and our objective is ultimately to be in and hopefully own each of them around the world. So the key thing is that all of this will require way more power and way more water, which is where our role comes into it. Because as mentioned as well, by 2030, we expect that this industry, powering AI with fabs and data centers, will need the incremental power of the whole of India in the next 4 years and the drinking water needs of the whole of the United States as well at the same time, because data centers will need to be cooled and fabs require vast amounts of ultrapure water. And the cool news is that those are technologies that we master, we've been mastering for a very long time. Nobody understands water better than Ecolab. We've been in the cooling business for a very long time and we've been in the water business, obviously, for a very long time as well. So we're building offerings that are helping data centers to be cooled in more efficient way by reducing the amount of water and moving towards direct-to-chip technologies. That helps cooling faster, this means more compute power, and this means less power for cooling and more power for compute, which is exactly what the tech industry is looking for. On the other hand, we're providing circular water solutions for microelectronics manufacturers because 1 fab requires roughly the drinking water needs of 17 million people. And the pace at which it's being built, well, that's not going to work for the communities, obviously. So the tech industries, the famous ones, especially in Asia, but in the U.S. as well, well, are looking for solutions to reuse and recycle water. But here is the key point, that water that's being used in those fabs needs to be ultrapure water, which means roughly 1,000 times more pure than the water that you would use in drugs, that you inject in your bloodstream, which is exactly what Ovivo is doing. So by bringing what Ecolab has always done in water circularity plus the capabilities of Ovivo in ultrapure water, we help microelectronics, ultimately, reuse and recycle water at ultrapure water level. So at the end, '26 for Global High-Tech, assuming we close, obviously, on Ovivo, will be roughly a $900 million business, growing double digits, with very strong margins. And it's important to keep in mind that, for us, it's a new step, a further step on our high-tech journey and one that will change over time the growth profile of our company. So a very good new chapter for our company. Operator: Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: I just wanted to focus on the Basic Industries and Paper returning back to growth in 2026. I was wondering if you could drill down further about on shifting resources, innovation as well as share gains, how that can help offset some of the end market weakness? Christophe Beck: Yes. Thank you, Ashish. I really like the underlying performance of that business. It's a good margin business, just that you know as well, it's slightly below our company average. But it's still a good business, good margin and good underlying performance. The biggest issue we have in that industry is it's consolidating, which means that they are closing mills. And mills are very big. And those mills, obviously, when they close are impacting our growth and there's not much we can do. We lose very little to competition; we gain share in the existing and new mills. But when a mill is closing, well, we lose those sales. And that's what's happened over the last 18 months. We see that process of consolidation slowing down. We see our underlying performance driven by what you were saying, innovation, improving as well. And I think the combination of both ultimately will be positive for Paper. So I think that we are reaching the bottom of that cycle in Paper. And I think in the next, I don't know, 1, 2, 3 quarters, Paper is going to get back to a growth trajectory, and the sooner the better, obviously. And on the Basic Industries, we have regrouped our resources, we're driving critical mass as well, driving efficiencies. But it's really making sure that we capture as much market share as we can right now as the market recovers as well. And similar to Paper but for different reasons, we see as well kind of the bottom come in the next couple of quarters, and then we should get back to a good place. So in both businesses here, 50% of our company, we need to keep that in mind, and there will always be a few businesses that are having subpar performance. I like the underlying performance. The market trends have been hard in the past. This is changing. So that's why I'm quite optimistic we will like where those 2 businesses are going to go. But at the end of the day, let's keep in mind that 85% of the company is growing very well with mid-teens operating income growth. So in a very healthy place. Operator: Our next question comes from the line of John McNulty with BMO Capital Markets. John McNulty: So I had a question on pricing. I guess if you can take the tariff surcharge out of the equation, I guess would you say that pricing is getting easier to push through just because the value proposition is becoming more evident? Or would you say -- or would you characterize it as maybe getting tougher just because there may be price fatigue, inflation may be moderating a little bit? I guess, how would you characterize it? Christophe Beck: Thank you, John. I would say the same. It's hard to put a metric obviously on that. But generally, the fact that pricing is getting stronger -- our total value delivered, by the way, is getting much stronger too. And we're always trying to get 2% to 3% -- sorry, more total value delivered than pricing that's being captured. So it's a good deal for customers. I feel that we're in a pretty good place. And our retention is very high, in the 90s, as you know, and it's remaining very stable as well at the same time. So a good story of customer for life with good retention, sharing the savings that they get in their operations, that translates into value pricing. And you're right, on top of it, so the tariff surcharge, or trade surcharge as we called it, is helping as well. But that's why I feel that 2% to 3% value price for the long run seems to be the sweet spot for our company. Operator: Our next question is from the line of Andrew Wittmann with Baird. Andrew J. Wittmann: Great. I had 2 questions. I guess, Christophe, just talking about the Water business as well here, you discussed the top line impact, the quarter, very detailed. Just wondering if you could just help us understand a little bit about how that top line is affecting that segment's margin performance? So maybe if you could bifurcate that as well. And then just quickly, kind of a technical question here, you mentioned a large new Pest customer. I was just wondering, was that referencing to an entirely new customer that is not a customer today? Or were you saying that's just a conversion to the new technology? Christophe Beck: Thank you, Andy. So 2 different questions, obviously. I think the easiest way to talk about Water top line and margin, if you exclude Basic Industries and Paper, which I know is a bit of a challenging accounting approach here to make sure I remain in GAAP. But generally, Water would be having a 4% top line growth and a 15% operating income growth excluding those 2 businesses. So it's pretty clear where our work is focused on, and that's why we're focusing on these 2 businesses, to make sure that we enjoy all the good side of the Water business that we really love and that keeps getting better. Now on the Pest question, so we never mentioned which customer that is just to respect, obviously, their own confidentiality. But it's a new one, which has been really interested by that new technology. The fact that we