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Operator: Good day, and welcome to West's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to John Sweeney, Vice President of Investor Relations. Please go ahead. John Sweeney: Good morning, and welcome to West's Third Quarter 2025 Earnings Conference Call, which has been webcast live. With me today on the call are West's CEO, Eric Green; and CFO, Bob McMahon. Earlier today, we issued our third quarter financial results. A copy of the press release, along with today's slide presentation containing to supplement information for your reference has been posted in the Investors section of the company's website located at investor.westpharma.com. Later today, a replay of the webcast will also be available in the Investors section of our website. On the call, we will review our financial results and provide an update to our business and outlook for FY '25. Statements made by management on the call and the accompanying presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts. The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results as well as those expressed or implied in any forward-looking statements made here. Please refer to today's press release, as well as other disclosures made by the company regarding the risks to which it is subject, including our 10-K and 10-Q. During the call, management will make reference to non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, free cash flow and adjusted diluted EPS. Limitations and reconciliations of non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release. I'll now turn the call over to our CEO, Eric Green. Eric? Eric Green: Thank you, John, and good morning, everyone. Thanks for joining us today. I'm pleased to report we delivered solid third quarter results with revenues, margins and adjusted EPS coming in above our expectations. Revenues of $805 million were up 5% on an organic basis. The adjusted operating margins were 21.1%, and adjusted EPS of $1.96 was up 6% compared to prior year. As you will hear today, our business momentum is steadily improving, and we expect this trend to continue. As a result of this strong performance, we are increasing our guidance for 2025. I want to especially thank our West team members for their efforts and continued focus in achieving these results. Before getting into the details of our Q3 performance, I want to highlight two notable appointments, which further strengthened our executive leadership team. In August, our new CFO, Bob McMahon joined West. Many of you know Bob, and he has done an exceptional job transitioning into his role, already visiting several of our websites and meeting with many of you. I'm excited to have Bob on board and partner together to lead the next phase of West grow. I'm also extremely pleased to welcome [ Davis matter ], our new Chief Technology Officer, who also joined West in August and is tasked with accelerating our innovation and new product introductions. Our team looks forward to benefiting from his industry experience and expertise. Now back to the Q3 financial results. Let's begin with a review of the Proprietary Products segment. Revenues of $648 million were up 5.1% on an organic basis. These results were driven by HVP components, our largest and most profitable business. We have a strong market position because of our trusted reputation for high-quality scale and reliability. This business has continued to strengthen each quarter, and revenues increased 13% organically in Q3. Several factors drove the strength of HVP components. First, elastomers for GLP-1 has strong growth and now account for 9% of total company sales. We benefit from our long-standing relationships as we partner with our customers in this market, supporting them as they expand their GLP-1 franchises. We're also collaborating closely with customers who are launching a pipeline of new GLP-1 molecules and generics. And we expect this market to continue to evolve as there are a number of new early-stage trials seeking to expand the range of indications and treatments using GLP-1s. Second, in biologics. We're encouraged for their underlying market demand as ordering trends are returning to normal. Less participation rate for biologics and biosimilars is trending above our historical levels year-to-date of greater than 90%. The third driver is HVP upgrades, including Annex 1. Given our strong market position with our elastomers portfolio, we are well positioned to benefit from what we believe is a long-term opportunity. We are tracking ahead of our expectations, and we currently have 375 ongoing Annex 1 upgrade projects. With the robust pipeline of new projects and our ability to partner with customers to convert current projects into commercial production, we anticipate Annex 1 and related HVP upgrades to deliver 200 basis points of growth this year, up from our previous expectation of 150 basis points. We expect Annex 1 to drive continuing demand for higher-quality products as European regulators now require pharmaceutical companies to demonstrate their culture of continuous manufacturing improvement. West is well positioned to support our customers with HVP components and technical documentation to meet those requirements. We continue to work through our constraint at our HVP manufacturing site in Germany. During the quarter, we made good progress hiring and training employees in installing new equipment to expand capacity. These efforts, in addition to product tech transfers, will allow us to further leverage our investments made in our global HVP components infrastructure and balance production across the network, enabling enough to drive future growth. Moving to the HVP Delivery Device business. Revenues declined compared to prior year as expected, driven mainly by the $19 million incentive payment we received last year. With respect to Smart [ Gild ] 3.5, which is less than 4% of the total company revenues were improving profitability every quarter by driving down costs and remain on track to go live with automation in early 2026, even as we continue to evaluate options to maximize the value of this business. Lastly, our Standard Products business increased 3.6% on an organic basis this quarter. Converting standard products to HVP components over time serves as an important funnel for our business by generating revenue and expanding margins. Turning to Contract Manufacturing segment. This business performed well in the quarter, delivering revenues of $157 million, growing by 4.9% organically. Moving forward, we are now utilizing our Arizona CTM footprint to consolidate operations from less efficient locations. We continue to expect the second CGM contract to conclude at the end of Q2 2026. The future available space is in an attractive location with strong operating team that is resulting in a number of promising discussions with multiple customers. Turning to our Dublin site. We continue to ramp production of delivery devices for the obesity market. We are currently validating and testing the equipment installed for the commercialization of our drug handling business in early 2026. GLP-1s is in the Contract Manufacturing segment accounts for 8% of total company sales. Overall, I'm very pleased with the performance of both the proprietary products and contract manufacturing segments along with the trends that we are seeing in our business and in the markets. Now I will turn the call over to Bob. Bob? Robert McMahon: Thanks, Eric, and good morning, everyone. It's great to be here, and I'm pleased to be part of the West team. West team. West's Injectable Solutions and Services business is second to none, and I'm excited about the long-term growth potential of the company. Now before getting into the details, I wanted to highlight that we have revamped our quarterly presentation to provide some supplemental segment information, which we may find useful going forward. Now on to the quarterly results. In my remarks this morning, I'll provide some additional details on revenue as well as take you through the income statement and some other key financial metrics. I'll then cover our updated full year and fourth quarter guidance. As Eric mentioned, third quarter revenue was $805 million, above the top end of our revenue guidance, beating our expectations. On a reported basis, total revenues increased 7.7%. Currency had a positive impact of 2.7 percentage points, resulting in organic growth of 5.0%. Of note, the incentive fee reduced organic growth by 280 basis points. So a solid result overall. I'll now go through each of our businesses in more detail. Within the proprietary segment, HPV components, our largest business, accounting for 48% of total company sales was the standout. Revenues of $390 million increased 13.3% organically. This was driven by robust growth in GLP-1s, HVP upgrades, including Annex 1, improving performance in biologics and a normalizing demand environment. We are very pleased with the continued momentum in this business this year. In our HVP delivery devices business, which accounted for 12% of the company's net sales in the quarter, revenues were $99 million. This was down 16.7% year-on-year organically, but roughly flat sequentially as we expected. In Standard Products, revenues of $158 million increased 3.6% on an organic basis, even as we saw Annex 1 accelerate. Standard products accounted for 20% of total company net sales this quarter. Now looking across our end markets for proprietary. Biologics revenue was $329 million and up 8.3% on an organic basis. Growth in products using our laminated technology and strength in Westar and Envision offset the headwind from the incentive fee in the prior year. Pharma revenue rose 1.4% on an organic basis to $183 million, with growth in RU seals, stoppers and plungers. And generics revenue increased 2.6% organically to $136 million, also driven by growth in seals and stockers. Now finishing up revenues. Our Contract Manufacturing segment delivered $157 million, growing 4.9% on an organic basis. Segment performance in the quarter was driven by an increase in sales of self-injected devices for obesity and diabetes, partially offset by a decrease in sales of health care diagnostic devices. Contract manufacturing accounted for 20% of total company net sales in the quarter. Pricing was a positive 1.7%, and we are tracking at roughly 2.4% for the first 9 months of the year, right in line with our 2 to 3 percentage point expectation. Now let's take a closer look at the rest of the P&L. Gross margin was 36.6% in the quarter, up 120 basis points as compared to the prior year. This strong result is due to the positive mix of HVP components, as well as good execution in our supply network. Adjusted operating margins of 21.1%, while down 40 basis points compared to the prior year were ahead of our expectations. And below the line, our net interest income was $4.5 million. The tax rate came in at 19.8%, slightly better than expected, and we had 72.6 million diluted shares outstanding in the quarter. Now putting it all together, Q3 adjusted earnings per share were $1.96, up 6% versus last year and $0.26 above confident of guidance. Moving on to a few cash flow metrics. Year-to-date, operating cash flow is $504 million, up 9%, while free cash flow of $294 million is 54% higher than last year as capital expenditures are down 23%. To date, we have invested $210 million in capital expenditures and remain on track for $275 million for the year. In summary, we had a very solid third quarter operationally that exceeded our expectations. And as a result, we're increasing our full year guidance on both revenue and earnings per share. For the full year, we are now anticipating our reported revenue to be in the range of $3.06 billion to $3.07 billion. This represents reported growth of 5.8% to 6.1% and organic growth of 3.75% to 4% for the full year. The foreign exchange environment has remained relatively stable since our last guide and so currency is still expected to be a $59 million tailwind for the year. We are also increasing our full year adjusted EPS range to $7.06 to $7.11 representing year-on-year growth of 4.6% to 5.3%. A few more items to help you modeling. This assumes flat other income and expense, a 21% tax rate in the fourth quarter and 72.6 million diluted shares outstanding. In addition, we continue to anticipate $15 million to $20 million in tariff-related costs this year and now expect to mitigate more than half of those costs in 2025. For 2026, we expect to fully mitigate the impact based on the current tariff landscape. Our updated full year guidance translates to fourth quarter revenue of $790 million to $800 million. This is a reported increase of 5.5% to 6.8% and an organic increase of 1% to 2.3%. And as a reminder, we also had a $25 million incentive fee in Q4 of last year, which we do not expect to repeat this year and is reducing our expected Q4 organic growth by roughly 360 basis points. In fourth quarter, adjusted earnings per share are expected to be between $1.81 and $1.86. Before turning the call back over to Eric. And while we're still going through our planning process, I did want to share a few thoughts on 2026. We are exiting 2025 in a good place. We believe destocking is largely behind us and demand will continue to improve for our key growth drivers. That said, our end markets remain dynamic, and we could see a range of outcomes. So we will be prudent with our planning. Our HPV components business will lead the way given the multiyear growth drivers of GLP-1s and HVP upgrades, driving our biologics end market. We are anticipating the remaining CGM contract will continue to run at full capacity until exiting in mid-2026. This is roughly a $40 million headwind for the second half of 2026. We are actively working on refilling that space with higher-margin business with the expectation of the pacing and ramp, the pipeline coming in better view by the end of the year. Lastly, we are building out drug handling in our Dublin facility, and this is expected to add roughly $20 million in revenue for next year, which will help offset the CGM contract. And we will get back to expanding margins. So while early, I believe 2026 is coming into better focus, and I look forward to giving specific guidance on the next earnings call. Now I'd like to turn the call over to Eric for closing comments. Eric? Eric Green: Great. Thanks, Bob. To summarize, we had a solid quarter, resulting in an upward adjustment to our guidance. We believe the positive trends in our business are sustainable due to strong execution, improving market conditions and our ability to respond to the evolving needs of our customers, our reputation for high-quality and services paramount. West has key competitive advantages that allow us to protect our business model long term, especially in our highest-margin HVP components franchise, and we continue to make progress improving our margins. This is why I'm confident that we are well positioned for Q4 and into 2026. Operator, we're ready to take questions. Thank you. Operator: [Operator Instructions] Our first question comes from Paul Knight with KeyBanc Capital Markets. Paul Knight: Congrats on the quarter. As you think about your long-term construct of 7% to 9% growth, are we heading there in 2026 in your opinion in terms of the momentum you're citing here in 3Q? Eric Green: Yes. Thanks for that, Paul. And I'll start and then maybe ask Bob to join us in the conversation. But as we think about the key drivers to be able to deliver the long-range plan and long-term construct it really -- the thesis is really around the HVP components and driving into double-digit growth consistently year-over-year. And as you know, the key drivers of that for us are biologics or biosimilars, it's also the driver on Annex 1 and also GLP-1. So we feel good that we have the foundation laid that allows us to drive in the right direction to get to that LRP long term. Bob, do you want to give more color? Robert McMahon: Yes. Paul, thanks for the question. As Eric said, the biggest growth driver we're seeing really nice momentum. As I mentioned on the call earlier, we've got some puts and takes here in 2026. But we feel good about the long-term growth of the business. We have to work through the puts and takes of some of the contracts that are coming in and out. And right now, I would say the street is in a good place. Operator: Our next question comes from Michael Ryskin with Bank of America. Michael Ryskin: Maybe just to follow up on that. The HPV components, as you said, a big part of the story. Really good growth in 2Q, continued that in the third quarter. Obviously, on GLP-1 and Annex 1 part of that. But could you talk about the sustainability of that being over double -- the double digits. You talked about hitting in the fourth quarter as well, but then going beyond just confidence in that trajectory? And then if I could throw on just a quick second part on the margin comment you made, Bob, about expanding margins next year. Can you talk about the new pieces of that between gross margin and volume leverage or your cost actions? Eric Green: Thanks, Michael. And you're absolutely correct on the HVP components, I mean, the growth is starting to sequentially get stronger from the beginning of this year as we as we were looking at how the order patterns are becoming more normalized. So we're seeing the markets become more in line with what we would expect long term. We're seeing that with the order trends through our discussions with our customers. And another precursor for us, we keep a cool sign on as the bioprocessing space. As you know, that's a key indicator of what we should see and expect more near to midterm. We also are -- so we're confident in our position in biologics and biosimilars, particularly of the products in market but also new approvals that are in pipeline. And then Annex 1 is another key driver that has multiyear growth algorithm conversion from standard to high-value products, which is a -- it's a good opportunity for long-term growth to get us to that growth algorithm we talked about double digits for high-value product components. And Bob, do you want to? Robert McMahon: Yes, Mike, thanks for the question. Maybe to add on the first question about HVP components. Certainly, we're feeling good about the momentum here. We're actually building to our Q4 guidance is low to mid-teens. So that momentum we're expecting to continue. Obviously, as we get into next year, there's some more challenging comps in the back half of the year. But that being said, the long-term growth drivers of GLP-1s and Annex 1 and the HPV upgrades are there. And that actually leads to your second question around the margin expansion. One of the things that I think we saw here in the quarter was just the beauty of that business being upgraded. The power of being able to drive more efficiency through the -- through the factories with the investments that we've made over time here as well as being able to provide more value-added products to our customers. I would expect that to continue next year. So when we think about opportunities, I do expect gross margin to be an area of opportunity for us to expand margins. But we're also looking at how do we ensure that we're also driving efficiencies kind of below the gross margin level as well. So I'd say it's both. But certainly, as HVP drives the growth that's -- we generate a mix benefit as well. So very nice from that standpoint. Operator: Our next question comes from Patrick Donnelly with Citi. Patrick Donnelly: Maybe one quick one on the CDM contract. It sounds like -- kind of the exited mid-'26. I appreciate the commentary there, Bob, on the $40 million headwind. I guess in terms of the visibility and fulfilling that with high-margin business, it sounds like -- what are the conversations there? What would the timing look like in terms of the backfill? How big of a gap would there be? And then maybe secondarily, just following up on Mike's question there, Bob, I know you spent a lot of time thinking about the margin opportunity here, where there's opportunities, whether it's footprint, higher utilization when you dug into the company here and look at the margin opportunity, can you just talk about some of that long-term stuff that you see and what opportunity you see on the margin, not only the mix to high value but also just more efficient operations? Eric Green: Yes. No, it's a great question, Patrick. Let me -- I'll cover the first, and then Bob will address your second question. But in regards to contract manufacturing, specifically the CGM manufacturing we have in Dublin, we have a number of customers we're engaged with today that late-stage discussions to identify what would be appropriate business to replace the CGM business that we be exiting or finishing the current agreement until the end of June of 2026. So we feel good about the prospects. We do know that the economics of the future business. The expectation is to be stronger than what we currently have in that facility. And secondarily, there will be a transition period the second half of 2026. But usually, what you'll find is, as we extract the equipment for our previous customer and install new equipment, there's engineering fees that we incorporate into our revenue for contract manufacturing. So there will be revenues to replace the gap. And I won't say it's going to be 1:1, but healthy revenues and margin. And we expect to have commercial operations up towards the end of 2026 if it is a pretty straightforward process. So I'm feeling good about the prospects and now the conversations have been ongoing and very, very attractive business that we could put into that location. Robert McMahon: Yes. And Patrick, on your second element of the question around our supply network. I think one of the things that I would say first off, is as we look at the footprint our ability to be local for local is a big opportunity and advantage for us for our customers. That being said, I think there's an opportunity in the medium and longer term to really optimize our footprint. And we're actually going through that analysis right now given the investments that we've made to kind of not only level load and fill those factories with check transfers across, but also the ability to actually drive more efficiency within the existing footprint. And I think that there probably is more opportunity to consolidate certain areas to drive even more efficiency as we go forward. That's not a 2026 element time frame. That's more of a longer term, which actually makes me feel good that there's not only some near-term opportunities to drive cost efficiencies, but also longer-term opportunities. Operator: Our next question comes from Daniel Markowitz with Evercore ISI. Daniel Markowitz: Guys, congrats on the print and welcome, Bob. Robert McMahon: Thanks good to be here. Daniel Markowitz: Awesome. So Eric and Bob, I had a 2-parter for you. First, I'm curious on high-level headwinds and tailwinds to high-value components in 2026 as you see it today. As I think about it, I see a few tailwinds. One is that you're comping the destock, especially in the first half. Second, you have GLP-1s growing off of a larger base. Third, Annex 1 is accelerating following the uptick in project growth through 2025. And then lastly, you have this unique one-off customer situation that I think was about 150 basis point headwind to 25%, but should benefit $26 million. So wrapping up on this first one, is there anything else I should be thinking about as a headwind on the other side or anything I'm missing? And then the second question, zooming in on one of those on GLP-1 elastomer growth, it was mid-single-digit percent of sales in 2024, and now it's been climbing pretty steadily to now about 9% of total revs. That implies a pretty healthy growth for GLP-1s in 2025. Is it right to think it's more than like 50% growth? And if so, what's causing that, should we expect sustained over 20% growth over the next few years? Thank you and sorry for being long-winded. Robert McMahon: Yes. I'll verify your math, Dan. We've been very pleased with the growth in GLP-1. And I'll turn it over to Eric to actually give some of the color commentary on what's been driving that. But I think it's important to understand that we expect that GLP-1s, while they may not be growing at that level, given the law of large numbers coming into next year, we are expecting very healthy growth in GLP-1 next year given the kind of underlying market dynamics there, Eric? Eric Green: Yes, that's an excellent question. So as we think about the key drivers for other product components, you're absolutely correct that GLP-1s will continue to grow over seeing even -- as you think of long term with the potential introduction of orals into the equation, we do think the market itself will be a healthy blend of injectables and orals with injectables continue to be the larger portion, but the overall market continues to grow quite nicely based on what we are hearing from our customers, but also other sources. So we're very well positioned with GLP-1s. As you remember, this is -- this is leveraging our high-value product manufacturing plants. We have five across the globe. And it's -- so we do have scale. We do have the portfolio that supports our customers in that area. You commented about the timing of potential headwinds. I think the one area I would say is on Annex 1 while we have really good momentum in our contamination control strategy, working with our customers is really resonating. And as you know, this is really converting our standard products that are on drug molecules in commercial today to high-value products. And the economics for us is very attractive. As you know, our averages for standard products are margins in the 20% to 30% range, while the HVP is 60-plus percent. And so it's -- but the timing on how these projects roll off into commercial revenues do vary from client to client. And so that -- I wouldn't say it's a headwind. It's more of a timing from quarter-to-quarter, but we're really optimistic and confident in the pipeline that we're currently working on, but also know that we're only touching a fraction of the 6 billion components, we believe, is the market opportunity here. I think the other area is just, again, timing of new drug molecules approved in market. If you kind of look at last year to this year, a number of approvals by the FDA might be a little bit lower for various reasons. But as we are planning with our customers of future launches, the timing might be a little bit on certain launches. Now saying that, the growth levers that you mentioned earlier about biologics, biosimilars, GLP-1s and Annex 1 are very favorable. And those are the tailwinds that we're moving to the balance of this year and into next year. Robert McMahon: Daniel, just maybe one other thing to follow up on your initial question around GLP-1s. Obviously, we watch that very closely and feel that our growth is largely in line with the growth that the end market is seeing as well. Operator: Our next question comes from Dan Leonard with UBS. Daniel Leonard: Thank you and Bob, you might have addressed my question right there, but I have a follow-up on GLP-1. It does seem like from the script data for Novo and Lilly that you're growing a lot faster than the market is growing. I wonder if there's a way to reconcile that. Could there be a compound or element here? Is it the clinical trial participation you alluded to? Any thoughts would be appreciated. Eric Green: Yes, Dan, this is Eric. You're touching on exactly the areas. So if you think about we're starting to see an increase in vials. So therefore, our stockers and seals are necessary. So that's a factor when we think about our volumes and also the pipeline of new molecules being looked at and gone through clinical. So there's other factors that we're working with several customers. And also, there's a couple of geographies. There's an element around generics that were also able to support. So overall, it's -- I would say it's a little bit broader than just the scripts data of our two customers. Operator: Our next question comes from Justin Bowers with Deutsche Bank. Justin Bowers: Good morning everyone, and first, I appreciate the increase detail and transparency on some of the disclosures this quarter. So a 2-parter for me. One, I just wanted to follow up on Annex 1. There were some updates earlier this year. And just curious how that's impacting customer decision-making and some of the conversions. And if that's been a catalyst for some of the acceleration we're seeing. And then part 2 earlier in the prepared remarks, you talked about liquid handling in Dublin, being about a $20 million opportunity, plus or minus. Is that sort of the peak opportunity? Or is there room for growth there in that facility beyond 2026? Eric Green: Yes, Justin, thank you for that. First of all, touch on the Dublin real quick. On the $20 million that we communicated. As we ramp up a new site, it does take time to get to full utilization. So I would consider this as early stages. And as we move into 2027 and a little bit beyond, that's when we get into our peak volumes and revenues. So the $20 million is really just kind of the ramp-up stage and then move through efficiencies through a few quarters, you'll start seeing the utilization significantly go up. So I would not look at $20 million as the peak revenues of that site for the drug handling. On the Annex 1, it's -- there are different factors. We do know that there are more conversations with the EU regulators with our customers as they are auditing and discussing about the regulations. Therefore, there is an interest to continue these projects on an accelerated pace. But again, as I mentioned earlier, there's a tremendous amount of opportunity of drug molecule that goes into Europe that we believe this is just really early stages out of the $6 billion components, it's a small fraction that we are currently converted to commercial at this time. Operator: Our next question comes from Larry Solow with CGS Securities. Lawrence Solow: Great. I echo the appreciation on the transparency, and I also welcome, Bob. I guess I want to just follow up on the -- just on the gross margin, really strong this quarter. Just curious if you guys are actually seeing, and I think this has been part of the team too, just an improvement in mix within HVP and getting more towards the -- up and to the right until the NovaPure and higher-margin HVP components. Are you seeing that dynamic continue as well? Robert McMahon: Larry, I appreciate the feedback. And to your question on gross margin, yes, that certainly is an element of it. When you look at our gross margin despite the incentive fee, we were actually up year-on-year 120 basis points. That was up almost 300 basis points. If you take that out kind of on a like-for-like basis and really the proprietary business, our HVP component business drove that. So what we're seeing is not only the investments that we made over the last couple of years being able to be filled and that capacity driving and you can imagine with the fixed installed base, the incremental margins are quite nice from that standpoint as it goes through the factory. But then as you're having these higher-value products there, you're driving higher ASP products through the facilities. And I think you see that, that's a very positive mix standpoint. The team has also done a very good job of driving down costs and driving up efficiencies. If I think about scrap and our yields, those are also areas of focus that the teams are really driving and I think as we talked about earlier, I think that we've got a multiyear opportunity from that standpoint. And then also, one of the areas is around also being much more focused on some of the raw material input costs. We're building out capabilities in our sourcing organization, working closely with our supply chain as well as streamlining some of the production traveling of our -- some of our products before they get to customers. So there's a number of elements, I think, that are in the next several years that I feel that we have an opportunity to continue to drive that gross margin opportunity Operator: Our next question comes from Doug Schenkel with Wolfe Research. Douglas Schenkel: Two quick topics I want to touch on. One is just a question on Q4 guidance and then one is on really visibility heading into next year. So on the fourth quarter, I want to confirm that you essentially bumped up guidance by the magnitude of the revenue beat. And if so, were there any timing dynamics in the third quarter that held you back from bumping up guidance more? Or was this just trying to be conservative in a period of continued uncertainty. So that's the first topic. The second is risk and visibility as a topic. So part of the attraction for a long time of West for investors has been that this has been a great sleep at night story, a steady compounder last year, with that in mind, I think the company and certainly the investment community were surprised by the roll-off of the incentive payments and drug delivery and also the changes in contract manufacturing. How would you characterize anything resembling that category of risk heading into year-end? I would guess you feel pretty good about it, but I just want to give you an opportunity to kind of tell us where we should all feel better about this getting back to be in the old West again? Robert McMahon: Yes, I'll start, Doug, and on the Q4 guidance, don't read anything into that. We don't believe that there was any material pull forward when we look at it, actually, if you look at it on a 2-year stack basis, Q4 is actually an acceleration but there's also an element of prudence that even given the market dynamics outside that we want to make sure that we feel good about that, and we do. And so we've got some good momentum there and I'll just leave it at that. Maybe I'll start with the second piece and then turn it over to Eric as well. I think this is an area that I'm focused on intently. And I don't want to declare victory just yet in terms of that. And we -- but we do feel good about some of the trends. I would say we have -- in our -- we're committed to improving and providing more transparency, which we'll continue to do over time. But the market is still dynamic. I think we are improving our visibility. But the market still has some variables that we're working through our business planning process right now, and that's why we wanted to provide some puts and takes to what we know today for next year. And I think the long-term trends are positive. It's the pace of when we get back there. And I'll turn it over to Eric to maybe add anything. Eric Green: Yes. No, thanks, Bob. And Doug, it's a great question because that's critical for historically what has been consistently from a demand profile perspective, pretty consistent of the market -- the injectable market space. We believe, based on the work that we have been doing and Bob did touch on this, is that going deeper in the different segments with clear accountability and ownership has given us better line of sight of our markets, obviously, engage with our customers, getting closer to them, which we observed during the pandemic period, we needed to do more of. And I'm confident we're making good headway and traction in that direction. The underlying market conditions continue to improve, considering where we were a while back. But your point is we are laser-focused on making sure we are reducing those risks and increase in visibility. And also providing more of that lens as we engage in these conversations. Operator: Our next question comes from Mac Etoch with Stephens Inc. Steven Etoch: Just one on delivery license, relatively flat year-over-year, excluding the incentive fee. And I think you highlighted some improving economics ahead of the automated line coming on in 2026. So, can you just highlight some of the various aspects driving performance during the quarter and the variables that you're seeing on the top line of margins as well? Eric Green: Yes. No, absolutely. Thanks for the question. When we look at the direct delivery device business, the area look at it holistically, the entire portfolio, we have administration systems in that category. We have Crystal Zenith and obviously, injectable devices like SmartDose. And I'm really pleased with the progress we're going to have throughout the year for our Crystal Zenith and also our admin systems. The area of focus has been on SmartDose to drive two levers with urgency. One is to drive down costs and improve efficiencies. And that -- the progress the team has made is on track with our expectations for this year, and we're seeing an improved margin performance or profitability quarter-over-quarter. There's more to come. With the automation that we are -- kind of being commercializing in early 2026, we're just going through the validation process as we speak. And we're confident that we'll be able to drive even more cost out of the -- out of the product itself. The second is to continue to look at alternative options to create even more value. with that product. And we will communicate once we can, but the final decision, but we're making progress in both areas. Robert McMahon: Yes. And I would just add, Mac, on that. If you look at it on a quarterly basis sequentially, is it where we expected it to. So we feel good about that and that work that Eric just talked about, we're looking at both of those paths with urgency and focus. And so I feel good that each quarter, the economics have improved in delivery devices, as we said in our prepared remarks, and there's more room to go, but we're also making sure that we're looking at this for the long term and evaluating what's the best value for shareholders. Operator: Our next question comes from Matt Larew with William Blair. Matthew Larew: Kind of a 2-part question around your manufacturing network. So after a couple of years of pressure on free cash flow and obviously an elevated CapEx spend for you, you've had a significant improvement in free cash this year as CapEx has normalized down to around 9%. So Bob, you referred a couple of times the opportunity for network optimization, but there's then the balance of obviously customers thinking about regionalization of manufacturing, some of the policy dynamics and obviously, still significant investment in HVP. So just as you think about maybe that balance of network optimization versus making sure you have capacity available for customers. But how are you thinking about the levels of CapEx needed to support growth, that'd be the first part. The second part is there's been a number of recent headlines around pharma tariffs and MFN. And I realize your business is tied to commercial volumes, not necessarily earlier-stage R&D how tuned in are your customers to those headlines in terms of influencing investment decisions versus sort of -- the train has left the station in terms of realization of their manufacturing. Eric Green: Yes, Matt, thanks for the question. Let me start with the CapEx that we are -- we have spent. But you're absolutely correct. Our focus really is on the high-value product components with our five center of excellence that we have, obviously, in Asia, Europe and U.S. Fortunately, over time, we have built the capacity and the capabilities to be able to support our global customers from multiple sites. So as you think about being more regionalized, we will support our customers in all markets. We're very well positioned from an infrastructure perspective. You're correct. As volumes increase, we will need to layer in additional capital, but we do feel comfortable that we're going to be back to the 6% to 8% of sales corridor for CapEx, but heavily weighted towards the high-value product components part of our business. And again, the concept of the center of excellence giving us that network capability, but also more of a campus site perspective versus doing more greenfield. I'll talk a little briefly on the -- on the second question you posed, and I'll turn it over to Bob to add any comments. But you're right. That conversation is active with our customers in the sense of what can we do to support our customers to drive down costs to support them. One is continue to leverage our global network. So there are a few cases where we could do tech transfers to move from one location to another geography to be more co-located with their end market. That's one opportunity that we are working with, but those do take around 12 to 18 months to complete and then to commercialize. But also I just want to comment. The products that we provide, the elastomer components that we provide are critical to the drug molecule, and they are less than 1% of the COGS of the drug. And so therefore, our focus is how can we help our customers drive better yields and efficiencies of their fill/finish process by providing more of the HVP services. So in that sense, we are working with our customers to provide additional services to improve the yield output from our -- for our customers. So it's an active dialogue. But for us, we're seeing less discussion about price, but more about making sure we're balanced from our global manufacturing perspective. Bob? Robert McMahon: Yes. Matt, I'll just add a couple of things. Obviously, that's one of the areas that's pretty dynamic when we talk about kind of the MFN here in the U.S. just recently, we haven't seen any change in our customer buying behavior. That's something that we'll continue to watch. But -- and on the other side, I actually think that, that's a potential lift of an overhang so that they can now move forward. And then the investments here that we're seeing in the U.S. we are seeing that -- we believe that's real. That's a multiyear kind of investment. But as we think about we're talking about kind of level loading, we've made a lot of investment in the U.S. for the COVID capabilities and capacity a couple of years ago. And so we're working very closely with those -- as those customers are building out additional capacity in the U.S. about this tech transfer that Eric was just talking about. So I think we've got good relationships with those customers. And I think we're well placed to be able to continue to invest. And I'll just want to reiterate what Eric said. We do think that we're going to continue to drive down our capital spend as a percent of revenue. but disproportionately invest behind our highest growth opportunities, which is an HVP. Operator: Our next question comes from Tucker Remmers with Jefferies. Unknown Analyst: I had another question on Annex 1. So talk about 2% contribution this year from Annex 1 projects. Can you break down how that split between those projects that are in a development or validation phase versus switches that have already been put in place and sort of hitting what I would call commercial production? Eric Green: Yes, great question. I would say if we look at the entire -- at the end of Q3, the number of open projects that we're currently working on, and the number of projects that convert into revenues are less than 40% with having converted since the duration of this project or this move towards Annex 1, so that kind of gives you a feel of as we ramp more new projects and they're rolling up. And we did mention earlier that some projects could be 3 to 4 quarters and a few others could be a 6 to 8 quarters. So it does depend on the scale of the project and the speed that our customers want to convert. Operator: And our next question comes from Luke Sergott with Barclays. Luke Sergott: Just wanted to ask here about the capital allocation. The first one of the hat tip to the transparency on the -- and the deck is beautiful. So given that you guys have like a pristine balance sheet right now, producing a lot of cash margins going the right way. Free cash flow seems to be picking back up. So update us on your capital allocation priorities, favoritism towards maybe a repo versus more bolt-on M&A? Robert McMahon: I appreciate the feedback. This is Bob. And you're hitting on one of the key priorities that I've got and talking with Eric and the rest of the team and actually just spoke with our Board about this I think there's an opportunity for us to better define and establish a capital policy. And to your point, with being blessed with such a strong balance sheet and our cash flows to be more active in using those cash flows to really drive the business. And so what I would say is stay tuned, but it is high on the list of opportunities that will help continue to grow the business over time. Operator: I'm showing no further questions at this time. I'd like to turn the call back over to John Sweeney for any further remarks. John Sweeney: Thank you all very much for joining us today on the call. An online archive is available at our website at westpharma.com in the Investor Relations section. That concludes the call. Thank you very much, everybody, and have a great day. Operator: Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Mobileye 3Q '25 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Galves. Mr. Galves, you may begin. Daniel Galves: Thank you. Hello, everyone, and welcome to Mobileye's Third Quarter 2025 Earnings Conference Call for the period ending September 27, 2025. Please note that today's discussion contains forward-looking statements based on the business environment as we currently see it. Such statements involve risks and uncertainties. Please refer to the accompanying press release, which includes additional information on the specific factors that could cause actual results to differ materially. Additionally, on this call, we will refer to both GAAP and non-GAAP figures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. Joining us on the call today are Professor Amnon Shashua, Mobileye's CEO and President; Moran Shemesh, Mobileye's CFO; and Nimrod Nehushtan, Mobileye's EVP of Business Development and Strategy. Thanks. And now I'll turn the call over to Amnon. Amnon Shashua: Hello, everyone, and thanks for joining our earnings call. Starting with the results. Q3 revenue of $504 million was up 4% year-over-year. The driving force was 8% EyeQ volume growth significantly outpacing the 1% growth in overall vehicle production among our top 10 customers in Q3. Operating cash flow was again a highlight. We generated $167 million of operating cash flow in Q3, well above net income. On a year-to-date basis, we have generated nearly $500 million of operating cash flow, up around 150% year-over-year. This reflects the cash generative nature of our business and our continued discipline in managing working capital. The core ADAS business is performing well, with volumes in very healthy range for the last 5 quarters and expected to do so again in Q4 based on our updated guidance. We again raised the midpoint of our full year outlook this time by 2% in terms of revenue and 11% in terms of adjusted operating income. Compared to our initial 2025 guidance, these increases are even more pronounced, 7% for revenue and 27% for operating income at the midpoint. Overall, we expect volumes to come in about 2 million units higher than our original guidance. This outperformance reflects a combination of stronger-than-expected launch activity, ADAS adoption growth and better than accepted results in China both from our shipments to Chinese OEMs and from the performance of our top 10 Western OEM customers in China. If we adjust our inventory digested in 2024, our 2025 volume growth is expected to outperform the production of our top 10 OEM customers globally by about 5 percentage points. We see continued momentum as EyeQ6 light is generating ADAS program wins at a high rate. So far this year, we already have been nominated for programs with future expected volumes well above our full year 2025 volume. We have added a new customer in Volvo. The growth potential in India is becoming increasingly clear as strengthening adoption trends and supportive regulatory environment. Additionally, we are seeing continued traction in adding REM to front-facing camera programs further reinforcing our base business. On the advanced product side, our position is differentiated in the fact that we are an OEM neutral platform that is cost-efficient and scalable with a credible technology path to eyes-off autonomy in both privately owned vehicles and robotaxis. All 4 of our advanced products surround ADAS, SuperVision, Chauffeur and Drive share common building blocks including the EyeQ6 high inference chip, substantial portions of our perception policy AI stacks and the REM crowded crowdsourcing driving intelligence and robust safety frameworks and the company's comprehensive data and validation infrastructure. The EyeQ6 high-based surround ADAS systems continue to develop as the next generation of standardized driving assist on high-volume vehicle platforms. This system addresses multiple objectives in a cost-efficient package. It's designed to meet stricter late-decade safety standards enables highway hands-free performance for lower cost and current systems and supports OEM goals to consolidate ECUs and to integrate technology on a single SoC. We have meaningful traction with a number of OEMs and very recently, received confirmation from a leading Western OEM that were nominated for a high-volume EyeQ6 high-based surround ADAS program across mass market vehicles. We continue to pursue a number of promising SuperVision and Chauffeur opportunities, although timing remains difficult to predict. The best way to ensure eventual new customers is to focus on execution of the SuperVision and Chauffeur production programs with Volkswagen Group, where we are first movers. Near-term execution includes major software drops in the coming few months that embodies significant innovation in AI. A few weeks ago, we received the first silicon sample of our next-generation SoC, the EyeQ7 high and all initial tests have been successful. EyeQ7 and its successor EyeQ8 now in design stages are designed for upgrading eyes-off autonomy to minds-off autonomy. Eyes-off systems is what Mobileye is bringing into production in early 2027 and also describes the current technological state of robotaxis. In both cases, there is a human either the driver or a teleoperator, that can resolve issues when needed. In the minds-off system, which we are targeting for 2029 and beyond, there is no human to resolve issues, and therefore, the driver can sleep and the robotaxi no longer needs teleoperators to intervene. This transition from eyes-off to minds-off is where EyeQ7 is going to play a meaningful role. More details will follow in the coming months. Turning to robotaxi. Our engagements are expanding through both Volkswagen and Holon, a division of Benteler. Once we remove safety drivers in our first U.S. city in 2026 and secure type approval for self-driving vehicles, the Volkswagen ID.Buzz and Holon urban shuttle in Europe, we anticipate geographic expansion. VW and Uber in Los Angeles, Lyft and Holon in the U.S. and multiple commercialization initiatives with Volkswagen and public transport operators across Europe. Additionally, we continue to get closer to naming an automaker and vehicle platform to complete the Lyft Marubeni value chain. That will enable preparations for commercialization in Dallas and other cities to accelerate. On the robotaxi technology front, we continued to outfit more of the ID.Buzz test fleet with a full EyeQ6 high-based production hardware and have successfully completed the first closed-loop testing with the Holon production vehicle. The MTBF performance is tracking well against the KPIs that are required to remove safety drivers in 2026 and begin commercialization. Everything continues on track. In summary, the opportunity set in front of us today is larger, broader and more urgent than it was when we went public in 2022. Near-term volumes remained strong. The demand for higher performance at lower cost is intensifying and eyes-off capability whether for personal cars or robotaxi is no longer seen as an experimental science project, but as an achievable and commercially viable reality. This is exactly where Mobileye excels. I'll now turn the call over to Moran. Moran Rojansky: Thank you, Amnon, and thanks for joining the call, everyone. Before I begin, please be aware that all my comments on profitability may refer to non-GAAP measurements. The primary exclusion in Mobileye's non-GAAP numbers is amortization of intangible assets, which is mainly related to Intel's acquisition of Mobileye in 2017. We also exclude stock-based compensation. Our Q3 results exceeded the color we provided on the Q2 2025 earnings call in July, with revenue up 4% year-over-year versus our prior outlook of roughly flat. The upside was a combination of EyeQ volume, which came in at 9.2 million units compared to the outlook of 8.7 million to 9.3 million and SuperVision volume, which was higher than 20,000 units in the quarter, a meaningful uptick versus Q2. Just a quick note on SuperVision. Volumes were higher than prior quarters, but should not be viewed as establishing a new higher run rate. We now expect around 50,000 units this year. This full year number is significantly higher than our original expectations and a good reflection on what we see as a sustainable run rate heading into next year for the current first generation programs applied to ZEEKR export volume and Polestar 4. These programs remain relatively small within our overall business and quarterly volumes can fluctuate as they have this year. Our gross margin declined by just over 100 basis points year-over-year basis. EyeQ ASP was down about $0.50 year-over-year. This was primarily due to higher volume of Chinese OEMs, where pricing remains a significant headwind, as we've discussed before. Another factor was higher volume of ADAS program based on EyeQ5 which carry lower gross margin due to higher costs. EyeQ5 currently represents about 10% of volume and is expected to peak to around 15% next year, creating some continued pressure. Beginning in 2027 and the more profitable EyeQ6 Lite significantly ramps up EyeQ5 share will go down, providing a tailwind to margins. Operating expenses were up 4% year-over-year, which was a bit higher than what we expected due to timing of engineering reimbursement. We continue to expect overall non-GAAP operating expenses in 2025 to be up about 7% to just below $1 billion. As Amnon mentioned, operating cash flow was $489 million through the first 3 quarters of the year. This is primarily due to strong cash flow from the core business. However, we've also managed tight control over the working capital accounts, particularly our balance sheet inventory which came down by about $100 million year-to-date. We are now well aligned with our 6-month target for balance sheet inventory, and we expect working capital to be more cash natural going forward. Turning to full year guidance. We are increasing the revenue midpoint by 2% and the adjusted operating income midpoint by 11%. Our full year outlook is based on EyeQ volumes of 35 million to 35.5 million, up from 33.5 million to 35.5 million. Earlier in the year, we maintained an unusually wide range to reflect macro uncertainty and ensure conservatism. Without condition now better clarified, we have greater confidence in narrowing the range and increasing the midpoint. Giving 27.3 million units year-to-date, the implied outlook for Q4 is 7.7 million to 8.2 million. At this point in the year, we expect that Q4 volume will end at the higher end of the guidance. We retained a small buffer to account for any unforeseen year-end logistical issues or OEM production constraints to stay cautious. In terms of understanding the current run rate of volume, we think it is best to look at the full year. This is particularly the case in 2025 where normal seasonality was affected somewhat by tariff timing and expectations. Typically, global production is stronger in the second half than the first, but that pattern did not hold this year. Bottom line is the lower Q4 volume compared to Q3 and Q2 should not be interpreted as a trend. It simply reflects an alignment of supply and demand across the full year to ensure customers enter 2026 with lean inventories. As noted earlier, SuperVision volumes are tracking ahead of expectations, and we are modestly raising the outlook to low 50,000 units at the midpoint versus prior outlook of around 40,000 and original outlook in the low 20,000. We expect full year gross margin to be right around 68%, implying a slight uptick in Q4 versus Q3. The full year is expected to be up about 30 basis points year-over-year, pretty consistent with our July commentary. Operating expenses, as noted earlier, are expected to be up 7% year-over-year to just below $1 billion, in line with our original outlook. Thank you, and we will now take your questions. Operator: [Operator Instructions] Our first question comes from the line of Aaron Rakers with Wells Fargo. Aaron Rakers: I guess the first question is, you mentioned a Western OEM design win that you've achieved. Can you just remind us again, is that additive to the prior kind of development engagement status that you've outlined previously? Is that reflective of the prior Western OEM that was on that list? And just anything around timing of volume contributions? And then I have a quick follow-up. Nimrod Nehushtan: So to be clear, the confirmation for a nomination that Amnon referred to in his remarks is for a second surround ADAS program. We have announced previously in the year our first surround ADAS program. This is the second from a second OEM, a leading Western OEM with significant volumes with multiple vehicle models, and we expect this to be a significant portion of that OEM's vehicle lineup in the future. And we will disclose more details on this in the next few weeks. Daniel Galves: Yes. And Aaron, this is Dan. You might be referring to the IR Day, the Investor Day slide from last year. It is one of the OEMs that was on that chart for surround ADAS. Aaron Rakers: Yes. I appreciate that. And then talk a little bit about gross margin. You highlighted the fact that EyeQ5 volumes at 10% would go to 15%, and that would continue to be a headwind to gross margin. As the EyeQ6 volumes start to ramp, how do we think about the delta or the gross margin inflection as we think about 2026 between those platforms? Moran Rojansky: Yes. So just to highlight that EyeQ5 volume doesn't have a lot of running programs or production programs, and we don't anticipate any new programs with EyeQ5. So all the new launches we have with EyeQ6 Lite. The profitability is not that different between them. It's just that it has a bit lower profitability than our EyeQ4. As for EyeQ6 that, again, is launching for our new programs, the profitability is, of course, the gross margin is higher than EyeQ5 and very similar to EyeQ4 that we are currently selling. So it's not some significant headwind. It's just a matter of platforms or specific of vehicle launches, mix between products, sometimes some of the projects ramp more, some of -- it's not something you can anticipate, but it's not very dramatic in terms of gross margin fluctuations. Daniel Galves: Exactly. Yes. I don't think we're going to specify like the impact, but the bottom line is EyeQ5 like percentage of total will be the highest next year, around 15%, so not too meaningful versus this year and then start to go down. Operator: Our next question comes from the line of Edison Yu with Deutsche Bank. Yan Dong: This is Winnie on for Edison. My first question is on the 4Q expectations. Just curious if there's any other factors that you're factoring into the market or recently, we've heard about the chip issue, whether you're baking that into the outlook? And then the second question is wondering if you can provide a bit more details around the Lyft and demo program, the launch time, the economics, et cetera. Daniel Galves: Yes. So I think on the Q4 volume, I think the point we're trying to make in the script is that you should look at the full year volume of kind of around 35.5% as the right number. Like when we're looking at '26, we are -- the starting point is 35.5%. It's not Q4 volume times 4. So there's really nothing going on specifically besides seasonality was different this year due to really, we think, because of the tariffs and trying to pull ahead some production into Q2 and Q3. So this is kind of exactly within expectations for us, shouldn't be seen as a trend. And I think that we see the trend of around $9 million a quarter. And that's -- there's -- in terms of [ Nexar ] we have not received any indications of request to reduce production, reduce shipments at all. In fact, if anything, it's the opposite. It's a very new situation. We don't -- in talking to customers, we don't expect any material impact in Q4, but we do have a bit of margin in the guidance versus the high end to account for that if there's a bit of lower production, but we don't expect it to affect Q4. Amnon Shashua: What was the second question, if you can repeat it? Yan Dong: It was on the Lyft and demo program, you can talk about the evolution to that win, the launch time and the economics. Nimrod Nehushtan: So if you refer to the Lyft robotaxi program, so we are working with Lyft and Marubeni and a vehicle producer on a robotaxi program in the U.S. We disclosed that the first city will be in Dallas-Fort Worth. We are now in advanced testing stages of this program, and it follows the leading program we have with Volkswagen Group for robotaxi activities in the U.S., and it's been tracking well. And the launch date will be disclosed in the near future. Operator: Our next question comes from the line of Joshua Buchalter with TD Cowen. Joshua Buchalter: I wanted to ask about the metric you gave about normalizing for inventory. I think you said you grew volumes 5% more than your top 10 customers. Is this sort of a rule of thumb we should be using of your expectations for sort of normalized unit growth in '26 and beyond as you see ADAS market and attach rates develop and then we layer in ASPs more. I'd just be curious to hear if that's like sort of a normalized growth rate you think is the right level for us to benchmark to on a unit basis? Daniel Galves: Yes. I think the key here is that investors and analysts should focus on kind of the expected volume of our top 10 customers, which are mostly legacy OEMs and has been a bit below kind of the overall vehicle production for the last few years, not meaningfully, but a bit below. And then we would expect to grow faster than in volume and revenue, we would expect to grow faster than that level because of things like ADAS adoption growth because of things like growing share within some of those customers because of things like emerging markets like India. So this year, we consider the performance pretty good. We grew about 5 percentage points faster than the top 10 OEMs, which were down 2% to 3%. And we're not going to put a precise number on what we think it should be going forward, but something in that range is probably fair. Joshua Buchalter: Got it. Dan, I appreciate the color there. And for my follow-up, so it sounds like you're speaking to engagements for eyes-off continuing to move forward. And it does seem like there is a good amount of momentum across the industry from both the robotaxi side and in consumer passenger vehicles for eyes-off features. I guess what do you think the OEMs need to see that gets them across the line in these engagements and I guess, any time line you would expect to be able to -- a reasonable time line to expect where you think you will be able to announce some additional Chauffeur or even SuperVision wins? Amnon Shashua: I think the focus now is execution. We are with the SuperVision, the hardware is on the C sample stage, which is very advanced from a production level. We have a number of meaningful software drops in the coming 6 months. So I believe that somewhere in the first half of 2026, we'll be in a very good position of being very close to production ready with the platforms of SuperVision and Chauffeur. And that should enable us to get more exposures to new program -- new program wins. So the focus of the company in that area is execution also in the robotaxi with a driver is execution. So really 2026 is an execution year and not necessarily focusing on bringing new business, at least not in the first half of the year. Nimrod Nehushtan: If I can add color to what Amnon said, in the last 1.5 years, we've been working simultaneously on SuperVision, Chauffeur robotaxi for execution in the past, let's say, 8 months, we've added also surround ADAS production program that execution process. Right now, we are on track with the original time lines of all of these programs, and we are in B sample or C sample hardware and stable platforms, which is an important achievement in order to maintain the original time line. And now we're focusing on software iterations, AI innovation and integrating the latest AI stack into these platforms. Doing so simultaneously is a significant achievement for us. And we believe that now within the next few months of showing a very mature production platform that uses production hardware with the latest AI technologies that shows meaningful performance improvement compared to what exists today in the industry is the next big thing for us to show in general to our customers and also for new engagements, and that's expected within months from today. Operator: Our next question comes from the line of Chris McNally with Evercore ISI. Chris McNally: Amnon, I wanted to dive in on the Surround and congratulations on the big win. It sounds like there's a different technology path that maybe you and the industry had thought a couple of years ago where supervision would sort of be the kind of a walkway to higher forms of Chauffeur and eyes-off and it sounds like given the industry has been a little bit slower on that front, maybe how much they would charge for it, et cetera, it seems like Surround is now that technology gateway. And I just would love to understand from your standpoint, is it sounds like a must for the OEM to hit 2029 regs, meaning they really can't do this with an internal solution or even the solution that you've been providing them originally with the $50 chip. So is this sort of -- is this one of the reasons you're seeing so much traction this is the logical step up of your Level 2 customers to Surround? Amnon Shashua: Okay. So I'll let Nimrod first answer and then I'll complete if necessary. Nimrod Nehushtan: Chris, so I think Surround ADAS is a very important category for OEMs because it's not just about new user experiences, but also adhering to emerging regulation in developed markets. And it's a very, very cost-optimized product segment. because it's designed for high-volume vehicles and for pretty much $20,000, $30,000 vehicles and above, it requires very, very efficient design and a close software hardware integration. Mobileye is known to have a very efficient chip and very efficient software, and we can achieve pretty much, we think, the most competitive price point for this product category. And from an OEM standpoint, thinking about whether you want to buy or build a product in that category, it's not just about understanding AI or different software technologies, can you get to such a level of efficiency on vehicles that are in tens of millions per year, if you fail, you may jeopardize your core business. And so forcing an existing available solution that is very mature is the safe choice. And maybe if you're into in-house development, you can focus this on the higher end of applications and smaller volumes, maybe 1% of your cars and then if it fails or is significantly delayed, there is no damage done to the core cash cow of the company. And that's where we see their interest just yesterday, GM announced their Level 3 eyes-off development. That is designed for a very specific vehicle category. I think they disclosed the type of vehicle, and it's a very high price point. As you all know, GM sells cars in $30,000, $40,000 also. Obviously, that solution is not appropriate for these vehicle price points. And it may make sense for them to find a proven, reliable, trustworthy high-performing, cost-efficient solution for the vast majority of volumes, while they focus on the high end. Amnon Shashua: And I think I'll continue. I think likewise going into Level 2 plus with 11 cameras, our SuperVision, we are working very diligently on very innovative cost reduction schemes. So looking into 2028 time frames and beyond, we can offer significant price reduction on SuperVision. The next level that OEMs are considering are eyes-off systems. And there, as I said before, execution is the key. If we launch an eyes-off system, and that's what we are planning to do in 2027 with Audi, that will be kind of an inflection point. Seeing such a product at work passing through all the regulation, the sub certification and regulatory approvals, passing the MTBF bar that is needed to have eyes-off, this is a significant achievement. Once we pass that bar, I think that will be a big inflection point. Nimrod Nehushtan: Yes. I think that there is no question beyond or about the fact that eyes-off driving and later mind-off driving is the ultimate value proposition for consumers. And we think that most OEMs are very interested and very bullish on this sort of proposition. The question is, is now the right time given the maturity of the technology and the available system is what costs for them to go all in with a partner. Today in the industry outside of China, there is no other technology provider that is working closely on the entire system, hardware, software, silicon, AI -- receiving approvals for testing and going through the ropes of homologation and all the necessary check boxes other than Mobileye with Audi. And all eyes are on us. And hopefully, within months, we'll show more and more evidence of the maturity of the technology getting there. And as Amnon said, we believe that will be a significant inflection point for that product. Chris McNally: Nimrod, my only clarification or a summary of what you said is super helpful. So is it logical then to think like your first customer, which is VW, that basically your target audience it's not going to be 100%. But your target audience for Surround is existing basic ADAS customers that now need to convert for 2029 and so your second customer, as an example, upgrades ADAS into Surround. And then there's a future path beyond that to eyes-off? Nimrod Nehushtan: That's exactly the case in that nomination we disclosed. It's an upgrade from EyeQ6 Lite to EyeQ6 High. That's -- that's essentially the decision that OEM made. And so that's the right summary of how we see things. Operator: Our next question comes from the line of Mark Delaney with Goldman Sachs. Mark Delaney: I hope you can double-click on the DRIVE opportunity with Lyft and Marubeni. I believe the company said today, I think it can name the OEM partner for that engagement soon. So should investors assume that the OEM partner is already effectively finalized? Or is there still uncertainty as to which OEM Mobileye is going to partner with? And if there is still uncertainty, what would the time frame need to be to line up the OEM partner in order to meet the 2026 start of operations objective? Amnon Shashua: So there's no uncertainty who that OEM is, but it's not finalized yet. So I cannot say with 100% guarantee that it will be finalized, but it looks on track and it looks good. I would say that this is in parallel to our existing activity with Volkswagen of the ID.Buzz and with the Holon platform with Benteler. So we have quite a lot of scale opportunity with the existing relationships. We have -- this is why I mentioned before that it really focuses execution. Scale and business will come once execution is there. Nimrod you want to add something? Nimrod Nehushtan: Just one more clarification, Mark. That vehicle provider, it's not that we will just start working with that vehicle OEM once we will finalize the agreement. In the past almost 18 months, we've been working closely between Marubeni, that vehicle OEM and Mobileye on creating multiple prototype vehicles and then working on the actual vehicle platform itself, integrating our self-driving system with the sensors, and it's all pretty much -- we have numerous vehicles that are equipped with all the sensors and all the compute infrastructure needed as if it's like an ID.Buzz we do in our leading program, and so we are starting -- we're hitting the ground running once it will be finalized and disclosed. It's a natural transition into serious development towards commercial launch. Daniel Galves: Yes. And I would just add one more point here is that if there's a bit of wait and see on consumer-owned high-end eyes-on and eyes-off technology, robotaxi is exactly the opposite. There's so much activity, but the key is removing the safety driver and starting to commercialize. And that's our main priority right now. And the core technology is the same, no matter what the vehicle platform is. There's integration work to be done, but it's the core technology that's being worked on. And once we kind of can remove the safety driver, then we can start to commercialize and scale. Mark Delaney: That's all very helpful. My follow-up question is also on Drive with VW and the ID.Buzz, you mentioned you're tracking to be driver out next year. Could you just speak a bit more on what still needs to happen in order to take the driver out next year? And any sense of when within the year that milestone may occur? Amnon Shashua: Well, there are a number of milestones. One is the readiness of the vehicle that should be ready in the next weeks or a few months. And second is the MTBF KPIs, which we are tracking, that are on track. And we believe that in the first half of 2026 we can start removing the safety driver in one city in the U.S. and to prepare for a commercial deployment later in the year and beginning of 2027. Operator: Our next question comes from the line of Joe Spak with UBS. Joseph Spak: Just going back to the surround ADAS nomination. I was wondering if you guys could provide a little bit of color as to sort of what got the customer over the line, maybe a little bit of detail on the level of integration that you were doing versus maybe the automaker is DXP involved? And then just in terms of the rollout, is this a case where we need to wait for new model launches? Or can this product be placed on refreshes? Nimrod Nehushtan: I will take this, Joe. So we think the driving forces behind this decision to upgrade from EyeQ6 Lite to EyeQ6 High was about basically, the standard sensor set for that OEM is at minimum 5 cameras and 5 radars. And in the older days, these -- some of these cameras was used just for top tier visualization when you do parking, for example, for the human driver. And just the front camera was used for ADAS and the radars were used for ADAS and that created a very inefficient design. And that OEM decided to create a more consolidated ECU architecture in which you can think of this as somewhat of a -- like simplifying the architecture and then routing all the sensors to the EyeQ, the EyeQ6 High is powerful to process all of these sensors and creates a much richer sensing state, a much richer user offering. For example, hands-free driving in highways, supporting all of the most cutting-edge advanced ADAS requirements in NCAP and so on, as we've mentioned. So it's about system simplification consolidating efforts and routing all sensors that already exist in the car to a more powerful chip, they can process them more intelligently and offer better user experience. The added cost for that OEM was very reasonable compared to the added value as evidenced by their decision. So it's not like a 10x more expensive chip in order to get that value, it's as we've disclosed in the past, it's 2 to 3x more expensive for that silicon component generally speaking. So I think it makes -- as they said it, it makes too much sense not to make this transition. We are also discussing about potential future -- that's with other OEMs but potential future consolidations like with parking applications and driver monitoring system and ADAS and hands-free driving all can be processed and provided by Mobileye on the EyeQ6 High chip with a very attractive cost and I think that's a compelling proposition for OEMs. And regarding your question about vehicle launches, it's a new architecture. And in parallel, we work on other, let's say, more existing architectures as well. So it's a combination of the two. Joseph Spak: And then I guess just as a follow-up, I think in the prior update there were maybe 3 or 4 other sort of advanced engagements about Surround. I was wondering if you could just get an update there. And maybe going off of some of the commentary on Chris' question, like have you seen sort of more initial maybe SuperVision move more towards surround in the near term? Nimrod Nehushtan: So I wouldn't say it's SuperVision engagements moving towards around. It's more about base ADAS engagement expanding to Surround from what we're seeing. The first 2 design wins we have for Surround ADAS are examples of OEMs with high volumes, the sell cars at relatively low vehicle price points that have, in the past, sourced a front camera solution and these examples decided to source Surround ADAS solution for the same vehicle category. So I think that's the evidence that we're basing our assessment on. And yes, we have a lot of engagement. Mobileye works with pretty much all of the OEMs on a recurring basis on what we have to offer, and we see a lot of interest. And I think we will -- we prefer to disclose when we have nominations and it's concrete like we did today. But we remain confident in the strength of our outlook. Operator: Our next question comes from the line of Shreyas Patil with Wolfe Research. Shreyas Patil: Maybe just to follow up on the earlier one. How do you think about the competitive landscape when it comes to Surround ADAS? I think there are 3 or 4 other major suppliers that are trying to win awards here as well. And maybe just to give a little bit of background on the bidding process that went into securing this award, the second award that you just announced. Amnon Shashua: We're talking about a very highly competitive in terms of cost, cost optimized product. So all the high-performance