focused early on, on the biggest out there helps, obviously. So everyone else see that it's good, the leading companies are embarking on that journey and that it's really working. So that's going to be, I think, helping us for the future as well because the more of those great retailers we have onboard, the more others will join as well. It's an ideal proposition for them, 99% pest-free. A good deal for their own operations, it's good for us. It's exactly the model that we want to build in the future. We're early on that journey, as mentioned, 400,000 devices today, but we will be at 1 million first half of next year. So it's showing how quick we're moving here, and we're clearly leading the industry, which is helping customers come to us. Operator: Our next question is from the line of Vincent Andrews from Morgan Stanley. Vincent Andrews: Christophe, if I could ask you for an update on One Ecolab. In particular, I know the focus initially was the top 35 customers, so as we get to year-end 2025, where will you be in terms of sort of the work you wanted to do with that top 35? And as we get into '26, will you be rolling it out more aggressively to the next 25 or 50 or what-have-you? Or how should we think about the layering in of incremental One Ecolab efforts from '25 to '26? Christophe Beck: Thank you, Vincent. So the way we approach it -- and I don't remember how public I was with it. So we launched One Ecolab a year plus ago, as you remember, mid of last year. And we said we will start with 3 customers in 3 major industries of the company, to move towards, we called it internally the Mag 7. They're not exactly the same as the ones you would have in mind, but some are, obviously, in '25. And then to move towards the top 20 E15 in 2026, to really make sure we can demonstrate that customer after customer and learn as an organization as well without boiling the ocean. It's progressing very well. Customers are very receptive. And the best example is really Food & Beverage United, where we brought Hygiene and Water together in North America, which you see the results in Food & Beverage, how the growth trends have shifted towards higher growth. It's exactly driven by One Ecolab, focused on some of those critical customers. It's where the whole idea came from when we acquired Nalco, by the way, in 2011. So it's an old idea that's coming to life, very well received by customers, working in terms of growth, and we will expand as we move forward in 2026. Operator: The next question is from the line of Patrick Cunningham with Citigroup. Patrick Cunningham: How should we think about SG&A leverage, particularly in Pest and Life Sciences, next year as you start to lap some of the growth investments you've made across both businesses? Is it a relatively linear path to your 2027 targets? Or is there sort of a continued step-up in growth investments embedded next year? Christophe Beck: Thank you, Patrick. Scott was looking for a question, so this is a perfect segue. And I would suggest we start with SG&A in general as well and then focusing on these 2. Scott Kirkland: Yes. Thanks, Patrick. As we've talked about, SG&A productivity has been a great story over the last several years. Since 2019, our SG&A leverage has improved 150 basis points, and we're expecting to improve another 20 to 30 basis points this year for full year 2025. As we talked about at Investor Day, beyond 2025, with the benefit of the One Ecolab savings that we're driving and net of investments, we will continue to invest in the business. And that leverage, I expect it to be pretty broad-based. Certainly, we are investing in the growth businesses, the growth engines, but expect going forward to deliver 25 to 50 basis points of SG&A leverage, benefiting from the One Ecolab program and the technology we're deploying. Christophe Beck: And what I really love on that whole journey, it's not becoming cheap and saving money left and right. It's leveraging digital technology, agents. We have many now in our organization. That's why being recognized as one of the leading AI companies in the world was a really cool news for us. It's really leveraging technology to do more with less. And we are still early on that journey, so I think it's going to keep getting better. So really good work here that's feeding ultimately the growth story that we want to capture. Operator: The next question is from the line of Manav Patnaik with Barclays. Manav Patnaik: I just had a question. The 85% of your business, core, I guess, you said was growing 4%. Assuming the macro stay the same, I guess, it sounds like it's the growth engines that could take that higher. And so I'm just trying to understand from your perspective, how long do you think before that mix is big enough to start moving the needle? Because you've obviously delivered well on the margins and EPS, and I think we're all looking to see if revenue growth can be better. Christophe Beck: That's a great question. As I was sharing at the Investor Day and with the team, the beauty of the company is our broad exposure to end markets, which means that we won't have all end markets in the red at the same time, but which means that we won't have all end markets in the green at the same time as well. So focusing on this 15% a little bit of our time to make sure that those ones are becoming less of a drag and, ultimately, a positive driver. But when we look at this 85% growing 4% and mid-teens, the growth engines are growing 12%, and even more on operating income. So which is a very good story. Ovivo is going to add to it as mentioned earlier, obviously, so High-Tech is going to get bigger. Since that group of growth engines is growing double digit, obviously, the mix is going to shift towards them over time. And I think that in the next few years, growth engines are going to become a really relevant part of our company. It's roughly 20% today at $3 billion. I would not be surprised if it becomes 30% to 40% in a few years down the road. Operator: The next question is from the line of David Begleiter with Deutsche Bank. David Begleiter: Christophe, on the price surcharge, how much did you realize? And with the surcharge now fully in place, should we think about this 3% pricing continuing for the next perhaps 2, 3 quarters? Christophe Beck: It's hard to know exactly because some businesses, like institutional, for instance, decided to bring -- and that was the same in '22, so nothing here to have it directly, so within the structural price. So we don't have a perfect tracking of that. And obviously, I don't really care because, anyway, also converging towards structural price. So with the surcharge, we're closer to 3%, obviously. That's why I'm saying 2% to 3% is the sweet spot. And since we round those numbers, sometimes you might be rounding down to 2% and sometimes to 3%, but I feel pretty good with where we are now. Our objective is to stay closer to 3%, but it depends what's happening with the tariffs as well. We're looking as well as what's happening with China, this week, we will know that in the next few days as well. The good news is that we know exactly how to manage that if we need to, and it leads to very good margin performance. So for me, 2% to 3% is the sweet spot, and our objective is to be as close to 3% as we can. Operator: The next question is from the line of Chris Parkinson with Wolfe Research. Christopher Parkinson: Could we just dig in a little bit more into the Life Sciences segment? Understanding it's been volatile over the last few years, however, it seems like there's a decent recovery pending in bioprocessing and pharma, so on and so forth. So if you could hit on the top line first, that would be helpful. And then if we could move into just the capacity additions, where we stand there and your ultimate progress towards '27 goals and how you feel about them. Christophe Beck: Thank you, Chris. It's a business and an industry that I love. And as hard as it's been the last few years, I would do it again, and we will love where this business is heading. Great team, focused exactly on the right innovations that the pharma industry is looking for to produce faster, high-quality, lower-cost drugs at a lower environmental impact. So really converging with an Ecolab model. When I look at the 3 elements that you mentioned, so top line, capacity and margins, let me take them one by one. So the top line, we've been growing low to mid-single the last few years. That was less than what we had planned for when we acquired Purolite. Well, that was during a time when the market went down, most of our competitors went down in terms of growth. Doesn't make it great for us, but at least it's adding some perspective. When I look at the growth trajectory that we have now, it's clearly accelerating. I mentioned this Q4 is going to be a bit softer because it compares to a huge growth in Q4 last year. But underlying, it's clearly accelerating. The new business is very strong. We're getting more commercial drugs as well in our pipeline, which makes a big difference, obviously. And the team keeps getting stronger and better as well. We're one of the only few companies having as well capacities in various places around the world. That adds to the resilience as well to it. And we add the whole water components and environmental hygiene that the other ones do not as well. So top line, finally, so getting from good to much better, and it's going to keep accelerating. With one caveat, is this capacity challenge that we have in our purification business, just because we have max capacity of what we can manufacture. But our plant in China in mid-2026 is going to open and it's going to enable us to unleash that growth in that part as well as the business, which is going to be great for the local market and as well for some international markets. And last point, on the margin, as we've shared as well at Investor Day, we are kind of in this mid-teens today, but underlying, it's more mid-20s because of the investments that we are making in that business as we build that franchise. So from the mid-20s to the 30, we see a clear path. But our focus is really to drive growth in that phase of the investment and then start to drive margins once we get enough growth that we can leverage the critical mass that we've built. Operator: Our next question is from the line of John Roberts with Mizuho Securities. John Ezekiel Roberts: In hospitality, you use a metric called seats in the seats. Could you give us an update on that? It seems like we have a lot of mix trends going on in the full-service restaurant market. Christophe Beck: So thank you, John. So I'm using the terms of food traffic for our business here. As you know, it's been very different versus than 2019, so before COVID, so people going and sitting in restaurants. So down 30% versus 2019. And that hasn't changed. Unfortunately, or fortunately, depending on how we want to look at it, 1/3 of the people are just going for takeaway, for delivery or for drive-thru, the famous 3D. So we see a stabilization of the food traffic, which is kind of a good news. But we've gotten used to that new model. And ultimately, with all the digital solutions that we have offered to that industry to manage this different way of selling products with less people as well, it's been a very good story, because we could grow very nicely because what we did was even more important to the hospitality industry. And it was sold at a high margin. as well. So less volume, better margins, very good growth. And I think for us, it's been exactly what we needed and it's made Institutional or the hospitality business even much better than what it used to be, and you can see it in the margin that's north of 20% today. And it's going to keep moving up with very nice top line growth as well. So far, so good. And the last point I'd say as well is our Specialty business is doing extremely well, doing even better than full-service restaurants. So the QSR, the fast food businesses growing in the high single. It's a very good story as well there, which helps us capture wherever people go depending on the economic times that we're facing. So overall, net-net, a very good story in a very new market. Operator: The next question is from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: In the Water business this quarter, did volume grow? And in Basic Industries and Paper, was volume growth negative high single digits? And did that represent a deceleration from the numbers you would experience in the previous quarters? Christophe Beck: So thank you, Jeff. As you know, so we don't disclose volumes by business, for obvious reasons. But as mentioned, every segment had positive growth, that we reported. So that's a good news. So there was no segment that was going down. And for me, it's really important that all businesses maintain positive growth, whether you're in High-Tech where it's much more obvious because the flow of the river is very strong, or you're in more challenged businesses, like hospitality, as we talked about before and seen there. So our teams are doing really well. So Water was positive with that perspective, obviously. Paper within Water was not, and it's in the low to mid-single. But it's improving. So that's why I feel quite optimistic with the next few quarters with our so-called underperforming businesses of Paper and Basic Industries. They're not where they should be. They do exactly the right things. So the underperformance -- underlying performance of underperforming businesses is strong, markets are not. But net-net, we're going to get to a good place in the next few quarters. So we're doing all the right things here. Operator: The next question is from the line of Matthew DeYoe with Bank of America. Matthew DeYoe: Just follow up on Vincent's question earlier on cross-selling in One Ecolab. Do you have any idea how much that contributed to organic growth in the quarter, or an expectation you can kind of give us for this year as it relates to just overall revenue generation? Christophe Beck: Well, Matt, it's very good actually. So we are a corporate account, as call it, driven organization, enterprise customers, to use a different term as well. And the top 20, E15 focus is contributing over average to the growth of the company. So this is exactly the right place to focus. It's always been true as a company. But to get the whole One Ecolab within an enterprise is harder to make it work very well. And that's why we've chosen to go with all our innovation, all our technology, bringing One Ecolab digital services together towards those Mag 7, as mentioned before, then the T20, E15, so the top 20 customers and emerging 15, so for next year as well. But they're doing better than the average of the company as well. So it's clearly a strategy that's working. And as we expand the focus beyond those 35 customers, it's going to help drive as well better performance for the overall company at higher margin because it's helping customers drive even more efficiencies within their own operations. And the best example is Food & Beverage, Food & Beverage United as we call it within our own company, where we brought Hygiene and Water together. And you can see the performance of Food & Beverage has been remarkable in the third quarter, and it's going to keep getting better. It's only North America that we've done it, by the way, and it's a very global business, serving global customers, with global quality standards, as you would imagine. And this one is going really well. It's a great team, with customer