chips that you hear the price point is not relevant for such a product. Our chip, the EyeQ6 High is both the core chip for our AV, for example, in SuperVision, we have 2 of those chips and in Drive we have 4 of those chips and in Chauffeur 3. But one chip is highly cost optimized, and we can meet the cost desires of OEMs with our system on chip that can process all those multiple sensors, 5, 6 or 7 cameras and 5 radars and ultrasonic and so forth. So we're talking about the game in which cost is highly, highly critical. So we have first mover advantage. So we were the first to receive nomination with the Volkswagen Group on Surround ADAS. And the new win of today shows that we are successful in leveraging our first-mover advantage. So it's all about here cost and performance, but cost is critical because we're talking about high-volume vehicle categories. And so it's not that there is no competition, but we do have first-mover advantage, and we are showing that we can leverage that. Yes, Nimrod go ahead. Nimrod Nehushtan: Another aspect of efficiency that we are -- should be considered beyond just the price, our EyeQ6 High chip does not have any limitation in deploying pretty much all of the state-of-the-art AI architectures while being very efficient in power consumption. This offers us -- this allows us to offer a solution that is passive cooled, for example, and does not require liquid cooling. So this is a small technical detail, but for the OEMs, it's a big difference in overall system cost in the complexity of the system, combustion engine vehicles may not have liquid cooling available, for example. Other competitors are trying to rely on more -- because the underlying product requires sophisticated processing of sensors and using some of the AI technologies, other competitors may try to use a high-performance chip for that product category. And beyond just the price disadvantage, it also complicates the overall system. So this is another element that is hard to compete with the low power consumption of our chip without compromising performance. Amnon Shashua: Yes, I'll just give a color in terms of performance of the EyeQ6 High. Our internal benchmarks running on both convolutional METs and vision transformers show that we are on par and in many cases, better than the Orin-X, which is now the choice of competition when OEMs are considering the Level 2+ systems. But at a price point, which is less than 25% of it. So this gives us a great advantage. On one hand, we have a high-performance chip, which is on par with the latest high-performing chips in the automotive industry. On the other hand with a cost structure and power consumption constraints that are way, way more appealing. Shreyas Patil: Okay. That's really helpful. And then maybe, Amnon, I think last quarter, you talked about Drive potentially becoming a more material revenue contributor by 2027. Wondering if maybe you can expand on that a little bit. And you've talked about in the past at a relatively high upfront revenue stream, maybe $40,000 to $45,000? How should we think about the rate at which you can bring that down, especially as robotaxi operators are looking to bring down vehicle costs to improve overall unit economics? Amnon Shashua: Our economics from every robotaxi is comprised of both onetime fee and revenue sharing on price per mile. And over time, we will kind of change the equation, maybe reduce the onetime fee, increase the cost per mile. So we both will have a recurring revenue and also the onetime fee of the system. With the robotaxi, it's really just execution because the current contracts that we have with the existing partners they talk about many tens of thousands of vehicles in the end of the decade. Just to give you a proportion, today's very, very successful Waymo is based on 3,000 vehicles. So it's really just a matter of execution. If we execute, we execute our plans of removing the driver during the first half of 2026 prepare this for commercialization beginning of 2027, the volume is there and in very, very big numbers. Daniel Galves: And in terms of the upfront cost, we have we have the room to switch around upfront cost versus recurring revenue because we have low costs in general. So we can stay profitable on the upfront cost down quite a bit and kind of replace that with more recurring revenue. Operator: Our next question comes from the line of Luke Junk with Baird. Luke Junk: I want to stick with robotaxi. We've talked a lot about U.S. robotaxi and Driver Out this morning. Hoping we could get an update on progress towards Driver Out in Europe as well, especially relative to the different regulatory homologation there and just maybe Europe versus U.S. dynamics in general right now for Mobileye. Amnon Shashua: Yes. So there are differences between Europe and the U.S. U.S. is mostly a self-certification process which we're doing. And we have today, close to 100 vehicles driving in the 3 locations in the U.S. for testing and working with additional carmakers or additional robotaxi platforms as mentioned, expanding that further. In Europe, we have an equivalent, let's say, volume of vehicles. The process for launching commercially is around -- is more about homologation and engaging with regulatory bodies in advance before you can commercially launch. We are doing this process alongside Volkswagen Group that are directly engaging with the German government. Just to add color on this, in the last IAA conference in Munich, we had a chance to meet the German chancellor who visited the Mobileye booth, and he also participated in a test trial with our ID.Buzz vehicle in Hamburg, and he was very impressed, he made remarks. It was covered all over the German media, and he made a very interesting remark about how Germany wants to be the leading country in Europe for autonomous driving, that he believes the time is now that our funds by the German government that should be allocated to accelerate this as much as possible. And he was very happy to see the successful collaboration between Volkswagen and Mobileye on this, and it's all covered in the German news so there is nothing confidential in what it I just said. And we think that we have good tailwinds to engage with the German government, specifically, and we plan to launch first in Germany. In Munich, in Hamburg and Berlin are the first 3 cities and we have good support, good alignment working with Volkswagen on that. We think it raises the entry barrier for other competitors when they want to enter the European market. So it's -- I think, again, as the first mover advantage by collaborating with an OEM at Volkswagen that has good ties with the German government, which really helps us in this situation. Luke Junk: And then for my follow-up, Amnon, you mentioned just a wrinkle in terms of more OEMs adding REM to front-facing programs, just curious your thoughts on that. Is it mainly around increasing the data collection? Could it be maybe a precursor of something in terms of future advanced product engagements with those customers as well? Amnon Shashua: So it's both for data collection, what we call harvesting. We have more OEMs using REM for harvesting and that's a precursor to also using REM for hands-free driving. Maybe Nimrod, do you want to add more? Nimrod Nehushtan: Yes. We recently signed with a new OEM for one of the bigger OEMs in the world that has significant volumes, and that's designed to provide significant volumes for harvesting globally and also use the REM database to improve the performance of the front-facing camera. It is for us today, the strategic value is mostly about expanding the OEM pool that uploads data. This data is important for us not just to use REM database explicitly as one of our moats, as we mentioned many times in the past, but also it's -- we use this very elegantly in our AI training and development. And that's something that maybe we'll share more details on in the future. But it is a very significant competitive advantage and expanding by being able to offer much better performance with not significant price increase OEMs of for front cameras, getting more data from multiple OEMs in millions. I think today, we have more than 7 million vehicles globally uploading data, more than 2 million vehicles in the U.S. alone. Europe is a similar number, also in Japan and Korea and soon in India and so on. So it's really a good global coverage but it is also diverse in terms of the type of OEM, type of vehicles, a number of OEMs. So we feel very comfortable with the strength of harvesting. Operator: Our next question comes from the line of Dan Levy with Barclays. Dan Levy: I wanted to just follow up on the prior question first and on the driver out, specifically in the U.S. for some of the programs you had, I know you said it was a self-certification process, maybe you can just go into maybe what are some of the gating factors that you need to see from a technical side to get comfortable to actually pull the driver? And what is the expected timing on driver out? Amnon Shashua: In terms of expected timing, we said it's going to be the first half of 2026 in one city in the U.S. In terms of the technical milestones, now we have a very elaborated safety program. It's called the PGF that we talked about in the past IR meetings and at the CES and we made that public also in terms of an academic paper that we published around it. And also in terms of mileage driven in order to prove to ourselves what is the MTBF. So together with ADMT which is the daughter company of Volkswagen, who was responsible for this program, we have agreed on MTBF milestones per type of accident. So it's not just one number. There are a number of different types of accidents. What is the MTBF, and we're tracking those numbers. And the trajectory that we see gives us confidence that we can achieve that by the first half of 2026. Dan Levy: Great. As a follow-up, on Tesla's call last night, Elon talked quite a bit about efforts with AI, their AI5 chip and all of the efforts in design and the strength of the performance, really emphasizing this, I think, is a key advantage. So -- and I think you've talked about this on the call here and more broadly. But as it relates to EyeQ6 and eventually EyeQ7, can you maybe just remind us to what extent the engagements with customers are looking at the strength of your SoC design, how that stacks up versus some of the other players? And for those that are maybe SoC agnostic, bring your own silicon, to what extent you're seeing customers actually leaning into your solution because of the SoC? Amnon Shashua: Well, I think the first question that you need to ask is why do you need more compute? And Tesla's approach and Mobileye's approach are different. Tesla is relying on a single sensor modality, which is cameras, omni cameras. And therefore, there are this bias variance in machine learning, you want to lower the variance, you need more and more data and more and more compute in order to bring the variance down to a point in which the MTBF is high enough. And the MTBF of Tesla's FSDs, just based on the public record of the FSD tracker, is orders of magnitude away from the bar that you need to pass in order to be unsupervised. Therefore, the requirement of significant more compute and significant more data is very, very intense and hence, the AI fight. Mobileye's approach relies also on redundancy. So we are doubling down on computer vision, on cameras and bringing the camera processing MTBF to be very high, but we are also relying on imaging radars, relying also on a front-facing LiDAR for eyes-off. So when you have redundancy, it's a different equation. And this is our PGF framework for creating profusing redundant subsystems. So then in our context, the question is, if with the EyeQ6 High, we are going to launch eyes-off at a very, very cost-optimized platform, right? The Chauffeur has 3 EyeQ6, and it's very, very -- it's highly cost optimized. The Drive 4 EyeQ6 is highly cost optimized, especially compared to platforms of robotaxis of today. So then the question is, why do we need more compute? Right, we replaced the EyeQ6 with EyeQ7. Is that going to reduce -- for what purpose? Is this to reduce price, not necessarily. So in our view, you need more compute to move from eyes-off to minds-off, and this is something that the industry are not talking about at all. All the targets around eyes-off, what is the bar to reach an eyes-off system. We are thinking of 0.29 and above on mind-off. And mind-off means that you need an AI that has very, very strong see understanding capabilities maybe it can work at lower frame rates. It doesn't have to be, let's say, 10 frames per second. Maybe it can be slower frame rate doesn't have to be doesn't have to replace the safety mechanism. So in our view, the EyeQ7 and EyeQ8 and all the additional compute comes on top of EyeQ6 and does not replace it. So it's a different concept. It's not that we have an EyeQ6 generation, and now we're replacing the EyeQ6 with EyeQ7 generation and then we'll replace EyeQ7 generation with EyeQ8, actually does not make sense when you are thinking about eyes-off systems because the validation process that is required to remove the driver is huge, is huge, right? So now you did all this validation process and now you are replacing your chip, and you have to do all those validation process again, doesn't make sense. So we have a completely different view of where compute is needed, where the added compute is needed. Daniel Galves: This will be our last question. Operator: Okay. Our final question is coming from Colin Rusch with Oppenheimer & Company. Colin Rusch: I just have a quick one around the cadence of your own chip design. Given some of the tools that we're seeing out there and the potential for accelerated time frames, are you seeing meaningful opportunities in terms of accelerating some of those development time lines and really being able to validate some of these more simplified designs that you guys are talking about? Amnon Shashua: Our chip portfolio covers both the very, very low end, like EyeQ6 Lite and the very high end. So EyeQ6 High, which is in production, is equivalent to, say, Orin-X in terms of looking at running programs like convolutional net ResNet, Vision net transformers, and the like. And EyeQ7 would compare to Thor in terms of its strength. And EyeQ8 is going to be -- which is now in the design stages and will be ready for 2029 production, is going to be 3, 4x stronger. And again, the EyeQ7 and EyeQ8 are responsible for the minds-off. It's not -- for the eyes-off we are set. We have the EyeQ6. We don't need to replace EyeQ6 with a more powerful chip to reach eyes-off capability or to reach a robotaxi -- robotaxi with teleoperators in the back office. The idea in robotaxi is to remove the teleoperators. This is why we want minds-off and the idea with consumer operated cars is to enable the driver to sleep while using the system. This is where we need more compute. And the cadence is once every 2 years. So this is the cadence and which is sufficient for the speed of where the industry is going and where technology is going. Daniel Galves: Colin, thanks for the question. I don't think we have time for a follow-up. I want to respect everyone's time. Operator: Thank you. This now concludes our question-and-answer session. I would like to turn the floor back over to management, Dan Galves for closing comments. Daniel Galves: Thanks, everyone, and looking forward to the Q4 call in January. Thank you. Have a good day. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good day, and welcome to the Allegion Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Vice President of Investor Relations, Josh Pokrzywinski. Please go ahead. Joshua Pokrzywinski: Thank you, Betsy. Good morning, everyone. Thank you for joining us for Allegion's Third Quarter 2025 Earnings Call. With me today are John Stone, President and Chief Executive Officer; and Mike Wagnes, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at investor.allegion.com. This call will be recorded and archived on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements that are made pursuant to the safe harbor provisions of federal securities law. Please see our most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements. Today's presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details. Please go to Slide 3, and I'll turn the call over to John. John Stone: Thanks, Josh. Good morning, everyone. Thanks for joining. Q3 was another strong quarter as we execute our long-term strategy and steadily deliver on our commitments to shareholders. I'm proud of our team's performance as we've remained agile in a dynamic operating environment. The double-digit revenue growth for the enterprise and continued segment margin expansion speaks to the resiliency of our model, our broad end market exposures and the depth of our relationships with channel partners and end users. We continue to take advantage of our business' strong cash generation, returning cash to shareholders and growing our business through accretive acquisitions. Year-to-date, we have allocated approximately $600 million to acquiring businesses consistent with the priorities we outlined at our Investor Day. As we approach year-end, the key market trends supporting our outlook are largely unchanged. Our team continues to execute well, and we are allocating capital for the long-term benefit of our shareholders. As such, we are raising our 2025 full year outlook for adjusted earnings per share to $8.10 to $8.20. I'll be back later to discuss the outlook and share some early views on markets for 2026. Please go to Slide 4. Let's take a look at capital allocation for the third quarter, starting with our investments for organic growth. In September, the Allegion team launched a new mid-tier commercial product line for Schlage, our Performance Series locks. These locks bring Schlage quality to more price points in nonresidential applications, giving us more ways to win in the aftermarket and building on the success of the mid-price point Von Duprin 70 Series exit devices released last year. Turning to M&A. Since we spoke at Q2 earnings, Allegion has announced 2 more acquisitions, UAP and Brisant. These U.K.-based businesses strengthen our product portfolio, including electronic locks in addition to enhancing our cost position. As discussed previously, the acquisitions of ELATEC, Gatewise and Waitwhile closed earlier in the third quarter. Allegion continues to be a dividend paying stock, and in the third quarter, this amounted to $0.51 per share or approximately $44 million. We did not repurchase shares in the quarter. And you can continue to expect Allegion to be balanced, consistent and disciplined with capital deployment over time with a clear priority of investing for profitable growth. Mike will now walk you through the third quarter financial results. Michael Wagnes: Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide #5. As John shared, our Q3 results reflect continued strong execution from the Allegion team, delivering double-digit revenue growth for the enterprise. Revenue for the third quarter was over $1 billion, an increase of 10.7% compared to 2024. Organic revenue increased 5.9% in the quarter as a result of favorable price and volume led by our Americas nonresidential business, where demand remains healthy. Q3 adjusted operating margin was 24.1%, down 10 basis points compared to last year. Both our segments had margin expansion which was offset by higher corporate expenses relative to the prior year comparable. Volume leverage and mix were accretive to margins. Additionally, price and productivity, net of inflation and investment was a tailwind of $2.2 million. Adjusted earnings per share of $2.30 increased $0.14 or 6.5% versus the prior year. Operational performance and accretive acquisitions contributed 10.6 points of EPS growth. This was partially offset by higher tax and interest and other. We still anticipate the full year tax rate to be in the range of 17% to 18%. Finally, year-to-date available cash flow was $485.2 million, which was up 25.1% as we continue to generate strong cash flow. I'll provide more details on the balance sheet and cash flow a little later in the presentation. Please go to Slide #6. Our Americas segment delivered strong operating results in Q3. Revenue of $844 million was up 7.9% on a reported basis and up 6.4% on an organic basis, led by our nonresidential business. Organic growth included both favorable price and volume in the quarter. Reported revenue includes 1.5 points of growth from acquisitions. Pricing in our Americas segment was 4.6% in the quarter. This includes a combination of core pricing and surcharges as we cover inflation, including tariffs. Our nonresidential business increased mid-single digits organically and demand for our products remains healthy, supported by our broad end market exposure. Our residential business grew mid-single digits, primarily driven by volume associated with new electronic products that we launched in the quarter and price. However, we still consider overall residential market demand to be soft, consistent with year-to-date growth rates. Electronics revenue was up mid-teens and continues to be a long-term growth driver for Allegion. Americas adjusted operating income of $252 million increased 9% versus the prior year. Adjusted operating margin was up 40 basis points as volume leverage and favorable mix were accretive to margins. Price and productivity, net of inflation and investments was a tailwind of $10.2 million. Please go to Slide #7. Our International segment delivered revenue of $226 million, which was up 22.5% on a reported basis and up 3.6% organically, led by our electronics businesses. Acquisitions contributed 13.6% to segment revenue, consisting of the acquisitions John mentioned earlier, net of the previously announced divestiture of API. Currency was also a tailwind, positively impacting reported revenue by 5.3%. International adjusted operating income of $32.3 million increased 28.2% versus the prior year period. Adjusted operating margin for the quarter increased 70 basis points, driven by volume leverage and mix. Acquisitions were accretive to segment margin rates, although slightly dilutive to the enterprise rates. We continue to drive portfolio quality in the International segment through self-help and adding high-performing businesses where we have a right to win. Please go to Slide 8, and I will provide an overview on our cash flow and balance sheet. Year-to-date available cash flow was $485.2 million, up nearly $100 million versus the prior year. This increase is driven by higher earnings, lower capital expenditures and improvements in working capital. I am pleased with the strong cash generation in 2025. And based on year-to-date performance, we see upside to our previous cash flow outlook. We now expect conversion of 85% to 95% of adjusted net income. Working capital as a percent of revenue increased due to acquired working capital, which does not impact cash flow. Organic working capital improved compared to prior year. Finally, our balance sheet remains strong, and our net debt to adjusted EBITDA is at a healthy ratio of 1.8x. We continue to generate strong cash flow and our balance sheet supports continued capital deployment. I will now hand the call back over to John. John Stone: Thanks, Mike. Please go to Slide 9, and I'll share our updated outlook. With one quarter remaining in the year, our markets remain largely consistent with our prior outlook. And the Americas nonresidential markets remain resilient, and Allegion is performing well in the aftermarket. Our spec activity has grown over 2024 and year-to-date 2025, driven by our broad end market exposure, and this supports our outlook. Residential markets, however, remain soft. And as Mike mentioned, solid performance in Q3 was primarily driven by new electronic product launches. International markets have largely been unchanged year-to-date, and we continue to expect roughly flat organic performance. We expect approximately $40 million of surcharge revenue in the Americas related to tariff recovery, which does include the August 18 scope expansion for Section 232. Based on strong execution and the recent acquisitions of UAP and Brisant, we're increasing our 2025 adjusted EPS outlook to $8.10 to $8.20. You can find additional details as well as below-the-line model items in the appendix. As you know, we'll provide Allegion's formal 2026 financial outlook during our February earnings call. So please go to Slide 10. Today, we'd like to provide a preliminary view on our markets for next year. And I'd say, overall, we expect rather similar market conditions to 2025. In the Americas, our broad end market coverage and spec activity continue to support organic growth in our nonresidential business. Residential markets continue to be soft. The input cost environment remains dynamic with tariffs, and you can expect us to continue to drive price to offset inflation. Internationally, markets have been sluggish; however, we do expect to benefit from 2025 acquisition activity. For the enterprise, we expect carryover revenue contribution of approximately 2 points from acquisitions closed in 2025. Please go to Slide 11. In summary, Allegion is executing at a high level, while staying agile and steadily delivering on the long-term commitments we shared with you at our Investor Day. Our performance is led by an enduring business model in nonresidential Americas, double-digit electronics growth and accretive capital deployment as we acquire good businesses in markets where we have a right to win. I'm proud of the performance by the Allegion team in this very dynamic environment, which gives us the confidence to increase our EPS outlook for the year. With that, we'll take the questions. Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Joe Ritchie with Goldman Sachs. Joseph Ritchie: So I appreciate all the color and the initial look into 2026. John, maybe just pulling on that thread on spec writing continuing to be up and nonres specifically, I think you mentioned last quarter that you were starting to see some positive momentum on spec writing specifically as it relates to office. Can you maybe just give us an update on the key verticals and whether there's -- there were any kind of like discernible differences between how you feel today versus how you felt a quarter ago? John Stone: Yes, it's a good question, Joe. And I think the comments would be very consistent that our spec activity accelerated over the course of 2024 and has grown year-to-date 2025. Rather than picking and choosing this vertical or that vertical, I would just say Allegion's spec writers are very versatile in their expertise and one day could be writing a specification for an elementary school. The next day, they could be doing multifamily and the next day after that, they could be doing a data center. So they have that capability and that engine never turns off. I think the main thing we'd have you take away is that spec activity has continued to grow in 2025, broadly speaking. And spec activity supports our outlook as we talked about in the prepared remarks and gives us the confidence that we still see organic growth in non-res Americas. Joseph Ritchie: Okay. Great. Helpful. And then I want to also kind of just talk a little bit more about your M&A pipeline. It's been such a great part of the story, really over the last, like, 12 to 18 months. And recognize that you've kind of given us the 2 points as a placeholder for next year. Just talk about the pipeline as you see it today. And as you're kind of thinking about like the potential accretion from an earnings standpoint into next year based on what you already know, just any color around that would be helpful. John Stone: Yes, it's a great question, Joe, and it's something we're really excited about. I think the pipeline is still strong and strong in both of our reporting segments, so strong in International, strong in the Americas. And if you recall our Investor Day material, where we talked product categories that we're looking for, whether that's portfolio expansion in our mechanical business, whether that's electronics, whether that's complementary software, we've got activity in all of those categories right now. So very excited about the pipeline. And I'd say you can expect us to continue to be disciplined around the strategy and around the types of businesses we acquire and around the shareholder returns that we generate from these acquisitions. So I feel real good about it. And I think it continues to be an important part of Allegion's overall growth story. Michael Wagnes: Joe, with respect to the question on the EPS. In the appendix, we provide what the full year benefit this year is, which allows you to calculate what the EPS benefit on acquisitions is in the fourth quarter. And think about that as a carryover rate for the first 2 quarters of the year. The acquisitions were largely done early July. So that should provide you enough information for you to get a framework for the relative size of the benefit that we have. Operator: The next question comes from Joe O'Dea with Wells Fargo. Joseph O'Dea: Can you just talk about conversations with building owners, architects, overall end users on the current kind of uncertainty impact in the macro, what they're looking for? Really just trying to get a sense for what your perception is of activity that's sidelined and just waiting for a little bit better visibility and what some of those key ingredients are to bringing that activity off the sidelines? John Stone: Yes, Joe, it's a good question. And I would say there's a couple of things going on. And as we are out with customers and end users quite frequently, our own channel checks would indicate comments very consistent with what we shared with you in the prepared remarks, that nonres project activity is humming along pretty well. And I think some private finance came off the sidelines this year. A more favorable interest rate environment would certainly continue to be a swing factor that we would see to bring more of that private finance off the sidelines. But I would say, overall, positive environment and channel checks, our customers' backlogs are pretty healthy and has given them pretty good confidence about organic growth as well. And that's what we've tried to convey to you today. I think nonres overall is humming along pretty well. Joseph O'Dea: Appreciate that. And then on the International side, I think this was the first quarter of volume growth after 4 of declines, actually better volume growth in International than Americas even this quarter. So just kind of unpacking a little bit more what you saw in the quarter, how you think about any momentum behind a little bit of volume growth there? John Stone: Yes. I appreciate you noticing that, Joe. I mean we were certainly really happy to see that and proud of the International team to put those numbers up on the board this quarter. I would say our view on the end markets is still largely unchanged, that it's around flattish kind of organic growth. But I would also say you've had some of the market segments there really at historical troughs, and we don't anticipate that they trend negative in perpetuity. So I think the International team has executed well in a lot of pretty challenging environments. And like Mike mentioned in the prepared remarks, our electronics businesses are still performing very well. And you add to that, we're still really excited about the ELATEC acquisition, which is a pretty sizable deal for us that will continue to add momentum there in the electronic space. Operator: The next question comes from Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start with maybe the adjusted operating margins. So those were flattish in the third quarter year-on-year. Just wanted to check, but it looks like perhaps you're assuming they pick up again with some margin expansion of a few tens of basis points in the fourth quarter. Just wanted to check if that was the right assumption and how we should think about the corporate cost movement into Q4 and next year in that context? Michael Wagnes: Yes. Thanks for the question, Julian. If you look at the third quarter, pleased with the segment margin expansion, did a really good job. We were negative in corporate. Part of that is just the year-on-year comp. Last year in the third quarter, corporate was low. This year, our third quarter is really consistent, slightly less than even what you saw in the second quarter. As you think about margin expansion for the year, you can back into it, we expect to have margin expansion for the year and in the fourth quarter. And then from a run rate perspective of corporate, the question you asked, you saw what we put up in the third quarter. Think of that as relatively what we've ran in the last couple. So you can kind of use that as a fine estimate. Julian Mitchell: That's very helpful. And just within the Americas segment for a second. You had a decent tailwind from that PPII bucket in the third quarter, and I think that was a good pickup from what you'd seen, that being flattish in the second. When we're looking out the next few quarters, should we assume that, that sort of gross price of about 4 or 5 points is a good placeholder and PPII stays as a decent tailwind? Just trying to understand operating leverage, you have that mid-30s placeholder from the Investor Day. Are we sort of on that path now leaving aside the corporate costs moving around? Michael Wagnes: Yes. If you think about the Americas, I talked about this earlier in the year. Inflation, especially associated with the tariffs, right, was a little quicker than some of the pricing benefits. We said that would improve as the year progressed. You see that in the third quarter. The big item for us on the pricing side is what is inflation and tariffs are a component of that inflation. Just look for us to drive pricing and productivity, and you've heard me mention this many times before. Pricing and productivity covers the inflation and the investment, and that helps drive the margin expansion. Overall, I feel good about the progress we're making in the Americas. I think we're doing a great job in combating a very dynamic environment of change when you think about tariffs and expect us to continue to drive that margin expansion that we talked about. Julian Mitchell: Got it. And that sort of mid-30s type rate based on inflation and mix and price, that should be achievable the next x kind of quarters. Nothing looks too out of line versus that. Michael Wagnes: Yes. Certainly, Q4 you could calculate. We'll be back in February to give you a '26 margin outlook. Think of that as a long term, right, to the long-term investors out there. Long term, we should be able to drive incrementals of 35%. Let us get to February of next year when we give our outlook and complete the annual operating plan. But certainly, for the fourth quarter, you could calculate the implied margin expansion. Operator: The next question comes from Jeff Sprague with Vertical Research. Jeffrey Sprague: I want to come back to the deals, really kind of maybe a 2-part question. First, just thinking about sort of everything that you've done here. It all looks like it makes sense and fits in and is nicely moving the needle as we've seen your results. But just thinking about kind of the margin entitlement of what you've acquired, where you might be on integrating these assets? Are they all truly being integrated or any of them sort of stand-alone? Just trying to kind of get my head around kind of the journey you're on here. John Stone: Yes, I appreciate the question, Jeff. And I think if you recall our Investor Day commentary, we talked about being disciplined. And I would say some of those guardrails around being disciplined would be consistent with our strategy, consistent with our geographic exposure and consistent with markets where we've got a right to win, meaning we've got brand strength, we've got human capital and talent, we've got distribution strength. And so yes, to specifically answer your question, all of these acquisitions are being integrated and being integrated rapidly. I think there are synergies across the board in revenue synergies, cost synergies. There are exposure to faster-growing segments that we've acquired. So I feel real good about the strategic alignment of every deal we've done and continue to feel the same way about the outlook on our pipeline there. So really good. But yes, I mean, we're not looking to acquire our way into adjacent spaces. We're not looking to expand geographic scope. We're staying in markets we know where we've got a right to win, and we're acquiring enhancements to our product portfolio in electronics and mechanical and complementary software and feel real good about it. So I think you can -- again, you can look for us to continue to be acquisitive but continue to be disciplined like we've shown. Jeffrey Sprague: And then I guess, discipline also includes the element of price paid. And I kind of appreciate like each individual deal, it's hard for me to press Josh or Mike for like specifics on multiples and all that. But is there a way to just step back and sort of collectively say, you gave us the dollars deployed, right, on a year-to-date basis, kind of what the average multiple has been? And when you think about the synergies, kind of what the -- maybe what the forward multiple would be looking out kind of 12, 24 months as you integrate these things? John Stone: Yes, Jeff, it's a good question. Very fair question. I think we've had some commentary around this in past quarters. So on the mechanical side, if we're expanding our mechanical portfolio, you would see something in the high single-digit EBITDA multiple would be a fair approximation. On the higher growth electronics and software, you're going to see a bit of a higher multiple there because we're expecting higher growth and higher longer-term returns. Michael Wagnes: Jeff, maybe also to help you out, the biggest acquisition is ELATEC. Clearly, that is the lion's share. So we gave that information when we released the -- when we made the acquisition and we issued the press release. You could see that and you get at least a pretty good idea of all the acquisitions, what's the biggest piece there from a multiple [ paid. ] Operator: The next question comes from Tomo Sano with JPMorgan. Tomohiko Sano: I'd like to ask you about the residential outlook for Q4 in America. So the residential revenue improved to up mid-single digit in Q3. And you mentioned no clear signs of the recovery of the market for 2026. But how do you see the residential segment performing in Q4? Could you share your current market outlook and also the new product contributions, especially for electronics in Q4, please? Michael Wagnes: Tomo, to answer your question on the residential. I apologize, we had some phone difficulties there. Overall, market demand for residential is soft. It's been that way for a while. In the third quarter, we did have that benefit associated with the new product introductions, the e-locks, that was the Arrive lock that we talked about in the first quarter earnings call. We launched it in the third quarter, and we had the benefit. As I said on the prepared remarks, overall, think of market demand consistent with year-to-date growth rates for residential, which is down slightly. So as you think about the fourth quarter, we would not expect a mid-single-digit positive growth. We would expect it more in line with market demand, which is that softer nonresidential market that we're in -- I'm sorry, residential. Tomohiko Sano: And my follow-up question is on tariffs and pricing. So you have demonstrated strong pricing power and agility in managing a tariff-related cost pressures. And are you seeing any signs of pricing fatigue or customer weakness? And how would you see the other market players reacting for pricing in the market, please? John Stone: Tomo, this is John. I would say -- I appreciate the comment. And yes, I think our teams and our customers have collectively responded well to the inflationary nature of the tariffs. I think our industry as a whole has moved up with price realization. And I'd say, just as Mike said in the prepared comments, as inflationary pressures continue, we stand ready to cover that with price. I would say the demand environment in nonres, as we mentioned, is good. It's healthy. Nonres is humming along pretty well. So I haven't yet seen something that we would call fatigue. Operator: We have one final question in our queue today. The next question comes from Tim Wojs of Baird. Timothy Wojs: Maybe just the first one, I'm kind of thinking bigger picture about kind of spec and spec writing and just kind of content within the spec. John, how would you kind of compare the content in the spec that you're kind of writing today versus maybe what you were doing 3 years ago? And I'm just trying to kind of get at how that spec is evolving, particularly as you kind of have done some of the, I'd say, ancillary product kind of M&A over the last couple of years? John Stone: Tim, that's a great question. I appreciate you asking. I would say a couple of things come to mind in terms of spec content. We're seeing electronics adoption accelerate, and that's evident in our specs. And I think evident in the electronics growth numbers that we've been showing lately. So very pleased with that. And I think the new product launches that we've been doing in nonres, in particular, are paying dividends there. I would also say we're starting to see -- it would be very small, but starting to see even opportunities to spec in some of the complementary software that we've developed organically into like a multifamily application. So that's very exciting for us to see as well. In terms of the new acquisitions, several of them, if you talk nonres Americas like Krieger Specialty Products, hand-in-glove fit with our spec engine, and we're excited to see the growth there. Because if you recall, that acquisition brought products that we didn't have in our hollow metal portfolio, high-margin, fast-growing niche products that we're finding great opportunities to spec into new customers even. So really good fit. Another good example from this year would be Trimco, makes high-end specialty hardware for commercial applications. If you had pulled channel customers of ours for the last couple of years, they would highlight something like a Trimco as one of the best acquisition targets for Allegion to go after. So really excited to have that team on board with us. And it's -- again, it fits right into the spec engine. So we're happy to see that momentum. Timothy Wojs: Okay. Okay. That's great to hear. And then maybe just on the modeling side. Just in International, kind of the opposite of Julian's question on PPII, that flipped negative this quarter. Is that just a timing consideration? Or is there anything kind of to read in there around price, productivity and inflation? Michael Wagnes: Yes. If you think about margins in International, good performance this quarter. It was slightly negative on the PPII. On a year-to-date basis, though, Tim, think of it as it's negative like $1 million if you add up the 3 quarters. So it's essentially covered. And look for us in International to cover that inflationary pressure. So I wouldn't look too much into the third quarter at all. Look at the year-to-date rate and you get an idea, we're doing a pretty good job there. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to CEO, John Stone, for any closing remarks. John Stone: Thanks very much, and thanks, everyone, for the very engaging Q&A. We look forward to connecting with you on our Q4 earnings call in February. Be safe, be healthy. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded. [Operator Instructions] I would now like to turn the call over to Zack Moxcey, Vice President of Investor Relations. Please go ahead. Zack Moxcey: Good morning, and thank you all for joining us as we discuss the third quarter 2025 financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Jason Conley, Executive Vice President and Chief Financial Officer; Brandon Cross, Vice President and Principal Accounting Officer; and Shannon O'Callaghan, Senior Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now if you please turn to Page 2. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements, which are subject to risks and uncertainties as described on this page, in our press release and in our SEC filings. You should listen to today's call in the context of that information. And now if you please turn to Page 3. Today, we will discuss our results primarily on an adjusted non-GAAP and continuing operations basis. For the third quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets, transaction-related expenses associated with completed acquisitions; and lastly, financial impacts associated with our minority investment in Indicor. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now if you please turn to Page 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil? Neil Hunn: Thank you, Zack, and thanks to everyone for joining us and excited to be with you this morning. As we turn to Page 4, you'll see the topics we plan to cover today. We'll start with our third quarter highlights and financial results. Next, we'll review our segment performance, our AI progress and momentum and our most recent set of bolt-on acquisitions. Then I'll get into our guidance details and of course, wrap up with your questions. So with that, let's go ahead and get started. Next slide, please. Turning to Page 5. Let me run through the 4 key takeaways for today's call. First, we had a strong third quarter. Total revenue grew 14%, organic revenue grew 6%, software bookings grew in the high singles area, and we continue to deliver impressive free cash flow with free cash flow growing 17%. And of note, free cash flow margins posted at 32% for the TTM period, really impressive financial results. Second, we're super encouraged by the progress and momentum we're seeing across all of our businesses as it relates to our AI enablement and our product stacks and our internal operations and more on this in a moment. Third, we're announcing today our first share repurchase authorization, $3 billion in total. And lastly, we continue to execute on our M&A strategy of acquiring faster growth platforms and bolt-on or tuck-in acquisitions at a high fidelity rate. In the quarter, we deployed $1.3 billion, $800 million for Subsplash, which we detailed this time last quarter, and $500 million on a series of tuck-in acquisitions. Also more on this later, but worth highlighting here, we are very encouraged by this recent capital deployment execution and the future growth potential that's being layered into our enterprise. Importantly, we remain very well positioned for the continued execution of our M&A strategy and continue to have north of $5 billion of capital deployment capacity available over the next 12 months or so. As I turn the call over to Jason, reflecting on the quarter, I'm quite bullish on most of what we're seeing, a very strong 3Q, real demonstrable AI progress, which is a long-term growth driver for us, excellent execution of our higher growth, higher returning capital deployment strategy and the announcement of our first-ever buyback authorization. This all bodes very well for the future. That said, we'd like to see some of our markets start to cooperate a bit better, namely the government contracting and freight markets, and we have some delays in Neptune. Much more on this as we walk through today's call. So with that, let me turn the call over to Jason to talk through our P&L and our balance sheet. Jason Conley: Thanks, Neil. Good morning, everyone, and thanks for joining us today. I'm pleased to take you through our third quarter results and strong financial position. Turning to Page 6. Q3 and TTM results reflect the long-term financial profile of Roper, which is to compound cash flow in the mid-teens area. We'll start with revenue, which was 14% over prior year and surpassed the $2 billion mark. Acquisitions contributed 8%, led by the final quarter of Transact before it turns organic and CentralReach, which we acquired in April this year. Of note, these businesses are tracking very well against our acquisition expectations. We printed 6% organic growth, both for the consolidated enterprise and across each of our 3 segments. Our Application and Network Software segments were in line with expectations, while TEP was a bit below given near-term timing at Neptune, which Neil will discuss further. EBITDA of $810 million was 13% over prior year with EBITDA margin of 40.2%. Core margins expanded 10 basis points and segment core margins expanded 30 basis points, led by our software segments. DEPS of $5.14 was 11% over prior year and $0.02 above the high end of our guidance range despite absorbing $0.05 of dilution from Q3 acquisitions that were not reflected in previous guidance. Free cash flow was outstanding at $842 million, up 17% over prior year and representing 32% of revenue on a TTM basis. Our software businesses captured strong renewals, and we drove great working capital performance across the board. Broadening out a bit, TTM cash flow of over $2.4 billion is a 17% CAGR over a 3-year period. And for those looking at per share metrics, you'll note that our share count has compounded at about 0.5% over that same time period. At Roper, we have been and will continue to be relentlessly focused on cash flow and shareholder value creation. Now let's turn to Slide 7 and discuss our very strong financial position. Our net debt-to-EBITDA stands at 3x, which is up only modestly from Q2 at 2.9x despite deploying $1.3 billion towards acquisitions. This places us in a great position with over $5 billion in next 12-month capacity for capital deployment. Regarding M&A, you can see that we've been quite active this year in acquiring high-quality growth businesses and several strategic bolt-ons. This is against the backdrop of a muted PE deal environment. The pipeline of high-quality acquisitions continues to build as assets mature in PE portfolios and a return of capital to LPs becomes paramount. Additionally, as Neil mentioned, we're pleased to announce another capital deployment lever that was previously unavailable. Our Board has authorized a $3 billion share repurchase program with an open-ended time period to execute. While M&A will continue to be the majority of our capital deployment allocation, our share repurchase program will allow us to opportunistically complement our M&A program. Over the last year or 2, we have talked about the great business building taking place across the Roper portfolio from strategy to talent to execution, all now greatly turbocharged by AI. Our repurchase program reflects both confidence in our strategy and our commitment to delivering long-term shareholder value. So with that, I'll turn it back over to Neil to talk about our segment performance. Neil? Neil Hunn: Thanks, Jason. Turning to Page 8. And before we get into our segment details, we want to discuss why AI is a powerful and durable growth driver for Roper. To start, AI represents a meaningful expansion of our TAM across the portfolio. We can now deliver transformational software solutions that automate labor-intensive work adjacent to our existing platforms. This creates substantial new value streams for our customers and correspondingly facilitates long-term growth for Roper and our businesses. Importantly, our businesses are uniquely positioned to win in AI, in fact, having a very high right to win in the AI world. Our software solutions are deeply embedded system of record applications with workflow-oriented domain-specific architectures. The decades of cumulative workflow knowledge built into our platforms, combined with the proprietary vertical market data, provide the precise context needed to develop Agentic AI solutions. Because of this, our businesses have an exceptionally high right to win as we deploy these capabilities across our VMS end markets. Internally, we're becoming AI native across all functions to drive productivity gains. We're excited to reinvest these gains to further accelerate our product development and go-to-market initiatives. It's important to note, we've always had more great ideas than resources needed to execute, and AI has the potential to attack this challenge. Finally, we have tangible proof points, though it's still early. Aderant has claimed a technology leadership position in legal tech, accelerating their bookings growth. CentralReach now has roughly 75% of their bookings attributed to AI-enabled products, which have automated 100 million reimbursement rule evaluations, over 3.5 million learner appointments and over 1 million clinical summaries being generated, great real-world examples of the power of AI. Deltek has released over 40 AI features into their cloud offerings, driving increased cloud conversion activity. And DAT has industry-leading AI/ML-enabled freight matching capabilities, which I'll detail shortly. These are but a few examples from across the portfolio. Very exciting times for sure. With that, let's now turn to our segment review, starting with Page 10 and our Application Software segment. Revenue for the quarter grew by 18% in total and organic revenue grew by 6%. EBITDA margins were 43.4% and core margins improved 40 basis points in the quarter. Starting with Deltek. Deltek delivered solid performance in the quarter with particularly strong results in their private sector end markets. Construction, architecture and engineering remained robust throughout. The GovCon business experienced softness in September as agencies paused activity ahead of the pending government shutdown. This timing is unfortunate. Pipeline activity and commercial momentum had been building nicely following the passage of the one big beautiful bill in July, and we are seeing increased engagement across our customer base heading into the new fiscal year. The fundamentals remain strong. The OB3 authorized significant increases in defense and infrastructure spending that will flow through to our customers once appropriations are finalized. This is simply the timing issue, not a demand issue. Finally, retention levels across the entire Deltek franchise remain very high. Aderant continues to be incredibly strong and continues to post impressive bookings and recurring revenue growth. The booking strength is broad-based, fueled by their AI-enabled solutions, especially as it relates to AI-enabled compliant time capture and billing and is a combination of market share gains, cloud migration and SaaS growth. Vertafore continues once again to be steady and solid for us. We continue to see consistent ARR growth and strong customer retention and strength across their agency, MGA and carrier solutions. This growth is enabled by their strong go-to-market capabilities and their long-term commitment to product strength. PowerPlan's performance has been terrific. Their success is a result of several years of business building in the product stack, the go-to-market capabilities, their service delivery really across all functions. In addition, to remind everyone, they serve power generation customers, which are adding capacity as quickly as possible to handle the AI workloads. The setup here should be quite good for a long time. Also in the quarter, we completed the acquisition of Orchard, a tuck-in acquisition for our Clinisys business. Orchard brings additional clinical laboratory capability to Clinisys with particular strength in reference, physician office and public health labs. Finally, the balance of our application software portfolio continues to execute very well. CentralReach was awesome again in the quarter, driving accelerating adoption of their AI tools and capturing ABA therapy capacity additions. Procare made a great installment of progress with new bookings continuing to be strong, posting low double-digit growth in payments with improved gross margins, though still work to do, in particular, with faster implementation time frames and share of wallet expansion, but meaningful progress for sure. Finally, Strata and Transact were steady and solid in the quarter. As we look to the final quarter of the year, we expect to deliver mid-single-digit organic revenue growth. This outlook reflects high single-digit growth in our recurring revenue base, offset by declines in nonrecurring revenue, primarily due to anticipated softness in our Deltek business stemming from the ongoing government shutdown. Given the uncertainty surrounding the duration and impact of the shutdown, we see potential outcomes across the full range of our MSD outlook from the lower to the higher end. That said, our businesses in this segment continue to compete and execute exceptionally well. The primary variable remains a higher level of market uncertainty than we typically experience for our Deltek business. Please turn with us to Page 11. Total revenue in our Network segment grew 13% and organic revenue 6% in the quarter. EBITDA margins remained strong at 53.7% with core margins improving 60 basis points. As we dig into the individual businesses, we'll start with DAT. DAT was solid in the quarter and had strong ARPU improvements. DAT continues to execute exceptionally well on their core strategy of driving enhanced network value for both brokers and carriers. This dual-sided approach positions DAT to better monetize their entire network ecosystem and more on this when we turn to the next page. ConstructConnect was solid again for us in the quarter. The growth was fueled by strong customer bookings activity and improved customer net retention. Of note, this business continues to make good progress with our emerging AI-enabled takeoff and estimating solution. Foundry is turning the corner on growth, posting continued sequential improvements in ARR, and we expect our Q4 exit ARR to grow year-over-year in the HSD area. Really happy for the team there as they've had to work through some tough market conditions. Next, our network health care businesses, MHA, SHP and SoftWriters were very good in the quarter. Of particular note, SoftWriters is executing at an exceptional level, winning a few very large pharmacy customers and making substantial progress on a high-impact AI solution, which is being beta tested in the market currently. Congrats to Scott and his entire team for their success. Finally, Subsplash, our most recent acquisition that closed on July 25, is off to a great start, delivering financial results in line with our deal model expectations. Of note, they saw very good market traction with their AI-driven [ sermon ] content offering, Pulpit AI, and they deepened its integration with their core engagement platform, driving strong product-led growth, exciting stuff. As we turn to the outlook for the final quarter of the year, we expect to see organic revenue growth at the higher end of the mid-singles area. As we turn to Page 12, we'd like to spend a few minutes describing the strategic evolution of our DAT business and why we're so excited about its future growth prospects. To start, our legacy DAT platform is the largest freight matching network across the U.S. and Canada. The scale is remarkable, over 1.2 million loads posted and 15 million rate views every single day. DAT is the clear market leader, delivering tremendous value to both freight brokers and carriers, both of whom pay to participate in this powerful network. As strong as the legacy business is, we're even more bullish about where DAT is headed. To bring this vision to life, DAT is building capabilities across the entire freight automation workflow from carrier vetting to broker carrier matching to AI-driven rate negotiation, load management tracking and finally, payment and settlement. Through deep customer partnering with the brokerage community, DAT is working to fully automate the freight matching process. As this happens, DAT will generate $100 to $200 per load in savings for brokers while giving carriers greater predictability and faster payments on their invoices. What sets DAT apart is this end-to-end product capability and its role as a neutral trusted partner, a Switzerland-like player that equally serves the entire freight brokerage market. This is a truly unique position in the market. This evolution also highlights the Roper DAT partnership at its best. We work closely with the DA team to craft this strategy, then we executed a focused M&A program to strengthen it through 3 strategic tuck-ins: Trucker Tools, Outdo and Convoy. With the deals complete, DAT is now fully focused on delivering against this strategic opportunity. Important to note, Convoy is an unusual transaction for us as it currently is not profitable, but we expect the financial returns over the next several years to be extremely attractive. The key to success is scaling efficiently, leveraging DAT's advantaged customer unit economics for both brokers and carriers to drive sustained growth and profitability. We are confident in this strategy, market position and DAT's ability to execute. I know this was a bit of a deep dive, but we wanted to share with you why we're so excited about the growth opportunity that sits in front of DAT, true AI-based freight automation. Now let's turn to Page 13 and review our TEP segment's quarterly results. Total revenue here grew 7% and organic revenue grew 6%. EBITDA margins came in at 35.2%. Let's start with Neptune. As we've said before, Neptune continues to execute really well, particularly around its ultrasonic meter strategy, and we're seeing strong traction in its data and software billing solutions. The new copper tariff that took effect on August 1 caused some short-term disruption. Neptune responded by implementing surcharges to offset the tariffs impact, which temporarily slowed order timing. These actions reflect the benefit of being part of Roper, doing the right long-term thing for customers and the business even when it creates near-term headwinds. Verathon continues to perform well. In particular, during the quarter, Verathon saw continued strength in its single-use recurring product lines, both BFlex and GlideScope, which remain key growth drivers. NDI also delivered an excellent quarter. As we discussed previously, NDI provides proprietary world-class precision measurement technologies to a range of health care OEMs. These technologies in turn enable guidance-enabled solutions across multiple clinical markets, including orthopedic surgery, interventional radiology and cardiac ablation. Finally, we saw strong execution and growth across CIVCO, FMI, Inovonics, IPA and rf IDEAS, rounding out a solid overall performance for this group of companies. Looking ahead to the fourth quarter, we expect organic growth in the low single-digit area given the very difficult prior year comp and the timing we discussed at Neptune. Now let's turn to Page 15 and review our Q4 and updated full year 2025 guidance. Starting with the full year outlook, we continue to expect total revenue to remain in the 13% area. Also, given the delays at Neptune and the temporary impact of the government shutdown, which is slowing year-end commercial activity at Deltek, we now expect organic revenue to land in the 6% area versus our previous 6% to 7% range. Relative to our full year DEPS outlook, we're tightening guidance to the high end of our prior range after adjusting for $0.10 of dilution from the $500 million of tuck-in acquisitions completed during the quarter. Specifically, we now expect adjusted DEPS to be in the range of $19.90 and $19.95. We expect to see our tax rate at the lower end of our 21% to 22% area for the full year. For the fourth quarter, we're establishing adjusted DEPS guidance to be between $5.11 and $5.16, which includes $0.05 of dilution for last quarter's tuck-in deals. Now please turn with us to Page 16, and we'll open it up to your questions. We'll conclude with the same key takeaways with which we started. First, we had a very good third quarter with exceptional free cash flow. Second, we're super excited about the pace of AI innovation and the growth potential in front of our enterprise. Third, we're announcing a $3 billion authorization for a share repurchase. And finally, we remain super well positioned for further M&A activity. Relative to our financial results, we grew total revenue 14% and organic revenue 6%, grew EBITDA 13% and delivered 17% free cash flow growth in the quarter. AI is a significant growth driver for Roper, expanding our TAMs by automating tasks and work across our vertical market offerings. With deep workflow integration, proprietary data and vertical market-specific architectures, our businesses are well positioned to succeed in AI, in fact, have a very high right to win and are already seeing measurable yet early product and commercial results. DAT exemplifies this strategy in action, evolving from a traditional freight matching network to a fully automated freight marketplace powered by AI. Through this transformation, DAT is unlocking significant efficiency and economic value for brokers and carriers alike, positioning itself for improved high-quality growth. As Jason mentioned earlier, we're excited to announce a $3 billion share repurchase authorization, which will deploy opportunistically, enabling us to take advantage of dislocations in the market. We're super confident with our talent advantage, our strategy and our execution capabilities, and this first-ever buyback is evidence of such. Importantly, we remain exceptionally well positioned to execute our M&A strategy. We have north of $5 billion of available firepower over the next 12 months and a very active, large and attractive pipeline of opportunities. Importantly, Roper continues to strengthen its position as an acquirer of choice for both target CEOs and their private equity owners. As always, we'll pursue these opportunities with our consistent, unbiased, patient and disciplined approach. Prior to turning to your questions and if you flip to the final slide, our strategic compounding flywheel, we'd like to remind everyone that what we do as Roper is simple. We compound cash flow over a long arc of time by executing a low-risk strategy and running our dual threat offense. First, we have a proven powerful business model that begins with operating a portfolio of market-leading application-specific and vertically oriented businesses. Once the company is part of Roper, we operate a decentralized environment so our businesses can compete and win based on customer intimacy. We coach our businesses on how to structurally improve their long-term and sustainable organic growth rates and underlying business quality. Second, we run a centralized process-driven capital deployment strategy that focuses in a deliberate and disciplined manner on cultivating, curating and acquiring the next great vertical market-leading business or tuck-in acquisition to add to our cash flow compounding flywheel. Taken together, we compound our cash flow over a long arc of time in the mid-teens area, meaning we double our cash flow every 5 years or so. So with that, we'd like to thank you for your continued interest and support and open the call to your questions. Operator: [Operator Instructions] Your first question comes from the line of George Kurosawa with Citi. George Michael Kurosawa: Great to be on the call here. Wanted to first touch on kind of the high-level organic growth picture. I think you can -- took a step back this quarter, but I think you can certainly argue there are some onetime or short-term dynamics at play here. Maybe just if you could frame your confidence in a reacceleration from here, particularly as we start to sharpen our pencils for '26. Neil Hunn: Yes. Appreciate it. Thanks for being on the call this morning. So the -- yes, I think you're right. I mean the reason that was a little rough this quarter were the 2 reasons we talked about, the commercial activity at Deltek with the government shutdown and then this tariff-related impact at Neptune. As we think about '26, I mean, it's a little early for us to get super detailed about '26. But if you sort of roll sort of segment by segment, it's been pretty -- in application, it's been pretty consistent trends there throughout '25. Deltek and government contracting should improve next year given the passage of OB3. I think the timing of when that improves is still up in the air a little bit. We'll see that as we get through our planning and roll into next year. But there's definitely sort of improvement happening in that market given the spending attached to OB3. In the Networks segment, it's been pretty consistent over the last 3 quarters. There is sort of a comp thing in the first quarter. So pretty consistent over the last 3 quarters despite the sort of the headwinds in the freight market. We'll have to see how the freight market evolves next year, but really like the business building we're doing at DAT, as I talked about. As I also mentioned, foundry is going to be better next year. And then on TEP, the Neptune order patterns likely continue normalizing the pre-COVID sort of lead time levels. Orders there have been pretty good. It's just the lead -- and the lead times are going to continue to shorten. NDI is poised for a couple of strong years, but we really need to get through our planning process to have more clarity on how TEP is going to play out next year. But all in all, we feel pretty good about the trends in GovCon, Foundry, CentralReach and Subsplash turning organic in the second half of next year and the general business building. But as usual, we go through a pretty exhaustive Q4 planning process, which we kick off in a couple of weeks. George Michael Kurosawa: Okay. That's super helpful color. And then maybe just one quick follow-up here on the AI strategy. I think you disclosed 25 products last quarter. I'm curious if you have an updated number just to give us a sense for the pace of innovation and just more generally, how you feel businesses are coming up the AI curve here. Neil Hunn: Yes. We feel very, very good. I won't rehash all the prepared comments about why we feel that way. But we're going from having a large number of products and key features. We talked about the 40 AI features in the Deltek core that's driving sort of the cloud migrations and SaaS. But increasingly, we're seeing sort of AI SKUs. So we feel real good about that. Now we've got to get through the commercial activities as we release these SKUs across essentially every one of our software businesses now and in the first half of next year that we got to go sell them and commercialize them and then the momentum will sort of pick up from there. But feel very good, very high right to win, a lot of compounding of knowledge about how to do all this stuff internally. This is -- you can hire some talent, you got to build it. So we feel real good about that. A lot of internal sharing that's going on, which is great to see, a lot of momentum. So we can certainly talk more about that, but feel great about where we are on the AI front. Operator: And the next question comes from the line of Brent Thill with Jefferies. Brent Thill: Just on the buyback, I guess, maybe walk through the strategy, why not leaning harder into M&A versus -- I believe this is your first buyback ever. What drove that decision? Neil Hunn: Yes, I appreciate it. The -- so just to be clear on what it is. So it's $3 billion. It's open-ended timing. It's opportunistic and in no way, shape or form, a change in our strategy. Set this in the context of the amount of capital we have to deploy over the next 3 years is somewhere in the $15 billion to $20 billion range. So it's not a change in any way, shape or form. The rationale for it is pretty straightforward. We just have a ton of conviction in what we're doing. And in terms of the talent we have on the team and that lead our companies, the strategies, the AI execution, the general continuous improvement execution, the business building we're doing. And we think this buyback is just clear evidence and support for our conviction there. But we're going to maintain a strong bias towards M&A. The compounding nature of the numerator is better than the denominator. It's just straight math. We're super active on the M&A front. We cultivate every day. In fact, our Janet Glazer leads our capital deployment efforts had a fantastic meeting 3 or 4 weeks ago, I think, with 18 CEOs of companies that are in the pipeline, so a marketing event, and it was met with great reviews, and we're really becoming sort of a buyer of choice, both for the CEOs of companies and also the private equity sellers. So we feel real good about the execution of our M&A strategy, and this buyback is just a small complement to the overall strategy of Roper. Brent Thill: Okay. Neil, I know the last couple of years, we've had a couple of things that maybe haven't gone the way you wanted to. The question is just how do you derisk this out of the guide? And I think investors have looked at the portfolio and said that you get the diversification aspect, but why do we keep having kind of the setbacks if we're that diverse. So that's the question I'm getting. Neil Hunn: Yes. So you're right. I mean we've built this portfolio to essentially take as much cyclicality and cycle risk as you can take out of an enterprise. If you look back over our long history, before we sold and divested all the industrial businesses, we'd cycle up or down 5 to 10 points. Now we're cycling like a point here or there. So we've essentially beaten out ostensively all the cycle risk you can in an enterprise. In this case, it's just -- it's frustratingly bespoke situations. Government contracting, normally, you're in GovTech because of the stability of the end market here. It's been anything but that the last couple of years. Transportation, who would have predicted like a 3-year freight recession. And so it is frustrating these things are stacking on top of each other, but they're bespoke, and we like the construct of the portfolio for sure. Jason Conley: I think the cash flow generation continues to be strong and consistent with what we thought. Obviously, we've had some new deals come in that have been dilutive, but we have been able to sort of push through that. Our guidance is -- adjusted for dilution is pretty close to where we were before. So despite some of the softness we've seen, we've been able to sort of maintain the bottom. Operator: The next question comes from Brad Reback with Stifel. Brad Reback: Software bookings decelerated a little bit sequentially, I think from the mid-teens to the high singles. Was that predominantly Deltek? Or were there other drivers there? Jason Conley: Yes. It was mainly Deltek, a little bit of frontline. We've talked about the -- some of the funding from the DOE. We don't get a ton of funding down to the states, but at the margin, it does slow down a little bit in K-12. But yes, it's Deltek Frontline. Outside of that, it's very strong. So if you look on a TTM, also a very lumpy dynamic, right? Software bookings are -- can be lumpy quarter-to-quarter. TTM is up low single digits -- sorry, low double digits. So I feel good about that trend. And I would also just call out that health care has been particularly strong this quarter. Our Strata business, we combined Strata and Syntellis a couple of years ago, and that's really starting to take hold in the market. So bookings are really strong there. And actually, our Clinisys business is doing quite well, too, in Europe and even in the U.S. with some of the bolt-ons we've done for them to get outside of the hospital, that's starting to gain traction as well. So just some color behind the bookings this quarter. Brad Reback: Great. And then, Neil, I think 2 questions ago, you talked about the rollout of the AI SKUs happening now through the first half of '26 and then needing to sell it. That all seems like we should be thinking about this more of a '27 and beyond organic driver as opposed to '26? Neil Hunn: I think that's a fair -- we're certainly viewing it that way. I think it's a fair assumption. We'll certainly see progress in bookings throughout next year because again, this is across 20-plus software companies and multiple products across 20 software companies. And so we'll see building momentum. But before it has a meaningful impact, I think it's '27 because of the commercial activity that has to go along with the innovation. Operator: The next question comes from Ken Wong with Oppenheimer. Hoi-Fung Wong: Fantastic. I wanted to maybe drill in a little bit on just the organic growth. Any way for you guys to help kind of slice what you might have seen from maybe the same-store sales versus maybe the net new organic that's coming on to the P&L. Hopefully, that question makes sense. Neil Hunn: We want to make sure we're framing -- answering the right question. Essentially, what's the cross-sell versus sort of net new mix? Is that your question? Hoi-Fung Wong: No. I guess what was coming from, let's say, the portfolio, let's say, prior to, let's say, like a Procare, Transact versus the stuff that is now kind of flowing in as incremental organic. What was once inorganic coming in as organic? Does that make a little more sense? Jason Conley: Yes, like what's the impact of Procare coming into organic. A little bit of accretion from Procare, not as we talked about, not as much as we had thought when we did the deal, but it's certainly accretive to the segment. Hoi-Fung Wong: Okay. Got it. And then on the TEP business, I think going into the quarter, I think the expectations were high single digit in the back half. I guess, yet only 6% in the quarter, low single in Q4. Was that isolated to any particular piece? Or was it a little more broad-based? Is it just Neptune? Or should we think about any other pieces that contributed to that slight weakness? Jason Conley: Yes. It was Neptune predominantly. I mean you had -- it was an acute impact in Q3. We always had a little bit of a tougher setup in Q4, but even aside from that, it was definitely down in both quarters -- it's Neptune, sorry Neptune. Operator: The next question comes from Joshua Tilton with Wolfe Research. Joshua Tilton: Hey guys, can you hear me? Neil Hunn: Yes. Joshua Tilton: I've been bounced around a few earnings this morning, so I apologize if it's already been asked. But I guess the #1 question