feedback, also because no one else can do it as well, which is a great way for us to strengthen our moat. So generally, this One Ecolab approach, our enterprise customers, is really working, and it's going to be a growth driver for the years to come. Operator: The next question is from the line of Mike Harrison with Seaport Research Partners. Michael Harrison: Christophe, just kind of following up on what you were just talking about with Food & Beverage. The performance this quarter was, I think, the best organic growth that you've shown in several quarters. You mentioned that there is some momentum from One Ecolab and from pricing. But I was hoping you could help us understand a little bit more about what's going on with underlying market dynamics that you're seeing there. And to the extent that you are winning new business, is that mostly share of wallet and One Ecolab opportunities with existing customers, or are you seeing some new wins in that business in Food & Beverage as well? Christophe Beck: Good question, Mike. It's -- 4% organic growth in Food & Beverage is strong, so for sure. It's much better than the market. Consumer goods are not exactly growing fast. When you look at the companies out there or the, obviously, saw famous names out there are closer to flat than to mid-single type of growth. So really pleased with the performance that we're driving. And we're doing it while increasing our margins as well at the same time. So it's almost a perfect play what's happening in Food & Beverage here, with this unification of Hygiene and Water. And again, it's only North America that we've done it so far, which is less than half our global business, but it's showing how well it's working, that whole approach. And to your point on the share of wallet and white spaces, it's a combination of both. We're getting, gaining definitely some new customers, new plants as well within existing customers as well. Because by bringing Water and Hygiene together, we help them not only produce higher-quality, safer food, but reduce a lot of costs as well at the same time. So in a slow growth industry, that's exactly what they're looking for. So what we're doing for them is exactly what they're expecting. But at the same time, we're adding digital technology that we monetize, charge for, using a different term. And we get as well the value share, so our share of the savings we're generating for them in terms of value pricing, that's also incremental. So it's a combination of white spaces and share gains. Overall an awesome story for probably one of our best global businesses that we have. Operator: Our next question is from the line of Laurence Alexander with Jefferies. Laurence Alexander: It looks like your operating results are running -- I mean, your organic growth is running pretty much in line or better than what you thought earlier in the year. FX looks like it's basically double the tailwind of what it was last year. Can you talk a little bit about the gives and takes and what levers you have to pull if currency moves the other way next year? Christophe Beck: Yes. Good question, Laurence. Let me pass it to Scott because it's an FX, DPC question. Scott Kirkland: Yes. Thanks, Laurence. Hey, as we've talked about, the underlying performance remains really strong. So even with FX, I mean the underlying EPS, the OI is growing double digits. And as you think about just in Q3 itself, while FX is in line with what we expected and as we guided, you also have the impact of year-over-year SG&A comp that is offsetting that FX in benefit of the nonoperating. So that underlying growth is really very strong. We previewed the year-over-year comp in SG&A during the Q2 call, and expect that Q2 -- our Q4 performance to continue as the SG&A normalizes. But we also are seeing commodity costs growing low to mid-single digits, and overcoming that as well. Operator: The next question is from the line of Jason Haas with Wells Fargo. Jason Haas: I'm curious if you could talk about the Pest business, if you've seen any increasing costs for leads or any increased competition in that space recently? Christophe Beck: If I understood well your question, so on Pest, Jason, so the SG&A versus competition? Is that what you asked? Jason Haas: Sorry, just to be more clear, I'm asking if the customer acquisition costs have gone up at all, if you've seen any step-up in competition from one of the major players out there? Christophe Beck: Customer acquisition costs. Okay. I wanted to make sure I got it right, Jason. Actually, it's become easier because -- and we're early on that journey, as mentioned. So we got 1 major retailer in the U.S. We're getting the second as we speak. We wanted to do it large customer by large customer. It's not a geographic play. It's a customer play because, ultimately, one brand wants to be safe and not have any issue in social media or whatever, really to concentrate on guest satisfaction and quality of the experience and the food, obviously, here. But what we offer here with all the digital technology, all the AI that we've developed within the company for many years now, well, is serving the needs of our Pest Intelligence business. No one else can provide as much technology as we can and have such a backbone like ECOLAB3D as well at the same time. So it's a leading offering. It's ahead of the competition. Customers are very open to it. And what I really like as well with it is that the whole industry, even if not moving all at the same pace, is trying to add value to customers and get paid for it as well at the same time. So very healthy competition. And it's a good thing for customers and for the guests, called the ultimate consumers of the thing, whatever those locations are, ultimately. And in terms of operating costs, well, when 95% a few time was spent in the past checking devices that were empty and you spend 5% of your time doing it tomorrow within your system, your operating costs are getting better and you can spend much more time acquiring new customers and serving them even better, which is why our margins is improving as well at the same time. We love that business. It's going to keep -- it's on a strong base of performance right now. It's going to keep improving as we move forward. And margin is going to improve as well. But I want to make sure that we keep investing as well in there because until we are 100% with the Pest Intelligence model around the world, well, we will not slow down our investments that has real impact on the operating margin, but it's still improving, as you could see since we're north of 20% now. Operator: Our next question is from the line of Josh Spector with UBS. Joshua Spector: I wanted to ask from a general context. You talked about '26 confident in the low to mid-teens EPS growth. I think around this time a year ago, you made comments around you don't really need strong volumes to get there. You're really confident in the price/cost equation. I guess when you sit here today and look out a year, do you feel the same way that you can kind of get there with 0% to 1% volumes and, if you start to see an acceleration, that's upside? Or would you frame it differently? Christophe Beck: I see exactly the same way the way that you described it. With the only caveat, we don't know how the environment is going to be in '26. We had some very firm plans for '25 with very strong FX headwinds and delivered product cost that would be really helping. Well, it was exactly the other way around that it happened in 2025. And still we delivered what we had promised in terms of top line, but most importantly, in terms of bottom line. So when I think about '26, for me, it's going to be a strong year, very similar to '25 with 3% to 4% top line, positive volume, 2% to 3% price, to drive