for me is just, is there anything you can give us on the guidance front, specifically for organic revenue growth that could increase our confidence that like you derisked it enough. Maybe you could just like walk us through a little bit further on where the derisking is coming from Deltek versus Neptune and kind of what gives you the confidence that this is a good base to start for the rest of the year? Jason Conley: Yes. I mean I think we've given the outline by segment. And so I think Neil had framed at AS, we've got it at mid-single-digit growth. There could be a range there, and it really depends on Deltek's perpetual license activity and a little bit to a lesser extent, there's a couple of projects at our Transact business that might hit this quarter or next quarter. So that's sort of the range there. And so I think we've given you that. Network is going to be sort of mid-single-digit plus. I think we've -- a lot of that's recurring revenue. And the only thing that can move around is Truckers, right? They can come in and out of the DAT on a monthly basis. So we think we've sort of -- we've got that sort of boxed. And then on low single digits for TEP, I think we've identified where the challenges are for Neptune's tariff activity. NDI works on mostly backlog for the quarter. The others are a little bit less backlog. But just based on the trends and the call downs we had with the business, we feel like that's an appropriate number for the quarter. Joshua Tilton: Really appreciate the color. And just maybe for a quick follow-up. I really appreciate all the color you guys gave on the AI positioning that you guys have and some of the examples. I guess what I'm trying to understand is it feels like every company that we talk to is trying to race to be a winner in this AI world at a pace that we've kind of never seen before. Is there a dynamic? Or do you feel that maybe you guys have this unique AI think tank going on inside of Roper because you have a group or a portfolio of companies that are all marching towards the same AI goal? And then if that's the case, maybe could you share with us how they're sharing knowledge and best practices and what they're seeing across some of the use cases that are already being successful to kind of set up the rest of the portfolio to be just as successful in their AI endeavor? Neil Hunn: Yes, I appreciate that. So I don't know if I would go as far as say like there's some think tank sitting in Sarasota that's like crafting all this. What it is, is we have clarity of purpose, right? So when you're vertical market, system of record, you're going to evolve like system of work, it's everybody -- the portfolio construct is so similar that we're running basically the same play across the 20-plus software companies. There's common purpose and common understanding about that. Then there is a lot of information sharing. Every 3 weeks, there's an AI sort of showcase inside of Roper. We have a few hundred people in sort of talking about 1 company or 2 companies to highlight what they're doing internally or externally, architecture, commercial, whatever it may be. We send a weekly e-mail about sort of where the state of the technology is, the state of the evolution of AI to galvanize the leaders. There's telemetry we're putting into our planning process that we're looking for, for both the product road maps and internal productivity. The group executives who, as you know, coach 6 or 7 businesses each, those businesses are together all the time on all things related to business, AI being a big topic of it. And I could see us in the not-too-distant future, sort of adding some resources at the corporate office at the center that are an overlay to all of that, that are really sort of scanning the horizon for the -- enabling technologies are going and how to apply that technology. Because at the end of the day, this stuff is hard. I mean it's what we're trying to do to identify tasks and work where you have to be deterministic and not probabilistic. It's hard to do. It's good that it's hard because when you do something that's hard, you create this magical moment for your customer, and that's where you can sort of have this win-win relationship on value. And so we're super excited about all that, again, have this high right to win because of all the context and data and decades of sort of accumulated knowledge about how these verticals work. And the final thing I would say is the real unlock for really anything inside of Roper is our org structure, right? where this highly decentralized high-trust autonomous structure, taking an $8 billion P&L gets put into 29 units. You have super talented leadership teams that are highly motivated intrinsically and through our financial reward system to compete and win in the marketplace, and this is the new frontier on how to do that. Joshua Tilton: Sounds like a good setup for AI success. Operator: The next question comes from Terry Tillman with Truist Securities. Terrell Tillman: Two questions. The first question is on software bookings and specifically with Deltek. The second one is going to be DAT. So first, in terms of software bookings, I think you said high singles in 3Q. So what are you assuming in 4Q? And the second part of that first question is, and maybe this is wildly optimistic, but assuming at some point, the government shutdown thesis, could you actually get those licenses in still in November or December? Or are you just assuming that doesn't happen? And then I'll have that DAT follow-up. Jason Conley: So -- yes, so thanks for the question, Terry. So I think for the fourth quarter, we'll see how it plays out. We had a very strong Q4 last year. So the comps are a little tougher, but I think it's the end of the year. And obviously, the pipelines look very strong across our businesses. You're right about Deltek. We're not assuming that's going to hit this year, but we've also seen customers make very quick decisions in the last few days, especially if it's sort of -- they've got an internal budget dynamic that they can utilize. So we're not assuming that at this point, but I will say just for '26, we do feel really good about what [indiscernible] is going to mean for Deltek. Additionally, I mean, just Deltek's had -- the markets haven't been cooperative just in general for the last couple of years. So the demand is definitely there. Deltek has done a lot to their cloud product. They're incorporating a lot of the new AI features that are going to be cloud only. So that should help drive some higher conversion. That's one of our -- I think it's our biggest maintenance base at Roper. So excited about the future, just need to get past this quarter of sort of uncertainty. Terrell Tillman: Got it. And then, Neil, on Slide 12, I like that slide, shows kind of where you've delivered on the platform. I know with DAT, pricing and packaging was an important kind of growth unlock and improvement this year. But now you have this idea of one-click automation and then newer areas that seem like they've expanded the TAM around management and payments. Like is there any way you can frame like how much you can garner now per successful load or transaction going forward with some of this newer technology versus the past or the present as you laid out on that page? Neil Hunn: Yes. I appreciate it. So yes, you're right. So the strategy at DAT, and I've called this out for a few quarters, if not longer, is we have this remarkable business that's a network between brokers and carriers, and we monetize both sides of the network on a subscription basis. And we have -- what we have is the market captured, and we have very favorable go-to-market unit economics, especially on the carrier side because the carrier, you get your authority first, then you probably subscribe to DAT second, so you can understand where you're going to grab your load from. So they -- it's a very efficient go-to-market motion on capture there, very unique go-to-market motion relative to the unit economics. So then the strategy is how do you just scaffold more value on both sides of that network. And then the ultimate value creation is the one you're talking about, which is how you sort of take the labor -- the task labor out of the matching of a broker transaction. As we mentioned today, we broker about -- there's about 1.2 million loads a day on DAT. There's about $100 to $200 in task labor savings for each one of those that's automated. So you can apply whatever percentage you think is fair. I'm going to leave that open at the moment. We have a good indication internally, but some small percentage of the total loads and then some small percentage, a fair percentage of the labor task savings, and you'll get a very large sort of opportunity. Now that's the opportunity. Now we have to go equip it. You've got to make -- we've got to integrate this capability into the TMS of every broker, so it's native. You got to onboard a large portion of the carrier base into this, which we're actively doing. So we're super excited. The early results were like sold out on the broker front. So the early results for integration is great. But there's a business we've got to go build here. And the reason that we're unique in this is that we're truly Switzerland. Like we don't -- we're not competing with the brokers. We're enabling the brokers, and it's a huge value savings for both the brokers and the carriers. Operator: The next question comes from Deane Dray with RBC Capital Markets. Deane Dray: Just want to get a clarification on the timing delays at Neptune. Our experience has been, especially recently going through COVID is once a utility is ready to place an order, they're unlikely to switch. It's already gone through the rate case. It's all a pilot study and so forth. So have they lost any of these orders? Or this is strictly delay at this point? Neil Hunn: No, no, just to be super clear. This is pushed to the right. So what we've done, and I alluded to this in the prepared remarks, is we have this tariff coming through. We at Neptune decided we concurred fully that they're going to assess a surcharge, which then you've got to go essentially recontract or renegotiate with all the open orders about how to do that, and it just puts some gum into the system. It's a little bit easier when you're going through distribution to do that because you have a distribution partner, you can sort of share some of this surcharge with, but when you're doing the direct business, that's a little bit more difficult to do it and a little bit slower. So this is 100% pushed to the right. In fact, Neptune reports, I mean, there was a little market share gain in the quarter for Neptune, but these sort of market share quarter-to-quarter are sort of a point here, a point there, 0.5 point here, 0.5 point there, but the latest report is the share has actually improved a little bit with Neptune in the quarter. Deane Dray: That's really helpful. And then a follow-up, and I'll echo the -- how much we appreciate that spotlight on DAT. And just the idea, can you talk about the implications of making the investment in Convoy. You added that it's not profitable, but just the willingness to subsidize and make that investment so you have this end-to-end automation, but just the implications of a bolt-on that's not profitable. Neil Hunn: Yes. So I'll just -- I'll start and ask Jason to add a little bit of color. In our case, it was very -- it was a unique situation for us. It was very much a buy versus build. This is very complicated. It sounds very easy. It is very complicated, complex algorithms to do this. They have to be absolutely deterministic. It's more ML than AI. There's a very large group of talented engineers that came with the acquisition. They're now part of the DAT sort of franchise. And so it's unique in that it's money losing at the moment, but it's like the final piece to sort of manifest the strategy of DAT and because of what we talked about earlier, we have such high conviction of what's going to happen here. Jason Conley: Yes. I would just add that, I mean, most of our strategies call for tuck-ins that are adjacent and they sort of fold them in. It's like we just did Orchard for Clinisys. That's sort of the bread and butter that we would do for bolt-ons. This is really a technology acquisition that was -- it's really to create a new market. And so I would say that's very rare for us, but we think it's a great opportunity. And so we're willing to make that technology investment. Operator: The next question comes from Dylan Becker with William Blair. Faith Brunner: It's Faith on for Dylan. Maybe expanding on the DAT question. It seems like this end-to-end platform has been in the making for some time. So can you talk about where you see DAT growing as you continue to build out this network and the long-term potential there? And maybe even how this can drive durability despite some of the headwinds we're seeing in freight? Neil Hunn: Yes. So we want to -- so the DAT core business is a low double-digit growth business when you get the benefit of some unit growth versus just packaging and price. So that's the long-term sort of organic growth rate of the core business. When you talk about this sort of this entire sort of tracking automated business, we're talking about adding a capability that doesn't exist in the industry that is multiples of the existing TAM. And so we want to see actual momentum in there before we quote sort of what the acceleration magnitude could be to DAT, but it's exciting for sure. So I know that's a little bit of a -- but not an answer you're not looking for at the moment, but we want to actually see the growth on the field before we call the how much accelerated growth rate that's going to be there. Faith Brunner: All right. No, that's helpful. And then maybe just double-clicking on Deltek. Can you maybe remind us what you guys saw during past government shutdowns and the impact to the business and any potential insulation there? Neil Hunn: Yes, happy to do that. So just to remind everybody, Deltek is 60% GovCon, 40% non-GovCon. We're talking about the 60% of Deltek that's in GovCon. What we've seen is when you have the government shutdown, it's the pending -- it's the potential of the shutdown and the actual shutdown that it just pauses commercial activity. The activity is still there. The pipelines continue to build. There's still discussions because everybody knows the shutdown will end, the government will be operational again, and we have this OB3 spending where we have to -- all that will be awarded and has to be delivered. It's just -- in the height of the uncertainty, there's just not a lot of signing of the purchase orders or the contracts. If this were -- hypothetically, if this were happening in March, we would probably not be calling down the year because there'll be time left in the balance of the year to sort of for the commercial activity to sort of resolve itself. It's just we're sitting here in the last 2 or 3 months of the year, we're going to run the clock out on the year and roll into next year. Operator: The next question comes from Joe Giordano with TD Cowen. Joseph Giordano: Just looking at App Software, I mean, if we strip out the Deltek GovCon stuff for a second and just think about like the acceleration of organic here, what's the catalyst for this? I mean you look back, I mean, it's been small variance, but we're kind of like 3 years around 6%, give or take. So like what in your sense is like really the catalyst to bring this into like a high single to -- more of like a high single framework? Neil Hunn: Yes. So it certainly will help when your largest business -- the largest segment of your largest business can sort of grow at its normalized growth rate. I mean we're a couple of years into sort of a slowdown with the uncertainties across all the government sort of spending so that helps quite a bit when you look at that. We've had -- just going through the businesses, Vertafore is steady for us, a lot of AI opportunity in front of that business, probably takes -- I mean, we'll see some early green shoots of that next year, but as we said earlier, probably more '27. Aderant has been just killing it. PowerPlan, doing a great job. CentralReach will turn organic, which will help. Frontline has been a little sluggish for the last couple of quarters, couple of years -- a couple of quarters, largely because of some uncertainty around the funding coming from what's happening in Department of Education. You've got this hangover from all the COVID spending and it's just now that's getting more normalized. So frontline reaccelerating, which is in the offing in the next couple of years will be super helpful to that regard. And then finally, our Clinisys business for the U.S. part of our laboratory business, the legacy Sunquest has just lagged for all the reasons that everybody knows for 8 years, and now that's turning or that's a mid-single-digit organic growth enterprise for us now. So that starts to help. So we like what's happening here in terms of the growth optionality and growth capability. Joseph Giordano: When you think about the buyback now and you think about the multiple of your stock, like what's the thought process when you're weighing like, okay, here's a $1 billion opportunity here or $1 billion of deploying capital. Like it used to kind of be pretty straightforward with where the multiple your stock was versus the multiple of what you're acquiring, and now it's kind of -- it slipped a little bit. So maybe talk us through how much that's informing your decisions on where to allocate at a given moment in time. Neil Hunn: Yes. For us, it's never been about the multiple of our stock. It's been what's in the compounding math for a cash flow acceleration, what's the best deployment of capital to optimize the long-term cash flow compounding of the enterprise. And now we just have another lever to buyback to put into that consideration set. Operator: The next question comes from Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start off with the outlook for TEP and Neptune, in particular, on the top line. So you had the backlog declining there for sort of 2-plus years. The revenue growth is slowing a little bit. So I just wondered sort of what's the confidence that, that organic growth on revenue doesn't continue slowing into next year, just given those backlog dynamics? Neil Hunn: Well, I think we got to -- so let's be clear about the backlog dynamic. This is about the buildup from the COVID period. I mean pre-COVID, this was -- you might have a couple of quarters of visibility to an order backlog. And it wasn't quite a book and ship business, but much more book and ship than it was when you ran up through COVID. And then all the customers gave us blanket orders that were a year plus out. Now we're -- when I spoke earlier, we're normalizing the order lead times slowly over time. So we -- the backlog grew and it's bleeding down based on this order timing dynamic. Set that apart from the demand environment, the market share environment. So that's point one. Point two, on the more normalizing piece at Neptune on the demand environment is we're just in a cycle now this year, probably next year, where we're just in normalized growth for that business, where the prior 2 or 3 years were accelerated growth because of the hangover from the COVID period. Julian Mitchell: That's very helpful. And then just my second one might be around sort of with all this effort around sort of AI, just wondered what the implication for that might be on your, let's say, core R&D. Is that -- could that be a bigger headwind to core margin expansion in future? And whether there's been any view to sort of looking to acquire more AI-intensive businesses within your overall capital deployment framework? Jason Conley: Yes. So actually, this is Jason. I think the -- it's interesting. We're getting quite a bit of activity using some of the frontier models out there, CloudCode, Codex, Cursor. And so we're not really seeing now. Obviously, we're going through our planning this year, but it's creating a lot of opportunity to just do more with less. And so that's the -- that's our posture is that our R&D envelope will probably stay the same, and we'll just get more out of it. And when it comes to acquisitions, look, yes, we'll look for small tuck-ins that we can do. We just did a really small one for Aderant, and that's not necessarily buying AI talent, but it's providing an AI solution that gets us faster to market. So we'll do those occasionally, I think it's not going to be our primary way to get after AI faster, but certainly will be an option. Operator: And this concludes our question-and-answer session. We will now return back to Zack Moxcey for closing remarks. Zack Moxcey: Thank you, everyone, for joining us today. We look forward to speaking with you during our next earnings call. Operator: And this -- the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. [Operator Instructions] You may submit questions also via X by sending a post to @TMobileIR, @MikeSievert or @SriniGopalan using hashtag #TMUS. I would now like to turn the conference over to Cathy Yao, Senior Vice President of Investor Relations for T-Mobile US. Please go ahead. Quan Yao: Good morning. Welcome to T-Mobile's Third Quarter 2025 Earnings Call. Joining me on our call today are Mike Sievert, our President and CEO; Srini Gopalan, our COO and incoming CEO; Peter Osvaldik, our CFO; as well as other members of the senior leadership team. During this call, we will make forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factors set forth in our SEC filings. Our earnings release, investor fact book and other documents related to our results, as well as reconciliations between GAAP and non-GAAP results discussed on this call can be found on our Investor Relations website. With that, let me now turn it over to Mike. G. Sievert: Thanks, Cathy. Great job. Good morning, everybody. Well, as you can see, Srini and I are here in New York with the senior team ready to discuss another truly extraordinary quarter for T-Mobile. But first, let me do a couple of welcomes. I want to first start by welcoming André Almeida to the team and to the table. André is a deep industry expert and a long-time colleague of Srini's. And he has also been a strategic adviser to me on many topics for many years. And I am so happy that he is here leading such a big part of our team. André Almeida: Thanks, Mike. Thank you very much. G. Sievert: And also, you all know Dr. John Saw, now serving as our President of Technology, and resident genius. John, thanks for stepping into this expanded role for us as President of Technology. John and I go way back to 2009 at Clearwire. So together and separately, we've been stewards of this centerpiece of T-Mobile's 5G spectrum strategy for a long time. It's great to have you here as our President of Technology. John Saw: Thank you, Mike. G. Sievert: All right. Well, let me just start by saying this. This call is an especially meaningful one for me as it actually marks the 50th quarterly earnings report for T-Mobile. And that means it's also my 50th report here. I've been here for every single one to offer my perspective and to help shape our narrative about the future, and I have had a blast. Leading this company over the past 13 years has been the honor of a lifetime. Together, we've transformed T-Mobile from a distant #4 player in crisis and decline into the world's most successful and customer-centric telecommunications company. I've seen T-Mobile go from last to first with the best network, the best value, the best customer experience in the market. And today, that margin of our differentiation is only widening, and the growth and financial momentum that flows from this, in many ways, only just beginning. I'm excited to continue to support this team right here and the strategies that enable this success in my new role as Vice Chairman. Just a few weeks ago, I talked about what it means to get CEO succession right, that you do it when three things are true. First, when the company has never been more successful; second, when the opportunity ahead has never been more exciting; and third and most importantly, when the leader to take us into the future is fully ready. Q3 is living proof that all three are true for T-Mobile right now. Now Srini is going to cover the results here in a minute with you, but I just want to say, wow, what another spectacular quarter. This team once again delivered the thoughtful, profitable and durable growth for which we are known. We smashed not only all-time customer records like best-ever postpaid account growth, best-ever total postpaid net additions while also leading the industry in postpaid phones with over 1 million nets and phone churn. But importantly, we also once again led the industry in financial growth by a wide margin across a wide variety of metrics, beating expectations again. Clearly, it is evident that this team under Srini's leadership executes like no other team. This quarter was a showcase of Srini's and this entire team's ability to rally the organization to deliver exceptional results while at the same time, building on the durable advantages that make it all possible. T-Mobile has never been stronger. Our growth runway is broad-based, our differentiation is widening. The Un-carrier ethos continues to disrupt the industry and delight customers. The opportunity ahead to generate even more outsized, durable and profitable growth across wireless, broadband, smart new adjacencies as well as digital transformation has never been more exciting. So with that, let's dive in. Srini, in more ways than one, over to you, my friend. Srinivasan Gopalan: Thank you, Mike. Hi, everyone, and thanks for joining in. I can't wait to start talking about Q3, but I'll take a minute. I just want to start by saying it's an incredible privilege to be here with this fantastic team, the best in the industry. And in the last 13 years, Mike, you have truly turned around this business and you've made the Un-carrier into this force for good, this disruptive, innovative, the most admired telco in the world. The network has gone from last to first like you've talked about, and we've delivered on industry-leading customer and financial growth. You and the team have created more value than any other CEO in the history of this industry, not just in the U.S. but globally. Thank you. Look, I've been involved in this team for some time now. And the one truly amazing thing the Un-carrier has done, and this is rare in this industry, differentiation. It's the one truly rare commodity in this industry. For a large part of this journey, that differentiation has come from outstanding customer value and experience. And as I look forward now, the foundation for the next big leap has already been laid. We have the opportunity to widen this differentiation even further with network leadership and digital transformation. I can talk about this all day, but I'll come back to it in our continuing strategy. But first off, to Q3 and the phenomenal quarter we've delivered. Starting with wireless. We had our all-time best postpaid customer account growth, and that's saying something when it comes from the Un-carrier. We achieved our best-ever total postpaid net additions and delivered over 1 million postpaid phone net additions, our best Q3 in over a decade. And that coming from T-Mobile is something. What I like is how broad-based this growth is. It's in the Top 100 markets, it's in smaller markets and rural areas. Even within the Top 100, our postpaid share of households is up where we're #1, #2 and #3 in market share. So it's truly broad-based growth. And it's not just gross additions momentum. In Q3, we led the industry in postpaid phone churn. So across the board, tremendous customer momentum. And it's not just volume, it's also in value. We saw postpaid ARPA grow by 3.8% on an organic basis when you exclude kind of the dilutive impact of UScellular, Metronet and Lumos. We're also delighted to have welcomed UScellular customers to the T-Mobile family, and provided them with immediate benefits from an improved network experience to great thankings like T-Mobile Tuesdays. Integration is off to the races. We're using everything from the T-Mobile playbook that we learned and perfected with Sprint, and we're simultaneously deepening our relationships. Let me turn to broadband, another huge growth opportunity for us. Again, we led the industry with over 500,000 customer additions on 5G broadband and over 50,000 on the newest addition to our family fiber, and that includes the contribution from Metronet following our close on 24th July. This is an amazing business. And here's an often underrated fact. Our 5G broadband ARPUs and customer lifetime values are very similar to our postpaid phone business, and that just drives great value creation. Now our customer results and industry-leading customer results flow through to industry-leading financial growth. Our postpaid service revenue grew by 12% year-over-year. Now that's obviously industry-leading. Our service revenue, as a whole, 9%. Core adjusted EBITDA, 6%. And another incredible quarter of service revenue to free cash flow conversion at 26%. So there's great customer momentum. And importantly, that's translating into that one key metric, cash conversion. So overall, an amazing quarter. Let me come back to what I was saying earlier about my strategic priorities and spend a moment on that. Let me start by saying I have enormous conviction in what the team outlined during Capital Markets Day, and even more so now that we're a year into that journey. Everything we've seen in the last year makes us double down on our convictions and convinces us that we're heading in the right direction. I expect continued profitable growth in our core wireless and broadband businesses. And this is the big deal, which is that momentum which we are seeing right now is being driven by widening differentiation, which means it's truly sustainable. And that widening differentiation is driven by kind of two big things. On the one hand, you have our growing network leadership, not just in reality, but in perception as well. And that's complemented by our digital transformation, which just takes pain out of the customer process. Let me talk about this in a bit more detail, start with the natural place to start, our network. We're often asked how big is this whole network perception opportunity? Let me give you some sense of it. One out of every three AT&T and Verizon customers chose them at some point because they were the best network. And these customers are paying a premium for something that is simply no longer true. You work the math. That means there are 70 million customers that are paying a premium for something that is simply no longer true and that we can unlock with our best network. And more and more of these customers are beginning to change their perception. In Q3, we hit an all-time high in our network perception amongst switches, and that's a big driver to the outperformance we're seeing. Now our network perception is changing because the reality is changing. Let me give you a couple of examples of how powerful our network is. Ookla data shows that our median download speeds on the new iPhone are nearly 90% faster than one of our benchmark competitors and over 40% faster than the other. That's why when you have jump balls with the device change, you see the Un-carrier's continued outperformance. Driving superiority in the network for a new device like this and such visible superiority is a huge driver to our performance. Another great example is our 5G broadband business. Now using the fallow capacity model in the last 2 years, we've nearly doubled our number of customers. Each of them use 30% more, so a phenomenal 580 gigabytes a month. At the same time, so doubling customers, 30% more usage per customer. At the same time, our average download speeds have increased by nearly 50% and our wireless speeds have gone up as well. That's what an ultra capacity network truly looks like. And we're not standing still. So we're making progress on perception. The reality is only getting better, and we will not stop. We're not standing still. We're building and upgrading thousands of new cell sites, many of which are in smaller markets and rural areas, and we're deploying and leveraging our nationwide 5G advanced network. I want all of you to know that I am committed to not only being the network leader of today, but also investing tirelessly to defend and widen the margin of our network leadership for tomorrow. Let me talk a bit about digital transformation. The amount of friction and frustration we cause customers today because of our processes and the state of evolution in this industry is phenomenal. We have a huge opportunity to change that with our digital transformation, and we saw great progress in adoption. Now I love this stat. Three out of four of our iPhone upgrades during our preorder window were digital. That is widening differentiation. Together with the stats I shared with you about network quality, that creates a moment where it's clear that we're different. And T-Life continues to be the center of our digital engagement with over 85 million app installs. Look, I can sit here all day and talk about all of this. But ultimately, what will matter is our results going forward quarter-after-quarter. And Q3 is just another proof point that the Un-carrier strategy is working, that our differentiation is widening. Now Peter will give you an update shortly on our guidance. I just want to say that I'm really excited to discuss our guidance in detail for '26 and '27 on our year-end call. I plan on increasing our guidance for '26 and '27, and that reflects the core strength in the underlying business and M&A. And I'm looking forward to our future. And as I look at it, it's even better than what we said a year ago. Let me conclude by saying our differentiation is only widening, this team's ability to deliver is totally unmatched. We've come a long way, and our most exciting days are ahead of us. Our future is bright. Our vision is clear. Our results will continue to speak for themselves as we march towards our lofty long-term goals. With that, over to you, Peter. Peter Osvaldik: All right. Thanks, Srini. As you can see, we had a fabulous Q3, which underpins the confidence in our increased guidance. So starting with customers, we are raising our expectation for total postpaid net additions to now be between 7.2 million to 7.4 million, an increase of just over 1 million at the midpoint. As part of that total, we are also increasing our expectation for postpaid phone net additions, now expected to be 3.3 million, highlighting the tremendous momentum we're seeing in the business. And on the strength of our T-Fiber rollout, we are also raising our fiber customer net additions guidance to be approximately 103,000 this year, up from approximately 100,000 previously. We now expect postpaid ARPA growth of at least 3.5% for the full year, including the dilutive impacts of UScellular, Metronet and Lumos. Excluding the impacts of UScellular and the fiber JVs, our underlying ARPA growth is now expected to be up approximately 4% for the full year. We now expect core adjusted EBITDA to be between $33.7 billion and $33.9 billion for the full year, an increase of $300 million at the midpoint, reflecting our ongoing core operating strength and the inclusion of UScellular into our full year guidance. And speaking of UScellular, in September, we both increased our synergy guidance to $1.2 billion in total OpEx and CapEx run rate synergies and accelerated the time line to realizing those run rate synergies to within 2 years of close. As part of that accelerated synergy realization plan, we expect to incur approximately $300 million in costs to achieve in Q4, primarily driven by merger-related costs related to UScellular, which will be excluded from core adjusted EBITDA. In network, where we remain focused on using our customer-driven coverage model to both defend and expand the margin of our network leadership, the merger also allowed us to accelerate a broader network transformation initiative focused on optimizing customer experience and value through cell site location optimization. As part of this effort in Q4, we expect to incur approximately $160 million in additional expenses related to cell site decommissioning that will be excluded from core adjusted EBITDA. With all M&A and financing incorporated, we anticipate Q4 depreciation and amortization expense of approximately $3.7 billion and interest expense of $1 billion. All right. Turning to cash CapEx. We now expect cash CapEx to be approximately $10 billion, an increase of $500 million, driven entirely by the inclusion of UScellular. And we now expect adjusted free cash flow, including payments for merger-related costs in the range of $17.8 billion to $18 billion, representing an increase of $200 million at the lower end of the range. All right. To sum it all up, not only did our results continue to demonstrate our ability to consistently execute and deliver outsized and profitable growth, we could not be more excited to carry our strong momentum far into the future. So with that, I'll now turn the call back to Cathy to begin the Q&A. Cathy? Quan Yao: Thanks, Peter. All right. Let's get to your questions. [Operator Instructions] We will start with a question on the phone and wrap a few minutes early for closing remarks today. Operator, first question, please. Operator: First question will come from Benjamin Swinburne with Morgan Stanley. Benjamin Swinburne: One for Srini, maybe one for Peter. Srini, you talked about sort of this -- the network perception gap and committing to narrowing that. Can you guys talk a little bit about your strategy and tactics to close that gap as quickly as possible? I would think the faster you can convince customers you have the best network across the country, the faster the business can grow. So your intentions are clear, but would love to hear about how you're thinking about making that happen beyond just spending more in marketing. And then, Peter, just going back to the USM synergies, very clear sort of how that's going to ramp over the -- well, very clear where you're going to get to at the end of the ramp. But can you talk a little bit about the path from here to full run rate, if there's any guidance you can provide to us on sort of the time line to capture all those synergies and what that looks like over the course of the next 2 years? G. Sievert: That's good. We'll start with the first question with Srini, and Mike wants to pile in on that one, too, and then pivot over. Srinivasan Gopalan: Yes. Thanks, Mike. Thanks for the question, Ben. Let me start with where we are on network perception. I mean one of the reasons you saw the outsized delivery this quarter is the extent to which we're already closing the gap. I mean if you look at this quarter, you saw at the margin more switching behavior. I mean that's due to a few different things. You had a new device going in. You also saw kind of churn normalization, partly driven by the fact that some of our competitors had 36-month contracts over a period of time, et cetera, et cetera, all of which meant at the margin more switching. And at that point in time, seeing our network perception really widened the gap. Like I said earlier, our perception among switchers is now at an all-time high. That's what drove some of the volume. So that gives you some sense of the critical impact this has. To your piece of what are we going to do about it, I think this is something we will attack across multiple vectors. Marketing is clearly one piece of it. There's also a reality, which is network perception ultimately is an incredibly local thing. It's down to how each customer feels about it. And when we think about activating all of our channels, activating digital to actually speak to customers at an individual basis, this is where some of our digital transformation and our network perception, our two big initiatives actually have a huge overlap. Using digital, using our local reach in stores and as an organization, becoming obsessed about how we drive this message of network perception home are central to how we drive this. The other piece is also just making it easier to come to us, because network perception is a barrier and inertia is a big part of network perception. So a lot of the stuff that we're talking about in our digital transformation just makes it a lot easier to come to us. And again, 75% of our upgrades, and you'll see an increasing number of our acquisition will come to us through digital channels. And that reduces a lot of the barrier of the switch because one of the big barriers is just kind of, I kind of get that T-Mobile now has the best network, but am I going to take the time to do it. So that's -- it's a multitude of initiatives. And to a large part, it's the intersection space between our digital transformation and our network perception. G. Sievert: Anything to add, Mike? Michael Katz: Yes. The only other two things I'd say is continuing to have the best network. We have a network that's 2 years ahead of everybody else. We've talked about it being still 2 years ahead 2 years from now, and making sure that we're widening that gap. And we've talked a lot about our strategies using things like customer-driven coverage to direct our network capital into places that really matter for customers to improve their experience, to make sure that they have the best possible experience there. And then when you have big switching like in quarters like this one where we have over 400 -- we have nearly 400,000 accounts come, that is one of the biggest ways to change network perception. Because think about the way that you learn about network perception. It's from friends and family and neighbors. And the more of those customers that join T-Mobile that talk to it about their friends and families, yes, we'll do marketing and all those things, but the most powerful way to change perception is from recommendations from the people around you. So big -- continuing to have big quarters like this one is a big part of changing those perceptions. G. Sievert: Love the question, Ben. Hopefully, what you're hearing from us is lots of confidence because we're in this kind of sweet spot on this one where the data tells us two things simultaneously. It tells us, one, what we're doing is working. And it was a big factor, as Srini said, in fueling all-time record customer results this quarter. So that's great. And at the second time, the data also tells us there is lots of room to run here. So a lot of people still have yet to make a decision either on the vector of it being worth it or on the vector of it being better. And that just shows us a strategy that's working, has lots of potential tailwind to fuel our business into the future. So we're feeling good. Peter Osvaldik: All right. UScellular, I couldn't be more excited about how we've hit the ground running, both with Jon Freier and his team from a customer perspective and Dr. Saw running to the races on network. So you're going to see this kind of go exactly, except quicker than Sprint. And what that really means from a modeling perspective, I won't get into the dollars, we'll incorporate that into our '26 and '27 guide. But you're going to see us invest in those costs to achieve early on. So I'd expect the vast majority of those to come in 2026 and then achieve the full run rate of those synergies. Remember, it was $950 million of OpEx synergies and $250 million of CapEx synergies, and we'll achieve those inside of 2 years. So as I model it out kind of by the end of '27, you're going to have those full synergies already coming to bear. Quan Yao: Thanks, Peter. Operator, next question please. Operator: The next question will come from John Hodulik with UBS. John Hodulik: And one last congrats again to Mike on his retirement. G. Sievert: Thanks, John. John Hodulik: Can we dig into the broadband business? I guess, first on the fiber, you guys had some new disclosures. But I guess for Srini, how big of an opportunity do you think the sort of fiber business is? I know you have targets out there for homes passed. But can you talk about how many sort of homes passed you have now at fiber, how you expect that to grow? Any targets for penetration? And then maybe comment on the sort of environment for more deals to potentially back up the JVs you already have out there. And then on the fixed wireless business, obviously, a big quarter. What's the opportunity there? And sort of what drove those sort of big lift in net adds this quarter? And sort of how do you see that playing out as we look into '26? Srinivasan Gopalan: Thanks for that question, John. So look, I'll talk about the big picture in terms of how we see broadband as an opportunity first and then spend a few minutes on FWA as well as fiber. We're really excited by the broadband opportunity. This plays to the heart of the Un-carrier, because what we've got here is customers in a place where they have an inferior product quite often, where they're paying a huge premium. It's classic Un-carrier territory, going in and attacking incumbents who have not invested in their networks and who are charging a large premium for a product that isn't living up to expectations. Now we'll go after that with both FWA as well as fiber. We see those as complementary. And the way we think about both those businesses is setting them up in a way that the economics allow us to pursue the Un-carrier strategy. What I love about FWA is the heart of it is the fallow capacity model. And what we're benefiting from is the ultra capacity network, but also the rapid evolution you're seeing in mobile technology, which is moving far quicker than a lot of other technologies, which is giving us more and more runway and also making the product incredibly sustainable. We see FWA as not a temporary category, but something that's here to stay as mobile technology gets better and better and taps into a customer need, which a lot of people trapped in old relationships with incumbents are suffering from. Fiber, again, we've been very thoughtful about setting up the economics in a way that we can scale and sustain this business. The way we thought about fiber is go after specific places where we're confident that the economics will work for us to create a win-win situation for customers. That's been the heart of the areas that we've picked fiber, places where we're either first to fiber, near first to fiber, places where we believe we can set up these JVs that allows us to be capital-light. Also, these JVs allow us to bring complementary skills into the things that we bring to the table like distribution, like the brand, along with the expertise that those folks bring in. Now we've talked about numbers on both of those. Let me just hand over to André to share his perspective on the scalability of these businesses. André Almeida: Thank you, Srini. So as you said, and I'll just double-click on a couple of the topics. One, I think we're very, very happy with our FWA results. I think as Srini mentioned in his opening comments, we did more than 500,000 net adds. That's an impressive 22% year-on-year growth. So we see a lot of strength and a lot of runway. And what I think has been outstanding about our FWA product is it's not just industry-leading, something we introduced into the U.S. in 2021 is the product keeps getting better. In 2 years, the speeds that we're giving our customers have gone up 50%, while we almost doubled the base of customers we have. So this is clearly, as Srini mentioned, a very sustainable product that we see is here for the long run. On fiber, I think we've been very consistent. We see this as a great complement to our FWA nationwide offer. And we love the business under the right parameters, as Srini said. And these parameters for us have always been threefold. One is technology. We love fiber, and we love the fact that we can be present in the two technologies that are gaining share in the U.S. market, FWA and fiber. The second one is price. We went -- go into fiber and FWA to create outsized returns for our shareholders. That means we need to be able to look at these opportunities at the right price, at the right valuation. And lastly, as Srini mentioned, is structure. We are committed to our capital-light structure because it not only allows us to scale, but it also allows us, as Srini mentioned, to use complementary capabilities. We're great at what we do. Our brand translates very strongly into fiber, and our early results show it. But we also love to bring in partners that are experts in building out and to make sure that the two of us together can create the best of both worlds. And as Srini mentioned, a win-win for customers. Srinivasan Gopalan: So John, hopefully, what you're hearing is lots of confidence in the numbers that we've put out. We've said 12 million fixed wireless access. We've said 12 million to 15 million homes passed on fiber. Are we looking at new assets? Yes, as long as they fit the criteria that André just laid out. But you know what this theme is like. We put a set of numbers out there. You can see the confidence we have in hitting those numbers, and then we strive to exceed them. That's exactly what you should expect in broadband as well. Quan Yao: All right. Great. Let's move on to our next question, please. Operator: The next question will come from Sam McHugh with BNP. Samuel McHugh: A couple of quick questions. First, just running the numbers on cost of acquisition. It doesn't look like you're spending a ton more on a per sub basis to acquire these customers versus recent quarters, which I think is quite encouraging. But can you just tell me what you're seeing in terms of SAC and SRC as well and the competitive environment? And I guess related to that, Srini, you talked about digital customer acquisition. I'm a Verizon customer, so apologies. I've been trialing the T-Mobile network with the T-Life app and the eSIM. Is that what you're talking about when you think about pushing digital for customer acquisition? Should we expect you to be a bit more vocal about the ability for competitor customers to trial the T-Mobile network and then go through the customer acquisition journey through the app? Is that what we're looking at? G. Sievert: Well, let's start with Peter on the first question and then maybe turn to Srini on the second question. We probably won't be able to give you as much as you're hoping for on this, Sam, telling you all of our plans on how we're going to compete. So you might be a little unsatisfied, but we'll start with the one we could answer. Peter Osvaldik: Absolutely. Let me -- you're not asking for my spreadsheet this time, Srini's. Look, you're absolutely right in terms of we continue to see extremely strong customer lifetime values. And from a SAC perspective and everything that comes from that, including linkage of our top-tier promos primarily to highest tier ARPU plans. And you'll love this. In fact, we now believe for the full year, we'll have ARPU increase of approximately 2%, so up from 1.5% that we had previously guided to. So that's really strong. But yes, we're continuing to see very strong customer lifetime values. And of course, it's because promos are an element of this industry, always have been. It's great when you see promotional times like holiday seasonality because it creates more customer consideration. And in those moments, we win. But one of the big tailwinds that we're also seeing that drives customer switching to T-Mobile as we've been talking about here so excitedly, is this best value, best network, best experience proposition. And the more we're getting from a tailwind on best network, that's just another benefit in terms of why customers are coming here. So we're very excited about what we're seeing from customer lifetime values and how that translates into ARPAs and ARPUs. Srinivasan Gopalan: Yes. So on the digital acquisition bit, Sam, as Mike said, we're not going to talk to you about all of our plans in detail. But look, a good parallel of what you should expect is what we did with upgrades. Like we said, 75% of our upgrades are now on T-Life. Now the heart of getting there was to actually take the upgrade process and simplify it, which is to take this painful -- I don't remember, John, it was what, 36 steps or something like that, and bring that down to something which feels like a transaction you're doing in 2025 rather than in 2002, right? It's -- digital acquisition and moving our customers to digital is fundamentally going after customer pain points and going after the way we've always done things in this industry and change -- and radically relooking at that process, and just making it simpler to do the one thing you can't do on your wireless, which is buy wireless. We feel it's kind of crazy that you can do. You can shop for any other category on your wireless except for wireless, right? And so it's a lot more than some of the things of we've been doing like test drive and being able to try out the T-Mobile network. It's a comprehensive relook at the entire process, and we'll work at that. G. Sievert: AI is playing a big role in this. And we talked a year ago about our intention to co-invent IntentCX with OpenAI. And in these breakthrough results you're seeing on the upgrade path, that's starting to come together. So quietly, some of the early elements of IntentCX are hitting customers now. And one of the reasons, I love it when you say this, Srini, like you could buy everything under the sun from this mobile phone, except your mobile phone service at scale. And the reason for that is that it's complicated -- it's a very complicated transaction involving trade-ins and valuing trade-ins and signing up for a 2-year payment plan, picking a plan, getting a promotion against that plan, possibly a promotion against that device and people throw their hands up and say, I need help. Well, AI is great at making the complicated uncomplicated, and we're seeing that in our upgrade flows. You start with your existing customers that already know how to transact with you, but there's obvious extensions here. And it's really great to see the power of this partnership starting to pay dividends. Quan Yao: Great. Thanks, Mike. Thanks, Sam. Let's move on to our next question on the phone, please. Operator: The next question will come from David Barden with New Street Research. David Barden: It's really great to be here again. Srini, congratulations on the new seat. Mike, while I have you, I wanted to follow up on a couple of things. One was, last quarter, you were joking with Craig about how new the satellite product was, and you didn't have any real color on what it meant for T-Mobile to be partnered with Starlink. I would love to get an update on kind of your learnings there and what that partnership means for you and how that partnership might be different than, say, AT&T and Verizon who have invested in AST SpaceMobile? And the second thing would be just on the comments you were making about the AI stuff. A year ago, you had Sam and you had Jensen on stage and you were talking about all the amazing stuff that AI was going to do as you kind of maybe disrupted the business model, the way you disrupted the go-to-market model in mobile. Could you kind of give us where we are now on that path? And maybe Srini could add where we're going to go. G. Sievert: Yes, I'll make a couple of comments and then turn to Srini. First of all, how we do it is we tend -- one of the things that has always worked well for T-Mobile is we look around corners. And you think about when we kind of invented the fixed wireless industry, nobody really believed us that we would create what we've created. Now they're all following and their best argument is, well, maybe it's temporary, maybe it will only last a decade. I mean good luck with that. So we saw that future, and now we're leading that industry. When I went on stage with Elon to say we were going to co-invent satellite directly to your cellular, people didn't believe that, that would happen. Some did, some didn't. But then what happened was really interesting. We did that announcement, so everybody would know we had this technology alliance. And then we put our heads down and did the inventing. And it took 2 years before we came back with a product and began beta testing it. And so that's what we did a year ago. We talked about the future of 6G and that together, we intended with the world leaders to craft 6G for the benefit of T-Mobile and T-Mobile's customers. And that an inherent part of this was this idea called AI-RAN that AI would be at the core of 6G networks and that it would be something that would be co-invented with T-Mobile's influence. And so we brought Jensen, we brought Nokia, we brought Ericsson, NVIDIA, and we laid out a future there. We did the same thing with how AI could transform subscription-based businesses. You can't just take all those models and implement them. You have to co-invent agents for every customer intention. And when you can do that, you can serve customers where they are, you can meet them with exactly what they're trying to accomplish and solve their problem and create a deeper relationship faster and more efficiently than the old way. And so these are the things we do. We lay out a future. We then go put our heads down and do them. To the question that you're asking, how are we doing at the ones we laid out a year ago, we are so pleased with it. As I said, IntentCX is well on its way. In fact, it's starting to touch customers now, which is really great. It's starting to affect our actual results, as you saw in these upgrade rates. And what we're doing in the labs together with OpenAI about how we can totally transform the customer experience is blowing our minds. So we are really excited about that. You also asked about what we see in the future as it relates to direct to sell and SpaceX. And it's hard to predict right now other than that it's going to get better. We see version 2 over the next few years is going to be backed, as you saw in recent transactions by more spectrum. That means as an adjacent service to terrestrial, something that adds on and makes dead zones more of a thing of the past, it's going to get better, and that's our whole goal here. So I don't know if you want to comment on what you're seeing, Srini, working closely with them. Srinivasan Gopalan: Yes. So I think there's this one remarkable thing about us as a company, right, which is this ability to have a clear vision, deliver stuff today and then build for tomorrow. Now the same thing is true of satellite. We work very, very closely with SpaceX. I mean the whole idea of flying towers in space, being able to communicate with the mobile device, which was also moving. That technology is something that people like John Saw have worked very closely with SpaceX to really invent. And our vision of this whole space started off with the end of dead zones. I think we're making huge progress on that. But when I pull together everything from 6G to satellite and the rest of it, I'll draw a parallel to where we are in 5G. We've invented a lot of this space. We're continuing to work on that. We believe as this technology matures, we will be 2 to 3 years ahead of the rest of the industry, just as we are in 5G. And that's the core of it, which is deliver things today that customers can actually use. We're seeing that in terms of upgrades on our plans. We're seeing lots of customers being able to benefit from this. And at the same time, have this vision of the world where we will be 2 years ahead of everyone else as the technology evolves. I think the same thing is true of AI as well. AI today makes a massive difference. The stuff Mike Katz was talking about in terms of customer-driven coverage, that is AI in use today. And at the same point, we're looking at what is everything we can do in the future, how does AI sit at the core of our network and drive everything we do with our network. Quan Yao: Great, thanks. Let's move on to the next question, please. Operator: The next question will come from Michael Rollins with Citi. Michael Rollins: Mike, congratulations on your successful tenure at T-Mobile. Best wishes as you move on to your next role as Vice Chairman. And Srini, congratulations on becoming CEO. So in terms of the switcher pool, can you discuss what you're seeing from that? Do you expect it to be higher for longer? And given that you use a 2-year EIP for your devices, is there something about your customer cohorts that could result in a future increase in upgrade rates to sustain or enhance customer retention? G. Sievert: Yes. I mean let's start by pointing out that we're just ending now as an industry, a cycle where we did see industry churn, particularly at our two benchmark competitors suppressed temporarily as they moved from 2-year to 3-year payment plans across the majority of their customers. And now we're starting to round trip those 3-year plans and customers are rolling off those at a normal pace. And so what you're seeing across the industry in 2025 is industry churn kind of returning to normative rates based on that dynamic and lots of other dynamics, but based on that dynamic. We haven't announced any plans to change our payment plans. So you have a run rate happening now that has a little bit of elevated switching due to a number of different dynamics, but that's certainly one of them. And just on the margin, this is really good because as you saw in this quarter's results, I mean, as Srini likes to say, more jump balls is good for us as the net share taker. And so that's a dynamic that we really like. Maybe, John, you could talk about what you're seeing out in the marketplace as it relates to the state of competition because I know one of the things that's kind of implied in your question is that a lot of people look at our industry and they're concerned about "overinvesting" in competition. We've covered earlier that, that's not what's happening, at least not at T-Mobile. We're really comfortable with what we're seeing. But what are the dynamics driving our outsized performance out there in the marketplace? John Saw: Yes. Thank you, Mike. And thank you, Mike Rollins. The overall dynamics is it's pretty consistent relative to the overall promotional activities that are happening into the market. So what you're seeing with us is this overall widening differentiation that both Mike and Srini have talked about that more and more people are realizing that there's a far better experience with the network at T-Mobile in addition to our long-held fame of value. And then, of course, what we're seeing is more opportunities in our Top 100 markets and then, of course, in our smaller market rural areas where we have continued growth out there. So this promotional construct that we've been using has been really resonating, which is our new plans on our experience, more experience beyond plans, some of our no trade up to a certain value in terms of what you're getting with us. All of those promotional constructs are working really, really well. But the overall environment is just generally being consistent. And then like what Mike said just a few moments ago, more switching in the marketplace against that backdrop is definitely helping to fuel our overall momentum in the marketplace. And of course, with lower churn and better retention that you're seeing from T-Mobile, coupled with higher gross adds, that's producing the overall volume that you're seeing in the marketplace. So we feel really good about what happened in Q3, obviously. We're seeing that momentum continue into Q4 so far, and that's reflected in the numbers and the guidance that you heard from both Srini and Peter just a few moments ago. So all of that's going incredibly well. We're excited about it. It's going against our plans, and that's what's really happening out there in the marketplace. G. Sievert: And what about -- how is it affecting customer lifetime values, the state of the competition out there? John Saw: Yes. Our CLVs have been very, very resilient. So when you look at -- we look at this, we don't report, obviously, CLVs, and we don't look at this on a daily or a weekly basis. But we certainly look at it and monitor these very, very carefully on a monthly and quarterly and ongoing basis. But overall, CLVs are holding very, very constant. As you're seeing premium plan adoption, customers self-selecting up that rate card continuing to increase, churn continuing to decrease relative to what others have seen in the marketplace. So overall, CLVs are holding very, very steady across the entire portfolio. G. Sievert: It's interesting because one of the critiques that some people have in the industry is they cherrypick one metric such as a device promotion and a broad CLV picture for customers and talk themselves into saying, well, competition is overheated. But that's not our experience. That might be an experience at some other companies, I don't know, but it's not our experience. And I think it's important to see because it's overall an equation of how long does the customer stay, what else do they buy from us, how deeper does their relationship become, how do we monetize that relationship, how efficiently can we serve them and so on. And all those -- even Peter has been forced to admit that our ARPA guidance needs to be increased yet again, and that's saying something. Quan Yao: All right. Thanks, Mike. Next question. Operator: The next question will come from Craig Moffett with MoffettNathanson. Craig Moffett: Mike, let me be on the long list of people saying congratulations on a remarkable run. And Srini, congratulations on stepping into the new role. And while I have all of you, let me also say Happy Birthday to Cathy. Happy Birthday. Quan Yao: Thanks, Craig. Craig Moffett: I want to ask about the iPhone cycle. There's been a lot of talk about this being certainly not a super cycle, but at least a more normal and more robust cycle than the last couple of years. Are you seeing that? Do you think that, that's likely to have carryover into the fourth quarter? And if so, what kind of opportunities does that create? And what kind of cost does it create in terms of accelerated number of subsidies that you would have to give for retention as well as customer acquisition? G. Sievert: Okay, great. Srini? Srinivasan Gopalan: Yes. Thanks for the question, Craig. So we're seeing -- this has been our best iPhone performance. We're seeing a strong cycle. Now to your questions of what does that land up meaning for promotions and spend and the rest of it. Look, the heart of it is every time there's a new device, people sort of reassess their choice. And that's one of the big drivers to our momentum in the last quarter. And when people reassess their choice and differentiation has widened, you see the kind of performance you saw in the last quarter. As we look at Q4, our momentum into Q4 is continuing to be strong, and that's driven our raise in our guide on postpaid phones. And so we're feeling really good about where we are in Q4. Now one of the really nice things when you drive volume through widening differentiation rather than simply promoting is you can drive volume at the same point as deliver the outsized financial results we've delivered this quarter. So we're feeling really good, and that's reflected in kind of our guide for Q4, not just in terms of what we're saying on volumes, but also what we've said in EBITDA and importantly, free cash flow. Quan Yao: Great. Thank you so much. Operator, let's do one more question on the phone, and then we'll turn to social. G. Sievert: All right. And I'm wondering, too, could we make it a hard hitting question for John about the network. I said in my opening remarks, by the way, this is my 50th one of these. And in the era where we had me and John and Braxton and Neville, Neville did all the talking because nobody could understand that we might actually be able to build a leading network. So he was always explaining it. So poor John is going to sit here because everybody is like, hey, yes, you guys have the best network. We're convinced. Anyway, sorry. You don't have to ask about network, I'm just kidding. Operator: The next question comes from Eric Luebchow with Wells Fargo. Eric Luebchow: Great. I appreciate it, and thanks Mike and Srini for all the comments. I guess I will try to touch on the network given that prompt, but maybe you could talk a little bit about your spectrum positioning today. Obviously, one of your competitors announced a large deal. There's another block of spectrum AWS-3 that's speculated out there. So certainly seems like they're coming with more spectrum soon. You talked about not just defending but extending your lead over the next couple of years. So can you talk about what you're -- where you're still deploying spectrum, maybe where there are opportunities to add given the balance sheet strength you have and other things you're doing on the technology side within the network to help extend the lead. That would be great. G. Sievert: I love it. Eric, all kidding aside, that's actually -- that's a really important question. And maybe we start with Srini, characterize what you saw in those transactions, maybe what our thinking, our thought process is and was. And then maybe we can talk -- hear from John, too, because while spectrum is the lifeblood, we're the leaders here and intend to remain the leaders and extend our leadership. There's a lot more to network leadership than spectrum. But first and foremost, on spectrum, Srini. Srinivasan Gopalan: So we love our current spectrum position. We not only have more spectrum than anyone else, we have better spectrum than anyone else. Now that drives a lot of decisions. And we see ourselves as kind of incredibly responsible caretakers of your investment in us. And therefore, the way we think when spectrum comes up, and there's been quite a few secondary market transactions on spectrum. We go through kind of the rigorous analysis of what is better. Is it better to buy the spectrum? Or is it better to densify? And our answer in all of those cases was it was cheaper for us to densify than pay the price that was being asked in those secondary market transactions. Now other people might have to make different choices. And in some sense, the fact that they have to make different choices is a reflection of the gap in our spectrum position. And that's the way we've thought of a lot of the conversations that have happened to date. Now let me be also kind of crystal clear on one thing. My intent is not just to defend our spectrum leadership, but to grow it. And the good news is we see several opportunities to do that in the coming years, whether that's other kind of strategic secondary opportunities or whether it's the auctions that will come by. And we feel in a very, very good place to go out and defend and even expand our spectrum lead. But like Mike said, building the world's best network is a lot more than spectrum. And John, maybe you can talk a bit about that. John Saw: Absolutely. First of all, I'm glad that there's actually not that many questions on the network because I think the network speaks for itself. It is our product. And you can see its impact on customer acquisition and customer retention. So absolutely pleased with where we are. A couple of words on our network leadership. And Srini, you're right that it's more than spectrum. It starts with our cell sites. We have more sites than the competition. And the grid of our sites are actually the denser as well, built like a layered cake with the right technology and with the best propagating low-band and mid-band spectrum. Now we were also the first to roll out stand-alone -- 5G stand-alone network, and our competition is just now getting started on it. And with this stand-alone network, we have launched new capabilities like slicing that is actually powering new services like T-Priority for first responders and SuperMobile. We were also first to roll out a 5G advanced network earlier this year. And with that, we have actually unlocked new capabilities ahead of our competition, like low latency, application-aware called L4S, better performance on uplink and downlink. It is not surprising at all to us that the latest smartphones released to the market performs best on our network. Like Srini said, 90% faster on iPhone 17 than one of our competitors. And not to leave our Android, the Samsung S25 is more than 100% faster than that same competitor, right? And by the way, and I can go on and on, but one thing, the Apple Watch this year that was released this year actually runs on our 5G advanced network using a new format called 5G rate cap, which is actually, for the first time, 5G optimized for wearables. Which means longer battery lives, lower latency and higher throughputs than those LTE watches that is running on our competitors' network. I can go on and on, but Eric and Mike, this is -- we won't stop. And with these assets and these capabilities, we are going to maintain and extend our lead for years to come. Quan Yao: Great. Thanks so much, John. Operator, let's actually take our final question from the phone, please. Operator: Yes, ma'am. That will come from Kannan Venkateshwar with Barclays. Kannan Venkateshwar: Maybe Srini, one on the balance sheet and Peter, for you as well. But broadly, when we think about the differences between the different operators right now, one of the biggest advantages you guys have versus your peers is you have massive balance sheet capacity, and your peers are now more constrained. It might be useful to get your perspective on how you could leverage that position. I mean you could obviously drive a more aggressive go-to-market strategy using that, but you could also use that balance sheet in other ways, like you mentioned spectrum or fiber or something along those lines. So it would be good to get some perspective on how you view your position from a balance sheet perspective and how you plan to use that. Srinivasan Gopalan: Thanks, Kannan. Look, we're delighted we have the strength in the balance sheet. And the way we think about it is strength in balance sheet does not take away our responsibility to be incredibly thoughtful stewards of your capital. So we do have strength in the balance sheet. That doesn't translate into, therefore, let's go do a bunch of things which don't make sense from a capital allocation perspective. One of the most rigorous processes we follow is how we thoughtfully allocate capital, right? Now you've talked about fiber. We will continue to pursue a capital-light strategy in fiber because it brings us a bunch of other skills that our partners bring to the table. Go-to-market, we will focus that based on what CLVs make sense, not because we have more balance sheet strength. From a spectrum perspective, we'll again follow the rigorous process of buying spectrum that makes sense from our portfolio perspective, buying spectrum where it passes our test of it's better to buy than to build. So love the balance sheet strength. But let's be clear, we're not going to be any less responsible because we're strong. G. Sievert: I love that. And the other thing that didn't come out in our spectrum discussion is sort of our speculation about the future. I mean one of the things that has happened this year is that auction authority has been restored to the FCC by Congress, along with a mandate to make a large amount of spectrum available. And spectrum prices, as always, will be a function of supply and demand. We see a lot of supply coming. Prices right now in the market are a function of low supply and a function of a once-in-a-generation sort of existential threat faced by our benchmark competitors at the time of the C-band auction created by T-Mobile that pushed prices to unprecedented levels, and that's where they stay. That will probably change over time. That's our bet. And the difference between us and others is that they might be in a business place where they need to act right now at these elevated prices, where we have the ability to be patient and pick our moments on spectrum. And we see those moments coming. So we -- as Srini says, we will not just defend but extend our lead over time. And certainly, entering those with a strong balance sheet is an element of it. And I just love your point that then like now, we will be thoughtful and we will be great stewards of your capital. So hopefully, that helps. Quan Yao: Thanks, Mike. All right. That's all the time we have today for questions. Mike, before I turn the call back over to you, I'm first going to hand the mic over to Srini for just a couple of brief comments. G. Sievert: I don't know if you guys are watching. I don't know if you're watching this instead of listening to it, they just brought us all champagne. Is that because of our quarter? It's got to be because of our quarter. Srinivasan Gopalan: Mike, look, I just wanted to say thank you so much. You've shown us what the Un-carrier spirit truly is like. You've shown us what it is to make bold bets. You've shown us the kind of grit that turns kind of ambitious goals into everyday wins. And for me, thank you for everything. Thank you, everything you've done -- for everything you've done to this team. And personally, thank you for being a great friend, thought partner and also just a wonderful human being. And I'm really looking forward to continuing to work with you in our next chapter. G. Sievert: All right. Thanks, man. Thank you, guys. Hopefully, over the last hour, what you saw is what I told you a month ago that this company is in great hands. We heard mostly from Srini today, that wasn't accidental. We wanted you to hear his voice and his vision for the future. You are going to be an exceptional leader for us and for this company. And of course, you're going to have the benefit of being backed by the best management team in American business. So you guys, it's been an honor and a privilege of a lifetime to be the CEO, and I look forward to continuing to support this team in my new role. I promise we don't plan to spend the day running your company day drinking. Thanks for joining the call, everybody. Cheers. André Almeida: Cheers. Quan Yao: Thanks, guys. Operator: Ladies and gentlemen, this concludes the T-Mobile's Third Quarter 2025 Earnings Call. Thank you for your participation. You may now disconnect, and have a pleasant day.