this 12% to 15% EPS, and at least 100 basis points in terms of operating income margins, to get to 19% plus, which is bringing us closer to the 20% that we committed to for '27. FX are going to be a help. Inflation might be a little bit of a headwind in '26, and everything else that we don't know. But I feel really good on that trajectory. And to your point, if things improve, if our end markets are even more open to what we do, well, that's going to be upside. That's why I feel really good with where we're heading in 2026 one more time, like it's been in the past few years. Operator: Our final question is from the line of Kevin McCarthy with Vertical Research Partners. Matthew Hettwer: This is Matt Hettwer on for Kevin McCarthy. Thanks for all the color on data centers that you gave earlier. Just following up on that conversation, I wanted to get your thoughts on how Ecolab is positioned with regards to next-generation cooling technologies such as direct-to-chip cooling. Do you have everything you need to compete and win there? Or should we expect additional bolt-on deals in that arena? Christophe Beck: Love that question, Matt. No one has everything they need for direct-to-chip cooling. This is leading-edge, obviously, technology. It's 5% of the data centers; those are the newest. But interestingly enough, when you say direct-to-chip cooling, liquid cooling, this is fluid management. This is exactly what we've done for a very long time, so managing fluids in a bunch of different industries, obviously. So in a way, it's coming closer to our own mastery of science and technology. So when I think direct-to-chip cooling, well, we've talked about our cooling distribution units that we call coolant intelligence unit, because they integrate 3D TRASAR technology that we've been obviously developing for many, many years. So we have that technology in the middle of a data center integrating 3D TRASAR. We've developed as well connected coolant, so the liquid itself, so to make sure that you have the best thermal performance to cool the chips as well. We have coolant monitoring systems as well to make sure that you don't have leaks, you don't have fouling, you don't have anything bad that's happening as well, to maximize as well the performance of the data center. And you have everything else obviously that's going up the chain, in chillers and towers, on the roof. The latest data centers that we're serving have no cooling towers on the roof and have no water in there as well. So we have many pieces that we need and we're developing and exploring the new pieces that we will need as well in the future. And that's why I think we're just at the beginning of that journey, but that's a field that's exactly what Ecolab should be focused on. We should become the owner of cooling technology for data centers in the world. And that's refocusing all our efforts, all our resources and all our investments as well in Global High-Tech. And on top of it, we do similar, obviously, with microelectronics, different technology. As mentioned before, it's reuse and recycle of ultrapure water, and that's where Ovivo is playing exactly, in that field. So it's really serving our dual strategy in high tech, to be the owner of circular water -- ultrapure water standards in microelectronics, and cooling technologies in data centers. And that's why I'm so bullish about what we've done, where we are today, but most importantly, where we're going. And that's why I'm saying, it's going to change over time the growth profile of this company because it's a huge growth wave and we're very well positioned on that wave. So we like where we are. The competitive set is strong out there, but no one understands cooling and water better than we do. So I would clearly bet on the Ecolab team. Operator: Thank you. At this time, we've reached the end of our question-and-answer session. I'll turn the floor back to management for closing comments. Andy Hedberg: Thank you. That wraps up our third quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation. I hope everyone has a great rest of your day. Operator: Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Have a wonderful day.
Operator: Ladies and gentlemen, and welcome to UCT Q3 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that this call is being recorded on Tuesday, October 28, 2025. I will now turn the call over to our first speaker today, Rhonda Bennetto, Investor Relations. Please go ahead. Rhonda Bennetto: Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Clarence Granger, Chairman; James Xiao, CEO; Sheri Savage, CFO; and Cheryl Knepfler, VP Marketing. Clarence will begin with some prepared remarks about the quarter, and James will share his thoughts on the industry and the opportunities ahead for UCT. Sheri will follow with a financial review, and then we'll open up the call for questions. Today's call contains forward-looking statements that are subject to risks and uncertainties. For more information, please refer to the Risk Factors section in our SEC filings. All forward-looking statements are based on estimates, projections and assumptions as of today, and we assume no obligation to update them after this call. Discussion of our financial results will be presented on a non-GAAP basis. A reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website. And with that, I would like to turn the call over to Clarence. Clarence? Clarence Granger: Thank you, Rhonda, and good afternoon, everyone. We appreciate you joining our third quarter 2025 conference call. I'll start with a brief review of our Q3 results, followed by an update on our 3 areas of focus, including new product introduction, flattening the organization and business structure and processes. After that, I'll turn the call over to James Xiao, UCT's new CEO, for a few observations from his first 60 days and insight into UCT's next phase of growth. And then Sheri will provide a more detailed financial review. First of all, we are very pleased with our third quarter results, which reflect continued progress on the priorities we've set for the year. This quarter, we realized a notable improvement in our gross margin, demonstrating some early benefits of the structural and operational improvements we've been implementing across UCT as well as some tariff-related cost recovery. These results speak to the resilience of our business model, the discipline of our global teams and our continued focus on execution in a complex and uncertain business environment. Throughout the quarter, we remain focused on strengthening our operational foundation through the 3 key initiatives I highlighted last quarter. First, we continue to drive new product introductions and component qualifications with our customers, ensuring we are positioned early in their technology development cycle. Second, we substantially completed the work to flatten our organizational structure. A key milestone that's improving our decision-making speed, increasing efficiency and better connecting our global teams. Part of this process includes driving factory-level efficiencies and consolidating select sites to further enhance productivity and optimize our cost structure. A third major area of focus, streamlining our business systems and the optimization of our prior acquisitions, including Fluid Solutions, Services and HIS into UCT's core systems and processes is on track. We installed our company-wide SAP business system into our Fluid Solutions Group at the beginning of July, and we have completed the strategic alignment between our Products Group and Fluid Solutions on qualification priorities with our customers. This alignment strengthens our position for new business opportunities and will support improved margins over time. These combined efforts represent a