Kati Kaksone: Good morning, everybody, and welcome to Terveystalo's Q3 Results Call and Webcast. My name is Kati Kaksonen. I'm responsible for Investor Relations and Sustainability here at Terveystalo. As usual, we'll go through the result highlights with our CEO, Ville Iho; and our CFO, Juuso Pajunen. And after the presentation, you will have a chance to ask questions. I will take the questions from the phone lines, as well as through the webcast, after the presentation. Without further ado, over to you, Ville. Ville Iho: Thank you, Kati, and good morning from my behalf. Let's dive directly into Q3 highlights. As you can see from the numbers, this quarter 3 was a quarter of margin improvement amid a revenue headwind. So the EBIT -- adjusted EBIT margin developed positively; very strong operating cash flow; EPS developing positively as expected; very high NPS, taking all-time highs all the time; but then with a decline of some 5% top line, adjusted EBIT in absolute terms slightly down. Double-clicking into different P&Ls and their role in the business, how they are contributing and continue contributing in the future, starting from Sweden. Just as a reminder, Sweden is in a phase still of turnaround. We have been adamant in the fact that we continue focusing only on turnaround and profitability improvement. Sweden is getting -- our Sweden team is getting the results. The underlying efficiency is continuously improving. The results continue to improve. The market being fairly muted at this stage still, we are not making proper profits yet. But looking at next year, volume development looks positive, and we start making results, and then it's time to focus on growth. Portfolio Businesses, quite the same story. The profitability turnaround has for large parts happened. Some minor fixes in smaller businesses, but the bigger businesses are doing fine and developing positively. Now, it's time to grow, and we are eyeing specifically in 2 different segments, as we have said before, dental and then opening public market. Healthcare Services, our biggest business, margin on a very, very high level, really strong, starting from a very strong position. Now, our eyes and focus turn into volume growth, and we continue to boost that one with selective specialties-driven M&A, and then investments in digital delivery and capabilities. Further double-clicking into the strategic agenda, as I said, Sweden profitability improvement program, [ Gamma ], almost done and dusted. Efficiency in all-time high level. Now, looking at organic and potentially inorganic growth there on a solid base. Portfolio Businesses, as I said, profitability improvement done and dusted. Now, organic growth in dental and also inorganic growth in dental and public partnership being relevant in the opening market when health care counties are actually starting buying, where we have seen positive signs already. Inside Healthcare Services, we are seeing very strong development in our consumer-driven businesses. We continue boosting that one, Kela 65 being a prime example of sort of a positive drive. Also in insurance business, our position continues to be strong and developing nicely; out-of-pocket in good place and developing positively against the low morbidity. We have reorganized our operations and our delivery model so that there's clearly separate brick-and-mortar delivery through our health care services or hospital network, and then, now, forcefully and decisively scaling up the digital health 10x, where we are eyeing at major leaps in efficiency, in transactions, more intellect in our patient and customer steering, and then finally, truly scaling up truly digital health care services, tech-based services, nurse services and in very near future also, AI-supported health services. Among all the positive developments, the challenge currently, which we'll further discuss is in occupational health care. We know exactly where we are. We know how to turn around the negative development. There we have a program called [indiscernible], led by new SVP, Occupational Health care or Corporate Health, Laura Karotie, and that one will be discussed in more detail. So, all in all, agenda, very clear, sort of 9 out of 10 moving very fast to the positive territory, more focus needed for occupational health care, which will be fixed. Looking at the volume development and our sort of view on markets in near term, next 12 months, starting from the smallest, Sweden, as we have communicated many times, the market has been very soft. Swedish economy has driven the demand for occupational health care services very low. Now, looking forward, both the market seems to be picking up. Sweden economy is doing better next year. But more importantly, looking at our internal view on the sales funnel, commercial activities, sales funnel looks positive. And when we are able to do, in next year, more volume on higher operating leverage, of course, then we'll start making money. Portfolio Businesses, public business, as all know, has been very, very slow in buying. Health care counties are only sort of picking up the buying activities. What we see in large tenders and also in smaller tenders is increased activity. And looking at the next 12 months, we see the market developing positively. Same goes with the consumer business. It has been fairly muted due to low confidence of consumers. We have seen already some positive signs, specifically in the dental services, which typically is the most sensitive for consumer behavior, and we expect the positive drive and vibe to continue for next 12 months. In public business, when we jump over to Healthcare Services, in public services produced by health care services units, it has come down and it has brought -- or contributed to lower volumes in Healthcare Services. We see that one bottoming out, and next 12 months should be more positive. Consumer business, even though our own position has been strengthening, has been fairly flat due to low morbidity. But with the sort of normalized view on that one, our strong drive in Kela 65 and insurance business, we see that one developing positively also going forward. Insurance business, equally, it has actually been the growth driver inside Healthcare Services, continues to be so. Number of insured persons in Finland continues to slowly pick up, and use of services is on a high level. Occupational health care, finally, so we'll double-click on the development, what has contributed to lower volumes in Q3, but very shortly, it's number of connected employees, sort of thinner scopes in the agreements by the corporate clients, and then inside those agreement scopes, lower use of services. All of these are slightly negative from our business point of view. It's been negative. It's going to stabilize. But specifically, number of connected employees will not be sort of turned around in 1 quarter. We'll turn that one around, but it will take a couple of quarters to get to -- again to all-time highs. If we dive deeper into this phenomena, as you can see, and it's good to remember the phases that we have seen in the development over the last couple of years and quarters. In '22 and '23, in the number of connected employees, we were pushing all-time highs. At the same time, as you remember, the profitability of this business was really, really low. And we struggled with the low contribution to rest of the business and hence, the Alpha program. With the Alpha program, we totally turned around the profitability of not only occupational health care, but the company. With that one, of course, the -- some of the less profitable agreements went out. And now, we see also some unintended tail effects of the Alpha period. Now what we are doing is, of course, we are rebalancing products, pricing, offering, and it's not going to be either or. It's going to be both, so both profitability and volumes. Occupational health care, as I said, is the biggest focus area in our agenda currently. It will be turned around with our program. It's a comprehensive exercise of renewing, partly even transforming sales and account management, our product offering to become more relevant and according to expectations by ever-demanding customers. And then, finally, digital front renewal, which we now can accelerate and fast track with our MedHelp joint venture. And our customers will see tangible results already from Q1 onwards on this area. Positive thing -- a very, very positive thing in our portfolio is consumer side, so combined insurance, Kela 65, out-of-pocket area. Our brand is doing fine. And that's, of course, one of the basic building blocks for boosting this business. We are the most preferred brand when we look at the brand preference development. We have been so. But now, we are all-time high. Also in top of mind, the company, health care services company that Finnish consumers think about them when they wake up in the morning, that's now Terveystalo for the first time. And that itself gives a very solid base for further improvement in this business. We have invested heavily in services. We invested heavily in digital engagement with our consumer customers. We have invested in Kela 65. And in that particular new segment, we are a clear leader in that developing market. Finally, Juuso will explain in detail the strength of our finances, the profitability, cash flow and balance sheet. We continue increasing our investments in our digital capabilities. It's an ever-increasing value driver in our business model. And we have some key focus points and developments in that digital ecosystem. For the professionals, we have launched the Ella user interface and digital front door and continue scaling that one up. And that's going to bring tangible efficiency improvements during next year in our sort of traditional brick-and-mortar appointment activities. For individual care, looking at -- looking from a customer's point of view, as I said, it's very much in the core of our 10x agenda. We are making leaps in efficiency, in transactions related to our incoming traffic and customer contacts. We are going to further improve the leading capabilities that we today already have in patient steering and customer steering. And then, finally, we'll make efficiency leaps in text-based appointments, text-based digital appointments, nurse services and introduce first AI-supported health services in very near future. In occupational health, as I said already, we are now in a very good position to migrate our occupational health capabilities, digital capabilities into new MedHelp environment. It's best-in-class in Europe. And our customers, as I said, they will see tangible results and fully a new view and sort of better control on their own people, own organization, sick leaves, workability, starting from Q1 next year when we start deploying new system to first customers. All in all, we are, in this digital journey, in very strong, very good place. Our architecture is where it should be. Our initiatives, projects create value, not in years, but rather in months, and we are confident in investing more and getting more yield out of the digital engine. With that one, over to you, Juuso. Juuso Pajunen: Thank you, Ville. So good morning all. I'm Juuso Pajunen, CFO of Terveystalo, and let's talk about the financial performance in the third quarter. So first of all, if we look at the whole group, we have the positive margin development continued despite the revenue headwinds. This was, in relative terms, the second best Q3 during the group's history, and the best one was during the COVID times. So what I want to highlight is that our efficiency is in place, our machine is [ ticking ]. But also having said that one, we do know that we can't be happy on the growth and especially the revenue development when it comes to occupational health care. So if we look at the big picture, portfolios in Sweden improved both in relative and absolute profitability, while they are still facing anticipated negative growth. So portfolios in the outsourcing businesses in Sweden, we are still coming from the efficiency hunt and now going for the growth mode. And then, with Healthcare Services, we have the strong margin, but the headwinds in the occupational health and the morbidity have been pushing the growth negative, like Ville also explained a bit on the occupational health part. So then, if we look first on the Healthcare Services, I will double-click in the next slide on the growth, especially what comes to visit growth. So let's park that question. But all in all, the performance, what comes to the relative profitability, it was really solid. We had the decline in revenues, headwind in the markets. And despite those ones, we were able, through solid cost control and our flexible operating model, to keep our profitability in a good place, especially remembering that this is the low season Q3. And for the growth, we have a strong plan. And in the longer perspective, I still remind you that the megatrends will continue to support our long-term outlook [ what ] comes to the growth. So then, let's see the visits. Let's address the elephant in the room. So basically, we can split our visits growth. So now, we are talking about the volume. We can split it into different type of buckets. First of all, we have the morbidity. So, that one is basically seasonal. We have no control over that one. And we had plenty fewer visits compared to previous year. And this is part of normal seasonal variation, and it changes annually. We have -- then if we go into the occupational health care, we have different factors behind the decline. We have basically macro-driven components. So the general employment in Finland is lower than earlier, and we have a sluggish economy, and that one also then impacts on the employers' behavior. So basically, they are implementing cost reduction initiatives due to own economic pressures and push, and that one impacts on our demand also. So, a concrete example on that one would be narrowing down the contract scopes on what they offer to their employees. Then we have the third component, which goes into more on what we have done ourselves. As Ville explained, how our profit improvement program has been progressing and how the -- despite having very high amount of connected employees, our occupational health business was not super profitable. Now, we have very efficient machine, profitable business, and we need to load further volume on that one and get then the benefit of the operating leverage. And for that part, we have a solid strong program ongoing, like Ville mentioned. The name is [indiscernible]. And we are confident that by implementing that program, we will address the weaknesses we have had, and we would expect to see growth in the number of connected employees in the coming year. In public sector, especially the capacity sales, which is a minor part in the Healthcare Services segment, but it is in a very low level due to the wellbeing county setups and all of that one. But now we have seen that the sales pipeline is opening up and the market is little by little finding its form. And then, we have the positive momentum, Kela 65 consumer insurance market where we have been growing and we have been able to capture positive momentum. And that one, we will obviously continue pushing. The experiences from Kela 65 are very positive from the patient perspective and also from our perspective. So with all of this one, there are various factors impacting our growth, and we will address especially the occupational health part decisively when going forward. Then if we go into the Portfolio Businesses, we have clear improvement in profitability. We have been able to improve the EBIT margins continuously, 2.2 percentage points up compared to previous year. And then, we have the momentum in especially public sector business. Outsourcing, we have been guiding you that it will most likely decline EUR 30 million this year, and we are on that trend, on that pattern and continuing on that one. On staffing, we started to have revenue headwinds during roughly a year ago, and now those ones are stabilizing out. And part of that one was also our own selection on how we address the market. But now little by little, the positives are coming, markets are opening up. Wellbeing counties are more and more capable of also buying and willing to buy. So this market momentum is little by little turning. And then, we have the consumer part that is growing. It is performing positively, and we will obviously continue to push on that part. So solid performance improvement in the portfolios when it comes to profitability. Then in Sweden, we are also improving both absolute EBIT and relative EBIT. We are still showing heftily negative numbers in a very seasonally low quarter. So Q3 is always difficult and weak in Sweden due to how the offering behaves during vacation period. In here, what I'm really proud is that our efficiency continues to ramp up. We have -- we continuously see, on our KPIs, positive development what comes to occupancy rates, but also we start to see that one on a monthly gross margin levels going up. So we are now getting into an efficiency place, and we will load further volumes on top of that one. We have a solid sales pipeline that supports us getting back on track and on heftily numbers. So program is in plan. Improvements are now continuously more visible also in the backward-looking income statement, and we will push forward. However, there is a weak market environment still in Sweden as a totality. So the macro has not recovered yet to the full extent. But despite macro, we are able to push Sweden back to good numbers in the coming year. Then, if we look at our investments, we've been continuously investing in technology. We have been stating since the Capital Markets Day last year that we will land somewhere between 4% to 5% of revenues in the longer perspective on the investments. Now, we are at 3.4%. We are heavy in digital. We have been talking about Ella, our professional user interface and related flows. You have seen, during the quarter, investments in MedHelp, the joint venture, which will be the digital front door in our occupational health. And then, some may have seen that we have deepening our collaboration with Gosta in the artificial intelligence and ambient scribing, further improving our tools. We have a good momentum. We have solid technology road map, and we have capability to invest. So we will continue on doing on that one. And then, in inorganic growth, the market is there, and we are evaluating different type of opportunities. And for those opportunities, we had a solid quarter for cash flow. We are now in the green bucket again. As was the [ negative part ] normal seasonality, so is this one. Our cash profile has not materially changed, and there is no reason to believe it materially changes either, so normal volatility. We are the Swiss clock we have been. We tick, tick, tick cash. And then, our leverage ratios, 2.1 at the moment, so we have powder to continue investing. So positive financial position, and we can definitely do organic and inorganic investments. Then, if we look for our guidance, basically this is unchanged. So despite some market headwinds, we reiterate our guidance after the second best third quarter ever. So we are expecting our adjusted EBIT to be between EUR 155 million and EUR 165 million. These are based on the current demand environment, employment levels and morbidity rates. So normal disclaimers, nothing new on that one. What is good to note maybe that the implied range for Q4 seems highish compared to previous year Q4. But then, you need to look back on your notes and remember that in previous year Q4, we had especially personnel-related items that we don't have this quarter -- this year in Q4. So the baseline adjusting needs to be a bit taken to understand our Q4 performance. So all in all, I'm happy to reiterate our guidance, EUR 155 million to EUR 165 million in total. With these words, let's invite Kati on stage and let's have a Q&A. Kati Kaksone: Thanks, Juuso. I think we are ready to take questions from the phone lines. Operator: [Operator Instructions] The next question comes from Anssi Raussi from SEB. Anssi Raussi: Maybe I'll start with your guidance as you mentioned that as the last item here. So you already said that there were some special items in your comparison period. But how should we think about underlying assumptions here? Like, does it require any improvement in the market sentiment or something you are not seeing yet to reach your lower end of the guidance range? Juuso Pajunen: I think that's a very relevant question. So, at the moment, the guidance is based on the current market environment and the current morbidity rates. So it already factors in, like always when issuing the guidance, everything we know up to yesterday evening. So the current guidance assumes lowish morbidity rates and the occupational health market in the conditions we know at the moment. Anssi Raussi: Got it. That's clear then. And maybe the second question about your occupational health care. So I think you said that maybe you lost some connected employees due to your profit improvement program. So do you think that it's possible to increase the number of employees or connected employees without sacrificing some of your profitability gains in this program? Ville Iho: Yes. Again, a good question. So, as I said during the presentation, it is not going to be either or, so either volume or profitability. It's going to be both going forward. It requires some balancing in our sort of offering and pricing, but we are not going to sacrifice the profitability just for the sake of absolute volume. Anssi Raussi: Okay. So maybe continuing on that one. So when we look at your -- of course, you showed your appointment volumes and the impact of prices. So how should we think about the pricing going forward in the coming quarters or years? Ville Iho: So, of course, the cycle is very much different than it was, let's say, 2, 3 years ago. The pressure on the -- contracts pressure on prices is, of course, higher post inflation cycle. And we should not -- or you should not expect as sort of a rapid price development going forward. Now, it's more on the how we package our products, what is the mix in our sort of agreement portfolio, and how efficient are we under the hood in delivering those services. And then, final component is the volume. So the growth cannot be, for example, next year, driven so much by the price increases as we have seen during last -- or past 2 years. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Kati Kaksone: All right. It's a busy results day today. I think there are some 30 companies today. There's one question in the webcast currently from DNB Carnegie from Iiris; two parts. Regarding the plan to address the revenue headwind, can we talk about when do we actually expect to see these measures to become visible in the top line and whether we plan to provide any financial estimates of the sales or earnings impact of those actions? Juuso Pajunen: If I start, like I actually hinted a bit, or not even hinted, written out loud in the bridge that we would expect the connected employees' impact to be visible in '26. And that's obviously coming from the nature that if you today win something before it's visible and the connected employees are part of our portfolio, that, especially in the big cases, is a matter of months rather than anything else. So we would expect on '26 the impact. And at the moment, obviously, our financial guidance relates to Q4 and full year '25, and we will come back for the total guidance for '26 along with Q4 publication. Ville Iho: Yes. Again, the only caveat is sort of with what Juuso said, this is that -- as I said before, we are not hunting the volume with the price of profitability. So it is going to be both profitability and revenue and also volumes. So we are not repeating the mistakes that the company did some 6, 7 -- or 5, 6, 7 years ago. Kati Kaksone: Maybe then, continuing on that one, a follow-up question from Iiris. We talked about an update to our product offering in the occupational health to make it more relevant for our customers. Can we give some examples on what that means in practical terms and where we expect to see the largest positive impact? Ville Iho: It's down to the segmentation of different needs amongst our customers. Of course, we are serving 30,000 -- roughly 30,000 different companies in Finland. And there's a wide spectrum of different type of needs and appetites also to pay for the services. Now, when we are talking about sort of transforming or renewing the products, typically, it concerns the sort of customers who are more sort of keen on looking at the price and value for money type of sort of comparisons. And there, we do have strong means inside the company to steer the services across our vast network. We have not used them to the full extent. So what I mean is that if there's a company whose main focus is to get things to a certain level and then look at the spend after that one, we have means to serve that type of customer. If there's a customer that wants to maximize the services to the employees, then we can serve that type of customer. If there's a product, which is priced with a fixed contract, we have means to control both the profitability, delivery and cost for that type of customers. And that type of steering capabilities will be sort of utilized to full extent now going forward. So we have the flexibility. We have different type of delivery models, and we are also renewing sort of commercial packaging of these type of different models. Kati Kaksone: Yes. And of course, MedHelp is a concrete example of the value increase that we can show to our customers in a relatively short term as well. Ville Iho: Absolutely. It's going to be the next level. Kati Kaksone: Good. Then, a question on the public outsourcing tenders and the outlook there. Besides the tender of Pirkanmaa wellbeing services county, which was won by our peer yesterday, are there any larger tenders opening up at the moment? Ville Iho: Well, there's one other which we know of. And then, I think what's going to happen is that health care counties are watching very closely each other. And when somebody is opening a path, then the rest will follow, specifically if there's a successful implementation of a certain model. So we believe that this is only a first step, this [ Pirka ], and congrats to Pihlajalinna for good competition and a nice win in there. Kati Kaksone: Yes, indeed. Then maybe a question to both of you. Can we talk about the M&A pipeline? How does it look at the moment? Juuso Pajunen: Yes, if I start, so basically, it is fair to say that M&A opportunities are now little by little emerging in different type of segments. And we are, as we have said, happy to do disciplined M&A when we see an opportunity to fill a blank, whether it's a technology bank, offering blank or other blank. So, that market is little by little activating, and we are and we will be active in that one. Ville Iho: Yes. There's -- just looking from sort of a short history perspective, where we have been and where we are now and potentially will be, the activity on our desk is way higher than it has been for 5 years or so -- 5, 6 years, sort of post-COVID or during COVID times. This is sort of an all-time high activity. And there are sort of real potentials out there. Of course, you always need to get to the -- get over the sort of finish line to get something materialized. But the funnel is there, and it's strongest that it has ever been during my term in Terveystalo. Kati Kaksone: Yes, definitely signs of picking up there. Then a couple of questions from Matti Kaurola, OP. We mentioned that the insurance business is growing fast. Are there any possibilities to take more market share from other players in that segment? Ville Iho: Well, I would say, it's not growing fast. It's growing steadily. So it's -- coverage of insurances in Finland has been developing positively, and then use of services have been developing positively. We have gained market share over the 2 last years. And then, further gaining market share, of course, requires also new means and new type of value creation for insurance companies. I think we have a strong plan there, which we continue implementing. The bigger moves, in my view, will happen only in 2027. Next year will be more like a steady progress in this segment. Kati Kaksone: Of course, we have a clear attack plan for 2027 to deepen the cooperation with the insurance companies. Then, maybe continuing on the outsourcing market and the well-being services counties, how do we look at the public outsourcing market in general in the future? Is it attractive? And is it a part of our core offering and our business going forward? Ville Iho: Well, we explicitly said earlier that we are interested in this new type of outsourcing deals. We were part of [ Pirka tender ]. And one can say looking now in hindsight, the competition and the outcome that each and every out of 3 main players were on the ball in sort of pricing and offering the package. So very close margins who won and who did not win. When it comes to profitability, of course, this would have not been sort of the richest agreement, but still value-creating, EPS enhancing, which is the key for our business model. So when this type of tenders come to the market, we are interested. Kati Kaksone: Indeed. At the moment, we don't -- we have one more question from the phone lines. Let's take it now. Operator: The next question comes from Anssi Raussi from SEB. Anssi Raussi: One follow-up from me. So you also mentioned these somewhat extraordinary costs last year in Q4 and that there were some one-offs related to employee expenses. But can you remind us like what kind of amount we are talking about that you consider one-offs in Q4 last year? Juuso Pajunen: Yes. So basically, compared to baseline in last year, if you go into the details, you remember that we paid EUR 500 per employee to all employees an extra bonus. And based on the CLA, there was EUR 500 per employee fall all under CLA. So that's the personnel expenses I referred to. And then, if you go into a bit deeper, you see that there was a bit of accelerated amortizations and depreciations in the income statement in Q4 last year. So, that one you need to put your finger into yourself, but normally, forecasting depreciation and amortization is not super difficult. Kati Kaksone: Thanks. With that, I believe we don't have any further questions on the phone lines or from the webcast. So any closing words? Over to you, Ville. Ville Iho: Well, as discussed earlier, a quarter of improving margins with revenue headwind; strong agenda to further accelerate the areas where we are progressing well and to tackle the headwind in occupational health care; investments with the dry powder provided by [indiscernible], used more and more to digital offering, where the agenda is -- strong architecture is there and delivering tangible results. Kati Kaksone: Great. With that, we thank you for your time, and have a great rest of the week. Juuso Pajunen: Thank you. Ville Iho: Thank you.
Essi Lipponen: Hello, and welcome to Fiskars Group's Q3 Results Webcast. My name is Essi Lipponen, and I'm the Director of Investor Relations. I'm here with our President and CEO, Jyri Luomakoski; and our CFO, Jussi Siitonen. Jussi Siitonen: Hello. Essi Lipponen: Here is our agenda for this webcast. Jyri will start with key takeaways of the quarter. After that, Jussi will walk us through the financials and then back to Jyri for business area specific performance and guidance. After the presentation, we will have plenty of time for your questions. We will take questions both through the phone line and through the chat. You can type in your questions in the chat already during the presentation. Before diving deeper into Q3, I still wanted to highlight the news that we shared last week. Jyri Luomakoski has been appointed as the President and CEO of Fiskars Corporation following his interim role in the same position. But with this piece of information, I will hand over to you, Jyri. Jyri Luomakoski: Thank you, Essi. It's a pleasure being here. If the numbers would be better, the pleasure would be even bigger. But let's go into the quarter. Key takeaways, some things went well and some clearly less good. And if we start with the positive ones, our net sales turned to growth, and this was very much driven by several of our Vita brands, actually, most of our Vita brands. And Vita grew in Q3 in the magnitude of 8%. The other positive thing is that we had actually a solid growth in the U.S. The market, which has been in some kind of a turmoil as a consequence of the tariffs, consumers becoming uncertain what's happening there, it seems that our value proposition to the consumers has been such that it's continued to appeal and we've had good development there. What didn't go well is certainly the decline of our comparable EBIT in the quarter. And this is much driven by our additional costs in the supply chain and many of them are self-inflicted. Why? Last year, the inventories started to grow, and that was still happening in the beginning of this year in our BA Vita. And we started very determined actions to take down the inventory levels by curtailing production. As a consequence, when you curtail production, your supply chain costs are partly fixed and there is less volume to absorb those costs. So it was a kind of a premeditated action from our side to prefer cash flow and go into '26 without too much of excess baggage from the inventories. What I will soon come back when we get to the BA updates, but in our Fiskars business area, the innovation pipeline actually over the last 1.5 years or so has been more than doubled. And that's very important to stay relevant to the consumers, but soon getting back to that. And then as a consequence of this, we specified actually our guidance. Comparable EBIT range was narrowed to EUR 90 million to EUR 100 million from the EUR 90 million to EUR 110 million. And currently, as we see the market picture, that is pointing us to the lower end of that range for the comparable EBIT for 2025. Turning over to Jussi, please. Jussi Siitonen: Thank you, Jyri, and hello, everyone. So I continue with this positive news what we had in Q3, i.e., top line growth, solid 4.1% growth, so that Vita was up 8.2%, then Fiskars BA came down slightly, 0.9% negative there. Actually, this is the first quarter since Q2 2022 that we were able to deliver this kind of mid-single digit solid growth. There are a couple of good news also where this growth is coming. So the fundamentals are in place. It was very broad-based. If we take our top 15 countries, which represent more than 90% of our sales, 12 out of 15 countries were growing in Q3. Also same for brands. If we take our top 12 brands, 97% of sales, 10 out of 12 brands were also growing in Q3. So it was very broad-based. EBIT, EUR 13.9 million came down EUR 10.4 million from last year for 2 main reasons. Jyri already mentioned the supply chain issue, what we have there of under-absorption of fixed cost when it comes to our production volumes. Another one is our SG&A cost. When it comes to SG&A part, it's mainly phasing between Q3 and Q4. On gross margin, EUR 46.7 million. It was down 140 basis points from last year, so that Vita was down 380 basis points, 3.8 percentage points there. And Fiskars BA was actually up 110 basis points. On cash flow and I will go a bit deeper to that after a couple of slides, it was up from last year, around EUR 7 million, but still negative of EUR 10 million. If we dive a bit deeper about this EBIT bridge here and where the difference versus last year were coming from. So as said, group was down this EUR 10.4 million, so that Vita was down EUR 7.5 million and Fiskars was down EUR 1 million. The rest is from other operations there. Focusing first, what we have here on the right, i.e., Fiskars BA. So you can see that underlying gross margin was quite significantly up there and only partially offset by tariffs. For the actions we have put in place there, as we said after Q2, are now impacting positive results there and are mitigating the tariff impacts in Fiskars BA. Same what I mentioned already about SG&A, you can see here. So Fiskars BA, SG&A slightly up versus last year, but that's also mainly phasing. On the middle, you can see Vita bridge, which is down to EUR 7.5 million, as I said. Here, you can see the impact of the supply chain challenge, what Jyri explained. So that was one biggest -- big driver there. And also in Vita, it's mainly SG&A phasing what we have there, showing quite strong negative numbers in Q3, but we assume based on what we have seen that that will be somewhat offset in Q4. Overall, when we are talking about SG&A here, I would say that year-to-date SG&A, which is flat versus last year, it's a better proxy for full year than just looking our Q3 numbers. And then, of course, the group as a summary of those 2 BAs down this EUR 10.4 million so that even at the group level, our underlying gross margin was improving. But then as a total, it was more than offset by those tariffs. Moving then to cash flow. As I said, cash flow was negative EUR 10.2 million here. Even though it improved from last year, it was still negative. And of course, this is the topic we are not very happy with. The actions we have been put in place or already put in place or Jyri also explained here are the ones we are focusing now also for the rest of the year 2026 to get cash flow back on track. Here, you can see the impact. I would focus more on year-to-date cash flow here to avoid this kind of seasonal volatility. The challenge what we have is well illustrated here. Inventory is up some EUR 46 million, whilst last year for the same first 9 months period, it was down similar type of number. So we had significant delta, negative delta there when it comes to our inventory situation. And then quite naturally being a component of net debt and EBITDA, the net debt continued increasing due to this negative cash flow as a main single reason there and then that we are behind last year with EBITDA. The fact is that net debt EBITDA went up from last year being now 3.7x. Our target maximum 2.5x is still valid and we remain committed to this target. And therefore, this is one example why we have initiated those actions to mitigate inventory inflow and make sure that actually we get back on track with this net debt EBITDA. But with that, giving back to you, Jyri, on BAs. Jyri Luomakoski: Thank you, Jussi. And briefly on our 2 business areas, starting with Vita, which is approaching its annual high season, which is the fourth quarter. And here, we've seen, as earlier mentioned, a broad-based net sales growth. So if 10 out of the 12 top brands are growing, that I think we can call a broad-based and geographically also broad-based. It's not just one market which is booming and the others not performing. And the inventory-related actions, we've touched quite much upon. And when we look at the growth, and Jussi mentioned, it's several years back when the group was reporting this magnitude of growth numbers and I think it's over 2 years you need to look back till you saw a growth quarter in Vita. And this is extremely important for us driving our performance that we have the underlying growth, have used the kind of a comparison or parallel to steer a ship that does not have any propulsion is very difficult. And the same applies to company growth being kind of the propulsion for the business too. Actions that we started to look upon in the summer already recognizing the inventory levels that the only way to solve the 2 big inventory issue is really to curtail the inflow and, of course, start to boost the outflow. When you look at the comparable EBIT margin, really the big delta is coming from the supply chain aspect and the phasing-related SG&A. The underlying -- preempting maybe a very logical question that would be arising out of the numbers, the underlying gross margin or in terms of pricing, we do not see anything that would be alarming us, and that's extremely important. So when we have the propulsion, i.e., growth and the brands are loved by the consumers, then I think we have the ingredients to improve our position. And that's what the guidance also implies. A few highlights, leveraging our assets -- production assets in the more complicated glass production, which economically industrial logic is more of a process industry logic. Royal Copenhagen, one of our biggest brands, very successful brand has now actually next to the hand-painted porcelain launched also high-end glassware with crystal and mouthblown glass. And those are manufactured in our crystal factory in Rogaska in Slovenia and in our Iittala factory in Finland. So good both for the supply and complementing the offering towards our consumers to have a complete Royal Copenhagen tableware and glassware set. Iittala has expanded now to the scented candles. And when you look at those before you even light them up, you see a form or shape that we all can recognize. So it's the Aalto silhouette. And this is something that appeals as a decoration item and now getting into the darker, less light time of the year, what is then nicer to than have a beautiful scented candle lighted up and you can enjoy all the effects. And actually, the fire is bringing one of those, it's the elements of glass that are the 3 scents, water and sand and air that are in this offering. When we talk about desirable brands, you might recall that historically and I still read in many reports about luxury. We have actively dropped the word luxury. We recognize that to be luxury, there are certain characteristics that many of our brands actually would fulfill, but not all of them. But our brands are very desirable. And one of the kind of manifests to that desirability, Moomin Day in the early August time frame. It was a few days -- a few hours online. We actually sold out the Moomin Day celebration mug. When the sales started, there were about 50,000 people queuing online. And interesting, when I bypassed our store at the Helsinki Airport at the Schengen side, the store opens at 5:00 a.m. Normally, our stores open at 9:00. And at 5:00 a.m., according to our colleagues there, actually there was a queue outside of that. So there were some happy ones who got 4 hours before others their Moomin Day mug. So I think that's a clear manifest to the desirability of a brand, but describes what we have in many of our brands. Moving over to Fiskars business area, relatively stable top line. And as you saw in the bridges, EBIT bridges Jussi just showed, the gross margin improvement and the tariff cost, the incremental tariff costs have been pretty well matching each other, which is a remarkable achievement by the team in terms of managing the situation, which is complicated. It's still fluid situation, as we know. Tariff announcements are still in the air and how those -- some of them will settle, we don't know yet. But a decrease of 0.9%. And when I look at many peer companies who have recently published their numbers, I think we've been weathering this storm extremely well and implicitly indicates -- and I don't have the proof in any formal statistics, but indicates that we've been actually able to capture some market share and have remained definitely relevant to our consumers. In terms of how to capture the market share, there are a few keys, but one of them is also continued distribution gains, which we also see that we still have a clear pipeline of distribution gains coming for this business. Looking at the highlights, many know Fiskars as either the scissor or the axe, or the garden business. Now here highlighting the latest generation, the Fiskars Ultra axe range, which is, again, how the world's best axes have been made even better. And there is a established heritage and know-how and this is a product family now we all are proud of having been able to launch it. Innovation focus. As I mentioned earlier, our Fiskars business area has more than doubled its innovation pipeline in the last 20 months. And this is not only nice picture and promises on November 11, actually, we are arranging for institutional investors and analysts an investor event that will be then broadcast or webcasted, get to know business area, Fiskars. Last spring, we had a similar event in Copenhagen for our BA Vita and the feedback from analysts covering us, some fund managers attending that was very positive that we really show what we are doing, who is doing it, and we are proud to show what will be there available soon also in the stores coming out of the innovation pipeline. So it's not only talk, but there will be a chance to get a look and feel and the touch of these new products that are coming partly later this year, partly in the coming year. Our sustainability targets, we take them extremely serious and continue our commitment there. And when we look at certain environmental criteria, circular products and services, we've been able to grow the share by 300 basis points from last year's September level of last year's first 9 months, but there is still a way to go towards our 2030 target that half of our sales comes from circular products and services. What might not look too ambitious currently is when we have reached minus 61% on our Scope 1 and 2 emissions from our own operations, 7 percentage points improvement year-on-year. The target was 60. So it looks quite favorable that we are reaching -- actually have now reached that target. Then how to tackle our -- the fact that our Scope 3 emissions is defined by us as a percentage of suppliers spend, how many percent have spent to vendors who have committed to science-based targets. And there we've been moving sideways and still have some way to go towards our target. So we are currently at 65%. And in our H1 reporting, in that context, we also flagged out that the rebasing of some of the sourcing for our U.S. business might actually take us a small step back short term before the new vendors can be qualified and submit their science-based targets. But it's not a target that we want to give away. On the social side, the zero harm target remains in force. We have 3.5 as our lost time accident frequency per million hours worked. It is a notch up from a number of a year ago, which is very unfortunate, but the work continues. Health and safety of our people is extremely important to us. And then finally, inclusion experience. We have a target in a comparison with global high-performing companies of 80 and we are currently kind of moving sideways, just shy of that 80 at 77. So not yet there. The split of our businesses, our BA, so separation into subsidiaries is advancing. The legal entity structure will be in our current assessment, finalized by the end of first quarter '26. The operational structure has been in force since last spring, but that's kind of the relatively easy part of it. We are operating in about 30 countries, have had more than 30 legal entities and then having those split and put under basically subgroups for the Fiskars BA and for the Vita BA under the holding company, which is Fiskars Corporation, i.e., the parent company. So that work is ongoing. We had the first wave of a number of countries that went well because that has to do also with IP things, et cetera. The next one is beginning of November. And this step by step, we will get there by the end of the first quarter. What do we want to achieve with this separation? Of course, full business accountability. So we have 2 colleagues who are running these 2 business areas and they have operational end-to-end accountability for their business. So there is no scapegoat of a group supply chain. They could say that, yes, we would have sold, but the factories didn't deliver, et cetera. So it's all under one hat, which improves flexibility. It improves the speed of decision-making. The closer to the consumer we are making decisions, I think the more relevant they are and more timely they are. The independent legal entities as subgroups under the holding company, that's very self-evident. Then when we talk about the transparency and measurability, once this is completed, we have already committed to the financial markets that we can provide and we will provide more transparency into the numbers. Currently, we have the income statement pretty well already covered by BA, but not the entire balance sheet. So there is potential. And by transparency, we hope that these individual businesses are also getting with their different type of characteristics in terms of financial dynamics and asset utilization, et cetera, the fair valuation, which then is reflected into the aggregate, basically some of the parts as Fiskars Group's valuation. And when we have this structure, there is definitely a different level of dedication and this is to accelerate, of course, to tap to the growth opportunities into which these 2 businesses have available to them. In terms of the guidance, already addressed it in the very beginning, we narrowed down the range. And also openly pointed out that we have the most important quarter of the year ahead of us and the current visibility indicates more towards the lower end of the range. I know that many analysts have calculated what does it imply in terms of growth in the fourth quarter that is needed to achieve these numbers. And I'm happy to share that while we do not share regularly kind of mid-quarter or monthly business updates or anything like that, but as of today, having the visibility, how sales has progressed also in October, i.e., the fourth quarter has started, that has been well consistent with the expectations and projections that are needed to get there. Consumers make the decision. And actually, it will be after New Year's Eve when we close the stores, when we actually will, in the end, know how the fourth quarter been. Our D2C share increased a notch in the third quarter. And traditionally, the fourth quarter is more direct-to-consumer heavy. So both our own e-com and our stores play a relatively seen bigger role, which means that the visibility is really at the point of sale that takes place. We have in the background, certain assumptions and definitely actions also and those relate to the supply chain variances, which we have addressed. Those 2 published factory curtailments or mothballing as somebody would call them, are both related to 90 days furloughs and that means that they will span also into the fourth quarter. The tariff impacts, direct tariff impacts are way easier to calculate. Of course, the indirect impacts on demand is very much then visible again on the point of sale. And we expect this Vita's positive net sales trend to continue in the fourth quarter. And as I mentioned, we are on track on that. And the tariff mitigation efforts continue as some parts of the tariff landscape are still effectively open. So in brief summary, what is really delightful here is that we've returned back to growth. Especially the Vita part and this is the year -- time of the year where that growth is relevant and super-needed. And the U.S., where we've had certainly many aches and pains with the very volatile tariff situation, we've remained relevant and been able to remain relevant also to our customers, i.e., the distribution and gain some more traction on that side. The actions to reduce inventories, they continue. It is not acceptable from my perspective to see inventory numbers as we currently have and that's something we need to fix. Innovation pipeline, more on that in a few weeks and guidance I already touched. And relating to a guidance longer-term topic, last spring when I took over as interim CEO, there was a date penciled into the calendar in this autumn for a Capital Markets Day. We all know that our long-term financial targets are basically expiring end of this year. That's clearly recognized. But at that time, I personally felt that it would not be right to go out and make promises about the future and then somebody else might be then bailing out those promises. That's not the style we want to kind of enforce in our company. In H1 '26, we will arrange a Capital Markets Day. The timing is still open. And in that connection, we also plan to issue then our new long-term financial targets. So this as a promise and now being able to bail out those promises, it feels way better to be standing here and announcing this and we will be back on the timing of this. That concludes my part of the presentation. So thank you for your attention so far and we are shifting to the Q&A session, I guess. Essi Lipponen: Yes. And let's first take questions through the phone line. But if you want to ask questions through the chat, just please write your questions in and we will take them afterwards. But let's see if we have any questions through the phone line. Operator: [Operator Instructions] The next question comes from Calle Loikkanen from Danske Bank. Calle Loikkanen: And first off, congrats, Jyri, on the new appointment. Then starting on few questions, if I take them one by one. First, in Vita, the inventory-related actions and the scaling down of production, for how long will this continue to impact profitability? Jyri Luomakoski: As I said, the current announced furloughs are 90 days furloughs. And with regards to Barlaston, that's a 90-day block kind of a mono block, I would say. And with respect to Iittala, it's phased and part of that is in '25 and part of that will be in the winter season of '26. And we are, of course, continuously looking at do we see the development. We had a notch of inventory reduction now in Vita already in Q3 with the bigger demand anticipated in Q4. Of course, we expect more. And it is very much a steering where we want to clear the baggage from the past, have a clear slate forward for the business and manage the cash flow and implicitly through that also the indebtedness or the net debt position. So timing, difficult to say, but it's not ending in Q4 already based on what we have announced with respect to Iittala. Calle Loikkanen: Okay. But you're not expecting a similar kind of impact on EBIT anymore from these actions as we saw in Q3? Jyri Luomakoski: Into our guidance, we have certainly factored in what we know for the actions for this current year. And at this stage, we are not yet going to guide any income statement or any other element of '26. So we are managing that situation diligently and carefully balancing between the cash flow optimization. And of course, we are in the business of making profits and delivering profits and that's even our legal obligation to do that and manage the situation between these 2 aspects. Calle Loikkanen: Yes. Okay. Got it. And then secondly, I mean, now looking at year-to-date adjusted EBIT, EUR 46 million roughly. So you need about EUR 44 million in Q4 to reach the lower end of the guidance. And last year, you did EUR 43 million of EBIT in Q4. So in practice, you need EUR 3 million more now in Q4. And so I was just wondering, I mean, you mentioned that you expect Vita to continue to grow top line in Q4, which should, of course, help. And -- but I was wondering, I mean, if you have these -- still these kind of inventory-related actions ongoing, probably a bit of negative EBIT coming in from those then or at least negative impact on EBIT. So can you elaborate a bit perhaps more in details on what levers there are for you to grow EBIT in Q4 to really reach the guidance? Jyri Luomakoski: Two critical aspects. Of course, the top line growth, as indicated, is vital for that. That's the prerequisite. With respect to the cost side, SG&A, where we had a uplift in Q3, which relates to phasing relates to some accruals. So they were accrued last year comparing year-on-year and some accruals when like with respect to variable compensation, short-term incentives, et cetera, apparently, and I was not there in this role, but as a former audit committee chair, you remember some of the facts from the history when the visibility went a bit sour last year, some of those were reversed, creating a benefit into last year's Q3, which makes the current comparison also somewhat unfair in terms of the Vita Q3 EBIT performance and that type of a ugly comparison doesn't reoccur in Q4. So that's -- so it's revenues and costs, which I know sounds like a very simplistic answer, but there are very targeted items. And of course, we are careful and very cautious in terms of other costs and expenditures in the fourth quarter. Calle Loikkanen: Okay. That's very helpful. And then lastly, before handing over to others. And I know there's still plenty to do this year, but what sort of initial thoughts do you have for 2026? Anything that you kind of are looking forward to or expecting from next year? Jyri Luomakoski: Next year, we hope that there will be a kind of stabilization of the tariff situation because now it's been waking up in the morning and checking the social media, what is the new situation, and that's been keeping our organization extremely busy. That's also time off the consumers and customers. It's time that has been spent in rebasing our sourcing and relates now to the U.S. Fiskars business predominantly. The team has done a tremendous job in terms of finding new sources, qualifying them, testing them and negotiating that we can move and base our sourcing into already settled down tariff environments and so forth. So that's the only part actually, given that we will issue our '26 guidance in early February in connection with our Q4 full year reporting that I can share at this stage. But that remains like a wish that we could concentrate on some more productive or progressive topics instead of fighting the situation here. Operator: The next question comes from Maria Wikstrom from SEB. Maria Wikstrom: Yes. Maybe continue a bit with the soft topic that Calle raised as well. So I mean, just getting a little bit of more color, I mean, as Q4, I mean your guidance, I mean, reaching the low end of the range indicates that you need to record some 8% growth in the EBIT, which in light of, I mean, today's results, I mean, something needs to change. But I mean, is the thinking right that, I mean, given that it seems that in the Fiskars BA, I mean, you have been able to get these price increases through and the EBIT is stabilizing -- more stabilizing year-over-year so the lift that we are going to see -- we would need to see is coming from the Vita segment? And then here, I mean, you think that the Q3 was somewhat extraordinary, so it should be better in the high season. Is that, I mean, rightly summed up? Jussi Siitonen: So Calle's math worked well. So if you take our year-to-date numbers here, you can see that we are EUR 25 million behind last year when it comes to EBIT on the first 9 months, making our guidance, we need to be roughly EUR 5 million better than last year in Q4. What I said in my part here is that we have some technical tailwind there coming from SG&A phasing. So therefore, I would say year-to-date change in EBITDA would be better proxy to give direction there for full year SG&A. So you can figure out how much upside we -- technical upside we are expecting there. And then exactly like Jyri said here, we do need demand, which as of today looks pretty good there for Vita that we are following the plans what we had in place. And then when we are prioritizing the cash flow here, so the decisions are very much ours here, what to do with production to ensure that we can continue improving cash flow. So these are the items what we have in place. This time, Q4 is a bit different from last year. So you might remember last year, we were struggling with demand when it comes to Q4. I would say, at the very moment, we have one problem less versus last year. And then we have this kind of technical tailwinds. But as said, all this needs to work very much with in plans what we currently have to make a guidance. Jyri Luomakoski: And your analysis on BA Fiskars' role in the fourth quarter is also correct. It's not really the gardening season. Yes, some craft things happen for the holiday season. And of course, from our perspective, we wish a lot of snow to the Nordic countries. The snow season is always something we are cheering while the traffic in the cities is kind of not happy about snow. Maria Wikstrom: Perfect. This is very helpful. And then wanted to touch upon -- on the geographical sales development as it seems that, I mean, the demand is better in Americas as well as in the Asia segment versus, I mean, Europe is still lagging behind. Is there any like lead indicators or some bright spots, which would indicate that Europe would join the crowd what comes to the demand? Or do you see that Europe is likely to remain muted also for the last quarter? Jyri Luomakoski: Of world economy, Europe does not currently have a big contributing factor to world economic growth and consumers in Europe are typically more cautious than in many other geographies. In the Nordics, we've had good tailwinds with our Vita business. So when we commented broad-based, both brands and market-wise. So Nordics, we have been able to remain very relevant and very much a desired way to bring some joy and making the everyday extraordinary with our products. But your analysis is correct that it's both North America, U.S., especially and Asia where the consumers are more happy to consume. Maria Wikstrom: And then finally, touching upon the tariff situation and your mitigating actions. I mean, personally, I was very surprised, I mean, how well, I mean, you were able to, I mean, to get the price increases through for the Fiskars segment, I mean, during the Q3. So would you say that, I mean, the tariff risk has now winded down? Or is there still, I mean, many unknowns that we should consider as a risk going forward? Jussi Siitonen: Yes, we are very pleased with the Fiskars BA team here, how they have succeeded to mitigate those tariffs. As you might remember, we got some extra burden there late August when those steel tariffs came in and we are still -- we are still mitigating also those there. We are now leaving the last 2 weeks, if I'm right, this last 90-day extensions, which is given to Chinese tariff. So let's see where it goes after 8th of November there. So no one knows at the moment. So we are, as Jyri mentioned, following on a daily basis what's the current mood when it comes to tariffs and trying to tackle it. More fundamental-based, the actions we have put in place, price increases are only part of the story, mainly focusing on our own footprint, what we have in sourcing there to find alternatives for those high tariff countries, how we are able to make some re-footprinting in that sense. So can't promise that we have tackled all the problems because we don't know them. But as the ones we know at the very moment, we are very pleased with our BA Fiskars execution capability. Jyri Luomakoski: And with respect to the re-footprinting that implies basically products that we have historically sourced out of China, we have qualified suppliers, brought tooling into some of the neighboring countries, which already have settled down tariff deals with the United States. And those tariffs are clearly at a lower level than the current China tariffs are and gives a kind of a planning horizon for us going forward. Maria Wikstrom: And then I had one more question in mind, which reflects to the Gerber division as I recall that Gerber was the one that had faced some difficulties or faced lower demand during the summer period. So what are currently the trends you are specifically seeing for the Gerber brand in the U.S.? Jyri Luomakoski: Gerber has been hit in some geographies by restrictions, whether you can advertise knives or multitools, which are then qualified also as knives because they are in some jurisdictions like weapons. And from that perspective, the push towards the consumers has been a more difficult struggle. Our efforts, and I visited in the summer Portland and the Gerber team, similarly as in the rest of Fiskars BA, innovation and remaining relevant to the consumer is extremely important. And I think it's fair to say that we have neglected that. It's been a few years where we haven't had too much of innovation flow, new products and happy to see that that pipeline is also well equipped with new ways to charm the consumer, to have the outdoor people, the fishermen and the women and the hunters and campers and all those with new need stuff equipped and that is the key to tackle this issue. So what we can't advertise in public or what needs to go beyond a locked cabinet in a outdoor store in some states in the U.S., we have now other ways in the pipeline to make us relevant and again, wanted. Jussi Siitonen: Yes. Maria, when I said that 10 out of 12 brands were growing in Q3, Gerber was one of the growing ones there in Q3. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Essi Lipponen: Yes, we do have questions in the chat. Thank you, Calle and Maria, for the questions through the phone. But maybe if we start with the question related to top line. And Jyri, if you take this one. Was there any impact of timing between quarters supporting the top line development in Q3? Jyri Luomakoski: Not that I'm aware. We have potentially between Q2 and Q3, we have the load-ins for the back-to-school season in North America. That's traditionally been something that either happens last week of June or first weeks of July and then you get big swings. But we are not here in that type of phasing the holiday season load-ins, which holiday season as reminding for Vita, less than half of our sales is through distribution, more than half, clearly more than half is through our D2C channels. Those load-ins are happening now in October anyhow. So those have not been moved forward to September. No signs of that. Essi Lipponen: Great. Let's see what we have next. Related to production, maybe Jyri, if you can continue. Given the current demand situation and production curtailments, how do you view the current production footprint, especially in Vita? Are you considering any adjustments? Jyri Luomakoski: A prudent and careful manager of a business always considers adjustments. I know this is kind of a rounded answer, but that's our obligation to see how we can best perform and serve our customers and in the end, make money for the company. Those always being in the background, but now here in terms of some concrete that there is a site that we would need to kind of permanently mothball or so, such plans are currently not on the table. And of course, demand situation is dictating. We are here for the customers, for the consumers. That's dictating in the end the footprint, how we are set up and how we operate that. Essi Lipponen: Thank you. Maybe, Jussi, related to working capital and inventories. How large working capital release are you expecting in Q4? Have you considered other actions than reducing inventories? Jussi Siitonen: Yes. Well, following our historical pattern, what we typically have had in Q4 is that working capital is coming down. And typically, cash flow has been improving versus Q3 and Q4 is happening now, we can't confirm it yet. The actions we have put in place at the moment are exactly ones Jyri already explained there with a high priority target of continue reducing inventories. This inventory challenge is very much on Vita side, less on Fiskars side. Essi Lipponen: Yes. And maybe to both of you, but maybe if Jyri starts. When comparing Q4 and Q3, are you expecting higher under-absorption of fixed costs in Vita related to the inventory? Jyri Luomakoski: We have implicitly guided for Q4, the EBIT or comparable EBIT number, not individual line items and not individual line items within our cost of goods sold where the supply chain variances would be ending. Certainly, we have our plans how and we will operate our different production sites during the fourth quarter. And based on that calculated and factored in into the mathematics, how we have arrived at our forecast, which are supportive of our guidance. Essi Lipponen: Great. Then about tariffs. And Jussi, if you start. Given the U.S. tariffs and additional steel tariffs, how much headwind are you expecting for 2026? And how much of these have you been able to mitigate as of now? Jussi Siitonen: Yes. Steel tariffs, as said, is something new there started or announced in late August. So there the steel tariff impact is mainly in 2026, whilst the other tariffs what we have for country-specific, they have been already since April this year. So there, this kind of year-on-year change is not expected to be significant. So it's mainly the new one, i.e., steel tariffs impacting more in 2026 than in 2025. We haven't announced any specific numbers how much they are impacting, what's the direct impact of tariffs on our gross margin, only say that when it comes to direct impacts there, we do have toolbox to mitigate them, including this re-footprinting what we are referring prices and the likes. And of course, we are now looking for category expansions there when it comes to offering what we have, which will also help to create new demand and therefore, tackling it not only by cutting costs, but also expanding our portfolio and top line there. So toolbox is quite broad. How much still left for 2026, that we haven't yet commented. Essi Lipponen: Yes. We still have a couple of questions and let's see if there are any new ones coming. It might be that we have already covered this, but maybe just to remind, how quickly can inventory levels in Vita be normalized? If you want to comment on that? Jyri Luomakoski: It is not a sprint. It consists of 2 factors. One is the one which is more really in our control, and that's curtailing the supply or the input into the inventories, both relating to sourced items and own manufacturing. And those we can tackle and those we have started to tackle very clearly. At the same time, the output from inventories, so clearance sales type of topics, that's also needed. Now we are heading to the seasons where you have, as we know, the Black Fridays of this world, they are, to some extent, also created for clearing some inventories and -- but it's definitely not done in the fourth quarter of this year. It's -- if not a marathon, but it's still long distance activity that we have there. So working on both ends, input and the output. And as we progress, the output, of course, requires always the willing purchaser, consumer or distributor. And once we have more to share on that front too, not only those actions that are under our control, we will, of course, be back and updating on those. Essi Lipponen: Thank you. And then maybe the final question for Jussi. With net debt at over EUR 600 million and leverage at 3.7x, what is the deleveraging plan for 2026? Jussi Siitonen: Very good point. First of all, it's just an outcome, what Jyri just explained. So that's the main driver there what we have on short term and then I'm moving to 2026. Typically, historically, we have come down when it comes to net EBITDA towards the end of the year after Q3. So that's our historical pattern there. More important than how much we are now coming down is to turn the trend. So we need to get a declining trend there when it comes to our net debt EBITDA and then impacting on both components there, net debt and then improving our EBITDA. I'm not expecting any rapid overnight improvement there. As I said, more important is now to have fundamentals in place to turn the trend, getting it on the lowering trend there. And then what we said that this max 2.5x net debt to EBITDA remains our target. It might take a bit more time than probably someone might expect to get it there, but it clearly remains our target. Jyri Luomakoski: And we work in a very determined way on both elements of this EBITDA -- Jussi Siitonen: Yes. Yes. Jyri Luomakoski: -- and the net debt where really the main lever is inventories. Jussi Siitonen: Yes. Essi Lipponen: Thank you. It seems that we are out of questions. So thank you for the active participation, and I wish you all a nice end of the week. Jyri Luomakoski: Thank you very much for joining, and happy shopping in the year-end holiday and gifting season. Jussi Siitonen: Thank you.
Operator: Good day, and welcome to Iridium's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ken Levy, Vice President of Investor Relations. Please go ahead. Kenneth Levy: Thanks, Clowey. Good morning, and welcome to Iridium's Third Quarter 2025 Earnings Call. Joining me on today's call are our CEO, Matt Desch; and our CFO, Vince O'Neill. Today's call will begin with a discussion of our third quarter results, followed by Q&A. I trust you've had the opportunity to review this morning's earnings release, which is available on the Investor Relations section of Iridium's website. Before I turn things over to Matt, I'd like to caution all participants that our call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical fact and include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks, which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward-looking statements represent our views only as of today, and while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or expectations change. During the call, we'll also be referring to certain non-GAAP financial measures, including operational EBITDA, pro forma free cash flow, free cash flow yield and free cash flow conversion. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Please refer to today's earnings release in the Investor Relations section of our website for further explanation of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP measures. With that, I'd like to turn the call over to Matt. Matthew Desch: Good morning, everyone. We just finished another solid quarter, which puts us on track to meet our OEBITDA growth expectations for the year. I'd like to use my time today to share some broader thoughts about the satellite space and our plans to address and capitalize on the changing landscape. Vince will then recap Iridium's quarterly performance in greater detail and highlight the trends we have seen since our last earnings call. As you are well aware, the recent proposed acquisition of EchoStar Spectrum by Starling to build a global D2D capability is a significant event for the satellite industry. We believe this acquisition will likely be disruptive to the status quo and will hasten the introduction of a global service that over time will connect new smartphones configured to use this spectrum. It could also accelerate the adoption of IoT devices that better compete with our global IoT services, at least better than the current D2D efforts using cellular spectrum on a regional basis in a few countries around the world. We acknowledge that more competition is coming to our corner of the satellite market. We take this increased competition seriously and believe that this development will affect us as early as the latter years of this decade and most certainly into the 2030s. Now that being said, we do have exciting prospects as well as an enviable position in established growing markets because of the quality and durability of our partnerships and satellite solutions. We have tremendous experience developing thousands of Iridium-connected solutions that are already in the market. This knowledge and our knowledge and our network will serve us well in responding to the changes taking place in the industry today. To be clear, we will be proactive and pivot to strengthen our position, amid ongoing changes to the satellite market landscape. We have a long history of doing this and I'm confident we will be successful and can continue to grow revenues as the market for satellite services evolve. Iridium has focused on providing unique specialized services in the satellite industry. While we have some areas of overlap with other satellite providers, we have never sought to participate in price-driven commodity markets and we don't plan to now. Our current development of Iridium NTN Direct is a great entry point into providing a new standards-based D2D service that will expose us to a new and potentially larger market opportunity. However, broadband D2D is still a nascent unproven market. And absent a partner with spectrum and committed capital to support this type of build-out, we have no plans to go it alone. As we think about our long-term future and think about the services we'd include in a follow-on constellation, we will look to opportunities that provide us with the greatest return on capital. And for now, and doesn't fit that profile for us. Instead, we plan to build on our market strengths and focus even more deeply on the areas we are uniquely qualified to deliver. This includes continuing to prudently invest in new growth areas around our unique industrial-grade IoT and PNT services and exploring acquisitions in adjacent areas that are complementary. We will focus on regulated applications where demand for safety services are growing, and our unique global satellite capability can provide a critical solution such as maritime and aviation cockpit safety services. In addition, we believe Iridium has a strong and defensible position in the growing autonomous systems market as a failsafe connection for drones, crudeless vessels and other autonomous vehicles. These vehicles will need multiple redundant connections for safety and reliability, and we'll also appreciate our PNT technology to protect their location and navigation. As I said before, we will continue with our investment in Iridium NTN Direct. Our development work with standards-based IoT continues to provide an exciting opportunity and is complementary to other D2D efforts in the industry. We are making strong progress on this new service, and we're now in the process of on-air testing from live satellites. We are getting good traction from mobile network operators. You likely saw our announcements with Deutsche Telekom and Carrier One, and there are more announcements to come. We're finding demand from MNOs for a global Iridium service onto which their IoT customers can roam and we believe Iridium NTN Direct will augment our already successful and growing IoT portfolio and expand our addressable market into the broader terrestrial IoT space. We will also seek to build or acquire intellectual property and assets that provide Iridium other outlets for growing new revenue streams that won't compete directly with these new D2D services coming in a few years. For example, Iridium has a very unique platform with our powerful new PNT service which has the ability to reshape security applications and fortify terrestrial networks. We're seeing a lot of traction in a number of commercial and government industries that need an alternative to GPS for critical infrastructure, protection for their navigation systems and accurate in-building time sources in addition to other security uses. We are also developing a unique quantum-safe cybersecurity product using our PNT signal that can improve identity access management and provide authentication for high-value transactions, tapping into the $20 billion identity verification industry and creating a new revenue stream. Even capturing a small portion of this growing market would be meaningful to a company of our size. We are also continuing our focus on U.S. national security missions, building on our collaboration with the U.S. government over the last 25 years. Iridium's network is relied upon for primary and backup communications, secured transmissions, specialized IoT services, tactical radios and much more. Many government agencies depend on Iridium service for critical data transfer, asset management and situational awareness to name a few. And of course, our technology is embedded into so many applications and missions. So it is not easily replaced by other satellite systems or evolving D2D services. We continue to discuss our EMSS contract renewal with the U.S. government and expect a positive and productive outcome in the next year as the government continues to rely more heavily on commercial satellite services like ours. Similarly, our contract with the Space Force Space Development Agency is another important touch point with the U.S. government. We see the work we're doing on building the ground entry points and operation centers for SBA's new network has given us great visibility into the government's Golden Dome initiative and credibility to support its future needs. We are well positioned to expand the scope of our work with the government going forward as they invest heavily in Golden Dome. These are just a few areas for which we believe disciplined capital deployment can provide continued strong revenue and bottom line growth and we look forward to being able to share additional details as we execute on our vision. Beyond our valuable global L-band satellite spectrum and the growing number of partners and solutions we've developed over our 3 decades of operations, Iridium is unique in the satellite industry and that we generate strong cash flows with reasonable capital cycles. With a healthy, flexible and still young satellite constellation, we won't need to spend on a new network until well into the 2030s with bus and launch costs significantly less than we experienced with our second-generation system, we feel good about our options for lower cost construction and launch when the time comes, including potentially as hosted payloads on another constellation system. Further, we have confidence that our strong cash flow should continue over the next 5 years and into the 2030s when a replacement system may be needed. Even with the increased uncertainty provided by a new satellite entrants, we still expect to generate at least $1.5 billion to $1.8 billion in total cash flows from 2026 through 2030, giving us a lot of flexibility as we enhance our business and focus on new growth opportunities. Given the increased focus on solidifying our competitive position, we have decided that we will pause our share repurchase program to emphasize strategic growth initiatives and continue our discipline in the deployment of capital as we remain committed to deleveraging the balance sheet. We believe this is a prudent course for now, even as we continue with our quarterly dividend program. As you can see by our earnings report today, we continue to grow revenue in subscribers, and we expect to grow well into the future. Since the beginning of the year, we've signed up more than 70 new technology and distribution partners to the Iridium ecosystem to either build new solutions or license our technology for new Iridium-based products. These are indicative of the continuing value of our network and demonstrate the strong pipeline we have for continued growth. We are confident that Iridium's many product lines will continue to be relevant, and we are excited to begin to invest in related technologies and businesses where we see meaningful growth potential. While the EchoStar Spectrum sale is a major development, it does not come as a complete surprise to us. More D2D competition is coming, but we have time to respond as market reaction will be slow. We've seen this with a limited market reaction to Apple's D2D offerings and the response to the new T-Mobile satellite services which have been underwhelming as well. We agree that the communications market is changing and new industries, which hadn't previously seriously considered using satellite solutions are now beginning to explore or build applications that offer real value to their customers. This is an attractive environment for us, and we expect Iridium's opportunities will expand. As we invest in new technologies and adjust our market focus, we know that our competitive advantage comes from focusing on specialized products and services for which high reliability and customized solutions remain key points of differentiation. With that, I'll now turn the call over to Vince to discuss our quarterly results and outlook. Vince? Vincent O'Neill: Thanks, Matt. Good morning, everyone. As Matt noted, I'll review Iridium's financial results for the third quarter. I'll also highlight some of the trends we're seeing across the industry and share details on Iridium's leverage and capital position. Operational EBITDA was up 10% in the third quarter to $136.6 million, driven by a combination of revenue from recurring services and engineering and support. On the commercial side of our business, service revenue was up 4% to $138.3 million, largely due to growth in commercial IoT, PNT and voice and data. Voice and data revenue rose 4% from a year earlier to $59.9 million, largely reflecting price increases implemented in the beginning of July, which drove a 4% increase in ARPU. Commercial IoT revenue totaled $46.7 million in the third quarter, up 7% from a year earlier. This increase continues to reflect broad-based growth of our IoT services for both consumer and commercial applications. Commercial Broadband was down 17% from the year ago period, though largely in line with our internal forecast. We anticipated the decline in broadband this quarter, which was largely attributable to a nonmaritime contract from the prior year period that was not renewed. Excluding this $1.4 million take-or-pay contract, the decline in broadband this quarter was consistent with the trend we saw in the first half of the year. Hosting and other data services revenue was $18.7 million this quarter, up 14% from last year's comparable quarter, reflecting an increase in PNT accentuated by a discrete event associated with the customer contract. We are in the early days of PNT business development and see robust opportunity ahead for meaningful revenue growth. We are encouraged by the level of market interest in the service that spans sectors and solutions. There is an increasing need for resilient position and timing solutions, especially for civil and commercial applications, to address jamming and spoofing and protect critical infrastructure. Government Service revenue was up modestly in the third quarter to $26.9 million, reflecting the step-up in our EMSS contract with the U.S. government in mid-September. This is the last price step-up to our contract, which will yield $110.5 million during the final year of the 7-year term. I should note that the government has the option to extend the contract for a period of 6 months at the current rate, which they traditionally exercise. Our formal negotiations on the new EMSS contract with the government will commence in 2026 in earnest. We entered this process with a strong relationship built over 25 years and understand well their priorities, needs and expectations. A good example of this is the integration of Iridium's technology in Colcom's new Snapdragon Mission Tactical Radio for U.S. government and Allied users. Turning to subscriber equipment. Sales were $21.5 million in the third quarter, down marginally from the prior year's quarter. We now forecast full year sales will modestly under on last year's level. Engineering and support revenue was $40.2 million in the third quarter as compared to $30.7 million in the prior year period. The strong increase from the prior year quarter continues to reflect Iridium's growing work with the Space Development Agency as well as new R&D and study contracts awarded in the prior year. For 2025, we are tightening our full year forecast for service revenue growth to approximately 3% and are narrowing our OEBITDA guidance between $495 million and $500 million, the higher end of our previously guided range. The primary driver of our adjustment to service revenue relates to the timing of PNT revenue. As previewed during our second quarter call, PNT revenue that had initially been expected to come in 2025, will now be delayed and pushed into future periods. And existing large customers working on a major deployment of PNT. Their investment is significant. However, the timing of implementation rests on factors outside of our control. We continue to work closely with this customer to support their rollout. This will result in hosted payload and other data services growth below trend in the fourth quarter and full year service revenue trending to the bottom end of our previously guided range. PNT remains a very attractive market for Iridium and will drive incremental revenue growth. We especially like the fact that it is a wide area of broadcast service that supports an unlimited number of users, while using minimal network resources. We've been happy to see Iridium PNT expand into a number of new applications like 5G networks. For example, you may have seen this week's announcement that T-Mobile is increasing their deployment of Iridium P&T for network resilience. Beyond this item, I would offer a couple of comments on trends we are seeing in our commercial lines of business as well as our ongoing work with the U.S. government. As I noted earlier, we initiated a price increase in our commercial voice and data business in July. Coincident with this rise in ARPU, we have seen a modest amount of subscriber deactivations tied to this pricing action. Going forward, we expect ARPU for our voice and data business to average $48 for the foreseeable future. Revenue in subscribers in IoT continue to grow. While we expect fourth quarter growth to increase from the 7% posted in Q3 due to contracted revenue with a large customer, we believe IoT revenue growth will now come in just below 10% for the full year. Our IoT business is running well. And as Matt noted, we have a number of new partners that have joined Iridium's ecosystem that are building new applications and will help drive future growth. As I mentioned earlier, the decline in our broadband revenue growth rate in the third quarter was abnormally high due to the impact of a nonmaritime contract from the prior year period that was not renewed. We anticipate that the year-over-year decline in broadband revenue will continue into the fourth quarter and trend closer to 8%. A faster conversion of maritime vessels from primary to companion service this year is hastening a mix shift in our Maritime business and will continue to be visible in our ARPU through the end of the year. Over time, we believe subscriber gains from the adoption of new Iridium Certus GMDSS plans will help to offset these ARPU pressures and that Iridium will remain an important player in the maritime sector. Iridium's government business will generate $108 million in EMSS revenue from the DoD this year. We also expect that the strong trends we've seen in engineering and support, primarily tied to our work with the FDA, will continue into the fourth quarter and support another year of record engineering revenue. Finally, with the tax legislation passed this summer, we expect an additional year of tax savings. We now expect Iridium to pay cash taxes of less than $10 million per year through 2027 and don't anticipate being a taxpayer at the full statutory rate until 2029. This updated tax profile will add further support to incremental cash generation. We hope this color is helpful as we enter the final quarter of the year. During the third quarter, Iridium retired approximately 1.9 million shares of common stock at an average price of $26.22. While Iridium stock trades at an attractive valuation, we believe it is prudent to enhance our incremental financial flexibility in the face of future changes to the competitive landscape. As Matt has already noted, we are pausing our share buybacks. Over the normal course, pausing our repurchase program will add approximately $50 million to our cash position by the end of the year and drive our net leverage slightly lower. Given the free cash flow Iridium will continue to generate, we have the ability to delever and quickly reduce net leverage from today's 3.5x. This increased financial flexibility allows us to consider options such as potentially buying back some of our debt, which reduces ongoing carrying costs. Absent an acquisition, Iridium could quickly delever below 2x net leverage well in advance of our targeted time line of 2030. Further, financial flexibility supports our ability to pursue strategic initiatives, including bolt-on M&A that bolsters our position in certain target markets. Moving to our capital position as of September 30, Iridium had a cash and cash equivalents balance of $88.5 million and ended the quarter with net leverage of 3.5x OEBITDA. On September 30, Iridium made a quarterly dividend payment of $0.15 per share to shareholders. This increase to the dividend rate results in full year growth rate of approximately 5% over 2024. We are committed to an active and growing dividend program as it augments long-term shareholder returns. Capital expenditures in the third quarter were $21.5 million. As we have noted previously, we anticipate higher capital expenditures in 2025 to support our work on Iridium NTN Direct and 5G standards. Turning to our pro forma free cash flow. We present a description of our cash flow metrics, along with the reconciliation to GAAP measures in a supplemental presentation, under the Events tab on our Investor Relations website. In those materials, we project pro forma free cash flow of about $304 million for 2025, with a conversion rate of OEBITDA to free cash flow of 61% in '25 and a yield approaching 18%. As Matt has previously noted, we expect that the Spectrum deals announced this year will bring more competition to the MSS industry over time. To ensure we are providing the most relevant guidance, we continue to guide service revenue on a year-by-year basis, but our withdrawing our 2030 service revenue outlook. Iridium has a durable and resilient business that will continue to generate significant cash flow over the long term. That strength is driven in part by Iridium-connected solutions that are not easily displaced and drive our recurring revenue quarter after quarter and year after year. We anticipate that even in the evolving competitive environment, Iridium has the capacity to generate at least $1.5 billion to $1.8 billion of free cash flow over the balance of this decade. I'd remind investors that Iridium is currently generating about $300 million per year of pro forma free cash flow. Just maintaining this run rate generates $1.5 billion through the end of the decade. Iridium occupies a unique position in the satellite market today. We have great assets, strong cash flow and many opportunities for incremental growth. While we acknowledge that the competitive dynamics in the satellite industry are likely to move at a faster pace, we remain very excited about our prospects and the durability of our existing business. With that, I'll turn things back to the operator and look forward to your questions. Operator: [Operator Instructions] The first question comes from Edison Yu with Deutsche Bank. Xin Yu: I want to follow up on the strategic options that the team has mentioned and maybe take it from 2 angles. First, you mentioned M&A several times I'm wondering what the time line maybe is for some of these actions and that's in the context stuff, is this a case where you had a bunch of M&A in the pipeline already and you're speeding it up? Or are you now looking for different types of targets post all the events that have occurred in the last couple of months? Matthew Desch: Yes. we haven't been a big acquisition company. Obviously, we did [ Satellus ] a few years ago, but hadn't done any sense. We have been looking at some areas that are complementary to what we're doing. We're looking at some now. I can't really comment on any specific timing because it's not completely within our control. But I did want to signal to you that, that will be a bigger focus for us going forward for obvious reasons. I mean there are things we can do to accelerate revenues and growth that are complementary to the specific areas we've targeted, and we're going to focus on those a bit more heavily. But there's not lots of targets. We're obviously not going to do many, many at the time, but we will focus on that more. Xin Yu: Understood. And then when I take a look at the M&A angle from, I guess, the opposite side, does it make sense to you for Iridium to be part whether directly or indirectly of some type of other solution, whether it's another big tech company trying to get into DDD in some way? Do you think that is a sensible thing after what's happened in transpired in the last couple of months? Matthew Desch: Well, it's only sensible based upon the value that, that would create for shareholders, which is our job to maximize. So clearly, we'd be open to those who have that desire. But I don't know for sure, but I wouldn't say that the recent news of spectrum purchase of that size and given the still uncertainty of the market will attract more to the market. I mean it might be less. But there's only so many of us that do have spectrum. We obviously have an important position there. And so if someone really wanted to do it globally, we could obviously be part of that. But that's not really for us to decide. That's not really something we can plan and execute on. That's for others to decide, but we'll do what's in the best interest in the long term value that we can create. Operator: The next question comes from Brent Penter with Raymond James. Brent Penter: Appreciate the commentary on the competitive environment. So at a high level, which of your business lines do you think are totally insulated from the competitive risk where you don't think about it at all really? Which business lines are maybe mostly insulated and which business lines do you think are most potentially exposed? Matthew Desch: Well, that's a very detailed question here. No business is completely insulated. We've largely been extremely competitive in the areas that we serve because of our global network because of our L-band spectrum because we're able to be a regulated provider when others can't. There's a lot of hurdles people have to overcome to compete say and the cockpit safety services or maritime safety services. Others have tried to do that, and it's taken years and years. So those kind of areas are always going to be pretty insulated from services. Some things like PNT, for example, given a 15-year head start we have on that given the fact that would be really very difficult to kind of recreate a service like that. Those are going to be pretty well protected services. Industrial IoT, really -- in many ways, that's protected by just a massive ecosystem and solutions that we provided, but we do have a wide variety of both proprietary and soon to be standards-based services, which also make that an attractive service that's in a business -- in an area of which there's going to be multiple suppliers. It's not going to always be direct head on the head competition, it's going to be actually multiple solutions in many things. For example, in the autonomous areas, we're finding ourselves being put on with terrestrial and even kind of broadband capabilities into autonomous solutions. So I think that covers a lot of area. The government is another area that after 25 years and being embedded into so many areas, having such high credibility in terms of what we can do and what our experience has led, which FDA is a good example of as we're lining up around Golden Dome, which potentially could be $175 billion, we find there's an awful lot of business that we can address. And we're mature enough as an organization to now go after that business where we couldn't have before. So I would say we feel like, first of all, we have a lot of sustaining strength in the existing businesses, a lot of momentum for -- in the coming years. Long term, as you look over 10 years, I think our business will evolve a bit, and that's why we're going to be more aggressive about evolving it ourselves into it. But I think that there's -- that's why we feel very strongly about the cash flows we're going to be generating over the next 5 years and can really kind of reiterate those. Brent Penter: Okay. Great. I appreciate all that detail. And so to take a big broad question and make it a little more specific. If we look at the Voice and Data segment, what -- can you give us a rough breakdown of what percent of your base there are more leisure or casual users versus what portion are maybe more industrial types or users that really need that more robust device and service that might be at less risk? Matthew Desch: Well, when you talk about voice and data, I mean, you're mostly talking about satellite phones and PTT devices and the like. And I don't think there's a whole lot of leisure in there. Almost everything that we supply is I would call for kind of a security, industrial kind of use, NGOs, first responders, militaries, and the like. I don't see a lot of people who are talking about the fact that they have a satellite phone for fund or use a push-to-talk device for roaming with family. So I think very little of that is really, I would call, consumer-grade kind of things. So it's another reason why I -- by the way, there's a little bit in terms of like subscribers. You can see we're seeing a difference in subscribers. As I was looking through and talking to the team about where that kind of year-over-year sort of subscriber, it's still small, but where is it coming from? It's all in kind of industrial areas. For example, the DOGE funding with USAID. There were some -- we're talking -- all these are, by the way, a pretty small effect. So there was USAID, the UN, for example, as some funding issues. So kind of NGOs in general. Of course, the -- we did have a small price increase this year, and I see some small impact, it seems like with some people who may be looking -- I'd say, again, maybe these are governmental agencies that decide they can use a few less given the price. I would say, tariffs have had a small impact. Really stretching a little bit, like the drawback -- the troop drawdown in Gaza, hurricanes. This has been one of the quietest hurricane seasons, but all these things have a small impact you could say is D2D an impact. The fact that you can do it with a smartphone, and it must be a small impact, but it really is, given all those other kind of issues, I can't see a real big impact really right now from D2D on that business. And I would say kind of the implication of your question is those are kind of consumer users and not industrial NGO, first responder, safety and security kind of application. So I hope that helps answer kind of where we see that business. Brent Penter: Yes. Yes. Very helpful color. And so my last question would just be kind of take a similar question with the IoT business. Can you all update us on what portion of that base is personal communication kind of or consumer users? Vincent O'Neill: It's about -- Brent, there is about 900,000 -- of the IoT subscriber base, roughly about 900,000 are personal subscriber users. Matthew Desch: And those are low ARPU users for the most part. As you can see, that business continues to grow and still expand in terms of number of devices and users, most of that business though is still -- as we can tell, not just everyday users who use this occasionally now and then, which is where a lot of, I think, D2Dis going. These are users that need a rugged purpose-built device for tracking or these again are a lot of first responders and those sort of people as well. So I think over half, which is our higher margin business is the broader industrial IoT area and that's the area that kind of continues to grow at pretty traditional rates right now. Operator: The next question comes from Mathieu Robilliard with Barclays. Mathieu Robilliard: If I could dive in some of the verticals a bit more. In terms of the broadband, one, you mentioned that there was a one-off kind of a contract that was not renewed. But I was wondering if you were still seeing an impact from the loss of core connectivity services that you had in the past, but I thought would be down by the end of last year or beginning of this year. So I just wanted to make sure what was the exposure still to connectivity service on the maritime. And then on the IoT and clearly, I think from what you've said, this is potentially the area where D2D could become the biggest competitor. At the same time, you are developing your home, D2D IoT or NTN IoT solution. And I think you signed the deal with Deutsche Telekom recently, and I wanted to clarify what exactly it is? Because my understanding is that your services are not yet commercially available. And so if you could clarify exactly the nature of what you signed with Deutsche Telekom. And also, which is another way to look at the threat of D2D or the opportunity. Clearly, when we look at pure mobile terrestrial IoT ARPUs, we're talking about less than $1 or low single-digit dollar per month per user, which is not the case in your IoT business, and I understand there's lots of different price points. But is your D2D initiative, is that something that could protect you to some extent, but also just bring lower ARPU for the same amount of subscribers? Matthew Desch: Okay. you have a couple there, Mathieu. I think you started with broadband. I want to make sure you understand that onetime which sort of distorts this quarter was actually revenue we had to recognize a year ago in the contract. So the contract was terminated. That wasn't the maritime contract happened to be kind of a little bit larger onetime kind of event that when you normalize that, we continue to sort of change the mix, if you will, in the maritime industry. I'm expecting that, that will eventually turn around. You can see the new products that are coming out. We've had some announced even in the last month. Intellian, which is a really important supplier in the maritime space, got approval for their combined backup GMDSS terminal that I think will be very attractive, and we have some more in the market coming. So I think broadband will eventually kind of flatten out, and we're not seeing any new trends in that area. In terms of IoT, yes, the contract -- the announcement of DT and the others that I think you'll soon be seeing are really kind of roaming arrangements. Those are MOUs. These are that relate to their agreements to allow their customers to roam onto our network, they're terrestrial customers. As I said before, we're getting a lot of interest, in fact, even growing interest there. The D2D market is not a 1 player wins all. What we're hearing from the mobile network operators is that they want multiple partners. They -- even the ones that have invested in people, I think you're going to see are going to roam on to our network as well. They appreciate the robustness of our network and the availability of it. I mean it won't be long before we deliver that service and the revenues. You're right, I think we'll be probably lower ARPU overall, but there will be an expansion of the market as opposed to necessarily -- they'll be going after applications that we wouldn't be able to address today with our proprietary solution. So for example, we can't address the smart meter market. There's many agricultural sensor markets we can address today. But our network is will be perfectly suited for those applications. And when we deliver a service, there'll be a lot of mobile network operator applications in this space, which they would find attractive to allow a Roman to our network. So we see that as a net positive and an important growth area for us. So I think I covered all of them, but let me know if I didn't, Mathieu. Mathieu Robilliard: No, that's very clear. I guess what I understand in terms of the agreement you signed with Deutsche is not -- this is based on your existing satellite IoT solutions. You're just signing a new partner, which is great in itself, but it has nothing to do with you... Matthew Desch: That's not true, Mathieu. The with DT was for Iridium NTN Direct. Whenever you hear the term Iridium NTN Direct, that's our service name for our new narrowband IoT standards-based solution based upon 3GPP Release 19 standards and the new chipsets and all that sort of thing. So that's what we're testing right now. It's actually starting to really do initial testing on live satellites. It's going to evolve into a service that we think will be ready next year, and we'll generate new solutions in devices that can both handle terrestrial and satellite communications. Operator: The Next question comes from Colin Canfield with Cantor. Colin Canfield: Following up to [indiscernible] maybe just asking it a little bit more directly, but as we think about kind of take on value on Iridium and maybe the process, typically, if we think about it maybe starting today and the cost starting now, is it fair to assume that like 9 to 12 months could be a kind of potential time line to realizing that the full value of Iridium? And as you think about kind of the key value within Iridium's kind of constellation RF network downstream devices, where do you think kind of are the key things that other partners might want to take out of the business or kind of integrate it into their wholesale back? I mean like there's a lot of, obviously, big dollars that are flowing around and like, yes, you can make the argument that the space equity market probably continues to drift higher from here. But it's just one of those things where it's tough to get public market credit for such an enduring and valuable asset. Matthew Desch: Yes. That's a good question and a difficult one to answer. I mean, I think our value is in the breadth of and experience and the ecosystem that we've had and all the solutions and growing market segments. We have -- I mentioned a couple -- a number of really, I think, important and enduring assets that we have, whether it's the U.S. government business, our PNT technology, which is quite unique, the breadth. I mean we've been the winner in IoT satellite services for a while now, and that isn't slowing down what we can do in other markets. I look at others right now. Yes, with a little else jealousy if people do have no revenues and only long-term kind of growth prospects. And obviously, the market isn't appreciating that about us right now. And that's why I think this sort of announcement of a bit of pivot and more investment into longer-term growth areas, which is clearly what people are appreciating now as opposed to return of capital and that sort of thing. I think it's prudent right now. So not sure if that completely answered your question, but hopefully I do think that there is some underappreciated assets of value. Perhaps we've been more underappreciated than some right now. And I think a lot of that has to do with people who have not really sustained the business as much, but they do have larger spectrum assets than perhaps we have and perhaps that's of interest to some. Ours are valuable spectrum assets, but we haven't chosen to market them to others. And clearly, people believe that maybe there's been a rerating of the value of satellite spectrum in the mobile satellite services banner, and we haven't promoted that. We still have value regardless. It's just we're not out there pumping that as being what the future of our company is. I believe that we can still create excess large growth going long term, and I think that will be proven. Colin Canfield: Got it. Got it. Definitely agree. But as we think about rank order of partners, right? Like the EchoStar SpaceX deal, I think you're talking a pretty clear indication that this basically plans to go after a handset, right? And so within that construct, kind of the big competitors that are read have substantial ecosystems are probably 1 in 1 alone and as a third company, right? So as we think of kind of that construct, is there a rank order of folks that you probably have a great relationship, someone like Paul Jacobs a global star or kind of some of the Amazon folks? Like how do you rank order the potential teammates that you would probably want to work with in the future? Matthew Desch: Yes, that's a tricky question to answer. I mean that sort of is leading to possible partnerships and aspects that I don't really want to signal. I've said in the past, especially having been here almost 19 years now. I do know everybody. I have talked to everybody. And I will say this is a very active time in the industry where there are a lot of discussions going on, but not necessarily -- I don't want to try to indicate that there are imminent deals are things underway. I think that would be inappropriate even if there were to talk about that right now. There are larger players in our industry that weren't there 5, 10 certainly when I joined the industry, and you mentioned people like Amazon Kiper and Apple and certainly, there wasn't a SpaceX, Starlink in those days. And those are kind of people with the assets and strategic ability to go kind of anywhere they want to go, which is a new thing for our industry, and I think that will be an interesting development. But I think we can exist within that environment very well and possibly even take advantage of that. Colin Canfield: Got it. I definitely agree. Appreciate the color as always now. Matthew Desch: Yes. Thanks. Operator: The next question comes from Tim Horan with Oppenheimer. Timothy Horan: Matt, just following up on that question. On the spectrum front, do you have a sense of what percentage of the world EchoStar Spectrum covers at this point? And I believe you and Globalstar are the only ones with really global spectrum coverage. If you can just elaborate on that, that would be great. Matthew Desch: Yes. It's a complicated question. The way spectrum works is that the ITU provides -- think of it almost there's a directory at the ITU on a country-by-country basis of who has priority. And we do have like the #1 priority with our network in many countries developed over 30 years. And so we're -- a lot of places probably that Starlink will never be today because those countries can make decisions now as EchoStar spectrum is kind of applied for it to decide whether they want them to be there or not. So it's hard to say they are a certain place or not. They're certainly can support the oceans now that they couldn't before. They could do markets that really don't have a strong regulatory environment. But there's probably some markets that are going to say no to them. And that is not an easily describable position. It's going to take some time. First of all, that spectrum is geostationary spectrum. So that requires it to be reallocated and reapproved. There will be other people that will try to move ahead of them in line. It might even be us in some cases. And so it will take some time for that to kind of be reallocated and reapproved. But I mean, I want to say I wanted to make it clear, I didn't want to spend all the time of how hard it will be for them to create a system. I wanted to be sure that investors understood that in no way are we in kind of denial of the potential of that solution. Certainly, their ability to create a much more global system, for example, than EchoStar could have done that on their own. Frankly, they have rockets and satellites and other things that others don't have. So it's going to be faster than we were anticipating in a network would have been deployed, but we were always expecting a network would be deployed that could do this over the long term. Just thought it would probably be 2035 instead of 2029 or whatever it turns out to be. So I hope that's clear. And even when it is, I really think that as you kind of imply there will be lots of holes, they won't be probably still as global as we will. But I wanted to make it clear. Our goal isn't go straight at them and compete. It's to be complementary to them, doing things like Iridium NTN Direct, which we think has enduring value regardless of really what happens here. Timothy Horan: That's really helpful. So on PNT, it seems like the opportunity now is much larger than it even was 2 or 3 years ago. I guess do you still think you can hit those revenue targets on PNT. And what does it kind of take to do that? Matthew Desch: Yes, we do. I'm as bullish about actually more bullish about PNT than I've ever been. I will say it's a little lumpy as the business gets off the ground. There are some really big opportunities that we see ahead of us. It's just the timing of those aren't clear. I think you're going to see a number of announcements in the future, which will give you a bit more clear understanding of why we're as confident as we are about that. But a lot of trials going on. We really do see we have a significant competitive advantage. I think we saw the Department of Transportation announcement this week with T-Mobile. I mean that's just a small fraction of the potential even in that market. And we're really seeing that the technology is very complementary to our IoT business. There's a lot of business, for example, in autonomous vehicles of all types that really need a really reliable timing and location signal to make sure that what they're depending on in GPS or any other GNSS system can be relied on. So yes, I think we have a tremendous head start and a great opportunity. And I did tease out an opportunity that we're building on top of that. I don't really want to go too much more into the cybersecurity applications. But again, it's things that we can do on that platform that others can't do and that we think could create interesting new revenue streams, potentially even above and above the projections we provided before. Timothy Horan: So the next few years, you're not going to really see any increased competition. You give us a sense of the revenue growth. Will it be better than this year? Are there any just some of the tailwinds or headwinds? I mean are we thinking mid-single-digit revenue growth? Any kind of color given you pull some of the longer-term guidance would be really helpful. Matthew Desch: Yes. I mean I'd really like to focus more on providing that in February. I agree with you. I don't think that there is sort of a near-term direct competitive change. But I don't think we're getting any benefits from providing really long-term guidance that in a changing competitive environment. And so I'd really like to get back at least for some of the guidance. We'll always be probably a much longer-term guider than anybody else. I just think everyone should be providing as much long-term guidance as they can. And we're not going to completely pull off of that. But I just would rather not kind of try to lead you to some specific number over the next 2 or 3 years. But as you can tell, we're still pretty bullish on our cash flow projection. So I think you can back into it that we're not really coming off any kind of general trends here. Operator: The next question comes from Gregory Mesniaeff with Kingswood Capital Partners. Gregory Mesniaeff: Matt, you mentioned that you guys picked up about 70 new distribution partners have been signed. Can you talk about any changes in the terms with these third-party resellers in terms of revenue split or economics? And how is that trending as you pick up new distribution partners? Matthew Desch: Yes. I mean when we pick up a new partner, and we describe someone who say, wants to integrate us into their drone systems or put us on a new ocean sensor or whatever it might be, I mean, there's a lot of new potential companies. Those are typically kind of -- we license their ability to deploy our technology. They're allowed to integrate us into maybe their chipset, maybe their end-to-end system and they can provision and turn on and there is typically a pricing schedule with that, but that really varies. That hasn't really changed in the 25 years. Each one taps into a fairly consistent, but flexible pricing system that allows them to provide a service to their customers at competitive rates. So really, the terms aren't changing. I mean I do think that there are some big new opportunities, particularly as we get into the PNT area, where pricing is evolving for example. Some people would like to build in 5 to 10 years of PNT protection into a service in a sort of a capital model. We're open to doing that. Someone kind of pay as a user or by region. We're open to that. So those get built into the specific pricing contracts with the new partner, but I don't think that's any different now than it would have been in years past. Operator: Next question comes from Chris Quilty with Quilty Analytics. Christopher Quilty: I want to follow up on the T-Mobile DOT announcement. You mentioned a fraction of the sites. I think it was 90% for the announcement. Can you give us a sense, I mean, of the sort of volume of units, just if you look at specifically the cellular market or took it out to the data center market, what sort of penetration do they need? Do they need in every site or a portion of the sites based upon the operations? And I'm just trying to get a scale for how big that might be? Matthew Desch: Yes. I mean it's a global market to protect the cellular infrastructure from jamming. It's still starting to be recognized. I mean this specific contract, just to be more clear, the Department of Transportation is the agency within the U.S. government that is tasked with protecting critical infrastructure like GPS. And they look at the issue in the U.S. market and the potential for terrorism and other activities and are trying to find what are the solutions that are out there that can. And so they provided money to a number of different organizations, but we were kind of told and indicated that our -- with T-Mobile, we were one of the most ready and available today and the only really global solution that could kind of attack this problem on overall. Specifically with T-Mobile, we had already been doing some work with them on some of their in-building systems, but this was a goal to demonstrate the value of our technology to protect macro base station sites. And so it's kind of doubled the number of applications, but really, as it's successful and demonstrated here and if there's any kind of issues, I could see this being deployed much more widely to thousands and thousands of cell sites. And I think you also see other cell phone companies that aren't protected today realize that this is a very cost-effective way to add a layer of protection to what is critical infrastructure. Our cell phones, our ability to operate terrestrially are really critical. So it's a big market. Christopher Quilty: And real quickly, I mean, in your core business, you're wholly focused on the wholesale market. Obviously, having acquired Catellus, they had a direct and indirect approach to the market. What's your go-to-market approach long term there? Matthew Desch: In PNT directly or in that specific market? Christopher Quilty: No, in PNT Direct generally. Matthew Desch: Yes, lots of new partner discussions, a lot of new areas. We're not necessarily going to go direct as well. I don't think there'll be many opportunities for that. We have developing new technology. I think you'll hear about that shortly that I think will expand the market tremendously. We've had some talk about putting our algorithms into their systems directly, but it will really it'll be similar to the way we go to market in a 2-way communication solution, but will be a much larger expanded base of of companies that will want to embed us into their solutions. So it will not be direct Still, it will be companies who like the ones today who are experts in the timing market or in the PNT market, there will be a lot of new companies as well that will want to integrate us into their solutions. Christopher Quilty: And to be clear, the ripe opportunity is that all the service and license revenue? Or is there a hardware component? And what does that mix look like over time? Matthew Desch: There's a hardware component to it potentially, and we make margins on. But as anything else, where if there's high volume, which this is something that could become a high-volume business that will be high volume of kind of low-margin hardware equipment. But we really want to service revenue, global service revenue and whether that's baked into our partners' product or it's something we offer on a regional basis or something that's really developing right now. Christopher Quilty: Got you. And on the UAV market, you talked about it before, but ostensibly, you've got 2 opportunities, TT&C capability with like a Certus device but also a PNT or all PNT, why is that market not doing given the 100 to thousands of all PGA lying around Europe and the Middle East nowadays? Matthew Desch: Well, I mean, in our IoT business, primarily, there's a number of partners who have put us into all kinds of drones. And I think that's expanding as the drone world. I mean that's obviously more of the defense space. And I think we are being used in that space. I think -- I do think PNT is still fairly new to that and will become an important part of that. Things where that market really expands, whether it's delivery drones or the urban air mobility market or just a lot of other drone applications, I think, have other issues with beyond visual line of sight regulations, which are just now coming to 4, which we've been part of, and we're starting to see those getting clearer. We will be a big part of that as the BV LOS standard to merge. And I think that will make the market expand quite more broadly. But everything today is almost being done on waiver or on trials or prototypes and that sort of thing. And I think that's going to change in the coming years. Christopher Quilty: Got you. And if I can, one final ViaSat and SPACE 42 came out with their Equitus, whatever announcement for the joint venture company, still no Iridium mentioned in any of these announcements. But can you talk about how you view that effort? Is it something that you view as competitive or something you could contribute to? Can you contribute your spectrum to a pool there without causing interference or other issues with your network? What's your current thinking? Matthew Desch: It's hard to tell what that really is yet. I mean it's an interesting idea. I've talked to Mark Dankberg, the CEO of ViaSat about it. I mean he tried to explain sort of the vision that they have for that. It's a very complicated vision. It requires a lot of new technology and new development and a lot of investment. I'm not really interested in investing in the opportunity and perhaps they're not even looking for that. But this concept has certainly not only not been tried, but it's going to be a very complicated business model to implement. And you're going to be competing with potentially some other well-funded and deep-pocketed company. So again, as I said in my remarks, it's not really clear how big the broadband D2D market is. I mean I'm sure that there will be a market for the service, but how well the service will work, what people will pay for it, what the assets in space that you really have to cover to provide a long-term value, it isn't going to replace threshold communication. So it's going to really be an augmented field kind of application. And I know that there's really high valuations with some people that are still projected to even be in that business. But until we see how global those services are, what the value propositions are, I'm not interested in kind of necessarily jumping into that. But could we be part of that long term? I've been given the opportunity. That certainly -- if that does develop, it's going to be many years for it to develop into something that we could even think to participate in. So I'll just keep an eye on it and see what the market thinks about it. Right now, I think you would probably agree with me that the investment world isn't going to throw money at new players right now. And I think that was really more demonstrated with Lincoln omni space getting together this week as well. Operator: The next question comes from Hamed Khorsand with BWS. Hamed Khorsand: Just one, on the consumer IoT side, are you able to differentiate the gains in the quarter coming from your partners that are not on a fixed contract with you? Matthew Desch: You mean some smaller partners like Zolio and Bivy and everywhere and somewhere and a number of others that provide consumer IoT services? Hamed Khorsand: Yes, versus your large customer that's on a fixed contract. Matthew Desch: I mean, yes. I mean we know how many subscribers they are. It's a small part of sort of our overall IoT business. And they also are continuing to -- we're not seeing any real impact. I mean if the implication is what are they seeing, say, from D2D, and I'd say they're not really seeing much at all either at this point. Hamed Khorsand: So they grew in the quarter? Matthew Desch: I don't have that information at my -- there's different things going on with each of those. And so I'd really -- you'd have to ask each of them where they're at. I mean, we don't usually speak to any specific partners. Operator: The next question comes from Louie DiPalma with William Blair. Louie Dipalma: I missed the earlier part of the call, but caught some of the Q&A. Given the rapidly changing industry dynamics, Matt, did you indicate that you plan on exploring strategic options? Or is the message just that your phone line is open? Matthew Desch: I think what I said was is that we recognize the competition long term is in our business and that we will be pivoting to do more using our growing cash flow to acquire and make additional investments in areas which are unique and for which we can protect and for which we can provide value, and that gives us confidence in our ability to continue to grow and compete long term. That's a brief summary, but you probably should go through my comments in more detail because I think I was very specific about addressing the overall changing global marketplace and what our intentions were. Louie Dipalma: Sounds good. And has there been any discussion on Aireon being part of the FAA's air traffic control modernization? Matthew Desch: Yes. I've talked to Don and, of course, we're on the board, and so we get a lot of visibility to that. The big new air track control system for which they're funding how small -- there is some discussion in there about things that Aireon would be particularly capable at. Things like in Alaska, the Caribbean and some areas. There's no discussions about Oceanic right now in terms of the -- which is really where I think Aireon would excel and for which there's a lot of airspace they could provide service. But there have been discussions, I think -- continuing discussions with the FA and Aireon about serving those areas long term. So I mean Aireon is pretty confident that, that long term, they'll be supplying that service as well. So yes, I think there's opportunities there for Aireon definitely. Louie Dipalma: A final one for your narrowband nonterrestrial network solution, will the chipsets be available next year? And what's the general timing of the -- like the Deutsche Telecom roaming partnership going live? Matthew Desch: Yes, the chipsets will be available next year. In fact, we have prototype chipsets today. We're in discussions for more chipsets, and you'll see that over time with other manufacturers making those available as well. Not a lot of changes that they have to make to accommodate us, but the those will be available in '26 time frame. And we do plan on having the service available in '26 at some point in lot of testing to go, probably more the latter half instead of the former half, but there will be chipsets available to support that. Louie Dipalma: And will those chipsets be different from like mass market smartphone chipsets? And is there a timing on when like your spectrum band would be included in like mass market chipsets? Matthew Desch: No, those are mass-market chipsets. These are the chipset that these suppliers that we'll be talking about the first that we've announced is Nordic. That is a standard Nordic chipset that will have our capability in it along with all the many others that they have in that same chipset, the terrestrial spectrum as well as satellite spectrum that would be in there. So if someone implements that, they can roam under our network. Operator: The last question comes from Justin Lang with Morgan Stanley. Justin Lang: I'll just stick to one here. Matt, just coming back to the acquisition pipeline, my apologies if I missed this, but curious if you could just generally size some of the opportunities you're looking at or just give us some general parameters. Is this more about a series of smaller deals that give you to hold in new markets? Or are you really weighing something transformational, and that's the message we should take away? Matthew Desch: Yes, I don't want to guide to either one of those necessarily. There are companies in both those categories. I would say I would lean towards more transformational deals as opposed to given the effort involved with very small things. We're not looking to radically change our business model, though. So I think I'm not going to be that different in terms of what we're looking at is that what I've told you in the past. Our goal isn't to go retail, for example. I mean we're probably likely stay wholesale. But there are some there are some business areas that are complementary for which we can take a bigger part of the value chain and for which would lead us into using our network in new ways. Some of those are big and some of those are small. But we'll let you know when we get a bit more specific about those things. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Matthew Desch: Yes, I know it is a bit longer. I just wanted to -- there were a lot of questions, and I wanted to give everybody a chance to talk about it, given the changing nature of the industry and some of the things we talked about today. I hope you since our continued enthusiasm and confidence, I mean, it was a big announcement recently, and I know the market reacted to it, but I really think we have a strong potential and a strong future ahead of us and a lot of opportunity ahead. And we're looking forward to talking to you, I guess in the meantime and certainly at our next quarterly call. Thanks for joining us. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Eagle Bancorp, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Eric Newell, Chief Financial Officer of Eagle Bancorp, Inc.. Please go ahead. Eric Newell: Thank you, and good morning. Before we begin the presentation, I'd like to remind everyone that some of the comments made during this call are forward-looking statements. We cannot make any promises about future performance and caution you not to place undue reliance on these forward-looking statements. Our Form 10-K for fiscal year 2024 and Form 10-Qs for the first and second quarter and current reports on Form 8-K, including the earnings presentation slides identify important factors that could cause the company's actual results to differ materially from any forward-looking statements made this morning, which speak only as of today. Eagle Bancorp. does not undertake to update any forward-looking statements as a result of new information future events or developments unless required by law. This morning's commentary will also include non-GAAP financial information. The earnings release, which is posted in the Investor Relations section of our website and filed with the SEC, contains reconciliations of this information to the most directly comparable GAAP information. Our periodic reports are available from the company online at our website or on the SEC's website. With me today is our Chair, President and CEO, Susan Riel; Chief Lending Officer for Commercial Real Estate; Ryan Riel; and our Chief Credit Officer, Kevin Geoghegan. I'll now turn it over to Susan. Susan Riel: Thank you, Eric. Good morning, and thank you for joining us. The third quarter reflected continued progress in addressing asset quality issues and positioning the bank for sustainable profitability. While our results remain below our long-term expectations, we are confident that we are nearing the end of elevated losses from decreased asset values. On credit, we've balanced appropriate urgency that is driven by our near-term view of the office market outlook with an approach that remains methodical and deliberate, we are directly addressing persistent valuation stress of office buildings. We believe that working directly with counterparties that have local knowledge leads to better execution. It is disciplined work but is the right path to long-term stability. Specifically, we moved $121 million of criticized office loans to held for sale in the quarter and are working with buyers to sell these assets. Importantly, in the quarter, we also took deliberate steps to reinforce confidence in our asset valuations and reserve levels. First, we engaged with a nationally recognized loan review firm to conduct an independent credit evaluation of our CRE and C&I portfolios. Additionally, we performed our own supplemental internal review of all CRE exposures of $5 million and above. We'll provide more detail on both initiatives later in our remarks, but I'm pleased to report that the findings from both outcomes support the adequacy of our current provisioning. Our core commercial and deposit franchises continue to improve. C&I loans increased by $105 million, representing the majority of our loan originations for the quarter. Average C&I deposits grew 8.6% or $134.2 million for the second quarter. This momentum reflects relationship growth, client retention and new account activity. These are clear signs that our brand, our service model and our people are earning and deepening trust in the marketplace because our decisions are made locally by bankers who know their clients and communities, we are able to respond quickly, tailor the structure for each loan, and deliver a level of service larger institutions simply cannot replicate, and we see opportunities to extend that same relationship-driven approach across all our client segments. We're executing on our strategic plan, addressing potential credit issues, diversifying the balance sheet, improving margins and aligning resources to protect and grow franchise value. These actions are positioning us to further improve funding quality, reduce wholesale funding reliance and drive toward a lower cost of deposits. Our pre-provision net revenue is believed to improve with time. Our priorities are straightforward: complete the credit cleanup, deepen core relationships, and deliver improved earnings performance, which should drive improved share value for shareholders. The fundamentals of this company are sound. Our strategy is working and we are focused on building long-term sustainable value. I'll now turn it to Kevin, who will talk more about credit. Kevin Geoghegan: Thank you, Susan. As discussed over the prior 2 quarters, we continue to take a disciplined approach to resolving loan challenges. Total criticized and classified office loans have declined for 2 consecutive quarters from a peak of $302 million at the end of March 31 to $113.1 million at September 30. During the quarter, we moved $121 million of loans held for sale. These loans are in different stages of disposition with potential buyers, and we expect to complete sales on a portion of them by the end of the year. Results for the quarter include a $113.2 million provision for credit losses, primarily related to the office portfolio. Our office overlay continues to be robust at $60.3 million or 10.4% of the performing office balance. Another $24.7 million is associated with individually evaluated loans and the model's quantitative component. Our reserve methodology incorporates those losses from evaluation impairments directly, among performing office loans, those rated substandard carry a reserve of 44.5%, and special mention carry a reserve of 22.2%. All pass-rated office loans greater than $5 million were reviewed in this quarter, resulting in just 1 loan migrating into special mention. Our allowance for credit losses ended the quarter at $156.2 million or 2.14% of total loans. That's down 24 basis points from the prior quarter, reflecting a decrease in criticized and classified office loan balances. At the end of the second quarter, nonperforming loans were $226.4 million. At September 30, they declined to $118.6 million, down $108 million from the prior quarter, reflecting transfers to held for sale, charge-offs and loan payoffs. You can see more detail on Slide 23 in our investor deck. Nonperforming assets were 1.23% of total assets, an improvement of 93 basis points from last quarter. We also transferred 1 $12.6 million land loan to OREO. Loans 30 to 89 days past due totaled $29 million at September 30, down from $35 million last quarter. Finally, total criticized and classified loans rose to $958 million, from $875 million last quarter. Within that total, Office declined $198 million, while multifamily, including mixed-use predominantly residential increased by $204 million. The increase in criticized and classified multifamily loans largely reflects the impact of higher interest rates on debt service coverage rather than any meaningful deterioration in the underlying property performance. Net operating income levels remain at or above underwritten expectations across most of the portfolio. There continues to be some pressure within the affordable housing segment, though it represents a relatively small share of the downgrades this quarter. As we indicated last quarter, we do not believe multifamily loans are affected by the same structural or valuation issues present in the office portfolio. The relative strength of multifamily continues to support stable collateral values, and we believe this pressure is largely limited to a near-term income rather than asset impairment. We will continue to be vigilantly monitoring these portfolios. Eric? Eric Newell: Thanks, Kevin. We reported a net loss of $67.5 million or $2.22 per share compared with $69.8 million loss or $2.30 per share last quarter. In the second quarter, we outlined a more proactive approach to accelerate the resolution of problem loans. This quarter's actions were deliberate as we address valuation risk. Even with this quarter's credit-related losses, our capital position remains strong. Tangible common equity to tangible assets is 10.39%. Tier 1 leverage ratio declined modestly to 10.4% and CET1 to 13.58%. Tangible book value per share decreased $2.03 to $37, reflecting the impact of credit cleanup rather than core earnings erosion. Continued deposit growth and an increasing proportion of insured balances reflect the depth and durability of our funding base. With $5.3 billion in available liquidity, we maintained more than 2.3x coverage of uninsured deposits, positioning us exceptionally well. Our teams have reduced brokered deposits $534 million year-to-date, and we expect continued progress in the fourth quarter. The improvement reflects coordinated efforts among our C&I teams, branch network, and the digital platform. From an earnings standpoint, preprovision net revenue was $28.8 million, down from the prior quarter. Adjusting for $3.6 million in losses from loan sales, PP&R was $32.3 million, a sequential increase, reflecting the underlying strength of our core operating franchise. Net interest income grew to $68.2 million, up $383,000 as the decline in deposit and borrowing costs outpaced a modest reduction in income on earning assets. NIM expanded 6 basis points to 2.43%, primarily driven by a reduction in interest-earning assets associated with a decline in nonaccrual loan balances in the CRE loan portfolio. Noninterest income totaled $2.5 million compared to $6.4 million last quarter, primarily due to $3.6 million in loan loss sales and a $2 million loss on sale of investments with proceeds used to reduce higher cost funding. We expect steady contributions from BOLI and a growing fee income as treasury management sales expand. Noninterest expense declined $1.6 million to $41.9 million, reflecting lower FDIC assessments and disciplined cost management. We remain focused on maintaining efficiency while supporting strategic priorities. We recognize that investors want certainty that credit risk is fully understood and adequately reserved. That's why in the third quarter, we engaged a highly experienced nationally recognized third-party loan reviewer to complete an independent credit review of our commercial portfolio. The goal was to provide us an independent perspective to quantify potential future losses under both baseline and stressed economic scenarios. The review is conducted separately from our internal risk rating control process and included over 400 individual loans representing 84.9% of the commercial loan book about $7.4 billion. It assessed potential losses over a 30-month horizon, a 6-month near-term view plus an additional 24 months based on Moody's baseline and stress scenarios. Each loan was evaluated for collateral liquidation value, cost to carry and dispose and borrower and guarantor liquidity to determine potential shortfalls. Utilizing Moody's baseline stress scenario, the independent loan review analysis concluded total potential commercial loan losses of $257 million as of July 31, the date of their review. Importantly, where the independent firm identified potential loss contract, it was in credits we had already flagged internally. Their conclusions validated our own view of the portfolio. This was confirmation and not discovery. Utilizing the Moody's S4 downside stress scenario, where there's only a 4% probability the economy performs worse than the baseline, potential losses increased by $113 million to $370 million. Between July 31, the date of the independent loan review and quarter end, we charged off $140.8 million and continue to hold $60.3 million in our qualitative office overlay and $24.7 million in individually evaluated reserves. Together, that totals $225.8 million, which represents approximately 88% of the total potential losses identified in the baseline scenario. The independent review assumed liquidation scenarios for consistency across institutions. Our reserve process, by contrast, reflects workout strategies that have historically resulted in better recoveries. That's a methodological distinction, not a difference in recognizing risk. Also during the quarter, we performed a supplemental internal review of all CRE loans greater than $5 million, covering 137 loans totaling $2.9 billion. Following this review, there were 5 downgrades of $158.2 million of special mention and 3 downgrades of $110.8 million to substandard. Together, these reviews give us a data-driven view of potential losses. They reaffirm our belief that we are adequately reserved and the bulk of loss recognition is behind us. With that foundation in place, let me turn to how these actions position us for improved performance heading into 2026. On Slide 11 of the investor deck, we presented our forecast for the full year of 2026. We expect net interest income to grow despite a smaller balance sheet, driven by mix improvements and lower funding costs. As Kevin noted, the total reserve coverage to loans declined primarily due to a reduction in the office qualitative overlay. Our qualitative overlay captures a rolling 12-month evaluation loss experience. As that period rolls off, it will naturally reduce the over life. All pass-rated office loans were reviewed this quarter to ensure current information and support our internal ratings framework. Looking ahead, we anticipate that loan growth in 2026 will continue to be concentrated in C&I, and we're pursuing that measured growth with a strong focus on disciplined credit standards. We're nearing our target investment portfolio range of 12% to 15% of assets, at which point we'll begin reinvesting cash flows to optimize earnings without compromising liquidity. Noninterest expenses are expected to remain well controlled. FDIC costs are expected to peak over the next several quarters and then decline as asset quality and liquidity metrics continue to improve, trends we've already seen reflected and lower premiums in the last 2 quarters. Finally, as mentioned last quarter, our capital return philosophy has shifted in line with performance and priorities. The dividend reduction to $0.01 per share was a proactive step to reserve capital flexibility is not in response to capital adequacy concerns. As earnings normalize and credit stabilizes, we will reassess the most effective forms of capital return. I'll now turn it over to Susan for a wrap-up. Susan Riel: Thanks, Eric. This was a pivotal quarter for Eagle Bank. We've made significant progress on the credit front, controlling valuation risk head on, completing an independent portfolio review and validating that our reserves are adequate. At the same time, we're seeing tangible positive outcomes across our commercial and deposit franchises. As we look ahead, we believe that in 2026, provisions will be manageable and earnings will improve and our focus on sustainable profitability will come through in our results. Lastly, before we turn to Q&A, we wanted to announce the voluntary resignation of our Chief Credit Officer, Kevin Geoghegan, who will be moving back to Chicago effect December 31. We have hired 2 seasoned veterans, William Parati, Jr. and Daniel Callahan to serve as Interim Chief Credit Officers and Deputy Chief Credit Officer respectively, until a permanent replacement can be hired. Bill spent the bulk of his career at Frost Bank in Texas and Dan at Commerce Bank in Missouri. Collectively, their leadership and very deep experience will facilitate the bank's continued focus on enhancing our overall credit risk management. Kevin was instrumental in both helping shape and implementing our credit strategies working tirelessly with the team to both proactively deal with the bank's problem loans and improve our credit risk management, governance and practices. We thank Kevin for his contributions and wish him well. Before we conclude, I want to express my sincere appreciation to our employees. Your dedication and professionalism make all the difference. With that, we'll now open the line up for questions. Operator: [Operator Instructions] Our first question today comes from the line of Justin Crowley of Piper Sandler. Justin Crowley: Obviously, a lot of steps taken this quarter. You had some of the losses on the sale of those 2 loans. But after all the charge-offs and marks keep taking moving credits into held for sale, and I know you had the independent review, which sounded pretty thorough. But can you talk even a bit more on just what gets you so comfortable or comfortable on when it comes time to close these transactions that further losses won't be there or at least hopefully not too significant. Ryan Riel: Thanks, Justin. This is Ryan Riel. I'd like to point out that in those 2 situations that the note sales that we -- or the property dispositions that we executed in the third quarter, the carrying value of those going into the third quarter was based on LOIs that ended up being traded down prior to execution of the transaction. In response to that, what we've implemented in our process to determine the carrying value of the loans in HFS and then just carrying values in general is we're getting brokers opinion, which, in our opinion, is a better valuation tool than appraisals in this marketplace. Brokers opinions give ranges of values. We've placed the carrying value at the bottom of that range in each case, along with consideration given to cost of disposition in an effort to make sure that, that situation that played out in those 2 examples does not happen again. Justin Crowley: Okay. And then as far as timing, and I imagine the sooner the better, but obviously, pricing is part of the conversation but can you get any more specific on the time line here for getting these assets off the balance sheet and maybe what a portion means? Ryan Riel: So it's hard to do that holistically. And each and every 1 of these cases, as Eric mentioned in his commentary, we are evaluating the circumstances of each individual asset in and of themselves and looking for that highest and best outcome, obviously, for the bank and for our shareholders. So in many of these cases, we have ongoing discussions in many of these cases, those discussions are far enough along that we can confidently say that disposition will occur during the fourth quarter of 2025. I don't want to -- a little bit superstitious. I don't want to jinx myself and put too fine a point on that, but there will be material action taken in that category during the fourth quarter. Justin Crowley: Okay. That's helpful. And then I know last quarter, you gave us a loose idea of where charge-offs could perhaps come in this quarter. And obviously, things changed and could maybe change more. But at the moment, where do you think those could come in that next quarter? And where does that leave things as we get into 2026. Eric Newell: Justin, this is Eric. I think what I would say about that in terms of next quarter and 2026, we're just not seeing early activity that would cause us to believe that there's continued impact on book value from credit, so in terms of charge-offs, I don't want to give you an estimate on that, but I just don't believe charge-off activity in the quarter will have a meaningful impact on provision expense, like it has in the last 2 quarters. Justin Crowley: Okay. So the idea would be you'd be more than comfortable with the reserve, taking those hits and not having to replace those losses through the provision? Eric Newell: Based on what we know right now, yes. And where our confidence comes from the 2 activities I talked about in the prepared comments, the independent loan review, which looked at 87% of -- or 88% of the book as well as that supplemental loan review that looked at almost $3 billion of pass rated CRE loans. Justin Crowley: Okay. And then with the pickup in total criticized balances? And obviously, despite the charge-offs taken on office, multifamily was again a driver after a similar trend last quarter. And I know potential losses have taken should be far less severe, but just wondering if you could spend just a little more time on that and provide any further detail on metrics just to help us get more comfortable with what we're seeing play out there. Ryan Riel: Sure. Justin, this is Ryan again. I'd like to point out that the transaction volume in our marketplace from a multifamily perspective, has sustained at prices that are still represent cap rates that are sub 6%. That is consistent with valuations that we underwrote to. I'd also like to point out that if you look at Slide 25, specifically and focus on the special mention and substandard categories where you're seeing debt service coverage be challenged. Many of those loans, the actual performance of the property is at or above our underwritten level. So the NOI is coming out at or above our expectation that was set at origination, the debt service coverage ratio that you see reflected is somewhat stressed based on the interest rate environment that we're in today. If you took that same NOI and compared it with where the permanent market is, you would get a better outcome in those debt service coverage ratios materially better outcome, frankly, because there's somewhere between 150 and 250 basis point gap depending on which permanent provider you look at. Justin Crowley: Okay. And then you pointed out on Slide 25, but somewhat related, but there is large $56 million specialty use loan in Montgomery that fell into special mention in the quarter. Can you just talk a little about what that credit is, what the collateral looks like? Just anything you could share? Ryan Riel: Yes. So that particular loan is a special use loan. It's actually a self-storage property at Montgomery County. The performance of that property has been impaired by higher-than-expected operating expenses, which are being disputed. The primary driver there is real estate taxes. They're being disputed by that customer and have seen a material drop over the last several quarters of that. It's an ongoing dispute that they're working there. Again, the top line performance of that property is at or above where we underwrote. Operator: the next question. the next question will be coming from the line of Christopher Marinac of Janney Montgomery Scott. Christopher Marinac: Just wanted to go through briefly the government contract business that you have and how that appears at this time? And does is there any kind of volatility to expect with the shutdown that's ongoing. Eric Newell: Yes. Chris, this is Eric. We haven't seen much of any concerns in the government contracting space because of the government shutdown. As a reminder, the bias of our portfolio is in defense and security. We looked at line of credit usage relative to earlier this year, it's actually down 30% that would be an early indicator of cash flow challenges to clients. And so we're not seeing that. But our relationship managers keep a constant flow of communication to understand anything that we might be to respond to. Ryan Riel: That's right. And obviously, Chris, the risk in that portfolio does increase as the shutdown looms. Friday, tomorrow would meet the first full paycheck of government workers not being met. And we're hopeful and some of the indications are that the shutdown, albeit prolonged at this point to be reaching conclusion, hopefully in the coming time. Christopher Marinac: All right. Great. And then just back to the kind of main credit issues. From the held for sale that you now have, is the timing on that going to be in the next quarter and can you just kind of walk through kind of how -- or maybe what the risk is that you have an additional write-off as those are finally disposed. Ryan Riel: I think I'll point back to the comments I made to Justin, that we've enhanced our process based on the experience we had in the third quarter with the 2 dispositions that we went through. So we are basing our carrying value at the lower end of the range of values that we've determined through third-party work, and I feel very confident based on conversations with market participants and potential buyers that our carrying value is better than where we'll do in many instances. Christopher Marinac: Great. And then I guess last 1 for me, just has to do with kind of the inflow in future quarters. I mean, do you have visibility about how the inflow may be the same or different in Q4 and Q1. And I guess part of that question is just sort of the ongoing maturity wall that you have in the portfolio. I presume that was addressed by the deeper dive that you just did. Kevin P. Geoghegan: Chris, it's Kevin. And just a clarification, did you mean the inflow into HFS or the inflow into criticized classified. Christopher Marinac: Really criticized and classified. Kevin P. Geoghegan: Yes, I just wanted to make sure that was the purpose of doing the additional review is to get as much current information as we could on the entire portfolio, so that in our parlance or wouldn't be surprises. So I think that inflow will -- that migration will slow down dramatically. Eric Newell: Yes. I would build on that. This is Eric, that our expectation is that you're going to see criticized classified decline into 2026. Operator: Next question is coming from the line of Brett Scheiner of Ibis Capital Advisors. Unknown Analyst: I'm just trying to understand, you talked about a temporary cash flow issue in the multifamily space versus a long-term impairment. I'm trying to understand the difference between the 2 and how do we square that? Ryan Riel: Okay. So the comments that I made before where the NOI, our underwritten NOI is as compared to the actual performance of many of these properties is at or below our underwritten NOIs at or below the actual performance. So the performance is better in many instances than we expected. The debt service driven by the floating interest rate structure that is on many of those loans is higher than anticipated and putting stress on that ratio. Additionally, there are some challenges, as we've mentioned in our comments in the affordable housing space that specifically within the District of Columbia, has put pressure on the performance. The bad debt expense in Washington, D.C., unfortunately, is well above the national average. The DC Council's passed the rental Act recently that will help alleviate some of that over time. And that's primarily where we see the short-term pressure and long-term relief. Unknown Analyst: Doesn't that higher debt service and the pressure that you talked about affect asset values? Ryan Riel: It certainly can. Yes. Unknown Analyst: But how do you think of that as just a temporary cash flow issue versus a valuation impairment? Ryan Riel: Because the cash flow will improve over time, and therefore, the valuation will improve over time. Unknown Analyst: Based on a refinance or some other issue? Ryan Riel: based on the passage of time and improved performance. Unknown Analyst: Okay. Well, I'll follow up offline on that. And then any other comments on Kevin's departure. I know that about a year ago, that was seems to be a big catalyst for a cleanup. Kevin P. Geoghegan: This is Kevin. Thanks for the question. As Susan talked about, I voluntarily resigned and I'm proud -- very proud of what I was able to contribute to the enhanced credit risk management processes and policies here. And I also want to take a second and just thank my colleagues as well. They all know who they are as they continue to manage through our asset quality challenges. Susan Riel: I would also add to that with Kevin's resignation and our desire to be deliberate in our process of finding a replacement and not miss a beat in continuing the strong credit risk management processes that we have put in place. We decided to hire Bill Parati and Dan Callahan on an interim basis so that we would have the time, the appropriate amount of time to seek a permanent replacement for Kevin. . Unknown Analyst: Okay. Great. And then only 1 other thought. As you go into 4Q, if you're at sort of peak marks and you don't think at this point, you'll need to be adding to reserves or charge-offs will leave through and then you'll have to rebuild into the provision. I assume that you'll be accreting capital in fourth quarter? Eric Newell: Yes. I would direct my -- this is Eric. Brett, I would reaffirm what I said earlier on the call in terms of the independent loan review as well as that supplemental loan review really helping validate management's view of credit and my earlier comment that I don't believe at this time that book value will continue to be degraded by credit. Unknown Analyst: Okay. So that's a yes. EPNR should exceed provision? Eric Newell: What I'm saying is that I believe that the credit costs will not be degrading book value. Operator: The next question is coming from the line of Catherine Mealor of KBW. . Catherine Mealor: Maybe just 1 follow-up on credit, and you've kind of touched on this, but I'm going to just add a little bit more directly. So as you did the independent loan review and the external loan review, what did you see as you did those reviews that was not maybe captured before and how you were categorizing some of these properties. So it was just seems surprising to me the big increase into special mention and then a few into substandard, again, particularly on the multifamily piece. And so just kind of curious what changed and what specifically you saw within that loan review that made you feel like it was now more appropriate to categorize the loans that way. . Ryan Riel: Katherine, thanks. That review was really putting all the current information that we had on every single loan in our lap at 1 point. And we do reviews annually on all these properties, all of our loans. But this was all at one time to make sure we really understood the depth of the portfolio. And with that current information, we saw some segments of deterioration, and we took according steps. . Catherine Mealor: All right. Okay. And then, again, as we think about part that I found really helpful that you brought out is the one on kind of movement in the office book that kind of shows you most where we are in the cycle from where we started and kind of the losses and write-downs and transfers out of the office book. And so it feels like from the office book, were really kind of far through the cycle and kind of working through those issues. The multifamily piece feels like we're a little bit more early. And so is there any way you can kind of articulate what you think the ultimate losses or write-downs in multifamily maybe relative to what we're seeing in this office book. Ryan Riel: Catherine, this is Ryan. I don't think they're comparable at all, right? The structural issues in the office market in the Washington, D.C. region are significant, and you see that in our performance over the last several quarters. structural issues just don't exist in the multifamily segment. If you look at transaction volume, it's a bit down, but investors are still very interested in Washington, D.C., well-located, high-quality Washington, D.C. region multifamily product. Some of the jurisdictional issues that I referenced are presenting some headwinds for the segment. We're facing those head on. We have good quality sponsorship in those situations. And some of the other issues that are shown on Slide 25, the special mention and substandard category are simply transactions that the interaction of the net operating income and the debt service coverage based on the interest rate structure that's in place in many of those presents a challenge that's below policy levels, sometimes below 1:1 in those situations in all of those situations, we have structural enhancements that allow us to qualify those as potential weakness is not well-defined weaknesses while we work to restructure, and we're in active discussions to restructure. As you know, in the office category, when we went into restructure conversations or workout conversations, the value of that collateral had diminished substantially. That is just not the case in the properties. Operator: Next question will be coming from the line of Nick Grant of North Reed Capital. Unknown Analyst: All right. I wasn't on mute. So I don't know what the IT issue was, but thanks for the question. So I mean, first off, I just want to applaud the proactive measures to work through credit like I mean when I step back to $37 a tangible book fells, I mean, much more reflective of the identified risk across your loan exposures, reduces future credit migration. And Susan, in your opening remarks that it here, improving franchise value is a focus, I mean, I really agree with that. I mean given industry activity on the M&A front, increasing activity like we should see more deals here. How do you feel about the franchise upstream optionality as a way to increase shareholder value? Eric Newell: Yes. I mean I can start with that and Susan and can finish. But I think from our perspective, we're focused on the strategic plan and building shareholder value through the diversification efforts in C&I, improving our funding profile and focused on improving pre-provision net revenue, which should drive enhanced or improved ROA and ROTCE. Susan Riel: But obviously, Nick, the Board will focus on anything that adds value to our shareholders, and we'll consider whatever other options come our way. . Operator: We have a follow-up question coming from Justin Crowley of Piper Sandler. Justin Crowley: I just wanted to hop back in and ask 1 quick 1 outside of credit. Just thinking about what will help out the margin looking forward here, you get better yield in C&I, but do you have any detail on how much in fixed loan repricings and adjustable that all reset maybe through the end of next year. I'm not sure if you can give some color on the magnitude and the yield pickup and I guess, maybe excluding anything that's set to hopefully move off the balance sheet. Eric Newell: Yes. I don't have that information in front of me, Justin, so I don't want to make assumptions for you there. But in terms of just more broadly with the NIM expectation, I think you have the similar phenomenon of investment portfolio rolling off, whether it's rolling back into investment portfolio, if we're getting close to that 12% to 15% with higher yields or the cash flows off the portfolio going as use loans, that's going to be helpful on the asset side. And then the -- on the liability side, it's the continued expectation in the fourth quarter as well as 2026 that we're going to be paying down wholesale funding, brokered funding which should be helpful in terms of cost of funds as well. About 40% of our loan book is fixed, but it's a short loan book growth. As Ryan has said in the call, a lot of our lending is value add. We're not the permanent financing takeout. So when you look at the average book, it's probably 3 to 4 years. Operator: Thank you. And that does conclude today's Q&A session. I would like to turn the call over to President and CEO Susan Riel for closing remarks. Please go ahead. Susan Riel: Okay. Thank you for your participation and questions during this call, and we look forward to speaking to you again next quarter. Thank you. . Operator: Thank you all for joining. You can now disconnect.
Stacy Pollard: Good morning, everyone. I'm Stacy Pollard. I'm here with Dassault Systèmes' CEO, Pascal Daloz; and the CFO, Rouven Bergmann. Unfortunately, our Head of Investor Relations, Beatrix Martinez, could not be with us today. She's out for a couple of weeks. So I have the pleasure of being in this room again. It's been a few years since I sat in the chairs beside you guys. So it's very interesting to be a different perspective on this side of the podium. Now let me move on and formally welcome you to Dassault Systèmes' third quarter webcast presentation. At the end of the presentation, we will take questions from participants in the room and online. Later today, we'll also hold a conference call. Dassault Systèmes' results are prepared in accordance with IFRS. Most of the financial figures in this conference call are presented on a non-IFRS basis, with revenue growth rates in constant currencies unless otherwise noted. For an understanding of the differences between IFRS and non-IFRS, please see the reconciliation tables included in our press release. Some of the comments we will make during today's presentations will contain forward-looking statements, which could differ materially from actual results. Please refer to our risk factors in our 2024 universal registration document published on the 18th of March. I will now hand over to Pascal Daloz. Pascal Daloz: Thank you, Stacy. Good morning to all of you. It's always a pleasure to be here in London and to have a chance also to interact directly with you. So we're going to review the Dassault Systèmes performance for Q3. Let me give you some -- at least my reading of the numbers. I think this quarter is a solid quarter with healthy margin, and I think Rouven will come back on this. And we -- with a strong EPS growth, and we continue to grow the recurring revenue part, which is, I think, the important thing because this is reflecting the strength and the resilience of our business model. Now if you look at the numbers, the revenue grew 5%, thanks to a strong demand across our core industries. Our subscriptions business is up 16%, accounting for almost half of the recurrent part of the revenue. If you remember, a few years ago, it was only 1/3. So this is growing extremely well. We hit a 30.1% operating margin, which I think is reflecting our focus on running profitable and efficient business. And finally, the earnings per share came at EUR 0.29 and growing at 10%. So behind this number, I think there are certain things I would like to highlight and which are our strengths. The first one is Industrial Innovations, especially Transportation & Mobility, we continue to expand our footprint. And despite the ongoing challenges in this sector, we have also a strong momentum behind 3DEXPERIENCE and SOLIDWORKS this quarter. The second thing is, I think our focus on accelerating SaaS adoption is starting to pay off this quarter, you will see. This is driving the revenue growth and the strong market traction. And to further support this momentum, we have established a new leadership at Centric to fast track the adoption of the SaaS business model. Lastly, in the field of artificial intelligence, I think we are shaping the future with a powerful combination between the industry most comprehensive data sets, the scientific rigor, the advanced modeling and simulations being combined with the real-world evidence, we call it the real-world validations. And AI for us is really not an add-on. It's embedded in the core of the 3DEXPERIENCE platform for a long time because you remember the 3DEXPERIENCE platform, this is really how we are managing the knowledge and the know-how for many of our customers. This quarter, we are coming with new category of solutions. And you remember the Virtual Twin as a Service, the generative experience and the virtual companions, and we will say more about this. And they are really transforming the way our industry, our customers, they are designing, producing and operating the life cycle. Now for the full year, we are confident enough at least to reaffirm the earnings guidance, and we expect the EPS to grow between 7% to 10%, with the total revenue rising 4% to 6% on an adjusted basis, and it's mainly due to 3 factors. The first one is the lower growth from MEDIDATA, which is in line with Q3, in fact, the impact of the SaaS acceleration for Centric and the volatility impacting some of the timing to close. Now let's dig into some details behind those results. Let's zoom first on the manufacturing sectors. As I was telling you, Transportation & Mobility has once again proven its resiliency. And to give you the numbers, this quarter, we are growing at 18%, one-eight. Why so? Because it's usually when it's a difficult time for our customers that they have to take radical decisions. And this quarter, we have some -- Ford took the decisions to go with us to expand outside of the engineering borders, and we have signed a contract with them for the next 5 years to use the platform across all the different programs. I will tell you more on this probably next quarter. But there is also another very important flagship customer we signed this quarter with Stellantis. And I know some of you were expecting us to move along this way, and I will come back on this. Why those companies are basically adopting widely the 3DEXPERIENCE platform, is because they are using our solution first to speed up innovation. And speed is becoming really one of the key topic. You remember a few years ago to develop the car, it was almost 48 months. Now we are talking about 16 months. So it's a little bit like fast-moving goods. And to master the complexity, you need a different approach, and this is where I think we are making a difference. Sustainability is also a topic. The electrification is driving the cycle. You know it. And more and more with the SDV, we are creating a personalized experience for the customers. And this is really the combo, if you want, of what we can provide with our solutions. We are also seeing a strong growth in defense. It's growing double digit this quarter, where programs are becoming more complex and collaborative. And I think our 3DEXPERIENCE platform, combined with what we call the model-based system engineering, MBSE, which is now a standard in the industry is more and more widely adopted, and this is really opening a new opportunity for us, not only in Europe, but also in the rest of the world. Life Sciences, the market remains unstable and challenging. I think Rouven will say more about this. We still see the new clinical trial start being contracted. Nevertheless, we landed with some big contract this quarter. And more importantly, I think we're also being encouraged by some large win backs. AbbVie is one of them. And you remember, it was one of the flagship customer of Viva a few years ago. They signed with us a contract for the next 5 years. And I think this is the proof that what we do is extremely critical. And I think also this is a proof that what we have built as a foundations is critical for them also for the AI-based programs, and I will come back on this. In Infrastructure & Cities, the demands keep growing, in fact, for autonomous and sovereign infrastructure, you remember, especially in the energy space. But we are more and more seeing new use cases or new opportunity emerging. One of them is the nuclear decommissioning. As you know, it's a big topic because you have many reactors around the world aging. And we are using our solution to do virtual twin as a service to manage the safety and the efficiency of this process and to manage the end of life of those nuclear reactors. So this space is really, again, a way for us to establish leadership in a domain where we are the challenger because in this space, I think we do not have the same footprint than the others. Now let me show you some key wins. Stellantis, for you know the company, I mean -- and you remember, we had a significant footprint with PSA, but the rest of Stellantis was much more in the hands of our competition. So what do -- they took the decisions to -- I mean, to standardize on 3DEXPERIENCE platform on the cloud, which is, I think, important for their system engineering backbone. And this is extremely important because, as you know, the system engineering is the foundation to do the SDV. And all the car players are moving along this way, and they are using our system approach, system-to-system approach as a way to standardize across all the domains to unify the bill of materials, but more importantly, against, they are building the foundation for their AI initiatives because one way to reduce the cycle of time to develop the car is to be much more generative and you need an infrastructure to do this. And that's what the 3DEXPERIENCE platform is ready for. So we are extremely proud to support this transformation. And it's a significant one because it's a ramp-up at the end with more than 20,000 users we need to equip with the systems. Moving to Life Sciences. I already say a few words. So AbbVie, it's a global biopharma. It's one of the top 10 global pharma. And it's a win back. And it's a win back of a win back, let's say this way, because again, a few years ago, they took the decisions to open some clinical trials with Viva. And now they are back with us. And there are a few reasons for that. One of them is the time. They were sharing with us that we are 10x faster in the way to run the processes and the clinical operations. It's also a big cost saving, which is an interesting takeaway because you remember one of the arguments which was used was this EDC is becoming a commodity and it's price sensitive. And the reality is the price is one thing, the savings and the efficiency is another one. And it's -- here, you have the proof. And the last argument, all the pharma sector, a little bit like the auto sectors, they are building their AI programs in order to automate, in order to use in a better way the data set they have. And they have seen through our platform, the ability to develop their own program on top of what we do. So those are the reasons, if you want, behind these win backs. Finally, from a customer standpoint, this is an interesting case also. Korea Hydro & Nuclear Power is the largest energy public enterprise in Korea, and they have launched the digital transformation to manage, I was telling you, the decommissioning of 26 reactors. So the reactors is first generation. They are progressively replacing it with a new generation. And to do this, it's a complex process. They have to decommission this large installed base. They showcased this example, this case in Koreans 3DEXPERIENCE forum a few weeks ago, and I was having the chance to participate to this. And frankly speaking, you should really look at it. It's amazing what they have been able to do because it's a very complex process. Safety is at stake. Compliancy is at stake. It's a very, very sensitive process because you have to manipulate the reactor when the reactor is still working. At the same time, you need to do it in a very precise manner. And to manage this complexity, to predict the complexity of the process to prevent the risk, to keep track of everything because you have to be compliant. They are using the platform and they are using the virtual twin in order to make this. So why I pick those examples? Because behind all of them, there is a clear pattern. We are not only the partner for them. I think in many cases, we are the game changer for them. We are the one allowing them to accelerate their industrial transformation, whatever it's in the mobility, life sciences and the energy sector. Now let's speak about 3D UNIV+RSES. So you remember, we announced it in Feb this year, and I was making this statement, 3D UNIV+RSES is not an extension of what we do. It's really a leap forward. And there are a few things I want you to keep in mind. What are our differentiations? The first one is we are building our AI engine on the large and the most structured industry corpuses. And it's the result of 40 years, having 400,000, almost 400,000 customers worldwide in a very different sectors, building the virtual twin of all the objects you can see on the slides. And this is a unique purpose to train our systems. So -- and remember, AI without having high-quality data is just only a noise. But if you have the right data, it's becoming game changer. The second takeaway is the data set is not enough for what we do. You need to build AI on science. And this is extremely important because if you are only relying on patterns matching and recognitions, it's not enough for what we do. The AI needs to be built on physics, biology, material sciences, engineering principles. And why so? Because when life are at stake, whatever it's -- when you develop a drug, when you fly in objects, when you have driving an autonomous car, you cannot take risk. The system should not guess, should not hallucinate. You need to understand how the parts fit together, how the materials behaves. And this is really what we have been able to build, which is an AI which is rooted in sciences. The third element is we are coming today, I mean, today, a few weeks ago on the market with the new category of solutions. So you remember, we presented it during the Capital Market Day. And now I'm really pleased to introduce you to our virtual companions. And in fact, it's a family of 3 for the time being. You have AURORA which is our business strategies, focusing on the outcome and efficiency. You have Léo for engineering experts, and Léo is really diving deep into design and simulations. And you have MARii is our scientific authorities handling the -- probably the most advanced questions on research. The interesting things, if you ask the same questions to all of them, you have different answer. So more than a long explanation, let's look at the video. [Presentation] Pascal Daloz: So as you can see, it's not just about AI. It's about having an AI, which is behaving like your team because you need -- when you do engineering activities, you need to assemble different domain expertise at the same time. And if you try to converge too rapidly to the solutions, at the end, you are letting some open opportunities untapped. And this is basically what we are doing with the virtual companions, which are a way to complement and to enrich the roles we have developed. Now this is also an interesting thing because you can use AI as a way to take smarter decisions and faster. And here is, again, a concrete example. It's AURORA. And AURORA is widely used by many industries for currently to deal with the tariff, with the trade policies, the supply chain issues. because this is changing so much that you need almost every day to reactualize your what if scenario. So AURORA, in this case, is not only anticipating but reacting. She anticipates the turnaround, the uncertainty. She try to manage with data-driven insights, the consequences. And this is important because for many industries, the margin is at stake. So to keep it you ahead, the system, if you want, is helping you to collaborate, is bringing you the right expertise, is telling you what are the different avenue you have in front of you in order to fix the problems at the right times. Now let's speak about SOLIDWORKS. This is an interesting -- this is a very important year for us. It's a milestone because we are celebrating the 30 years anniversary of SOLIDWORKS. And why this is important? Because if we step back, after 30 years, I think no one will debate that SOLIDWORKS is the undisputed leader in the 3D CAD. And I put some numbers on the slide just to give you the proof, 8 million users. It's by far the largest design community around the world, 1.5 million commercial license, which is truly addressing the large company, but also the start-ups and all the shakers. It's almost 300,000 clients worldwide and again, covering the large spectrums of all different industry we serve. So it's a lot of legacy of innovations that we are keep pushing from a product development forward. And I think now with SOLIDWORKS, we are also introducing the artificial intelligence to build the next phase to make it faster, smarter, easier to use, in fact. And the topic for us is not only to automate tasks, but more importantly, to give more time for the creativity. And we have some features we are introducing and some functionalities. The first one is obviously the generative design. Second one is what we call assistive features. which is an intelligent and pattern of recognition when you do, for example, an assembly. And all those kind of things are really helping the users to work smarter, but not harder. Behind this, I think if there is one message I want you to keep in mind is this AI approach is a way to do the docking bridge with the 3DEXPERIENCE platform. As you know, this topic is at stake for several years. And I think now I believe we have find the routes to connect the SOLIDWORKS' large installed base we have with the 3DEXPERIENCE platform. It's a way if you want to turn the SOLIDWORKS users into the lifelong experience partner. So I think -- and Rouven will come back on this, but you will see the performance of SOLIDWORKS this quarter is really extremely good. It's growing at double digits. Now to conclude, I think why everything I share with you matters. There are a few things. I'm sorry, I should not anticipate your presentation Rouven. The first one is 3D UNIV+RSES is giving a few and large advantages. The first one is, you remember, we are helping our customer not only to manage the full life cycle of their products but more and more to manage the life cycle of the intellectual property. And you should remember what I'm telling you. In this AI periods, the most important is assets is intellectual property because everything you built is leveraging the intellectual property. And if you do not have a way to manage it safely to take it as a real asset to manage your life cycle the same way you manage the life cycle of the products, you take the risk to be out of the game. And this is what we are bringing to our -- to mix the different knowledge coming from different sources, but at the end, still tracking will belong to what to. The second thing is, in many domains, we are turning compliance into a competitive advantage. If you take aerospace, if you take health care, if you take energy, those are extremely heavily regulated industry. And one of the answer to the tariff war is to put more regulations. That's the way to protect, if you want certain markets. The flip side of this, if you are an industrial company, you have to manage with this complexity. And AI is a fantastic tool to read millions of documents to extract 1,000 rules and us, what do we do with those rules? We do design -- we do compliance by design, if you want. The system is checking automatically that everything you do, every design you do, every decision you do are compliance by design. The third element, I think generative AI is really a game changer as soon as you can trust it. And your AI in many industry we serve needs to be certifiable. If you cannot certify the output of what you have produced with AI is useless. And the way to do it, if you remember, we are training our AI on very comprehensive data sets, which is pretty unique. And those are very high quality of data sets. And it's validated by the science, which is even more important. And we are deploying those artificial intelligence capabilities into a secure and sovereign environment, which is what we do with 3DS OUTSCALE. So this combination is pretty unique on the market. It's very differentiate -- it's a huge differentiations compared to many of our peers. And this is, in my view, a game changer in many, many customer engagements we have right now. The last but not least, I think we are coming on the market with a new category of solutions. You have seen this morning the virtual companions, AURORA, Léo and MARii, but you will see more and more the generative experience, the virtual twin as a services. We have a road map for this -- for '26, '27, and this will accelerate the contribution of AI in our revenue streams. So with this, I think it's time for me to hand over to you, Rouven to give more flavor on the numbers and probably the outlook for the rest of the year. The floor is yours. Rouven Bergmann: Thank you, Pascal, and also welcome from my side to our call today. Thank you for joining us online and here in the room in London. Let me start with 3 key messages. First, top line growth and margin expansion are our top priority. Second message, the 3DEXPERIENCE platform is driving our business model shift to subscription and recurring revenue growth. This engine is working well with 16% growth of subscription this quarter. The third message is we are mission-critical, as you saw in the examples to our clients. In fact, in 2025, we are winning significant contracts with many of the top industrial companies across the world, and this is laying the foundation to long-term value creation with cloud and AI. It is these powerful long-term partnerships that give us confidence in our long-term targets. Now before I dive into the specifics of the quarter, a few more things to summarize briefly for you. Our financial results for the quarter were solid with 5% revenue growth and an expanding operating margin, which is up 100 basis points and 10% growth in EPS. Industrial innovation is driving the growth of 9% in the quarter and 8% year-to-date, while MEDIDATA and Centric were softer than expected. As discussed previously, the repositioning of MEDIDATA is ongoing. The change of the model to reduce the dependency on clinical trial activity will take time as we are doubling down on the enterprise and the PLM opportunity in Life Sciences. And for Centric, we're accelerating the SaaS transition. And to this effect, we have promoted a new leadership team, as you heard from Pascal. Now looking at the full year, we adjust our revenue outlook to 4% to 6% ex-FX, in line with our current trajectory of 5% top line growth year-to-date. At the same time, we maintain our EPS growth target of 7% to 10% ex-FX. This is thanks to the strengthening of the operating margin driven by additional efficiencies we are generating in the business. With this in mind, let me take you through the details. In Q3 and year-to-date, total revenue software were both up 5% ex-FX. Recurring revenue was strong, up 9% in the quarter, and it highlights a very solid acceleration when compared with 7% year-to-date. Subscription revenue growth was 16%, and it was driven by new deals signed in the quarter and the increasing visibility from large contracts that are ramping. As a result, subscription revenue now represents almost half of the recurring revenue base. It's up 3 points from last year. And starting in 2026, subscription revenue will surpass maintenance revenue in absolute terms. 3DEXPERIENCE was the growth engine behind that, up 16% in Q3, and the signings of Ford and Apple contributed to the strength in subscription growth. Upfront license revenue declined 13% as our clients continue to adopt the subscription model at an increasing rate. The best proof of this is that recurring revenue now accounts for 84% of the total software revenue year-to-date. The operating margin improved 100 basis points for the quarter and is driving strong EPS growth of 10%, thanks to the productivity gains and cost discipline. In fact, OpEx was up 3.1% in the quarter, and we continue to rebalance resources to support our growth strategy. Now turning to the growth drivers. In Q3, we saw very good 3DEXPERIENCE revenue, and it's now representing 40% of software revenue year-to-date. The growth was broad-based, up 16%. Cloud revenue was 8% in Q3, 7% year-to-date. 3DEXPERIENCE cloud revenue grew 36% in the quarter and 29% year-to-date. The key wins for 3DEXPERIENCE cloud, such as Ford, [indiscernible], Dallara Automobili and Stellantis demonstrate the value of the platform for our clients where transformation is critical as is the need to leverage AI. Now let me review the Q3 actuals versus our objectives briefly. Total revenue came in at EUR 1.461 billion in the quarter, mainly affected by currency headwinds. Excluding currency, growth was 5% at the low end. Operating margin was 30.1% and above the objective to 60 basis points from performance and a negative currency effect of 20 basis points. EPS was EUR 0.29, driven by better operating performance against a small currency headwind. Now looking at the geographies and product lines. The Americas rose 7% in Q3 with good performance in Transportation & Mobility, High Tech and Aerospace & Defense during the quarter. Europe was a bit softer at 4% in Q3 with double-digit growth in Southern Europe, solid performance in France and also Germany. This was supported by subscription momentum, especially in Aerospace & Defense. Asia was up 4%. India had an outstanding quarter. Korea was up double digit. Here again, strong performance of Transportation & Mobility as well as Aerospace & Defense. China experienced softness in Q3, but also on a tough comparison base when looking at last year's number. Now let me review the performance of our product lines. As mentioned previously, Industrial Innovation delivered excellent results in 2025 across key domains led by CATIA, ENOVIA and DELMIA as well as SIMULIA, highlighting the value of the 3DEXPERIENCE platform is delivering to our clients. So it's broad-based across domains. We are mission-critical to the transformation of our clients with superior capabilities to generate virtual twins. Life Sciences growth was lower than expected. It was down minus 3% in the third quarter with MEDIDATA impacted by continued study start declines, but importantly, continuing to gain market share. Overall, from an industry standpoint, the volume business continues to face pressure. When we entered 2025, we had assumed that volumes would stabilize, helping to support our forecasted growth in the second half. Conversely, we observed a decline in high single digits in Phase III studies and mid-single-digit decline across Phase I and Phase II since the beginning of this year. While we are expanding our market share, the impact of the decline in study starts is not yet compensated by the growth from the expansion with our enterprise and mid-market clients who proved resilient. As you heard from Pascal, we had a major MEDIDATA platform win back, the top 25 pharma, AbbVie, after a brief period with a competitor, AbbVie decided to return to MEDIDATA for all clinical trials, leveraging AI everywhere. This validates the trust clients place in us and the value of the MEDIDATA platform. Additionally, in Q3, we expanded partnerships with Sanofi. You see the press release this morning and also expanding our business with IQVIA, including Patient Cloud. Looking at Life Sciences outside of MEDIDATA is the opportunity to win with PLM is our clear priority. For the first 9 months, growth is up double digit, highlighting the strong potential of our portfolio to address the challenges of this industry. Now moving to mainstream innovation. Growth in this segment was mainly driven by SOLIDWORKS, as you heard. The shift to subscription is well underway at SOLIDWORKS. Centric growth was slower than expected in the quarter due to some shifted renewals, and we saw an acceleration in the share of clients adopting the SaaS model. Now turning to cash and the balance sheet IFRS items. Cash and cash equivalents totaled EUR 3.910 billion as of Q3 compared to EUR 3.953 billion at the end of 2024. This decrease of EUR 43 million on a euro basis was driven by a negative currency impact of EUR 269 million. At the end of the quarter, our net cash position totaled EUR 1.321 billion, a decrease of EUR 138 million versus a net cash position of EUR 1.459 billion at the end of last year. Now let's take a look at what drove our cash position at the end of the third quarter year-to-date. We generated EUR 1.334 billion in operating cash flow for the first 9 months versus EUR 1.348 billion last year. The cash conversion from non-IFRS operating income was 97% for the first 9 months. Cash conversion is a top priority, and we expect the conversion to improve going forward. And starting Q1 2026, we expect working capital to support cash conversion reaching the 2024 levels with the potential to improve further. As discussed previously, 2025 operating cash flow is impacted by significant contracts that we signed in the quarter as well as higher payments related to tax and social charges as well as negative FX. For the full year, we now expect operating cash conversion -- for the full year 2025, we now expect operating cash conversion to be in the range of 78% to 80%. To sum up, operating cash flow year-to-date was mainly used for the -- for investments, EUR 581 million, of which EUR 240 million was for acquisitions, EUR 216 million for the purchase of the Centric noncontrolling interest with the remainder of CapEx of EUR 123 million to support our cloud growth. We paid EUR 343 million in dividends and made a net repurchase of treasury shares of EUR 186 million. For any additional information, you will find the operating cash flow reconciliation in our presentation that we published this morning. Now let's transition to our financial objectives for 2025. Net-net, our year-to-date revenue is up 5%. For the full year, we now adjust our revenue outlook to reflect this trajectory and expect growth of 4% to 6% ex-FX for both the total revenue and software revenue versus 6% to 8% previously. In absolute terms, we are adjusting the full year revenue outlook by approximately EUR 140 million to the midpoint. This reflects an impact of EUR 30 million from Q3 and an FX impact of about EUR 20 million. The remaining delta can be explained by 3 factors: a, the lower growth from MEDIDATA in line with the Q3 performance; b, the impact of the SaaS acceleration at Centric; and last but not least, we also factor in an increasing macro volatility with the potential to impact the timing to close large transactions. Please also remember that we had a high comparison base in Q4 of 2024. Now looking forward, the change of model for Centric is on -- sorry, the change of model for MEDIDATA is ongoing. And we are confident as well into the accelerated SaaS transition of Centric given its strong positioning in a very large market and clients are endorsing it. For Industrial Innovation, we have built a very strong foundation in 2025, where we signed significant contracts, and we expect in 2026 to expand on these partnerships, transforming with virtual twins and generative experiences. And last but not least, the SOLIDWORKS momentum is strong. Recurring revenue outlook remains stable. It's at 7% to 8% growth. And underscoring what I said at the beginning, we are implementing a sustainable recurring growth model with increasing visibility. Above all, I mentioned the strength of our operating model, highlighted by the margin improvement. As such, we are maintaining our EPS growth expectation of 7% to 10% growth or EUR 1.31 to EUR 1.35. To achieve this, we expect Q4 OpEx to continue to trend in the same range of Q3, delivering margin expansion of about 100 basis points, which is driven by ongoing productivity initiatives, having the right people at the right place to make it simple. So this is all based on FX assumptions for an average rate for the year of euro to dollar at $1.13 and euro to yen at JPY 166.7. Now briefly on Q4. As you can see, the revenue range of 1% to 8% is fairly large. This is predicated on potential uncertainties in the timing of deal closing, mainly for the upfront license business, while subscription growth of 8% to 12% is solid on a high comparison base. Operating margin is expected in the range of 37.2% to 38% and EPS growth of 7% to 17% ex-FX to hit EUR 0.41 to EUR 0.45 EPS for the quarter, reflecting the ongoing operating leverage. Now as I reflect on the performance so far this year, I want to highlight that our operating model is resilient, and we apply strict financial discipline to support our long-term growth. We occupy a unique leading market position in which that makes us mission-critical today and tomorrow for our clients. Profitable growth and improving cash conversion, as mentioned, is a top priority with clear objectives to show results starting 2026. AI and cloud are 2 main growth drivers. We are confident we will deliver on their ambitious growth targets. We are committed to continue to invest right for innovation, for clients and for shareholder value. Now Pascal and I look forward to take your questions. Operator: [Operator Instructions] We pause for a brief moment and take questions from participants in the room first. Adam Wood: It's Adam Wood from Morgan Stanley. Maybe just to start off, you finished off even identifying that it is a reasonably large range for the fourth quarter in terms of revenue growth. Could you maybe just talk a little bit about what is in there at the bottom and top end of those ranges in terms of pipeline conversion assumptions on big deal closings? I mean, at the bottom end, are we assuming that none of the big deals close? Just to give us a little bit of a feeling for what's in there and how conservative that bottom end is? And then maybe just secondly, Pascal, you talked about the huge breadth of customer data that you have that you can train models on and use for AI. First of all, could you just talk about how challenged that is where customers are still on-premise? And then how much does that force them and accelerate the shift to cloud with the impact that has on the revenue transition? Rouven Bergmann: Thank you, Adam. I'll take the first question. The -- can you hear me well? Just working with microphone. Yes, there's a wide range on license. The recurring subscription part is fairly consistent compared to our performance year-to-date. I think that's important to note. On the range, the low end of the range is derisked with large transactions. We have a long list of large deals that we have all validated extremely detailed to see where they can fall and the size of those transactions in different scenarios. What I said, given that increasing macro volatility and the timing that -- and the impact on timing of closing this could create, we were prudent to reflect at the low end, a more conservative and prudent perspective of large deal contribution. So the midrange -- the midpoint requires some of those large deals, but we have the potential to do better because our pipeline is strong, but it's depending on the timing of closing of those large deals and the size of those large deals. Pascal Daloz: Coming back to your question about the transition from the on-prem to the cloud and how it is linked with AI. Definitively, AI is accelerating the trend, right? And there are a few reasons for that. One is because no need to wait to have transition everything before to start AI. And the way we do it, we do what we call supplemental. So when you have a large installed base or large deployments of the 3DEXPERIENCE platform on-prem, we come with an instance on the cloud in order to basically enable all this AI new category of services we are developing. And this is really accelerating the trend. And you have seen in the number, it's 36% growth this quarter, the cloud related to 3DEXPERIENCE platform. It's 30% since the beginning of the year. And it's extremely correlated also with the subscriptions acceleration with 16% this quarter. So in a way, this is helping the transition. And if you remember a few years ago, we were convinced the collaboration will be the catalyst for the people to move to the cloud. I think AI is the way to go. Mohammed Moawalla: Rouven, Pascal. Mo from GS. Firstly, just it's encouraging to see on the industrial business, there is pretty good momentum, particularly with Stellantis, Ford. As you look kind of into next year, as we think of some of the headwinds and the tailwinds, how should we think about the kind of growth across the different sort of segments of the business? Because obviously, in mainstream Centric has a transition still to navigate. On the Life Science side, it sounds like kind of visibility is still reasonably low, but the industrial business is ramping. So how should we think about the sort of puts and takes for growth next year? And then secondly, as we think about the Life Science business, have you sort of -- clearly, it's sort of behind plan. How do you think about the kind of strategic sort of view of this business over the medium term? You're willing to kind of write it out? Or is it something that perhaps maybe you need to kind of change the scope of to try to extract more of the growth areas that are probably better positioned? Pascal Daloz: Do you take the first one, Rouven? I'll take the second one. Rouven Bergmann: Okay. In terms of the building blocks more, when we look at the trend of 2025, Industrial Innovation up 8% year-to-date, 9% for the quarter, very much supported by the strong growth in 3DEXPERIENCE adoption. That's a very healthy and sustainable trend. That was always our objective to convert that growth into recurring revenue and subscription growth. As I mentioned that in year-to-date, there is -- and in Q3, there is always good contribution from new deals that we are signing, but also contribution from deals that we have signed in previous quarters that are ramping and are contributing to growth in the current quarter. With many of the significant deals we signed in 2025, this will be the case in 2026. So from an industrial standpoint, manufacturing industries, including for SOLIDWORKS because in SOLIDWORKS momentum is also favoring. I think we are fairly confident in our ability to continue to transform these huge industries. And in a way, many of the deals that we signed are a starting point for what's expected in 2026 and beyond. So without giving you guidance for 2026, but I think from that perspective, the 2025 trends are healthy and stable and sustainable. Related to MEDIDATA, the growth profile, yes, is very much affected by the volume business as we are changing the model to become more enterprise and more sticky by really looking at an enterprise solution to transform life sciences with the objective to generate evidence and outcomes faster for patients. And that's not just in the clinical trial, it's in research, in biology, but also in manufacturing and quality management and the whole life cycle of real-world evidence and trials and patients. So the opportunity is large, and we are making the changes to be in a better position in 2026 now. Now for 2026, I think we want to be cautious on the growth contribution from that part. We're not expecting a decline in 2026 from Life Sciences. I think we are in a better position in 2026 than 2025. That's our starting point. And for Centric, the situation is difficult in 2025, but it will improve in 2026. The SaaS acceleration is imminent. It's already happening as we are speaking, because customers are transitioning faster to the SaaS and cloud solutions than to the