comprehensive transformation that positions UCT for greater agility, efficiency and long-term profitability. While it will take time for all the benefits to be fully realized, these actions are foundational to building a stronger and more competitive company for the years ahead. We all recognize that the current macro landscape remains dynamic with near-term volatility and reduced visibility. Yet the underlying fundamentals of our industry remain exceptionally strong. AI-enabled high-performance computing continues to drive a powerful new wave of semiconductor innovation, fueling demand for advanced manufacturing technologies, new architectures and next-generation processes. These structural growth drivers play directly into UCT's strength, our deep technical expertise, our manufacturing expertise and the ability to respond with speed and precision as our customers' needs evolve. With that, I'll turn the call over to James to share more about our operational progress, customer engagement and the opportunities we see ahead. James? James Xiao: Thank you, Clarence. My first [ 60 ] days as CEO has been inspiring. The talent and their drive across UCT give me full confidence in our ability to take the company to the next level. Our industry is entering a new era fueled by AI and rapid technology change. That is what I call UCT 3.0, evolving from a trusted partner into a trusted strategic partner and co-innovator deeply integrated into our customers' technology road maps. By harnessing our operation agility and innovation velocity, we will unlock new levels of growth with our world-class facilities while supporting our global customers with speed, scale, automated infrastructure and innovation. To build a little more on what Clarence already highlighted, my immediate focus remains on strengthening the profitability, optimizing our global footprint and positioning UCT for long-term growth. Operationally, we are driving measurable improvement in quality, cost efficiency and on-time delivery performance. Through lean and quality initiatives, we are streamlining our process across sites and sharing best practices, including broadening our vertical integration and optimizing the organization and our accountability. Automation and digitalization, including the integration of AI-based inspection and robotics are also accelerating factory throughput and quality consistency. With that, UCT will have more robust infrastructure and processes to better capture emerging growth opportunities during the next ramp. Our optimized footprint strategy ensures the capacity is aligned with regional wafer fab equipment demand growth. We are establishing a cluster-based manufacturing network to improve global innovation, speed and cost efficiency through regionalized centers of excellence with new product engineering and mass production transfer. To build long-term value creation, we will accelerate the design to production cycle, capitalize on high-value new product introduction at a leading-edge node and further strengthening our strategic partnerships with semi-cap customers through technology integration and execution discipline. We are aligned with our peers, customers and industry sentiment that the long-term outlook for the semiconductor market is very much intact. We see powerful sustained demand driven by AI, high-performance computing, data center expansion and advanced packaging technologies. We view these structural technology inflections as the foundation for a decade of growth across the semiconductor ecosystem. In the short term, while downstream fundamentals and sentiments are improving, it could take several quarters to see a meaningful acceleration in wafer fab equipment spending. This does not change the fact that I'm very excited about UCT's future and the opportunity to lead this company into the next AI era of semiconductor advancement. Back over to you, Clarence. Thank you. Clarence Granger: Thanks, James. I know that with your leadership, UCT will be in good hands. Since this is my last conference call, I wanted to thank all our investors, our customers and especially our employees for the trust they placed in me during this transition period. It was my honor to step in and reconnect with everyone, and I am very confident that James will take us to the next level. With that, I'll turn the call over to Sheri for a review of our financial performance. Sheri? Sheri Brumm: Thanks, Clarence and James, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. As Clarence and James noted, our third quarter results highlight meaningful progress on our key initiatives for the year. These achievements demonstrate the effectiveness of our strategy and the resilience of our organization as we continue to position UCT for long-term profitable growth. For the third quarter, total revenue came in at $510 million compared to $518.8 million in the prior quarter. Revenue from products was $445 million compared to $454.9 million last quarter. Services revenue came in at $65 million in Q3 compared to $63.9 million in Q2. Total gross margin for the third quarter was 17% compared to 16.3% last quarter. Products gross margin was 15.1% compared to 14.4% in Q2 and services was 30% compared to 29.9% last quarter. Gross margin gains were supported by improved site utilization, a higher value product mix, cost and efficiency initiatives and tariff recoveries. Margins continue to be influenced by fluctuations in volume, mix, manufacturing region and related tariffs as well as material and transportation costs, so there will be variances quarter-to-quarter. Operating expense for the quarter was $57.7 million compared with $56.1 million in Q2. As a percentage of revenue, operating expenses were 11.3% versus 10.8% last quarter. As mentioned in the previous call, this increase in OpEx was mainly due to incremental SAP go-live costs. Total operating margin for the quarter came in at 5.7% compared to 5.5% last quarter. Margin from our Products division was 4.9% compared to 4.8% and services margin was 11.1% compared to 10.5% in the prior quarter. Our third quarter tax rate came in at 22.7% as we have revised our full year estimated tax rate to approximately 21%. Our mix of earnings between higher and lower tax jurisdictions can cause our rate to fluctuate throughout the year. For 2025, we continue to expect the tax rate to be in the low to mid-20s. Based on 45.6 million shares outstanding, earnings per share for the quarter were $0.28 on net income of $12.9 million compared to $0.27 on net income of $12.1 million in the prior quarter. Turning to the balance sheet. Our cash and cash equivalents were $314.1 million compared to $327.4 million at the end of last quarter. Cash flow from operations was breakeven compared to $29.2 million last quarter, mainly due to timing of cash collections and payments. Reducing our overall interest expense remains a key priority. During the quarter, we took advantage of favorable conditions in the credit markets to reprice our Term B loan, lowering our interest rate margin by 50 basis points. This proactive step further optimizes our capital structure and reduces our long-term borrowing costs. Another development includes the renewal of our share repurchase program for an additional 3-year term, authorizing up to $150 million of repurchases with a maximum of $50 million per year. Although we are not anticipating near-term repurchases, we view this program as a valuable component of our disciplined capital allocation framework. The tariff environment for the semiconductor market remains dynamic, and we continue to see the effects across the supply chain. During the third quarter, we achieved some tariff recovery, and we will continue to closely monitor developments, leverage our global footprint and localized supply chain to help mitigate the impact, maximize efficiency and protect our profitability. As stated earlier, this quarter was very favorable for product mix and factory utilization. We see Q4 returning to similar levels as the first half of the year. As a result, we project total revenue for the fourth quarter of 2025 to be between $480 million and $530 million. We expect EPS in the range of $0.11 to $0.31. And with that, I'd like to turn the call over to the operator for questions. Operator: [Operator Instructions] Your first question comes from Charles Shi of Needham & Company. Yu Shi: Maybe the first question on the near-term industry demand outlook. It sounds -- it looks like you guys are seeing maybe we won't really see a pickup over the next several quarters before an actual pickup start to happen. And I wonder what your view right now on first half next year? Should we still kind of assume that the $500 million per quarter level? And what's the early view on the second half next year? That's the first question. James Xiao: Yes. Okay. So Charles, thanks for the question. And I look forward to work with you and your firm as a long-term partner. I think that our view on this, as you already heard from some of our customers, right? They really see a kind of mid- to high range of year-over-year growth in next year's WFE in general. I think that some customers see that a little bit of a flattish outlook in first half, and they see a kind of step function increase in the second half. Others see differently. So I think that I really do not want to give you a specific because the controversial outlook we have from different customers. So I would say that we will see a mid- to high range and year-over-year growth and the timing of that to be seen. Charles, you want [indiscernible]. Rhonda Bennetto: Go ahead, Charles. Yu Shi: Yes. Maybe a second question on Q4. It looks like you're guiding Q4 slightly below the September level. I believe one quarter ago, you were expecting some pickup tied to some of the opportunities you saw in Europe. And I wonder why the guide is a little bit lighter than the expectation a quarter ago. Was that the timing of that program in Europe or something else has probably weakened a little bit? Sheri Brumm: Charles, this is Sheri. Yes, we did -- we have seen that demand and continuing to see that, but we are seeing some different forecast from other customers. So it's just causing a little bit difference in Q4 than what we initially said last quarter. But we are seeing strength in that specific revenue that we talked about in Q3. As you know, we have a large bell curve of margins that we produce for our customers. And in Q3, just happened to be a little bit better mix than what we've seen previously. And Q4 is kind of going back to the mix that we've seen in the first half of '25. But that's generally why our Q4 is slightly down from the Q3 time frame. Clarence Granger: But Charles, this is Clarence. So as we said, we were going to capture some new business in Europe in Q4. We did capture that business. It's just, as Sheri said, some other businesses slowing down and offsetting that. But overall, we are very confident in our position in capturing new business, and we feel we're well on our way to have a much stronger year in 2026, albeit maybe in the second half. Yu Shi: Got it. If I may, I have one last question. what's the -- is there anything changed -- anything that's different in terms of your view about your China for China business? We knew that at the beginning of the year, there was some technical challenges that your Chinese OEM customers saw and that kind of led to quite a bit of a decline in that part of the business. Is that on track to recover? And is it on track into the, let's say, into the fourth quarter, where do you see that China for China business in terms of maybe revenue run rate where it's going to be at? Clarence Granger: Charles, yes, we knew this question was coming from you. We were kind of flipping a coin to see who got to answer it. I got the short straw. So I guess it's my turn. So just to make sure we clarify on our China situation. Literally, a little less than 7% of our total revenue is to our Chinese customers. So it's not a huge portion of our revenue. But obviously, I understand why everybody is interested in China with all the talk going on. So -- but in terms of the revenue, our revenue this quarter and next quarter will be about the same percentage for China. So it's relatively flat right now. And frankly, because of all the political turmoil, we are migrating all of our non-Chinese customer manufacturing out of China. So as you know, we've called that China for China, but we're probably going to quit using that terminology. But essentially, all of the products manufactured in China as of the end of the fourth quarter will be manufactured in China and all of the products for our non-Chinese customers will be manufactured outside of China. So that's an important strategic direction for us, and we've accomplished what we said we would. So from a long time -- long-term perspective, we're very comfortable with our position in China. We think the Chinese market is going to be one of significant growth over the next few years, and we fully intend to participate in that market going forward, albeit on a slightly different footing where we have essentially 2 separate manufacturing organizations. Operator: Your next question comes from Krish Sankar of TD. Robert Mertens: This is Robert Mertens on the line on behalf of Krish. First, congrats, James, on the new role. We look forward to working closely with you in the future. Just my first question, could you walk us through some of the remaining synergies with these recent acquisitions you've done? I believe last quarter, maybe you had mentioned integrating the Fluid Solutions Group systems into existing products. Are those targets still on track? And then I have one follow-up. Clarence Granger: Sure. So yes. So obviously, we've talked about the acquisitions. We had Fluid Solutions, Services and HIS. And so the Fluid Solutions is the one where we've made the most significant progress right away. We have completed the inclusion or update to the SAP business system in our Fluid Solutions site. This will -- this will give us consistency between our traditional UCT manufacturing and our Fluid Solutions. We've also completed the strategic alignment between the Products group and the Fluid Solutions on qualification priorities with our customers. So we've made very good progress there. What that means, though, is the reason we need strategic alignment is the Fluid Solutions products will be utilized in the subsystems that our product systems that our products groups build. So we won't actually see -- as Fluid Solutions gets more and more qualified, we won't actually see an increase in revenue. What we'll see is an increase in margins because the Fluid Solutions products will be replacing other products that we've had to buy from other suppliers. And so that will result in improved margins for us. And so we're very pleased with the progress that we've made there. The other 2 sites are the services side, and we've made some good progress on the integration of the services side. We had previously had the business unit separated from the manufacturing arm of the services group, and we've now combined that to improve our overall efficiencies. That's been accomplished. And the HIS group, we are considering various options relative to locations and possible levels of increased utilization for new product introduction and possible site consolidation. So we have not finalized all the activities that we're doing in those major areas, but we do think that we've made significant progress, and we expect