on-premise. And we expect around mid-teens growth for this business next year. And if you add all of that, I think we are -- we should enter 2026 with confidence. Of course, the macro standpoint is going to weigh, and we have to assess that. But the building blocks are in place and are shaping. That's the message to you. Pascal Daloz: The second part of your question, Mo, is if we do -- if we consider Life Sciences still being strategic for Dassault Systèmes, right? Ultimately, this is the question you ask. And the answer is yes. And there are a few reasons for this. One, if you look at who are the industry spending the most in research and development, Life Sciences and High-Tech are the 2. In the previous century, it was the auto and aerospace. In this century, they are the 2 spending the most. And if you remember, the core market we serve is really the innovation space, and we are obviously serving the one spending the most in innovation. So from market attractiveness, there is no doubt. The second reason is because we did not diversify in the life sciences only for the purpose to expand or to diversify the market. It was also a way for us to learn new scientific -- at least to develop new scientific foundation. Let me tell you why. If we want to address the sustainability challenge, we need to understand how life is generating life, right? This is -- it seems maybe a little bit far from the day-to-day numbers. But from a scientific standpoint, this is extremely important for us to crack how life is designing things. And my bet is the next generation of generative design will -- from a scientific standpoint, will come from this space. So this is the second reason why this is so important to continue to invest and to crack this sector in a good way. Now the question, what are we doing to change the game? Rouven already answered partially to these questions. The first one is we need to minimize the dependency on the volume of clinical trial. That's obvious because right now, the model is extremely sensitive to this. So when the market is booming, we are getting the full benefit of it. You have seen it during the COVID time and just after the acquisition of MEDIDATA. But when the market is shrinking, basically, you are penalized. And I know every quarter, I'm repeating this, the worst of the worst is, in fact, we are gaining market share. But you have hard time to figure out because you see the number decreasing. In a way, we are reinforcing our position into this space. So the way to do it, there are 2 different axes. One is to be more sticky and less dependent on the number of clinical trials, which is the enterprise approach, which is nothing more than the PLM approach we are applying to the sector. And we see a lot of traction downstream. All the topics which are related to the manufacturing, to the supply chain management, how to accelerate the transfer from the lab to the production system are extremely critical. Why -- the reason why we signed with Sanofi, the extension was they have 12 molecules in their pipelines. They need to basically put on the market in the next 3 years. They want to speed up the ramp-up for the production and to gain almost a year compared to what they used to. And the way to do that is very simple. You do most of the ramp-up production when the molecule is still at the lab level in terms of development. So you do what we do in other industries, except we do it specifically for the life sciences. So this is one axis to be enterprise-wide and to focus on the downstream and basically climb up, if you want, the value chain. The second one is MEDIDATA is a medical platform. The 3DEXPERIENCE platform is an enterprise platform, but MEDIDATA is a medical platform. And if you look at what kind of information we have into the systems, those are the medical insights for right now only the clinical trial and the intent is to expand the usage of this medical platform when the patient, they are under treatment. So this is what we call the patient centricity because there is no reason we cannot follow the patient when the patient is taking the drugs. And we can follow this, we can follow the adverse effect, we can follow -- we can make prescriptions, how to do -- to take the drugs, when it is the appropriate time, right? There are many, many services we could imagine around this way. And this is the strategy we are building around myMedidata. Those are the 2 axes we are using as a way to, if you want, be more sticky and less dependent on the volume of things. Now this is requesting to change the offer, right? And this is what we are doing. In the way we report the number, there is a little bit something which is hidden. In fact, you do not see the traction of the rest of what we do in Life Sciences because in the Life Sciences and Healthcare line, we are only reporting basically MEDIDATA and BIOVIA. But we are selling more and more DELMIA, ENOVIA, SIMULIA and also CATIA and SOLIDWORKS in the med device, and this is reported into the Industrial Innovations. So if you combine all those things, the picture is, in fact, better. Balajee Tirupati: I'll repeat my question. The first question is on MEDIDATA. How are you seeing the dynamics in the U.S. evolving? It would appear that some of the overhangs, regulatory overhangs have been reducing of late. And separately, we have also seen some of the CROs in IQVIA, ICON reporting decent booking numbers of late. So where are you seeing incremental growth headwinds for MEDIDATA coming from? And as we go in 2026, are you seeing a better visibility or some improvement in the decline in starts that we have seen in 2025? Rouven Bergmann: Yes, Balajee, thank you. I think the IQVIA and ICON outlooks were mixed, to be fair. So I don't think that anyone is saying we are yet through the decline in clinical trial activity. For sure, when we just look at clinical trial starts, Balajee, and the public available number that where all pharma companies are reporting their clinical trials that are starting, the numbers are down. And as I mentioned before, for Phase III, they are down significantly, and this is where the lion's share of value is concentrated for a software vendor as well, also for CROs because this is where there's the largest operation and there's -- most of the people are involved, and it is where the lion's share of the value is created. This is what's affecting us. And we have yet, to Pascal's point, to show that we can rebalance that headwind that we are facing from the volume decline with growth by creating a more sticky offering, connecting the dots across the life sciences enterprise to have that growth outweighing the decline just from the volume in terms of number of trials started. This is the challenge that we are facing. This is what we're seeing right now in our numbers reflected of minus 3%. At the same time, when I look just at the segment level from enterprise and mid-market, both parts are growing. But also for those 2 parts, they have less clinical trials in their portfolio than what they were doing in 2019, even before COVID. So we are already rebalancing, right, with our offering and improving our -- increasing our footprint with more value that we are creating for clients for which we are -- that we are able to monetize. But when you then include the pure volume part, still it overweighs and it reduces the growth in this quarter to minus 3%. I think regarding the U.S. regulation, right now, biotech funding is still not great, right? And that's also a reason why there's less trials started in the U.S. and in Europe. But we see an increasing trial activity, for example, in Asia, specifically in China. And that's a market opportunity that we are also addressing, but it's a different market with different economics. And now looking into 2026, it's difficult to predict what trial starts will be in 2026. I think what we should assume at this point is that our mix in 2026 is improving versus 2025 to be in a better position to offset that volatility. And offerings like clinical data studio are an enterprise offering. They are not clinical trial related. And this offering is going very, very well, and we are leading with this offer in the industry. One important part of the AbbVie announcement is the AI everywhere part. So when you are making decisions today as a company to go -- to think 5 years out, AI is at the center. And our AI strategy is resonating very well. And this is a catalyst for 2026. So I'm a bit -- you hear, I'm a bit more optimistic than what we're seeing in 2025, but it's too early to declare victory. Balajee Tirupati: Thanks for very comprehensive answer. If I can have a follow-up question. So following up on the AI debate that we have right now, and I appreciate it is a bit different for vertical software companies. But are you seeing your clients taking a pause in decision-making also on account of trying to understand what -- where the debate moves of software versus foundation model and also as your own 3D UNIV+RSES offering matures. So are customers also weighing decision and taking a pause in decision-making? Pascal Daloz: So it's a very good question. In fact, for many of our large customers, they started the AI initiative 2 years ago, in fact, by doing a lot of by themselves or sometimes partnering with start-ups. After 2 years, they are coming to the conclusion, it's promising, but you need to integrate this foundational model in the way you operate the company. And we are at this point. Let me give you an anecdote. I was with Ford a few weeks ago. And the CIO was telling me he stopped almost all the AI initiatives because now he wants to rationalize. But he want to rationalize in the productive way. He say, obviously, it's a lever for us. We have investigated many use cases. Now we need to focus on the one being more promising. And usually, the way to do this is very simple. You look at the moonshot, the one really changing the game. If you focus AI on the things which are making some improvement in what you do, you will never have your payback because AI is costly. However, if you focus on things you cannot do or you can do with a very different level of efficiency, the payback is there. And we are really at this stage. So for us, I will say it's driving against the adoption of the platform as the data lake. They are building more and more on the foundation because there is no need to redo the job. We have already done it. And more importantly, it's already integrating in everything they do. Because at the end, if you want to design the car, you still need CATIA. The fact that CATIA is driven by an AI engine is one thing, but you still need CATIA to produce the model, to produce the geometry, to produce basically the instruction for the shop floor. This is really where we are game changer. And this is extremely difficult to do without having our foundation, in fact. So to come back to your questions, I think, yes, there is a pause in a way people are doing less experiment -- but now they are taking the decision to focus on the core use cases, which are really productive and making the moonshot, I call it the moonshot, I mean, having a significant lever on the efficiency or opening new avenue. For example, this is what we are seeing in the material science. There are certain things you cannot do if you do not have an AI engine to do that. We are at this crossroad, but we are much more benefiting from this than something else. Charles Brennan: It's Charlie Brennan here from Jefferies. Apologies, 3 questions for me. Firstly, I'm struggling to match the narrative on to the actual numbers. You're attributing the weakness in the quarter to MEDIDATA and Centric, but MEDIDATA is a recurring revenue business and recurring revenues actually beat expectations. Centric is partially a license business, but it doesn't feel big enough to account for the size of the license decline. Is there anything else going on there, maybe a change in revenue allocation between the 2 lines? Or what else went wrong in the quarter to justify the shape of the numbers? Secondly, I'm hearing accelerating subscription as one of the themes coming across -- is that just Centric? Or is it more broad than that? And traditionally, it's tough to accelerate growth when you're moving to subscription. Do we need to think about a phase in '26 and '27 with accelerating license declines? And do we have to think about that in the shape of growth going forward? And then thirdly, I should probably sneak one in on cash flow. 84% conversion in 2026 is a surprisingly precise guide given the recent track record on cash flow. Are you confident that, that takes account of all of the working capital terms on deals that you're going to sign in 2026? Or is there scope for payment terms on deals in '26 to disrupt that 84% cash conversion? Rouven Bergmann: Okay. Thanks, Charlie, for the questions. Let's start -- go through this one by one. On the quarter, there's nothing else than what I outlined. I don't know where the disconnect is, but maybe I just reiterate it in simple form. Yes, MEDIDATA is a recurring business, but it also has a volume aspect of clinical trials that are starting and ending in a way they are not recurring, right? I think we were always clear about that. There's a subscription part where we contract over a period of time. And then there are studies that are starting and ending, and there is volatility to that. Charles Brennan: [indiscernible] Rouven Bergmann: Of course. But when studies are ending, they stop recognizing revenue. So there's a lot of studies ending. There's new studies are starting. If you're down minus 3% in a quarter on EUR 250 million, you can do the math in terms of how many this is, but there's a number of trials. We are running thousands of trials, Charlie. So in a market, as Pascal said, where the volume is stable, right, where we can gain growth through market share expansions, it's a solid generator of growth. And this has been the model of MEDIDATA for a long time. Now today, the volume part or the consumption business, you might say, represents about 30% of the overall business. And that business is down high single digits. And that's impacting the quarter, high single digit to low double digit for that volume business. Now it's offset by the increase in subscription contracts from deals that we are expanding and winning in the market. So that's to the MEDIDATA part. There is no magic to that other than this. On the subscription acceleration, as I said in my remarks, it's twofold. It's deals that we are signing in the quarter and ramps that are contributing to the growth from deals that we have signed in previous quarters. We are transitioning our installed base to cloud. But in many cases, it's not a 100% transition. In the case that Pascal mentioned in his -- in the presentation, the company, Stellantis, that's 100% for that part, right? It's not contributing to subscription this quarter. It will contribute over the period of time. But we have other deals where we have on-prem and cloud hybrid deals where there is a portion in the license subscription and a portion in the cloud subscription. And that has a higher impact on the in-quarter revenue in the subscription line. But it's still recurring and it's building over time. And this high structure of deals helps us to get away from the subscription license where the upfront portion is most significant and helps us to spread revenue more equally over time to create a more recurring base. And of course, when you look at our subscription on a quarter-to-quarter basis, it's -- I know where you're coming from, it's not sequentially up every quarter because of the on-premise part of subscription, which we well understand that depending on the start time of renewal or renewal dates, there is a fluctuation from quarter-to-quarter on our subscription business. You can go back years and you can see that. So rounding up the point, there is a contribution from deal signing in the quarter that are hybrid, where we have on-premise and cloud portion, where the cloud is over time and on-premise has more of a point-in-time impact. And then we are seeing ramping deals from deals that we have signed before. So also here, there's no impact from -- for the Centric part -- for the multiyear deals of Centric that we have recognized over the last quarters and last year specifically and before, that revenue is part of upfront license because it's a license subscription where you upfront revenue and it impacts the license part. So that's not driving the subscription business, Charlie. But going forward, as we are transitioning this business more to an ARR model to a SaaS model, it will support the subscription growth. And that's the whole point of what we are doing. From a cash flow perspective, Well, I think 2024 is an outlier in terms of several effects that we are facing related to tax impacts, social charges that are higher compared to 2024. That is all going to be in our base in 2025 compared to 2026. So we don't have those onetime effects any longer. At least they are not foreseeable at this point in time. And as it relates to the ramping deals that I talked about on the subscription line, they will generate significant higher cash in 2026 than in 2025. I have that level of visibility. Now that's the baseline for the assumption to be back at the 2024 levels. Now is there a possible variability? Yes. But the baseline assumption is the 2024 performance. Pascal Daloz: Maybe one additional comment I should make. Charlie, there is no trick. I think my commitment is very simple. I want to continue to gain market share in all the industry we serve. And I think quarter after quarter, I can -- I hope I'm proving to you that this is what we do, including in sector where it's extremely competitive. And the second thing is we are accelerating the transition to subscription and to the cloud. That's what we do. So my view, we are doing the right things. It's the appropriate time. Against, we were pushing this for a few years ago, but the market was not ready in our space for the cloud. Now it is, they are. And if you remember, the subscription used to be 1/3 of the recurring revenue 3, 4 years ago. Now it's 50%. And we are on a path in the next 3 years to be almost 2/3 of the recurrent part of the revenue. So I think we are walking the talk. That's what the commitment to do. This is what we are doing. We are redirecting the deal. And I think at the end, the numbers are reflecting this extremely, I mean, transparently, Charlie. Operator: We have an online question coming from the line of Laurent Daure at Kepler Cheuvreux. Laurent Daure: Yes. I have 3 quick questions. The first, if you could elaborate a little bit giving us an update on your pipeline of large deals by maybe verticals and your discussions with those clients, the long sales cycle, is it just the macro? Or is there anything else on the discussion you have with them? My second question is if you could give us a bit more color on the change in management at Centric and also on the 15% growth you're expecting for next year, the visibility you have on that, given that you will continue to move subscription? And my final question is, when you refer to a couple of years to rebalance the Life Science business, do you see a risk that maybe for 2 or 3 years that this business end up being kind of flattish? Pascal Daloz: Okay. So Laurent, I will take it, and Rouven, feel free to add whatever you want at the end. So the pipeline coverage is 2x, which is good. For Q4, usually, this is where we are. So -- and it's relatively balanced between the large deals and, let's say, the midsized deals, which is also important because when you have too much on the large deals, this is sometimes difficult to manage. In terms of industry contribution, it is relatively consistent with Q3. So you still have a fraction which is transportation and mobility centric. We have a large part also coming from aerospace and defense. And we also have a good visibility on industrial equipment. So that's for the core industry. And again, we -- the pipeline coverage is definitively not the topic. What we observe, and we have been explicit about this, sometimes 1 or 2 big transactions can shift from one quarter to another one, independently of us. And that's what Rouven is mentioning when he says the volatile geopolitic is basically putting some volatility on the time to close. But it's only a question of time to close. It's not a question related to the pipeline. Coming back to the Centric management change. In fact, it's very simple. You know Chris is turning 70. Chris, the founder of Centric, turning 70. For a few years, he was preparing Fabrice Canonge to be -- to take the positions. So we say it's the right time. We completed the acquisition of the remaining piece of Centric. So from basically a timing standpoint, it was appropriate to make the changes right now. And as part of the new setup, the new leadership, we have put this transition to the cloud as one of the objectives for the team and the EUR 1 billion threshold, which is the size of this business we want to achieve in the coming years, also one of the objectives for this new team. The last thing is related to Centric performance for next year. Rouven Bergmann: Life Sciences, the next 2 to 3 years. What is our expectations, the rebalancing of Life Science. Pascal Daloz: The rebalancing is already happening again. So except -- and this is what I was telling you, we are reporting in a line which is not making it visible for you. So probably something we need to change for you to have a visibility to understand how the momentum is going in order to basically balance between the volume-based business versus the enterprise-based business in Life Sciences. Now if we step back a little bit, I think the booking growth is good for Centric -- for MEDIDATA. So the topic is not the booking, it has to accelerate, obviously. But it's against this termination of studies and not having a new one starting again, which is the topic. I do expect we are reaching the bottom, frankly speaking. I told you this last year, I remember. And again, it was not -- it was based on facts because we were tracking all the pipelines. The way we do this, we look at how many Phase I, how many Phase IIs. We make some assumption about the move from one to another one. And this is how we are computing, if you want, the potential new studies starting every year. Now there is a big change, and you highlight it. We see Asia contributing to the trend, especially China, right, which was not the case in the past. And we were relatively dependent, as you say, on the U.S. dynamic for the creation or at least the most promising molecules coming on the market for the Phase III. Now we see basically this being much more balanced between the different continents. And this is also giving hope for me because we see -- and if you track it, we are seeing a lot of investment in the biotech in China, but also in Korea as well, Japan as well. So I do believe if we combine the 2 together, we will be in a much better situation. And Centric because that was also the question. Again, we have this massive renewal last year. That's the reason why we have the base effect this year. And if you combine this with the fact that we want to accelerate, I want to accelerate the transition to the cloud and the SaaS business model, this is creating the gap. But this basically, in 2026, we will be in a much better situation because we will not have the base coming from the big renewal. Anyway, the trend and the acceleration of the cloud is already happening. So that's the confidence I can share with you. Operator: Our next question comes from Frederic Boulan at Bank of America. Frederic Boulan: I've got 2 and a short clarification. Firstly, around AI, if you can spend a minute on your commercial model of the offering you've presented, any kind of attach rate you foresee on a midterm view? Second, coming back on the free cash flow side and your 84% conversion from next year. Any specific moving parts or action plans you want to call out to underpin your confidence in free cash flow acceleration? And then short clarification on MEDIDATA, can you confirm the comment you made on expect similar growth or similar revenue decline? Is this a comment about Q4 versus Q3 level of minus 3%? Pascal Daloz: So Rouven, I take the first one. For the cash flow. So the way it works for the AI new category of solutions is very simple. You remember the portfolio is structured around role, processes and solutions. So in front of the role, we have the virtual companions and the virtual companions are there to advance the role and to extend the roles. The generative experiences are there to basically automate the processes. And the solutions ultimately is what we want to do with the virtual twin as a service. So keep this in mind for the purpose of the clarity. Now how do we price each of them? The virtual companion is priced on a fraction of the cost of the people we are either augmenting it or basically substituting sometimes. That's how we price. For the generative processes, the generative experiences, it's a usage-based model. So it's a token base like many companies do. And why so? Because I really want to ease the adoption and to accelerate the adoption with this consumption model. And it's something we master relatively well because it's almost the same approach we have for simulation for a long time, right? And for the virtual twin as a services, it's an outcome-based model because at the end, you are not selling any more the tools, you are selling basically the end result of what the tool is producing. So it will be an outcome-based model. Now from an attach rate standpoint, it's still a little bit early because we came on the market with this. But we could expect that for many roles you have in the market being used right now, you will have an extension with the virtual companions for sure. You could expect that for processes, which are the most complex one, the generative experiences will be a way to accelerate significantly the time to market and the efficiency. This is true for the design. This is true for the manufacturing. This is also true for the compliance, as I was highlighting it. And virtual twin as a service, it's something we do specifically in the new industry because they are not equipped. Usually, they do not have all the skills, and we are gaining a lot of time by doing so. One example of what I'm saying -- in the Life Sciences, when we are speaking about the manufacturing systems and the production systems, more and more, we go straight with the virtual twin as a service, which is an easy way for us to deploy our solutions and to reduce the time for the adoption. That's how we are basically pricing and how we are planning. And you remember what Rouven say, say the contribution of those new category of solutions, we are expecting EUR 0.5 billion in the coming plan, which is ending in 2029. Rouven Bergmann: Okay. Thank you, Frederic. I'll go through the cash flow question. Regarding the 84%, what are the kind of puts and takes and level of visibility and action items that we have underway. I think first, important to mention is we have a certain level of visibility from large contracts that we have signed where there are clear payment terms that are going to drive cash in 2026, early 2026. So that gives us a clear perspective on the puts and takes between '25 and '26, which I call the timing effect that we had. So that's one part. We also have some other nonrecurring payments in 2025 that will not recur in 2026. We also have visibility to this. Now above that, -- when I look at our DSO and the impact of the DSO in context what we just discussed on Centric. Centric has been a big driver of the increase in DSO or has contributed to the increase in DSO, I should better say. And now as we are moving to a recurring model, we will see the benefit of that also in terms of better aligning revenue and cash. So the conversion from that perspective should also will benefit from this change that we have decided. And then the last point is we are applying strict discipline on cash management, and that will have an impact also in 2026, and I already see that happening in 2025. The last point regarding the MEDIDATA comment, yes, this was related to Q4. So the trend of Q3 to be expected similar in Q4 2025. Pascal Daloz: So this is concluding this morning's session. So thank you very much for the one being there with us in London and for the people being connected. Look forward to seeing you on the road, either Rouven or myself, we will do some roadshow in the coming weeks. And see you no later than early next year. Thank you very much.
Sandra Åberg: Good morning. Welcome to Essity's presentation of the Q3 results. We will start with an overview of the financial highlights and the business highlights and Ulrika will present the business highlights. Following that, we will have a session with our CFO, who will take us through the financials. Ulrika will then present the initiatives that we announced this morning, initiatives launched to accelerate Essity's profitable growth. We will, as usual, end today with a Q&A session where you have the possibility to engage directly with us. [Operator Instructions] With that, let's dive into the quarterly performance. Ulrika, over to you. Ulrika Kolsrud: Thank you, Sandra, and welcome also from my side to this presentation of Essity's Q3 results. And to summarize the quarter, we continue to deliver positive organic sales growth. We also strengthened our profit margins. We delivered a strong cash flow and a result above SEK 5 billion. Price, volume and mix all contributed to the 0.9% organic sales growth, with price being the most significant contributor. And we had organic sales growth in all our 3 business areas. Once again, we delivered record high gross profit margins and this quarter, it flowed through down to the bottom line. So the call to action that we had in July to pull the brakes on our SG&A cost development really made a difference. And we ended up at a profit margin of 14.6%. Setting aside the quarterly results now for a moment. This quarter has also been about how to set ourselves up for future success. As I shared in the Q2 webcast in my -- during my first month in this new role, I have done an extensive review of the business. And then together with the leadership team worked on what to change, what to improve, what to prioritize in order to accelerate our progress towards our financial targets and towards our vision. As a result of that, I am today launching 2 initiatives, that will improve our performance. The first one is the reorganization designed to sharpen our focus to become more fast and also more agile. And related to that, the second one, a cost-saving program that will reduce our organizational costs. More about that later, but let's now dive into the Q3 results, and we start with Health and Medical. Q3 now, for '25, marks the 18th consecutive quarter of growth for our Medical Solutions business. We are growing across the 3 therapy areas; Wound Care, Compression Therapy and Orthopedics. And what is very important for future growth and profitable growth in the medical categories is innovation. That plays a key role. There are still so many unmet needs, both for healthcare as well as for patients and consumers to innovate on. One example is for people with wrist fractures. Today, it's difficult for them to keep up with hygiene and keep up with the daily activities of lives with wrist braces that exist commonly in the marketplace. And with the launch of Actimove Manus Air, we are solving that problem. This wrist brace that you see now on the page here has a lot of advantages. It's water resistant so that you can wash your hands. It's food-grade resistant so that you can cook and keep up hygiene. It doesn't restrain the movements of the fingers and the hands, so you can keep on working if you work by the computer. Also, it has an open design. So if you're a health care professional, you can inspect the wound and change wound dressings with the brace on -- and all of this, while providing that stabilization that is needed in order to heal in a fast way. So certainly, this innovation is a very good addition to our offer in Orthopedics. Then if we move to incontinence care in health care, also in Incontinence Care, we were growing sales and volumes in the quarter. You might remember last quarter, then I talked about the challenging market conditions that we had in some markets, and that is still the case. However, we have very strong underlying growth in many other markets that is compensating for this. And in times where health care funding is under pressure, it's even more relevant to have products and solutions that are saving time for caregivers. And with the launch that we had this quarter with TENA, a new product concept, we are addressing exactly that. The TENA Pro skin stretch day and night is a unique product concept that we have put to market now that makes it easier to put on and take off the product. When it's in a closed fashion, then it is just as a TENA pant, you can pull it up and down just like normal underwear, making it easy for the wearer to use the product. The challenge with the pant though is that it's not so easy for a caregiver to apply the product. And this one is reopenable. You can open and close it, and that means that the caregiver can also very easily apply the incontinence protection. And that saves time for the caregiver. Now this is not the only impactful innovation that we are launching in the quarter. We're also launching a new product in the lighter range of our assortment, and that is the TENA Discreet Ultra. It's a very discrete product, super discrete to wear, yet it does not compromise on the superior TENA protection. And why is it then important to have a superior product in this part of the assortment? Well, this is where we attract consumers where we bring consumers into the category. And we, of course, want the women to experience the first little leaks to choose purpose-made products and to choose TENA as their purpose-made products. And many consumers do that. They choose TENA. And we see that because our incontinence sales in retail is continuing to grow at a very good rate. This is especially true for the U.S. And if you might remember that in U.S., we are investing to grow, and those investments are paying off. So in the quarter, we could enjoy a 21% growth of incontinence in U.S. retail. In Feminine Care, we're also continuing to grow in a very good way with high growth rates. Here, Mexico is an important market for us. We are clear market leaders, and we will continue to strengthen our position in Mexico by launching a new night product, SABA Noches. And also here, it's a very important segment to be superior in because not only do we provide a good night sleep for the wearer, but also it's a quality stamp for the brand. So as you can hear, we are continuing to grow strongly in the 2 higher yielding categories in consumer goods. So Feminine Care and Incontinence Care. On the other hand, in Consumer Tissue and in baby, we are declining. In Consumer Tissue, we are suffering in the branded sales from the weaker consumer sentiment. And also, we see a price competitiveness increasing across the consumer tissue business. The good news is that if we look at Mexico, we are growing very well in our Regio brand during the quarter. And also now we are really gearing up for the sneezing season making sure that we have the right hankers in the shelf to be ready for the sales boost that will come during the next quarter. And also, we continue with our efforts to have a high promotional pressure and to focus a lot on the value segment so that we can fuel growth in Consumer Tissue. Then what about baby? Well, you all know that we have had a period where we have had declining volumes on the back of lower birth rates and also very intense competition. We're still declining in baby, but we have improved. In the quarter, we turned around Libero in the Nordics big time. We had the actions of higher frequency rate, of promotions, of a limited edition. I was going to say that is called Wildlife that you see on the picture here and also stronger marketing campaigns. And all of that paid off. So the Libero consumers have found their way back to their brand. Another category where we can report a big improvement is in Professional Hygiene. Also here, we continue to see a challenging market situation, of the least in the U.S. in the HoReCa channel. However, we are improving volume sequentially in Professional Hygiene. And that is thanks to the activities that we have done with selective price adjustments and also more focus on the value segment that we talked about last time. What's also very good to see is that we continue to grow our premium products, so our strategic segments as we did also previous quarter. This is, of course, very important for us short term, but it's also important to fuel future profitable growth. And speaking about that, what's super important to fuel future profitable growth is that we are -- really have strong relationships with our customers. What's happening right now in the customer landscape in Professional Hygiene is that a lot of our distributors are consolidating. And then it's even more important than ever to be the preferred supplier. And therefore, it's so nice to see that one of our customers, Impacts, have this quarter named as the best supplier. And with that positive news, I hand over to our CFO, Fredrik Rystedt. Fredrik Rystedt: Thank you so much, Ulrika, and I will give a little bit of numbers background to what Ulrika just mentioned here. So I'll start with our sales. And as you've already heard, we are continuing to grow organically with 0.9%, so just under 1%. Now if you look at the absolute sales number, it is down by 4.5%. But of course, this is just due to the fact that the Swedish kroner is strengthening. So if you actually look at our sales in constant currency, we actually grew with a bit over SEK 300 million. So it's basically currency impact. So turning a bit back to the organic sales growth of 1%. As you see, the volume growth was 0.2%. And this is exactly what it was also in Q2 and similar to what it was also in Q1. So we've had this volume growth level now for a few quarters. It is, however, a bit different. And so you remember perhaps that we have struggled a bit with professional hygiene with baby and degree also with Inco Health Care. And those have all 3 improved this quarter. But on the other hand, that improvement has been partly offset by lower volume development in consumer tissue. So it is a bit different. We are happy to see the improvement in those areas that I mentioned. So to give you a little bit more flavor, if we start with Health and Medical, generally speaking, volumes picked up actually. So it is still challenging when it comes to Inco Health Care markets in general. But despite that fact, a bit as we expected, we have picked up volumes and it looks clearly a bit better at this point of time. Medical continues to grow, especially in the wound care, and we've seen that growth for so many quarters now. So it's a very, very good and continuous development for medical in general. It's wound care as I said, but it's also this quarter, actually a lot in compression. So good development overall in the volume sense. Now if I go then to consumer goods, geographically, we are growing everywhere when it comes to incontinence and feminine. So it continues with strong growth in both of those areas. Ulrika mentioned earlier that baby is looking a bit better. And of course, this is due to a much better performance in our Nordic branded area with Libero. So we've taken market shares there. It's still challenging on the European market for the retail branded European market for baby and that will also remain for a few quarters to come, most likely, but it's looking a lot better. So you may remember that we had a volume decline of about 4.5% or in that vicinity, volume decline in baby in Q2 and a similar decline also in Q1. And this quarter, it's been about 1% decline. So it looks clearly better. On the other hand, as we have already talked about here, Consumer Tissue is a bit more down, negative growth, and this is because we have prioritized margin rather than growth in volume. And we do continue to see actually a down trading in that market. So volume is not so good in consumer tissue. Finally, Professional Hygiene, looking a lot better, and the volume decline is still there, it's minus 1% roughly. And of course, that's a lot better than what we saw in Q1 and Q2. So clearly, looking better. As before, it is a base assortment that is declining and the premium products or strategic products as we sometimes call them, dispensary base is continuing to do quite well in terms of growth. So overall, mix is actually continuing to behave very, very well in professional hygiene. So turning a bit to price and mix. As you see, 0.7%, this is basically most of it actually related to price. And you can see from the slide here that Consumer Goods and Professional Hygiene, both performing well in terms of price performance. And Health and Medical is slightly down. This is all actually Inco. So this is selective price declines that we have -- that we have done. We did talk and Ulrika mentioned it earlier that we also have sequentially a little bit lower prices in professional hygiene. This is deliberate. We wanted to -- on top of expanding our value offering in Professional Hygiene, we also wanted to grow more generally by selective price decreases. So if you look at just sequential price decreases, we also see a little bit of that in Professional Hygiene, deliberate. So that's pretty much it on the volume and an organic sales side. So turning to our margin, that is improving both sequentially and year-on-year. So if we look at -- decompose the year-on-year improvement, you can see that a lot of is coming, of course, from the gross profit margin. And most of it, as we've already talked about, relating to obviously price to a smaller degree on mix and volume, but it's -- a lot of it is price. We also actually have a positive development in our COGS. And this is no surprise. Raw material is performing better, and so is energy. And -- but we also have other cost items there. One thing that we have talked about a lot is, of course, the savings that we do. In this particular quarter, we had about [ 115 ] or so in savings, which we were happy about. Generally speaking, it has been a tough year when it comes to saving in COGS. And we still aspire to reach our annual target range of about EUR 50 million to EUR 100 million. We're not there. We aspire to get into that range for the full year, but it is challenging, and this is, of course, due to the relatively low volume development that we have in our production. So that makes it a bit more challenging to get to our target range. A&P, not surprising. We've increased the absolute spending level and also as a percentage of sales. And this is a profitable proposition. We know that the return of A&P spend is attractive. So this is why we do that. We talked a lot about SG&A previously, and we've also announced measures to actually -- to make the growth rate become much lower. And there has been a lot of success there. So clearly, when you look at our SG&A development, is much better now than we have seen in the previous quarters. The growth in particularly IT and personnel cost is lower now. Let me just point out, though, that there is a portion -- a smaller portion, I should say, of the improvement that relates to lower bonus provisions. So the improvement is not as strong as you see here, there is a smaller portion that is due to that. But I'll come back to the future in a second. But generally speaking, if you disregard that, underlying performance of SG&A is much lower than the inflation rate. So the measures we've taken have clearly paid off. Now finally, there's a bit of other here. This is just a one-off in last year actually. We had an insurance payments last year and we didn't have it this year. So that's the final part. So overall, a very, very good quarter, I should say for the group in terms of margin. And basically, you can see year-on-year, that health and medical and professional hygiene are still slightly down and consumer goods up. But if you look at it sequentially, which we're happy about, both Health and Medical and Professional Hygiene have turned a little bit and actually now improved. So all in all, a good margin development. Turning to cash flow, a bit -- just some short comments, generally speaking, quite a good quarter, both in terms of underlying cash generation, but also in terms of working capital. We were not so happy about working capital in the second quarter, much better looking this quarter. So when you look at accounts receivables or accounts payables in working capital, the days are roughly about the same. It's still a bit too high when it comes to inventory. We are working our way down to that. So hopefully, we'll see a good development in working capital also as we go forward. And finally, the balance sheet as a consequence of that strong cash flow generation. We have been able to, in comparison to the 6 months balance sheet, we have been able to reduce our net debt with about SEK 3 billion or so, and of course, our net debt-to-EBITDA ratio is now down to SEK 1.2 billion. I think this is a good -- perhaps opportunity to give you a little bit about the flavor for what we expect for Q4. I mean, again, we don't give that much of forecast, but let me just give you a little bit. Strating with COGS. Perhaps, we expect to -- that COGS will actually, from a year-on-year -- compared to Q4 of 2024, we expect COGS to be lower this quarter coming up in '25. And the reason is mainly driven by input cost or and particularly so [indiscernible] cost. So we expect COGS to be lower. When it comes to A&P, we also -- we expect it to be flat to higher compared to last year. So Q4 versus Q4, we expect to spend more in A&P. As I said, this is a good return on those investments. And finally, when it comes to SG&A, this is worth mentioning that we will have, also in comparison Q4-Q4, a fairly low growth rate. So clearly, we will retain that lower growth rate than we've had in the previous year. But just worth noting that from a sequential standpoint, Q4 SG&A, excluding A&P is always much higher. So sequentially, you should expect higher cost but year-on-year, a quite a low growth rate. So finally, I guess, just a reminder, perhaps, we have our financial targets. They remain intact. So more than 3% in organic sales growth and more than 15% in EBIT margin, excluding items affecting comparability. As you know, as you've seen here in Q3, we're close to our margin target. And of course, we got some work to do when it comes to our annual organic sales growth. And that, Ulrika, I guess, you will talk more about. Ulrika Kolsrud: Yes. Thank you, Fredrik. So question then, of course, is how to deliver on those financial targets. And you all know this, but I think it's worth repeating. We will deliver on our targets by prioritizing the categories segments, market and channel combinations that has the highest potential for profitable growth and where we have a clear right to win. We will deliver on our financial targets, not the least by delivering differentiated innovations that are driving market share development and pricing power. Also by having the most effective and efficient go-to-market. It should be easy to do business with Essity. Also to really find efficiency savings across our full value chain and not the least to continue to grow our people and to continue to build that winning culture that we have. Now I've said before that this strategy is highly relevant and is something that we continue to execute on. My focus has been how do we accelerate the execution on this strategy because I see significant potential for us to fuel growth and improve our performance. For example, we could unlock the full potential of our portfolio by sharpening our focus on the most attractive categories and segments. Also, I see opportunities for unleashing the full power of our organization by creating more end-to-end accountabilities, by decentralizing decision-making and reducing our operational complexity in the organization. And we could, by freeing up resources to reinvest in A&P and in our growth initiatives, we could become -- drive profitable growth more forcefully and also be more competitive. And those are the reasons why we are now then launching 2 initiatives. The first one is the reorganization to become faster, to become more agile and also to sharpen our focus. What we will do is that we will create 4 new business units that are global and based on our product categories. They will have the full P&L responsibility and also have the end-to-end accountability, and that is what is different from before. Those 4 business units will be Health and Medical, Personal Care, Consumer Tissue and Professional Hygiene. And consequently, we will start reporting financially in these segments as from 1st of January, 2026. Now the benefits with doing this is that we are decentralizing decision-making. We are cutting out duplication, and we are becoming more consumer and customer-centric. And by that, we will be faster in our decisions, we will be faster in our execution, and we will be faster in responding to evolving consumer and customer needs. We will furthermore sharpen our focus then on the most attractive categories and segments. Now what I've explained now is how this organization will become more effective, but it will also drive efficiencies since we are simplifying the structure. And those efficiency gains is the key component of the cost saving program that we're also launching. And this cost-saving program is expected to generate a saving of SEK 1 billion and had full effect in the run rate by end of 2026. It's primarily SG&A we're talking about, and that is on top of the COGS saving program that we have that Fredrik was alluding to before, and that is generating SEK 0.5 billion to SEK 1 billion annually. Market A&P, so market investments are excluded. In fact, it's important that we maintain -- at least maintain both A&P as well as R&D investments in order to fuel growth. And we want to reinvest the savings that we generate into our growth opportunities in higher-yielding areas where we also have a proven track record of high return on investments. So with these 2 measures, we will unleash the full power of the organization, we will free up resources that we can invest in profitable growth, and we will unlock the full potential of Essity's product portfolio. Now let's summarize the quarter before we move into Q&A. In the quarter, as you have heard, we delivered positive organic sales growth. We strengthened our profit margins, had a good cash flow and delivered a profit above SEK 5 billion. We also launched 2 measures to improve performance and fuel growth. And needless to say, looking forward now, 2 of our key priorities will be to implement this organizational change as well as to achieve the SG&A and COGS savings that we have been talking about. In parallel with that, of course, a priority is for us to continue with our efforts to drive volume growth and profitable volume growth in a challenging market environment with the ambition to perform while we transform. Thank you. Sandra Åberg: Thank you, Ulrika, and thank you, Fredrik. We will now move into questions. [Operator Instructions] And please try to limit your questions to one at a time because that will give Ulrika and Fredrik, the possibility to give you the best answers. Are you ready to start with the questions? Ulrika Kolsrud: Yes. Sandra Åberg: So let's move into questions. So we have a first question from Aron Adamski. Aron Adamski: Sandra, Ulrika, Fredrik. My first question is on the divergence between lower COGS picture and the prices which are higher. In that context, it would be great to hear why your expectations for pricing across your biggest categories over the next couple of quarters? And also, are you currently seeing any pressures from retailers to roll back prices or maybe the competitive pressures accelerating? Ulrika Kolsrud: If I start, I could say that, as I mentioned, when it comes to Consumer Tissue, there is a high price competition across that business. And of course, also in other parts of our business, it's a high price competition. And we always look at ways to balance, of course, volume growth with having a good pricing performance. We've talked before in Q2, but also this quarter about the selective price adjustments that we do in Professional Hygiene, which is to fuel growth and to adapt to the market situation that we have there. Anything you want to add, Fredrik? Fredrik Rystedt: No, not really. I mean we didn't specifically talk about sequential price movement now in our presentation here, but we've seen a bit of price decline sequentially in Inco Health Care and Professional Hygiene and baby as you alluded to, and these are deliberate basically. I think it's fair to say -- we also saw a very, very tiny price sequential decline in Consumer Tissue. And exactly as you say that, of course, there is more room for that potentially when [indiscernible] comes down even further. But again, it's very difficult to discount. We always try to maintain a very solid price management. So it's difficult to comment in advance. Ulrika Kolsrud: I hope that answered your question, Aron, did it? Aron Adamski: Yes. Sandra Åberg: Thank you, Aron. So now it's time for Oskar Lindstrom, Danske Bank. Oskar Lindström: Good morning. A couple of questions from me. First off, on the cost savings. Of the SEK 1 billion, how much should we expect to sort of drop down to the bottom line or to EBIT? And how much will be reinvested in increased A&P spending. That's my first question. Should I go on with the other? Ulrika Kolsrud: No. Let me answer that one first because as I said, primarily, we are going to reinvest that saving into profitable growth. And then you will see the effect on margin as we grow volumes and then we'll have the operating leverage of margin. Oskar Lindström: Right, and about the timing here, should we expect the sort of reinvestment into A&P then to sort of come at the same time as the cost savings are being implemented or before? Or what's the timing going to look like? Essentially, what I'm looking for is, is this going to have a positive and negative impact on EBIT margins during 2026. Ulrika Kolsrud: If I start with the way we will work with this is that as the savings materialize, we will then have freed up resources that we can reinvest. So it will coincide to a big extent. Fredrik, do you want to comment on margin development in light of that? Fredrik Rystedt: No. I think one thing, Oskar, maybe just to remind you, is that we've always said that what will bring our margins higher is basically operating leverage, so it's volume. So what we are now doing is using the freed up -- as Ulrika just said, we are using the funds that we free up to fuel volume growth, and that volume growth in its turn will enhance margin. That's the plan. So it's not our intention to boost, if you say, the margin with the cost saving program, but rather to reinvest it as the savings occur. Does that make sense? Oskar Lindström: Yes, thank you. And just a final question on the sort of balance between lower-end private label and your own branded or higher-end branded product. I mean a lot of other consumer segments have seen this deteriorating from the producer's perspective in that consumers are down traded and you've also mentioned this during the past -- how is that developing? Are you seeing any -- is it worsening the same signs of an improvement? Ulrika Kolsrud: It's -- I would say, if we talk -- I mean we're talking consumer tissue, it's pretty much the same. I mean we see that there is a down trading, and that is what we see in our branded business is declining and the private label market is increasing. And I don't see any major movements. It's quite similar to what it's been. Sandra Åberg: Thank you, Oskar, for your questions. [Operator Instructions] And as I can see, Patrick Folan from Barclays, you have a question. Patrick Folan: I just joined some -- sorry, from repeating question already asked, but 2 for me. On health and medical, can you maybe walk through any kind of contracts that were gained or lost during the period? And maybe how you see kind of the outlook for the segments you're considering your experience there? And maybe more specifically kind of looking at the reorganization and the change in structure, I mean what was behind the decision to strip out personal care and tissue from the Consumer Goods unit? Is there more focus trying to go into certain segments? Or is it just trying to have more disciplined cost strategy in terms of how you allocate resources? Ulrika Kolsrud: Thank you, Patrick, if I start with the first question, I think if you look at Health & Medical, it's a lot of contracts, especially on the medical side, but also on the Inco side, it's a lot of contracts. So we don't necessarily talk about all those individual contracts and what we have gained and lost and so on over time. I think in the Incontinence Care, health care arena, it's quite stable when it comes to our contract base. And in Health and Medical, as you can see, we are continuing to grow. So we are growing with new contracts and taking new business as well as with growth within those contracts that we have. Then if we move to the organization, there is the intention, as you heard me -- or maybe you didn't hear explain, you said you came on a bit late. But we want to create this end-to-end accountability. And to do so, we want to work then with the different product categories more separated because then that allows us to have that end-to-end accountability with the business unit and the one P&L responsible is responsible for innovation, marketing, supply chain and sales. So that is one reason. Another reason is that it allows us to focus on the most attractive categories and segments. Both that Personal Care comes more in the limelight, and that will drive performance and focus on Personal Care, but also in Consumer Tissue, it allows us to focus more on the most attractive segments within that category. And then I would say thirdly is that Personal Care and Consumer Tissue, our businesses that have quite different character. And by running them separately, we can optimize the way we work based on the specific business drivers in those 2 businesses. Patrick Folan: Okay. Clear. And just a follow-up on that. In terms of the benchmarking exercise, for the SG&A kind of cost program. How did you guys arrive at that kind of SEK 1 billion number, I suppose? Fredrik Rystedt: Maybe I can try and answer that, Patrick. So 2 things. We looked at the reorganization if we start in that end and we looked at what kind of savings potential, that organizational change actually brought with it. So that was a starting point. We also looked at our other buckets of SG&A, and we looked at where we could optimize that spend. So as an example, our IT spend as we go forward, you will perhaps remember that we've had a very, very significant increase of our IT spending for various reasons over the course of a couple of years. We now feel it's appropriate to actually reduce that as an example. So there are many different things that has gone into that analysis. But the main part is actually related to the reorganization that we have described here today. Sandra Åberg: Thank you, Patrick. I hope you have your answers to your questions now. Then we will move to Niklas Ekman, DNB Carnegie. Niklas Ekman: Can I ask you about use of funds because you are now generating cash flow in the range of SEK 12 million, maybe SEK 13 billion, you have dividends that are slightly below SEK 6 billion and buybacks of SEK 3 billion. So you're essentially now improving your balance sheet significantly. Can you elaborate a little bit about -- on your thoughts here on M&A potential? Are you saving for future M&A potential? Is there scope to increase either the dividends or buybacks? Or what's your thoughts here on the use of funds? Ulrika Kolsrud: Well, if we start with the dividends, we stay with our policy to increase our dividends over a year and stay true to that. Then we see buybacks as a recurring way to allocate capital so that we will continue with as well. Then the good thing is that we have, as you say, a strong balance sheet. So we can both invest in organic growth and deleverage, and we can have the funds to invest in an M&A, should we find something that is value creating. Niklas Ekman: And just how is that market now and the potential for you to do M&A and also considering the valuation of your own shares at the moment? Ulrika Kolsrud: Well, I think we talked about that last quarter as well, right, that, of course, we want to be careful in making sure that our M&As that we potentially do are value creating. And then there has to be the synergies to bridge that gap between the valuation of a potential acquisition and our own valuation. Niklas Ekman: Very clear. Can I also ask about U.S. tariffs? That was not a big, but still an issue in the Q2 results. What is it looking like now? How is it impacting you? Fredrik Rystedt: Maybe I can take that, Niklas. We've had this quarter, Q3, SEK 110 million roughly and we are looking at a lower number, about SEK 70 million in Q4. And the reason between -- the difference between these numbers is simply that the Canadian government has actually taken out the tariffs on our exports from the U.S. to Canada. So this is the difference. So as I said, Q3, SEK 110 million, roughly about SEK 70 million in Q4. Sandra Åberg: The next question comes from Antoine Prevot, Bank of America. Antoine Prevot: A question from me on Latin America, I mean, continue to be strong compared to, I mean, maybe some of the part of Staples, which have been a bit weaker there. Anything specific you want to flag? Is it you mainly continue to gain market share there? And do you expect that to continue in the coming quarters? Ulrika Kolsrud: I don't know want to necessarily comment on the coming quarters because we don't know how that will play out. But what we can say is that we are doing well in what is a quite challenging market now in Latin America, where the consumer sentiment is changing and so on, but we are growing very nicely. We talked earlier now this morning about the feminine brands, for example, that is doing very well. And also in our Consumer Tissue business, we are growing in, for example, Mexico. Also, our incontinence business is growing very well in Latin America. So overall, it's looking good for us in Latin America. Antoine Prevot: Perfect. Just to follow up. I mean, it's more like innovations led to that market share? Or is there something else there? Ulrika Kolsrud: Can you repeat, sorry? Antoine, can you repeat your question? Antoine Prevot: Yes, sorry. Is it just -- what's driving these different strong performance in North America in the different categories you defined? Have you launched new product there? Or what has been kind of like backing that? Ulrika Kolsrud: It's a combination as in many cases. If we look at Consumer Tissue, it's been -- we've had quite good promotional season that has helped to boost growth in that category specifically. In feminine, as I shared, we have a new launch, and we have a very strong offer that we continue to invest behind, and we get the payoff from those investments. So -- but in most cases, it's a combination of really marketing our attractive offer, adding on new innovations and upgrades to fuel growth and then also promotions. Sandra Åberg: Let's now move to Charles Eden, UBS. Charles Eden: Just wanted to clarify your comments because I think there is perhaps an incorrect interpretation this morning, looking at how the share price has developed during the call. You said the cost savings are not going to improve the margin of the group, which one could conclude means your cost of business is going up and that you need to spend more just to stand still. Am I correct? What you're trying to say is you will reinvest these SEK 1 billion cost savings into the business with the aim of driving superior volume growth and market share gains. And then these factors should contribute to stronger margins over time as opposed to just trying to cut cost to drive the margin improvement? Is that the right way to look at it? Maybe that's been misinterpreted. Ulrika Kolsrud: Exactly. Charles Eden: Because I think people have sort of interpreted you saying we need to spend more just to stay where we are on the margins and that's not what you're trying to say, right? You're trying to say, look, we want to drive it through market share gains to push the margin higher rather than we have to spend more to stand still. Ulrika Kolsrud: Exactly. Charles Eden: Thanks for the clarification. Ulrika Kolsrud: Thank you for clarifying for us. Very helpful. Sandra Åberg: Then I think that we have another question from Aron Adamski, Goldman Sachs. Is that right, Aron? Aron Adamski: I have 2 very quick follow-ups. Firstly, on Baby Care. I think clearly, the business performance improved sequentially, but it's still below the midterm outlook that I think you laid out at the CMD last year. I was just wondering, since your targets were formed initially, do you think there has been any fundamental shift in the category fundamentals, specifically in Europe that could perhaps make the initial goals more difficult to achieve in the longer term? And then the second follow-up is very quick, just on Consumer Tissue and sorry, if you mentioned this already. How is your private label business performing both on volume and pricing. Is that still a significantly accretive part to this category? Ulrika Kolsrud: If I start with the first one, I'm not so sure, but the time horizon here what we are referring to. But generally speaking, I could say that we do see the lower birth rates and that is something that continues to develop. That has an impact on the fundamentals of the category. When it comes to weaker climate that we see and that some consumers are more price sensitive, that is more of a temporary situation. So that we expect to change over time. Then with the private label division, I mean that is still a value-creating part of our business, even if we now have lower -- we have lower volumes in that business in the third quarter. As we said, it's a high price competition in this category. Fredrik Rystedt: And there, we mentioned it earlier, Antoine, that we have maintained a margin protective stance a bit. So we have been eager to do that. And of course, with high price competition, it is a bit challenging on the volume side. But once again, this is more, you can say, normal fluctuations in that business. So nothing dramatic. Sandra Åberg: So I think that we are out of questions. So do we have any more questions? [Operator Instructions] No, I think we're out of questions. That means that we can wrap up. Any closing remarks, Ulrika, before we end? Ulrika Kolsrud: Yes. I think we are leaving -- we are leaving a positive quarter behind us now. And we are launching initiatives that will fuel our profitable growth going forward. And just on the previous discussion that we had, I think it's important to point that out that we have a lot of belief in our growth platforms that we have. And looking forward to freeing up resources so that we can continue to accelerate growth in those areas. And that will drive also margin improvement by operating leverage and mix improvement. So that I want to leave you with. Thank you for listening. Sandra Åberg: Thank you, Ulrika, and thank you, Fredrik. And thanks to our audience for listening in. And if you have any further questions, you know where to find us. Have a good rest of the day. Bye.