significantly more progress in 2026. Robert Mertens: Great. That's helpful. And then just for the tariff recovery benefit in the quarter, was that meaningful to the overall margin growth in the September quarter? And was this sort of a onetime benefit catch-up from suppliers? Or should we expect a bit of a tailwind in the December quarter as well? Sheri Brumm: Yes. Well -- this is Sheri, Robert. We will continue to collect surrounding our tariffs going forward. We did collect slightly more than what we anticipated in the original forecast. So that did help with our overall EPS. But we anticipate -- we have put a really good process in place and for go forward now, and that basically will assist us with that collection as we move forward. Clarence Granger: I guess the other point I'd like to make on that, we're now to the point where we're very -- first of all, this was not a onetime hit. This is ongoing. But we are very confident that we are now to the point where we are able to recover approximately maybe a little over 90% of the tariffs that we get charged. So this should be less of a factor to us on a go-forward basis. Operator: The next question comes from Christian Schwab of Craig-Hallum Capital. Christian Schwab: Congrats, James, on the new role. As far as WFE outlook for calendar 2026, I understand you're seeing conflicting data points and third-party research is kind of all over the place as well. But that being said, do you think the company is positioned to outgrow WFE growth in calendar '26 regardless of what that number is? Historically, kind of in an upturn, you've kind of done 10% or more growth on top of WFE. Is that what we should expect? Or would you expect the business to kind of follow whatever WFE looks like? James Xiao: Christian, this is James. Nice to meet you virtually. So I think that, as I mentioned, the 26% is really a kind of 5% to 8% of year-over-year growth, depending on which analyst you're looking at. And from the UCT perspective, it's hard for us really to give you a concrete forecast on how much is our year-over-year growth. For the following reasons because number one is that we still see some of the customers still have inventory. So the consumption of inventory actually kind of delay the revenue from UCT perspective, right? So we're not synchronized because of that, number one. Number two is also, if you look at the NPI cycle of our customers, it takes quite a long time for them to really ramp up their NPIs and really kind of qualify UCT, especially for the NPI products. So therefore, you probably see them to have this incremental revenue while the UCT revenue growth from the NPI product will be a few quarters behind. So therefore, we cannot fully capture the NPI growth. But -- and then the third is really the product mix. If you look at the leading-edge spending, right, you can see that the litho is more than 40% of the spending. UCT historically is really edge and that intensive. But with that said, we're working very closely with our third customer, which is a litho company and grow our revenue with them. So I think that longer term, you will see that we're more kind of matching the double-digit growth when we grow that litho business. And finally, I think that this also goes to the China factor, right? So I think the domestic OEMs in China depending on the analyst report, you kind of follow, there could be an increasing percentage of the worldwide WFE growth. And [indiscernible] not necessarily have the same market share as we have the rest of the world. With all that factors, I cannot give you the exact number, but we're pretty confident we will outgrow the WFE. Operator: Your last question comes from Edward Yang of Oppenheimer. Edward Yang: Welcome aboard, James. Can we just close the loop on your comments about reduced visibility? It just seems a bit discordant from the rest of the industry so far, where I think the tone seems to be a bit more positive. So what are you seeing specifically in your order book? Just want to better understand the offsets. Is it China? Is it memory? I saw that your memory revenue was down. Or is it specific customers that give you some caution? Cheryl Knepfler: Ed, this is Cheryl. I'll start sort of with the industry view and then let James talk a little bit more in terms of some of the products. So when we look at the industry, we do have a number of the companies and third parties who are indicating second half should be positive. There's a lot of things that are going in on that. But we also have some of our large growth customers who are indicating some level of concern, whether it translates to them saying their revenue is looking to be flat or others. So there are at least 2 of our customers who are looking at flat revenue, flat to up, others who are still forecasting significant gains opportunities, but all on the second half. So -- and we've had 2 or 3 or 4 years of saying second half growth. So I think we are just looking at remaining prudent in how we're looking at things since we are getting some level of conflicting information. However, I do think we have a lot of programs going on that James will reference that indicate that we do expect to see a level of growth through that, but we just want to remain cautious about how we're looking at it and how we structure things. James Xiao: Well said, Cheryl, I think that the only thing I want to add is that it's really the business nature. I leave in both words at semi-cap OEMs and now with a subsystem company like UCT. I see the visibility is a little bit different. The other side is about 6 to 9 months, if you will. Here, it's really a quarter plus, I'd say. So therefore, there is a visibility kind of difference. Therefore, I think we want to stay very, very precise on what we know and what we can really kind of share with you and the rest. Edward Yang: Okay. That's helpful. And James, I mean, you spoke a lot about efficiency and optimization, but I would love to get your thoughts also on your plans for restarting the growth engine at UCT. Where do you think the best opportunities are? Is it in leading edge, AI? Is it M&A, China? Would love to get your thoughts there. James Xiao: I think that those are all relevant. I would love to do all of them, but I think that we're also constrained by the resource, and I want the team really focused on the fundamental first, right? So as a subsystem partners to our OEM customers, we want to make sure we really deliver on time. We really have the least quality excursion. And also, we continue to drive the cost efficiency, right? So that's really my first priority. Then I think that the growth really -- it's always follow that Horizon 1, 2, 3 cadence. I always want to focus on Horizon 1, which is really expand the business with our partners in the OEM space. The top 3 customers is definitely our focus. And then we can look at the diversification in that space means that some of the other semi-cap OEMs. I really want to continue the vertical integration that Jim and Clarence already did in the past 5 years. And integration is part of that, that we can further expand the engineered product as long as it fit our core competency and also fit in the vertical integration strategy we have. And finally, as Horizon 2 or 3, we can look at all the areas you mentioned. So -- but I think that we'll have an upcoming investor conference, and we can share more of my growth strategy with you and the other folks. Operator: There are no further questions at this time. I will now turn the call over to James Xiao for the closing remarks. Please continue. James Xiao: Thank you for joining us for this earnings call. I look forward to further chat with you at the follow-up call. Rhonda Bennetto: Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.