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the TechnipFMC Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the conference over to Matt Seinsheimer, Senior Vice President of Investor Relations and Corporate Development. Please go ahead. Matt Seinsheimer: Thank you, Regina. Good morning and good afternoon, and welcome to TechnipFMC's third quarter 2025 earnings conference call. Our news release and financial statements issued earlier today can be found on our website. I'd like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current expectations, beliefs and assumptions regarding future developments and business conditions, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Known material factors that could cause our actual results to differ from our projected results are described in our most recent 10-K, most recent 10-Q and other periodic filings with the U.S. Securities and Exchange Commission. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. I will now turn the call over to Doug Pferdehirt, TechnipFMC's Chair and Chief Executive Officer. Douglas Pferdehirt: Thank you, Matt. Good morning and good afternoon. Thank you for participating in our third quarter earnings call. Total company revenue in the period was $2.6 billion, adjusted EBITDA was $531 million with a margin of 20.1% when excluding foreign exchange impacts. I am very proud of the continued strength in our execution and the delivery of another quarter of high-quality inbound. With total company orders of more than $2.6 billion in the period, 15 of the past 6 quarters have achieved a book-to-bill above 1. We generated free cash flow of $448 million and distributed $271 million through dividends and share repurchases, continuing to deliver on our commitment to return a significant portion of free cash flow to shareholders. Subsea realized quarterly inbound orders of $2.4 billion. This commercial success is the cornerstone of our ability to deliver growth in both revenue and profitability. In the quarter, we announced 4 awards driven by continued strength in South America. We received multiple flexible type contracts from Petrobras, which included the direct award of a high-pressure gas injection risers for pre-salt projects. We were also awarded a contract to supply subsea production systems to be deployed in an array of greenfield developments, brownfield expansions and asset revitalizations across Petrobras' extensive portfolio. In Guyana, we were awarded the Hammerhead project from Exxon Mobil, where we leveraged our in-country experience and solid track record for providing schedule certainty. This award represents the seventh greenfield development on the Stabroek Block and will utilize our Subsea 2.0 technology. TechnipFMC has supplied all of the subsea production systems for ExxonMobil in Guyana, since the first contract award in 2017. Our commercial success year-to-date reinforces our confidence in delivering more than $10 billion of subsea orders in 2025 as well as achieving $30 billion of inbound over the last 3 years. Beyond the current year, we believe that offshore projects will continue to receive an increasing share of capital investment. This change in spending allocation is due in part to the significant improvements made in developing the large, high-quality and prolific reservoirs found offshore. These strong attributes were always known and the resource quality was always there, but cost overruns and schedule delays in the past would ultimately challenge project economics. In today's offshore market, much has changed, driven by a number of factors, including improvements in the quality and interpretation of seismic data, shortened delivery times for large production infrastructure, significant reductions in the time required for drilling and completion activities and as reflected in our inbound awards, the introduction of new commercial models and innovative technologies. At TechnipFMC, we wake up every day with a single purpose, the relentless pursuit of cycle time reduction. This mindset led to the development of our pre-engineered configure-to-order product platform, Subsea 2.0 as well as the creation of the industry's only fully integrated execution model, iEPCI. These innovations provide the elements to shorten cycle times and improve project returns. But even more importantly, to help provide our customers with greater schedule certainty in our project execution. It is this combination of higher economic returns and greater project certainty that is providing sustainability to current activity levels, underpinning our outlook and securing $10 billion of Subsea inbound in 2026 and our confidence that activity will remain strong through the end of the decade. In closing, the continued strength in our Subsea inbound orders reflects the confidence our customers have today and our ability to successfully execute their projects on time and on budget. This is making the author resurgence more durable as evidenced by the shift in spending to these markets. TechnipFMC is also driving this change in behavior. With iEPCI and Subsea 2.0, both having a profound impact on investment decisions by derisking and accelerating subsea projects. The success of these unique offerings has also contributed to the notable increase in the level of direct awards to our company. With greater project certainty, we now see the execution phase of subsea developments as an opportunity to further leverage lean operating principles. In doing so, we can learn, refine and enhance our own processes, driving a culture of continuous improvement to further shorten cycle times and improve project returns. While focusing on the customer is always a top priority, we also believe that our shareholders should share in our success. Yesterday, we announced our Board of Directors authorized additional share repurchases of up to $2 billion. This significant increase to our share authorization exemplifies our confidence in the outlook as well as our commitment to maximize shareholder value. I will now turn the call over to Alf to discuss our financial results. Alf Melin: Thanks, Doug. Inbound in the quarter was $.6 billion, driven by $2.4 billion of subsea orders. Total company backlog ended the period at $16.8 billion. Revenue in the quarter was $2.6 billion. Adjusted EBITDA was $531 million when excluding a foreign exchange loss of $12 million. Turning to segment results. In Subsea, revenue of $2.3 billion increased 5% versus the second quarter. The sequential improvement was largely driven by increased project activity, particularly iEPCI projects in Africa, Australia and the Americas. This was partially offset by reduced project activity in Norway. Adjusted EBITDA was $506 million, up 5% sequentially due to higher project activity. Adjusted EBITDA margin was 21.8%. In Surface Technologies, revenue was $328 million, an increase of 3% from the second quarter. The sequential increase was primarily driven by higher activity in the North Sea and Asia Pacific, partially offset by lower activity in North America. Adjusted EBITDA was $54 million, an increase of 3% sequentially due to higher activity in international markets. Adjusted EBITDA margin was 16.4%, in line with the second quarter results. Turning to corporate and other items in the period. Corporate expense was $28 million. Net interest expense was $11 million and tax expense in the quarter was $76 million. Cash flow from operating activities was $525 million and capital expenditures were $77 million. This resulted in free cash flow of $448 million. We repurchased $250 million of stock in the third quarter. When including $20 million of dividends, total shareholder distributions were $271 million. We have also increased our share repurchase authorization by an additional $2 billion, providing us with $2.3 billion of current authorization. Since the time of our initial authorization in 2022, we have distributed more than $1.6 billion through buybacks and dividends, representing nearly 60% of free cash flow generated over the period. During the quarter, we reduced debt by $258 million including early repayment of the 6.5% senior notes maturing in February 2026. We ended the period with $438 million of gross debt, largely comprised of private placement notes that extend out to 2033, with interest rates of 4% and below. Cash and cash equivalents was $877 million. Our net cash position increased to $439 million. Moving to our guidance. For Subsea, we expect seasonal impacts to our fourth quarter results, with revenue declining mid-single digits sequentially. Adjusted EBITDA margin is expected to decline approximately 300 basis points to 18.8%. For Surface Technologies, we anticipate revenue to decline low single digits sequentially, with an adjusted EBITDA margin similar to the 16.4% reported in the third quarter. Lastly, we expect corporate expense to approximate $35 million. Moving to our full year outlook. I'm going to highlight a few items. Most notably, the updates we have made to our guidance ranges. For Surface Technologies, we now expect adjusted EBITDA margin to be in the range of 16% to 16.5%, above our prior full year view. And for total company, we are increasing our guidance for adjusted EBITDA by $30 million, which we now expect to approximate $1.83 billion for the full year when excluding foreign exchange. Lastly with the continued strength in our cash conversion, we are also increasing free cash flow guidance for the year to a range of $1.3 billion to $1.45 billion. All other guidance items for the current year remains same. Before I move to my closing remarks, I want to recognize the tremendous progress the team has accomplished so far. The consistency in execution and further adoption of lean operating principles make us well positioned for continued improvement in most everything we do. Additionally, our commercial differentiation and the relative stability of offshore markets give us unique visibility, allowing us to provide an early view for Subsea for the upcoming year. For 2026, we are guiding Subsea revenue to a range of $9.1 billion to $9.5 billion with adjusted EBITDA margin in the range of 20.5% to 22%. We will provide the remainder of our 2026 financial guidance with our fourth quarter earnings. In closing, the continued momentum in operational performance drove another solid quarter for TechnipFMC. The strong execution was also reflected in robust free cash flow generation, leading us to increase our full year expectation to $1.375 billion at the midpoint of the guidance range. We are on pace to return more than 70% of free cash flow to shareholders in 2025 through dividends and share buybacks. And with our increased free cash flow guidance, shareholder distributions now have the potential to double versus the prior year. Yet even with this substantial increase in distributions, we have maintained the flexibility to further strengthen our balance sheet by reducing gross debt almost $450 million since the beginning of the year, including the opportunistic prepayment of our highest cost debt. And finally, as we look further ahead to 2026, we have provided our outlook for Subsea, which at the midpoint of the guidance implies double-digit growth in adjusted EBITDA. Importantly, this level of EBITDA growth in Subsea is essentially double the anticipated growth in revenue, further expanding margins, improving returns while providing strong support for robust shareholder distributions. Operator, you may now open the line for questions. Operator: [Operator Instructions] Our first question will come from the line of Scott Gruber with Citigroup. Scott Gruber: I wanted to start on the share repurchase authorization. It's going to be another good year of free cash this year, strong returns to shareholders above 70%. With the increase in the repurchase authorization and what should be a strong free cash year next year, how are you guys thinking about the right level of cash return in '26? Alf Melin: Sure, Scott. So obviously, we are very pleased with the year we've had with free cash flow generation this year, really supported by our strong commercial and operational execution that we had all year. This execution is foundational because the operational delivery uncertainty around that is really leading to the consistent achievement of milestones that then trigger billings and associated cash collections. So that's really, again, the fundamental strength in the cash flow conversion out of EBITDA clearly has increased significantly this year. However, when you exclude maybe working capital benefits and a few onetime benefits that we have seen in our free cash flow conversion from EBITDA may not be able to stay at that level. But if you think about what we have said historically, we said that we're going to be around 50% of free cash flow conversion from EBITDA, and we think we're now approaching more like 55% when you're normalizing for working capital to a more neutral position. Scott Gruber: That's great. And how to think about the kind of level of return to shareholders from the free cash flow for next year kind of what's the framework you guys are thinking about? Alf Melin: Yes. So we are just recommitting that we will have at least 70% of free cash flow returned to shareholders. So that's -- we will continue at that level at the same level as we've had in '25. Operator: Our next question will come from the line of Victoria McCulloch with RBC. Victoria McCulloch: Just on the Subsea award intake, when we were speaking last quarter, you mentioned that there were some awards that haven't been announced to the market that we would see in the coming weeks. I think there was 1 from Equinor in July. Has there been anything that possibly still yet to be announced from of the order intake. Certainly, it seems your to the order intake is obviously very strong and running ahead for of others in the market. It's very strong by TechnipFMC. And then as a follow-up, not totally linked, what are your working capital expectations for this year within the new free cash flow guidance? Douglas Pferdehirt: Sure. Thank you for the question, and happy to clarify. First of all, thank you for pointing out another solid quarter of inbound. We are differentiated in that. And I think that's very much a result of what we've done to create the company that we have, and it shows up in the level of direct awards it comes to our company. So in other words, the total available market that's accessible by the rest is shrinking every day as our direct awards continue to increase. So if you think about it that way, that's what gives us the confidence, the reassurance and the ability to continue to outperform. In terms of those specific, the comment around potential future announcements, there are actually still more to come. That really is governed by our clients. It typically has to do with their conversations with the local governments or their partners. And when they give us the green light, then we go ahead and make those announcements. But nothing -- there's no surprises there. There's no -- it's just a normal part of the process. It's struck out a little bit longer than we had anticipated when I made that comment. But again, thank you for pointing out the strength and resiliency of our outlook and our ability to win and secure the highest quality projects, realizing that we are being very selective in what we focus on. Alf Melin: Yes. And this is Alf. Regarding the free cash flow and the working capital assumptions. As you clearly point out, we have had a very exceptional year this year and a very strong year in terms of working capital performance. So whatever you can kind of gauge from the year-to-date numbers now is kind of one way to see the upside this year. When we guide for going forward, we will typically put ourselves with a neutral position. That's the right starting point. Operator: Our next question comes from the line of David Anderson with Barclays. John Anderson: I was hoping you could unpack the '26 Subsea guide a little bit for us in relation to kind of what I'm hearing from the rest of the market. Recognizing the midpoint of the guide, the revenue guide on Subsea is in line of consensus. I'm assuming the service component is up roughly cut 10%, like we've been seeing in the past years. So if as backlog conversion looks pretty steady for next year. We keep hearing about offshore picking up the late '26 building into I'm just curious if that's a trend that you think should also play out in your Subsea revenue. You mentioned shortened cycle times. I guess does that imply backlog conversion should start to accelerate in the second half of next year? And does Subsea 2.0 convert faster in the mix? Douglas Pferdehirt: Sure, Dave. I think you dropped off there at the end. You might have to bring me back. There were quite a few a few things packed in there, year back, Dave. So if I don't catch everything, just you can ask me a follow-up. So first of all, thank you for asking us about 2026. I think we're the only ones talking about 2026, to be very clear, which again says a lot about who we are as a company, the unique visibility that we have, our position within the market and the confidence that our clients have in us to be able to award us projects far earlier than they have done historically or that they would do with the competition. So again, it's a privilege for us to be able to talk about 2026. When you -- as you said, as we kind of unpack that guidance, you're right, backlog coverage is strong. And it's not just the quantity of backlog coverage, it's the quantity of backlog coverage, and that was both in my prepared remarks as well as in Alf's, it's that ability to have confidence in increasing not just revenue, but also margin and margin at a faster rate than revenue growth. So this isn't just about volume. This is about higher-quality inbound and just, quite frankly, exemplary execution, which I'm extremely proud of our team and all of our employees for what they've been able to deliver. So those things set us up very well and give us the confidence to be able to go out now and no one else is talking about 2026, and we're able to go out with guidance for 2026, with a high level of confidence that we will be able to achieve that. You asked a question about Subsea services and kind of its growth rate, like in 2025, I would think of it as in line with the growth of the overall business. So in other words, we gave you the revenue forecast. So you can look at that top line growth and reflect something similar for subsea services. In terms of cycle time reduction and how that helps the conversion from backlog, indeed, it does, and that's a big part of the secret sauce is in terms of our ability to grow, whilst retaining a modest CapEx investment, meaning we don't have to invest to grow. We decided to do more with less. So we're not about building and spending capital and adding assets. The smart way to do it is to do more with less, which quite simply shows up in returns have not been achievable historically that we are demonstrating, and we'll continue to demonstrate as we go forward. So that's -- now we're not -- everything is tied to that accelerated cycle time, still the offshore installation side where there's work to be done. And it's an area we're focusing on how we can make that as efficient as we have the configured order Subsea 2.0 product architecture. And there's not everything in the Subsea 2.0, not every of our product architecture has achieved the level of Subsea 2.0 if you will, customization. So there's a lot of upside here left in the company, and those are all of the things that we're focusing on that we'll benefit from as we go forward. If I didn't cover everything you had hoped, please feel free to follow up. John Anderson: Pretty close, pretty close. Let's hope I don't drop out here. So my second question is just about the Subsea margin guide for next year. What percentage of revenue are you expecting to be Subsea 2.0? And can you tell us how much -- what percentage of the inbound year-to-date has been Subsea 2.0? Douglas Pferdehirt: Sure. So I think the easier way to think about it and maybe how it creates leverage for the company, is how much of it is actually flowing through the facilities. So we are right now -- let's say, when we exit 2025, exit this year, we'll be approaching about 40% on of our capacity, we'll be working on Subsea 2.0. Now the inbound levels of Subsea 2.0 have exceeded the 50% mark and continue to grow, and we would expect Subsea 2.0 orders to grow as a percentage of total orders also next year as well as iEPCI orders as a percent of our total orders will grow substantially. So these are big, big leverages -- these create a lot of leverage for us as we continue to move forward in ensuring that we continue to grow, expand our margin, increase our leverage and drive returns. Operator: Our next question comes from the line of Arun Jayaram with JPMorgan Securities. Arun Jayaram: My first question is regarding your 2026 Subsea guidance. Doug, at the midpoint of the guide, it implies 175 basis point improvement in margins. I was wondering if you could help us understand how you think about the drivers of the margin expansion between Subsea 2.0 mix -- Subsea services mix and maybe pricing improvement? Douglas Pferdehirt: Sure, and good morning, Arun. So clearly, all of those factor in. I'm going to really focus on the first 2 because to me, those are the ones that are sustainable. I think too many companies for too long, have just focused on the last one, and that is never a long-term strategy. So we have redesigned our company. We changed our operating model to create that leverage that we can have that sustainable leverage regardless of the level of activity that there is in the marketplace. So when you think about it, there's really the 3 components. There's -- we do have some legacy backlog, some legacy projects still in our backlog, and those will be working off. And we're getting down now to below the 10% mark of what is left in our backlog. So there'll be some of that remaining in 2026. And then -- but there will also be more Subsea 2.0, as I just responded today and more iEPCI execution going through. All of that is -- those are the things that are like, let's say, very tangible. But what you have to keep in mind is the entire organization, it's not just the manufacturing part of the organization. The entire organization is on this industrialization journey, and it's real, it's real. And many of you have had the opportunity to visit and see how we operate today versus how we used to operate and the rest of the industry still operates, and it's very different. And it creates that what we call solidification, standardization and industrialization. And it goes across everything that we do, including the functions and every activity we have in the company. This is what creates that leverage. So when you get over 20,000 women and men working together every single day, finding those incremental improvements and being rewarded and celebrating those successes, that creates that momentum that gives us just a high level of confidence in room that we're going to be able to continue to accelerate and grow the performance of the company. Arun Jayaram: Great. Maybe 1 for Alf. Your net cash position has grown to just under the $500 million, I think it's like $439 million. You highlighted plans to return at least 70% of free cash flow. I just wanted to talk about what you think about the balance sheet and future uses of free cash flow because you have a very underlevered balance sheet. And I guess the ultimate question is could we see you returning essentially all of your free cash flow, just given how strong the balance sheet sits today. Alf Melin: Thanks, Arun. Thanks for the question. I think it's well placed. Yes, for sure. I mean we have taken care of a lot of things on the balance sheet, pointed out in my prepared remarks, $450 million of reduction of debt this year in addition to delivering on our commitment to at least 70% to shareholders. This debt reduction really reflects more than 50% of debt reduction since the beginning of the year. And clearly, our balance sheet needless to say, is just in great shape. We don't see any major change to our capital allocation, meaning we intend to continue to be a capital-light company. We have guided in the past that we will have CapEx in the range of 3.5% to 4.5%, and we continue to intend to stay at the low end of that range. So given also that we have taken care of most of our debt obligation, and we have really -- we like the maturities that we have out there for the rest of our debt, and we really don't see work in the debt structure significantly at this point. So it certainly leaves opportunity to -- when we say at least 70%, we clearly are focused on minimum that amount, but any excess cash, clearly, shareholder distributions will be one of the areas where we go to. Operator: Our next question comes from the line of Derek Podhaizer with Piper Sandler. Derek Podhaizer: Just to kind of keep going on Dave and Arun's comments about just the catalyst within the backlog improvement and the margin outlook. You talk about the industrialization, you have the Subsea 2.0. But Doug, can you maybe talk to us about what 2.0 could mean for the surf side or the installation side of things? Just thinking about those continued catalysts as we work towards the year, just the continued improvement of the business. Douglas Pferdehirt: Sure, good morning, Derek. I don't want to say too much, but I think there is a significant opportunity to further industrialize the full iEPCI scope. So remember, back in history, we were running them in parallel. We were working on the Subsea 2.0 configure to order for the SPS or the subsea equipment portion of the -- of our activity. And then as a result of the merger, we now have the ability as a single entity, and you cannot do this if you are not a single entity because it has, let's say, conflicting behaviors between a traditional surf company and a traditional equipment provider. So as a single entity, now for 8 years. It's been 8 years ago that we actually merged. It gives us the opportunity to expand that across the whole portfolio. So I am sure you all will have an opportunity to hear much more about that in the future. But I'm going to be a little bit quiet today, which I know is not my normal behavior, but there is a -- it's an incredible opportunity, but I am going to stop there. We're working hard at it. Derek Podhaizer: Got it. Fair enough. I appreciate that. Second on the subsea opportunities list, it's pretty noticeable and evident that scope of over $1 billion is meaningfully increasing really since the middle. Could you talk about the drivers behind that? I'm assuming the certainty that you guys bring to the table. But where could this ultimately go from a project scope perspective as we continue to see that wedge just increase over time? Douglas Pferdehirt: Thank you. I didn't think of it as a wedge, but I'll take that. It's certainly been an ever-increasing wedge. And we've talked a lot about that, including the prepared remarks and that's really being driven by the fact that the best reservoirs are offshore, at least the best reservoirs that are accessible to the marketplace. So the capital is going to flow in that direction. It was always -- there was always some hesitation by our customers in the past, again, because of the unpredictability of the execution of offshore projects. What we have brought back to the industry, we've given our customers their mojo back, we have our mojo, and it's simply a fact of being -- performing well every single day, giving our client confidence by providing certainty. We have to reduce cycle time every single day. whilst providing certainty. If we can do that, and we will do that, we have done that, and we'll continue to do that. That will give our customers great -- ever greater confidence to invest more and more of their capital allocation to the offshore. It just makes economic sense. The breakevens of the projects, the returns on the projects the reserve base of very minimal decline rates compared to other areas that they can invest in. It just makes sense. So look, the opportunity list continues to strengthen. As you pointed out, Interestingly, the 3 new projects that are on the list are all gas. I wouldn't overreact to that. I think -- but I do think there is something to be said about that. I do think gas is a bigger portion of the future of the hydrocarbon mix in particular, in the offshore. And again, a lot of these offshore gas as LNG. So we often think about LNG in a terrestrial way because LNG is the physical thing that you see is often on the key side. But a lot of the supply of that gas is coming from offshore gas, particularly outside of the U.S. So anyways, it's an interesting combination of projects that were added, but here's something -- maybe here's just a little teaser for you. The livid you don't get to see, which is our proprietary opportunity list, which drives our direct awards, that list has grown at an even faster rate. Operator: Our next question comes from the line of Ati Modak with Goldman Sachs. Ati Modak: Can you talk directionally about the outlook for Surface Technologies for '26 given the Saudi activity potential? And then you also raised the margin guide for '25. So maybe help us understand the drivers there as well Douglas Pferdehirt: Sure. So we talked a bit about it last quarter. I'm super proud of the team. They've taken the necessary actions to ensure that they can provide adequate returns to the company and to our shareholders. We've focused where and what we do. And as a result of that, they're able to deliver quite exceptional results and actually improving results when others in this realm, I think, are going the other direction. So I will tell you the outlook is less certain. It is why we did not include that in our early guidance. We were able to for Subsea, but the Surface or the Onshore business remains much less predictable. Certainly, the -- historically, the level of continuity in our international business or non-North America business, it's much more predictable. It has less less downside swings to it, if you will. But it's still very early. And we are talking to our clients now. We're working through that on a budgetary work. There they're doing it themselves. So there's not a lot of information to be exchanged. But we positioned ourselves with the right customers, in the right basins, providing the right technology. And we've had very good success with our iComplete offering, which is the digitalization of the entire frac pad, not just the [indiscernible] digitalizing their work or the wireline company digitalizing their work, but we put an overlay interface, where we can control the whole well site, allowing record performance in terms of continuous pumping. So we're going to continue to bring those high-end solutions as well as continue to benefit from the in-country investments that we've made in local manufacturing in the Middle East, where we are very well positioned with those clients, and we'll continue to succeed on a relative basis because of those investments that we've made. So just a little less clear at this point, and I think we will provide that guidance along with our -- the full company guidance and -- with our Q4 results as we do historically. It's just a different business than our Subsea business. Ati Modak: Got it. That's helpful. And then can you give us an update on the electric Subsea infrastructure opportunity, where that stands as of now, I've seen some announcements from some of your peers earlier this year as well. Just wondering if that is starting to become a little bit more topical and what that could mean in terms of orders and margins for you? Douglas Pferdehirt: Sure. It's progressing. What you've seen is to greenfield, all-electric awards. TechnipFMC received the first-ever All-Electric Subsea award and that was for the BP Northern Endurance partnership project we announced a few quarters ago. And then more recently, there was an award in the North Sea. We have said this, and I'll repeat it. I think the level of transition in terms of greenfield developments, to all-electric are not going to be as strong as I originally had anticipated. But there are 3 areas that are most definitely going to benefit from all-electric. And the third one being actually very, very interesting and very new. So those 3 areas are carbon capture and storage. We believe they will go -- they have gone all electric, and we'll continue to go all electric. So all of those opportunities that we're working on or we have secured are based on an all-electric infrastructure. And we have the industry's only certified all-electric CO2 injection tree, and that's important. The second area is in the area of brownfield tiebacks. We've talked about this before. It increases the radius from the host facility by about 4x and potentially even greater than that. And that has a lot of implications and positive implications in terms of customers being able to tie back to existing infrastructure, very low -- at a very low breakeven or very high returns. It helps us not only in the fact that we have the old electric solution, but we have other solutions like flexible pipe and subsea processing that all kind of come together to create that opportunity. And then the third area is where we're actually now able to retrofit hydraulic trees with electric actuation, if hydraulic actuation was to be deteriorating, there's always redundancy, so it doesn't fail. I don't want to say -- I don't want to put the wrong impression in your mind, but when it starts to deteriorate its performance over time, the customer would have to retrieve that tree, bring it back to the surface, take it back to the shore and retrofit, reinstalling, that is certainly months and can be quarters before that production is put back online. We have developed a novel solution to be able to go into a -- in situ on the C4 with the use of remote-operated vehicles and swap out hydraulic actuation controller for electric actuation. It is really interesting. And obviously, you don't lose that multiple months, multiple quarters of production. So it has a lot of upside for our clients, too. So I just think the original focus of electric as well, all new projects will go all-electric. I just don't think that's the case anymore, but we are finding by having invested and developed the technology, we're finding these other applications that could be quite exciting as well. Operator: Our next question will come from the line of Sebastian Erskine with Rothschild. Sebastian Erskine: Can you hear me now? Douglas Pferdehirt: Yes, we can. Sebastian Erskine: The first one, just a bolt-on, it's a very strong year for TechnipFMC on order intake. But I think a theme that has emerged perhaps is that some operators have kind of chosen a bit, they're going to slow walk deepwater FIDs. Some competitors have called Sub-Saharan Africa is a good example of that. And I also saw an estimate that was putting company tree awards down mid-teens percentage year-over-year in '25. So it would be great to kind of get your perspective on how the cycles evolve year-to-date versus your expectations at the beginning of the year? And I guess, looking forward, perhaps, what are the specific key basins that are going to drive '26 for you? Douglas Pferdehirt: Sure. So look, I just have to be candid. We're not experiencing that. And I think that's clear. I mean, 3 years ago, we called the market and we said that the market was going to be resilient. We were going to be able to secure $30 billion worth of awards over a 3-year period, and we're well on track to do that. So -- and as far as our expectations for this year, they're right in line with original expectations, which is we said would be in that $10 billion range. And now we're saying we'll be more than $10 billion. So I'm not sure what others are experiencing, but our results, I think, speak for themselves. Now let me maybe explain why. Remember, 80% of our business is direct awarded to our company never goes out to competitive tender. So just think about what that does to the total available market. The total available market that's left is very small compared to what we have privileged access to because of the trust and the confidence that customers have in us, our unique offering and our ability to be able to reduce cycle time, improve their project returns, hence leading to those direct awards. And that's why when I say that proprietary data set that we work on our opportunity set that we're working on, which is not on our public list. Even though that public list is growing, those other projects are are only accessible by our company. And keep in mind, we are at the table very early because these are direct awards. We are doing the concept study. We're doing the pre-FEED study. We're doing the FEED study, and we're going straight into an iEPCI 2.0 execution. So I guess we just have greater visibility. Sebastian Erskine: Really appreciate that. And a follow-up on that. I mean, looking at your backlog at a very large level, I'd like to get your perspective on kind of resourcing to execute that level of work. And I read somewhere that had increased staffing at your manufacturing facilities in Brazil, Malaysia and the U.K. by some 20% to 40% in 2024 versus a kind of base of '21, so post-pandemic. Are you happy with the resourcing at the moment? I guess looking at it, given the tightness is, are there some concerns in the industry around potential bottlenecks or capacity constraints? And how are you positioning to execute that work. Douglas Pferdehirt: Well, first of all, I can't confirm those numbers. Those are new numbers to me, but I'm not sure where they came from or what you heard, but let me just answer the question more broadly. First and foremost, and this is a commitment I make to every single customer, we do not take on any work that we can't execute. And so look, we know bid work. I mean there's work out there with our competitors, we're now bidding it. It's very clear if it doesn't meet our threshold in terms of the quality of the work or the type of execution that is expected or where it is expected or the currency in which we're going to be paid or the risk that we're asked to take on, and we will just now bid that work. So first of all, it's -- what we inbound, we have a commitment to deliver and it's important, deliver on time, on budget. I mean the reason why we get repeat awards is only because we're performing at a very high level. We have never not gotten a repeat award. We often replace the competition. I mean it is a very different scenario in terms of how we are operating versus how we used to operate, which is all the industry -- the rest of the industry still operates. So I really can't say much more than that other than we just have a different operating model. It took a lot to get here. Thankfully, we did it 10 years ago. And so now we're singularly focused on execution. We're not focused on anything else than delivering to our clients and meeting their expectations. So long answer to your question is we are very confident in our staffing levels. We're very confident in the resource levels. The whole strategy of the company and reducing cycle time is the ability to do more with the same. So it's not about staffing levels. It's about being more efficient. Operator: Our next question will come from the line of Marc Bianchi with TD Cowen. Marc Bianchi: I wanted to start with some more questions on services. So Doug, can you remind us what the mix of services between like installation versus servicing your installed base is in the business like roughly? And the reason I ask is the the comments earlier about kind of '26 and a service growth rate looking like the overall subsea, I would have thought that services could be doing a better growth rate than sort of decelerating, so maybe you could unpack that a little bit for us? And then the second part of it is like if you look longer term, is there anything we should be thinking about how the integrated awards that you've taken in the past several years affect the servicing opportunity and then anything with like the vintaging of your installed base as we come up on maybe some anniversaries of more service opportunity? Douglas Pferdehirt: Sure. And thanks, Mark, for bringing us back to service, its important. The only thing I would disagree with in your statement, I think you said deceleration. There certainly hasn't been a deceleration. Look, you do get a compounding effect. The larger the installed base, the more opportunity set there is, and certainly, the higher the volume, the longer the tail and the more opportunities you have. So let's talk a little bit about the mix of services. So yes, you have the original installation activity. And then you have all of the activity around the inspection, maintenance and repair of the installed infrastructure. And then you have another bucket that's all around refurbishment of equipment. And then you have that final bucket that's all around intervention services. And what is very beneficial, not just driven by iEPCI, but just probably driven by the market presence that we have is that whenever the wellbore needs to be intervened on or in which happens at a much higher frequency than the equipment because the equipment is built to last for 25 to 35 years. We come out -- we provide the services associated with giving the client assets to the wellbore. So that's what I mean by that intermittent work. So -- and wellbores can fail within the first year, wellbores can fail within 5 years. The more intelligence and all that, that are put in the wellbores, it's just more opportunities for things to potentially need to be replaced or repaired, which means we are involved. So look, there is no doubt that we have -- the Subsea Services business has grown substantially. We I gave some prior guidance for this year at about $1.8 billion. As you know, that's almost double where we were not too long ago. So yes, very proud of our Subsea Services business. It is a business that's going to -- it's not just the quality of the earnings associated with it, but it's having that leverage in that footprint and that sustainability and continuity. So perhaps my remark about it being growing in line with the core business, which is also growing at a good rate, maybe made it seem understated, but that wasn't the intent. Marc Bianchi: Got it, great. And my second question is just around fourth quarter. And if I sort of look at what the revenue guide is here for Subsea, it would look like you're highly covered with backlog like more than usual. But I think there were some conversations during the quarter about some extra vessel downtime beyond normal seasonality. Maybe you could just unpack a little bit what's going on there, and maybe how we should think about how that progresses through the -- into the first quarter? Alf Melin: Sure, Mark, Alf here. So yes, you are right. First of all, we are well covered on the backlog. We did have a strong Q3, and -- but we are, as you point out, guiding Q4 down versus Q3. And that revenue is declining largely through the utilization of vessels. We have this seasonal activity levels pretty much every year, where we see that decline, particularly in the North Sea. But overall, it's affecting our ability to go offshore and generate revenue. So that's there. And then we talked about the revenue -- the associated EBITDA decline. However, when you look at the big picture of where our guidance was in terms of revenue, we were at $8.6 billion of midpoint. And if you kind of take this all together between the Q3 and the Q4 performance, you'll see that there is an uptick and an expectation that we will be above midpoint for the full year when it's all said and done. Operator: Our next question comes from the line of Saurabh Pant with Bank of America. Saurabh Pant: Doug, you gave some good color on 2026, and you gave that color early, a lot of good questions, but your revenue is still below the orders you have been booking for several years now, right? So there should be upside going forward. What I want to focus on bags as you enter deeper into the execution phase of this backlog, right? What are you focused on? What are you looking at, especially among wondering both the installation, the side of things. the vessel side of the market, especially given some consolidation out there. Just maybe talk to the execution side of things as you execute on the backlog and orders you're booking. Douglas Pferdehirt: Sure. I think the biggest thing to focus on, and we've talked about this previously on calls was just if leads the quality of the inbound, which obviously goes into the backlog, which then has to be executed. And what we know is we know there's more iEPCI, we know there's more 2.0, and that creates a significant level of confidence in our ability to be able to execute those projects. I said earlier, it came out on a couple of the earlier questions. it's all about relentless pursuit of the reduction of cycle time. Sure. That makes sense. It means our customers get a higher project return. It means they're happy for us to share a greater portion of the economic value that we create, but it also has to do with our internal efficiency. And again, being able to do more with the same or the same with the last, whatever scenario you might be in. But that's how we're able to ensure that we can deliver this backlog successfully for our clients and maintain that reputation and the honor position that we have with our client base today. Saurabh Pant: Right, right. No, that makes sense, Doug. As maybe a quick one for you or maybe correct me if I'm wrong on this. I think I heard you talk about 55% normalized free cash flow conversion, right? And I think you were assuming neutral working capital in that, [indiscernible] I'm wrong. And then how does the order exceeding your revenue dynamic play into it, right, as long as orders are above your revenue, should we think that working capital should continue to be a tailwind? Maybe just spend a couple of minutes on that, Alf, please. Alf Melin: Sure. So first of all, maybe the clarification maybe I made around our normalized working capital -- normalized free cash flow conversion. Again, I said that before, we have talked about it being 50%. And now as a guide at this point in time, we say that if you think about our EBITDA, we think we will be getting around 55% conversion from that EBITDA number if you assume working capital neutral. You're right about the dynamics of working capital being a variable to our business. And clearly, in a period of significant growth in inbound, providing that you can get the high-quality backlog that we've been able to do that gives us the ability to achieve early milestones and ongoing milestones in the projects and allowing us a consistent execution. We have the ability to stay neutral or better which is always the ambition we have as we execute the incremental subsea work. When you now look maybe a little bit at the inbound picture year-over-year as we kind of have similar inbound year after year. we may see some diminishing opportunities to incrementally build on that, but that's certainly always our ambition. But at this point, if I'm looking ahead, I wouldn't go much about neutral working capital at this point if you're looking ahead but that's certainly something to -- that we will come back and guide further on when we come back in February. Operator: Our final question will come from the line of Mark Wilson with Jefferies. Mark Wilson: Obviously, the adoption and the resilience of what you put in place here just jumps off the page yet again. And I'd say the ExxonMobil ahead Subsea 2.0 awards seems to be the ultimate validation of that. However, one part, Doug, I'd say that we haven't touched on is the question about installation capacity out there in the market, still essential for all clients. And obviously, you work with Saipem in Guyana at Hammerhead as well. So could you just update us on TechnipFMC's view on that merger that's going on to Saipem 7 in the market, and whether you see any impact from that regarding the vessel infrastructure you've spoken to in the past and indeed, if anything, worth commenting on your submissions regarding that process? Douglas Pferdehirt: Sure, Mark, and thank you for your patience. So just a clarification. So well, first of all, thank you for the comments. Those are well received. Yes, the seventh project in Guyana was critical. The fact that 2.0 shows that evolution, that continued market adoption and with obviously a very important client to us. The only thing I need to clarify is we don't work with Saipem in Guyana. So we do and our scope is our scope and then the installation scope is bid separately. So that question would really need to be answered by ExxonMobil not by ourselves. In regards to the merger, look, the regulators will make their decision. Our customers will make their decision. So they ever the regulator decides and then there's whatever behavior the clients decide on how they want to react. We are in a position where when asked or encouraged by our clients or the regulators to comment. We have a responsibility to comment, and we're just providing clarifications on market, market segmentation and the way that the market operates, but it will be what it will be. Keep in mind that we have this relentless pursuit of reduction of cycle time meaning if we can now deliver a subsea project in 2 years versus 3 years, I've created 33% more capacity with my existing fleet. So this is about being more efficient, having higher returns, not having more assets. Operator: And I'll now turn the call back over to Matt Seinsheimer for any closing comments. Matt Seinsheimer: This concludes our conference call. A replay of the call will be available on our website beginning at approximately 3:00 p.m. New York time today. If you have any further questions, please feel free to reach out to the Investor Relations team. Thank you for joining us. Regina, you may now end the call. Operator: This will conclude today's call. Thank you all for joining. You may now disconnect.
Ryan Mills: Thank you, and good morning, everyone. Welcome to our fourth quarter and fiscal year 2025 earnings call. Erik Gershwind, Chief Executive Officer; Martina McIsaac, President and Chief Operating Officer; and Greg Clark, Interim Chief Financial Officer, are on the call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics documents, both of which can be found on our Investor Relations website. Let me reference our safe harbor statement found on Slide 2 of the earnings presentation. Our comments on this call as well as the supplemental information we are providing on the website contain forward-looking statements within the meaning of the U.S. securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks are noted in our earnings press release and other SEC filings. Lastly, during this call, we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Erik. Erik Gershwind: Thank you, Ryan. Good morning, everyone, and thank you for joining us today. I'll begin the call with some perspective on our recent performance and a view into our mission-critical path forward. I'll then offer some commentary on our end markets and overall economic conditions. Greg will cover our results for the fiscal year before passing it over to Martina to provide her perspective on our recent performance and our expectations for fiscal year 2026. I'll then wrap things up by providing some additional color on today's announcement regarding our upcoming leadership transition. As we turn the page on fiscal 2025, I'm encouraged by the progress that's happening inside of our company. We entered the year with 3 top priorities, and those were to maintain momentum in our high-touch solutions, to reenergize our core customer and to optimize our cost to serve. We're making strides on all 3 fronts and are doing so in the face of an uncertain environment. While there is still plenty of work to be done, our recent progress is beginning to evidence itself in our financial performance as we return to daily sales growth, and we're poised for operating margin expansion once again. First, our high-touch solutions, including vending and implant, continue the strong track record that we've seen all year long. Martina will provide more details shortly. Second, and most notably, we've begun to see our core customer average daily sales growth rate inflect and turn positive. As you recall, we launched 4 initiatives aimed at reenergizing our core customer base. And those were realigning our public-facing web pricing, which was completed during our fiscal 2024, upgrading our e-commerce experience, accelerating our marketing efforts and optimizing seller coverage. The largest milestones occurred at the end of our fiscal second quarter as we launched our upgraded website and our enhanced marketing efforts. Since that time, we've seen a steady improvement in core customer performance. Third, we've made progress in optimizing our cost to serve. We're on track with the supply chain productivity improvements that are yielding between $10 million to $15 million in annualized savings. We improved seller coverage and effectiveness by leveraging an enhanced data-driven territory model and tools that help reps more easily identify white space opportunity. And we have a growing pipeline of additional productivity programs that we expect to fuel more gains in fiscal 2026. I'll now turn to the specifics of our fiscal fourth quarter on Slide 4, where you can see average daily sales performed better than expected and improved 2.7% year-over-year. The return to growth in our core customer base, along with continued strength in the public sector, resulted in better-than-expected volumes and was the primary driver of the beat. Benefits from price came in as expected during the quarter, contributing 170 basis points to growth year-over-year and 90 basis points sequentially. As a reminder, we took a broad-based low single-digit pricing action towards the end of our fiscal June. That said, gross margin came in below our expectations at 40.4%, declining 60 basis points both year-over-year and sequentially. The primary driver here was tariff-driven purchase cost escalation, which came in faster and hotter than we expected during July and August. We also saw some other headwinds such as public sector-related customer mix. We have since taken action with pricing moves in the fiscal first quarter and have begun to see gross margins improve. Operating expenses in the quarter were approximately $306 million on a reported basis. And on an adjusted basis, operating expenses stepped up approximately $8 million year-over-year to $305 million for the quarter, but remained flat on a percentage of sales basis. The primary drivers of the year-over-year increase were driven by higher personnel-related costs and depreciation expense. Sequentially, adjusted operating expenses performed slightly ahead of expectations and declined approximately $6 million compared to the fiscal third quarter. Reported operating margin for the quarter was 8.6% compared to 9.5% in the prior year. An adjusted operating margin of 9.2% declined 70 basis points compared to the prior year. This did, however, exceed the high end of our outlook by 20 basis points. We delivered GAAP EPS or earnings per share of $1.01 compared to $0.99 in the prior year's quarter. And we also saw year-over-year improvement on an adjusted basis. With EPS growing nearly 6%, coming in at $1.09 compared to $1.03 in the prior year. The positive trend we saw in the fiscal fourth quarter has continued into the first couple of months of fiscal 2026 as our daily sales growth rate ticked up further to 5% in September, and it's we're expecting to grow between 4% and 5% in October despite impacts from the government shutdown. As we look ahead, we expect the step up in operating expense to moderate and productivity to build. All of this positions us well in our efforts to restore profitable growth and operating margin expansion in fiscal 2026 and beyond. Turning to the environment. We characterize conditions as stable with some pockets of improvement, while the ongoing overhang of uncertainty remains. Tariffs have moved from a possibility to a reality as we're now experiencing meaningful price inflation across many areas of the business. Customers are generally understanding of price increases, as long as we provide sufficient transparency into tariff-related impacts. That said, the need to provide customers with offsetting cost savings measures is very real. And this plays well into our high-touch and technical value proposition. Our suppliers are describing continued cost pressures on certain raw materials that are heavily China-based or influenced. And if this sustains, it could lead to further price inflation in the coming months. From an end market perspective, we've seen stabilization and even firming up in some of our larger verticals. Aerospace remains strong, while end markets such as heavy equipment and agriculture, which have been particularly weak over the past 2 years, or at least stabilizing. Some areas of acute softness do remain such as heavy truck. Looking at Slide 5, I I'm encouraged to see how MSC is faring in this environment. Average daily sales in the quarter began to outpace the Industrial Production Index once again, supported by our improved customer performance and continued strength in the public sector. With that, I'll now pass things over to Greg for an overview of our financial results for the fiscal year. Gregory Clark: Thank you, Eric. Good morning, everyone. Please turn to Slide 6, where you can see key metrics for the fiscal year on both a reported and adjusted basis. Average daily sales declined 1.3% year-over-year primarily due to softer volumes in the first half of the fiscal year and the slight FX headwind. These headwinds were partially offset by positive price that contributed 60 basis points to growth and some carryover benefits from acquisitions in the prior year. Moving to profitability for the year. Gross margin of 40.8% contracted 40 basis points compared to the prior year due to negative price cost and customer mix. Operating expenses stepped up approximately $56 million and $55 million on an adjusted basis as expected. Combined with slightly lower sales, this resulted in a 190 basis point increase in adjusted operating expense as a percentage of sales. However, we exited the fiscal year with adjusted operating expenses as a percentage of sales performing in line with the prior year. Reported operating margin for the fiscal year was 8% compared to 10.2% in the prior year. On an adjusted basis, operating margin declined 230 basis points compared to the prior year. Together, this resulted in GAAP EPS of $3.57 or $3.76 on an adjusted basis, compared to $4.58 and $4.81 in the prior year, respectively. Now let's turn to Slide 7 to review our balance sheet and cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $430 million, representing roughly 1.1x EBITDA, continue generating healthy cash flow in the quarter despite the increase in receivables through lifts and sales, we delivered free cash flow of $58 million during the fourth quarter, representing 104% of net income. This resulted in free cash flow conversion of 122% for the fiscal year ahead of our annual target. Turning to capital allocation on Slide 8. Our highest priorities remain organic investment to fuel growth and advancing operational efficiencies across the business. Returning capital to shareholders also remains a priority. We purchased approximately 496,000 shares throughout the year. Combined with our quarterly dividend, which we increased by approximately 2% this month, we returned $229 million to shareholders in the fiscal year. I will now turn the call over to Martina for a deeper dive into our quarterly performance and expectations for the new fiscal year. Martina McIsaac: Thank you, Greg, and good morning, everyone. Turning to Slide 9. We're encouraged by our daily sales trend that continues to improve across all customer types. During the fiscal fourth quarter, we were most pleased by the return to growth of the core customer with daily sales improving 4.1% year-over-year, driven by both price and volume. National Accounts declined 0.7% year-over-year. This customer base continues to see a greater impact from the macro environment as only 44 of our top 100 customers showed growth in the quarter. However, on a sequential basis, national accounts performed in line with core customers and improved a little more than 1%. And Public sector continued its strong trend in the quarter with daily sales growth of 8.5% year-over-year and 10% sequentially. While this business has been impacted by the government shutdown, with sales growth turning negative in October compared to up low double digits in September, we view this as temporary. Let's now dig a little deeper by looking at some of the key initiatives and KPIs supporting the daily sales improvement in the quarter on Slide 10. First, I continue to be pleased by the ongoing expansion of our solutions footprint. Our installed vending count grew 10% year-over-year or 3% sequentially to more than 29,600 machines. Average daily sales in the quarter for vending were also up 10% year-over-year and represented approximately 19% of total company sales. With respect to implants, our program counts at 411 expanded 20% year-over-year and grew 3% sequentially. Daily sales from customers with an implant program grew 11% year-over-year and represented approximately 20% of total company sales. Improvements to our core customer growth rate have been driven by several programs, which Erik mentioned earlier. The first is sales territory optimization. Moving to the middle of the slide, you can see the increase in coverage effectiveness, which enables us to be more present at customer sites. The number of customer location touches locked by field sales were up double digits year-over-year and mid-single digits sequentially. This increase was achieved with fewer sellers illustrating the potential that still lies in our sales effectiveness efforts. As we have shared, we've also invested in website upgrades and enhanced marketing efforts to restore core customer growth. In the fourth quarter, average daily sales on the web turned positive year-over-year with growth in the low single-digit range. We experienced similar improvements in the trend of certain KPIs such as direct traffic to the web and conversion rates of our top channels. Our streamlined checkout experience drove declining abandonment rates in the quarter and enhancement to the search function of our site also started showing early positive signs. The percentage of users adding to cart within the first 0 to 5 minutes, improved in the low single-digit range, giving us confidence that users are finding what they're looking for more efficiently. Before I move past our quarterly results, I would like to spend a few moments on gross margin. Q4 gross margins came in about 50 basis points lower than our expectations. 20 basis points of the miss can be attributed to mix and other factors. 30 basis points of the miss was due to price cost. While our price realization performed as planned, cost realization did not. A combination of a rapid surge in the number of supplier increases, compressed supplier notification period, higher sales volume and a greater mix of direct ship orders all led to higher cost realization than planned during the quarter. In response, we've made further pricing moves during the fiscal first quarter and are seeing gross margins improve off of 4Q levels. Before we get into our outlook, I want to highlight some exciting changes made to the leadership team that will strengthen our commitment to growth and the customer experience. You turn to Slide 11. We First, we welcome [indiscernible] to MSC as our new SVP of Sales. [indiscernible] brings 2 decades of engineering and field sales management experience from her time at Hilti with a proven track record of consistently delivering above market growth. In this role, she will build on the progress made by MSC towards sales excellence. With Gida's arrival, Kim [indiscernible] will be taking on the newly created role of SVP customer experience. Leveraging Kim's 30 years in the industry, this new team will be dedicated to ensuring that every interaction a customer has with a is seamless and memorable, driving customer retention and share of wallet growth. I would like to congratulate both [indiscernible] and Kim on their new roles and look forward to sharing their future success. As for the rest of the management team, John Reichelt is settling in his role as Chief Information Officer. He and the team continue making progress on the evaluation of our systems design. And lastly, our search for a permanent CFO is underway, and we have begun discussions with both internal and external candidates and hope to fill the role in the next quarter or 2. Let's now move on to our expectations for fiscal '26 by starting with our outlook for the fiscal first quarter on Slide 12. We expect average daily sales to grow 3.5% to 4.5% year-over-year. The lower end of the range assumes the government shut down less through the remainder of the quarter, whereas the higher end of the range assumes that the shutdown ends before the end of our fiscal quarter. Our expected range also takes into consideration quarter-to-date sales with September up 5.1% and October trending towards 4% to 5% growth. As a reminder, we returned to growth last fiscal November, making it our toughest comparison to the prior year for the fiscal first quarter. We expect adjusted operating margin to fall within the range of 8.0% to 8.6%, which takes into consideration the following: gross margin to improve from 4Q levels, and to be 40.7%, plus or minus 20 basis points and an increase in adjusted operating expenses compared to the fiscal fourth quarter of approximately $7 million to $10 million primarily driven by an annual step-up in depreciation and amortization from fiscal year '25 to fiscal year '26, a step-up in incentive compensation expense, 1 month of the merit increase and an increase in marketing investment, partially mitigated by continued productivity. The increased marketing investments are the result of the progress we're seeing in our core customer and are all directed towards high-return areas of our accelerated marketing program. Turning to Slide 13 for our expectations of certain line items for the full year. We expect depreciation and amortization costs to be roughly $95 million to $100 million, representing a year-over-year increase of approximately $5 million to $10 million. This largely reflects carryover from the investments made in technological and digital capabilities as well as continued growth in vending. Other underlying assumptions include interest and other expense of roughly $35 million, capital expenditures of $100 million to $110 million and a tax rate between 24.5% and 25.5%. Free cash flow is expected to be approximately 90% of net income. And lower than the previous year, driven by working capital needs to support top line growth. To assist in modeling the cadence of sales for the remainder of the fiscal year, the bottom of the slide provides historical quarter-over-quarter averages and key considerations for the second quarter and the back half of the fiscal year. And lastly, we have 1 extra business day year-over-year in the fiscal fourth quarter, as shown at the bottom of the chart. Looking beyond the fiscal first quarter, we expect incremental margins of approximately 20% at mid-single-digit revenue growth as gross margin restores to expected levels as we exit the fiscal first quarter and the benefits of our productivity initiatives build through the fiscal year. And with that, I will now turn the call back over to Erik for closing remarks before we get into Q&A. Erik Gershwind: Thank you, Martina. I'd like to close out the call on a more personal note. It has been an honor and a privilege to serve as MSC's leader for the last 1.5 decades. And while I'm stepping away from day-to-day leadership, I will continue to serve MSC as Non-Executive Vice Chair of the Board. As I prepare to transition I've taken some time to reflect on my 30-year history at MSC. Working alongside such an exceptional team has been 1 of the greatest privileges of my career. We have, together, grown and transformed this company from a traditional spot by distributor into the trusted mission-critical adviser and industry leader that you see today. Most importantly, we achieved this while living up to the values set forth by my grandfather, when he began selling cutting tools from the trunk of his car all the way back in 1941. Succession planning and leadership development have been pillars of MSC's values since its inception over 8 decades ago. Leaders are chosen carefully, and they're thoughtfully developed over time. Like my grandfather, like Mitchell and David before me, 1 of my most important responsibilities is developing our next leader and then stepping aside when that person is ready. And so it is with great pleasure that I hand the baton to Martina who will succeed me as MSC's fifth CEO. As you all know, Martina has been with MSC for over 3 years, and she knows every operational corner of the company. We've worked hand-in-hand during a critical phase at MSC, and she's been instrumental in shaping our operational improvements and our strategic growth initiatives. The board and I have the utmost confidence in her and we look forward to seeing her build on the momentum that's seen in our recent results and to provide a very bright future for MSC. I'd like to thank everyone on the call for your friendship and your support over the years. It's been a pleasure working with each and every 1 of you. Martina, I'm going to turn it back over to you to close the call. Martina McIsaac: Thanks, Erik. First and foremost, on behalf of all of us at MSC, I would like to take a moment to acknowledge your extraordinary leadership and the lasting impact you've had on the company. Over our nearly 30 years here, you've guided us through remarkable growth in transformation. And Erik, your leadership means a great deal to all of us. It has shaped the company we are today. Personally, I would also like to thank you and our Board of Directors for your confidence in me and for this opportunity to continue driving MSC's growth and operational performance. During my time leading our day-to-day operations for the past 3 years, I've been deeply engaged listening to our associates, our customers, our suppliers and our shareholders and this has helped shape the strategic initiatives, which are starting to be reflected in our results today. With these building blocks and a strong leadership team now largely in place MSC is set to achieve new levels of growth and further strengthen its leadership position. I could not have asked for a better opportunity. As I look ahead and prepared to step into the CEO role on January 1, our focus will be on value creation, maintaining our recent growth momentum and delivering a balanced capital allocation strategy. all while living up to our core values. I believe this is possible by turning our attention to 3 key areas. First, we must harness the incredible commitment of MSC's talented associates to strengthen our culture. We want to raise our own expectations and inspire curiosity, self-responsibility and a spirit of continuous improvement. Second, we must build on the momentum from the initiatives that have resulted in a return to growth you see today. We do this by executing on our recent organizational changes to drive disciplined sales excellence and a relentless commitment to customer experience. And third, MSC needs to deliver on its commitment. We must bring productivity and consistency to our everyday work and use data to drive speed and accountability through our operating system. I could not be more excited to step into this role, and I look forward to building stronger relationships with everyone on today's call. And with that, please open the line for questions. Operator: [Operator Instructions] Your first question for today is from Ryan Merkel with William Blair. Ryan Merkel: And great to see the inflection in the business and, of course, to Erik and Martina congrats on the new roles. My first question is just on gross margin, the 30 basis points of the negative price cost. I don't recall ever hearing Erik, a surge in supplier price increases and costs working through the P&L sort of faster. Can you talk about what sort of happened there? And then how you addressed it. It sounds like you raised prices a bit more. Erik Gershwind: Yes, Ryan, so I'll start, and then I'll turn it over to Martina just to provide some historic context. You are correct that this is unusual. And obviously, you and I together have seen in this industry a lot of inflation cycles. This 1 was has been a fairly unique we look back, the concentration of increases that we saw really in a very short window of time was unusual, even unusual relative to a post-covid inflation period, which had also been historic. So I do think it's played out a little differently from prior cycles. I'm going to turn it over to Martina to talk about how we're handling that, and we're encouraged about what we're seeing in a bounce back in Q1. But I'll let Martina talk in a little more detail. Martina McIsaac: Yes. So Ryan, the 30 basis points, I was price behaved exactly as we expected. We were very pleased with the work that our team did. Price contributed 170 basis points right on our forecast, and we were able to work with customers. I think you heard in Erik's prepared remarks, customers are understanding of what we're doing and why we're doing and we're helping them navigate a very uncertain time. Cost, to give you a little bit of context of what Erik just said, we took a price increase at the end of June. So sort of between mid-June when we lock that increase in the end of August, in those weeks, we took more inflation than we took in 9 months post COVID in 2022. So that kind of gives you a feeling for scale. And it was both the number of increases, the changes in these increases, the changes in supplier behavior compressed lead times. So we amassed this amount of inflation in the business, and we had committed to pricing stability, so we did not plan to take another increase until Q1. So we didn't react and we have now since taken, I think, the right actions in Q1 gross margin is restoring. We headed into the quarter with a headwind on price cost. We will exit the quarter in a much better position. And I think we have taking a hard look at our processes. When you think about where we want to take the company, I think good, we're happy with the accountability and the way our team reacted in September. But this is a great example of where our operating system where we could have where we need increased visibility because we would have taken more price in the quarter. Ryan Merkel: Got it. Okay. Very helpful. And then for my follow-up, I heard you say mid-single-digit revenue growth was achievable this year if you just use the sequential and then 20% incremental margins. So that's great to hear. On the 20% incremental margins, I know you're not giving specific guidance, but are you expecting to have gross margins sort of up year-over-year given initiatives and then SG&A as a percent of sales, do you think that you can work that down year-over-year because you talked about some productivity and then maybe leveling off of the cost increases. So a little more color there on what your expectations would be helpful. Martina McIsaac: Yes. So let's start with gross margin. I think we've taken the price increase actions now in the first quarter. We expect to be price cost stable over the cycle and stable through the rest of the year. I think, obviously, our best opportunity is to accelerate growth and leverage our cost structure, but we do have a very healthy pipeline of productivity projects that will continue to build through the year. And so we're looking we're expecting incremental margins in the teens in the first quarter, and we expect that to build through the year. Ryan Mills: And Ryan, just to give a little bit more perspective on that incremental margin commentary, if you look at where we ended up at the fiscal year and at a mid-single-digit growth assume gross margins stay stable. It implies roughly a $30 million to $40 million step up in OpEx. We feel pretty comfortable achieving that where the business currently sits today. Operator: Your next question is from Tommy Moll with Stephens. Thomas Moll: I wanted to ask about some of the seller effectiveness KPIs that you updated us on today. customer touches sales per rep per day both moved up significantly this quarter. What's behind those inflections? And what inning are we in, in terms of some of the operational changes that you've made and the improvement that they can drive going forward? . Martina McIsaac: Yes, absolutely. So we're in the I'd say we were in about the third inning. So we've got taken the first steps, and I'm really excited about [indiscernible] join the team to take the next steps we have a sales management process in place now that looks at a whole range of leading and lagging indicators, and that is different by role and by level. If you boil it up, the 2 things that we look at are how often are we in front of the customer as a leading indicator, we need to be on the plant floor in order to drive growth. And then we're measuring sales per rep per day. So we'll continue. I I believe sales is a science. There are fundamentals that need to be in place. We've taken the first step, which is really around good territory design. We have to make sure our sellers are pointed at the right potential, and we'll continue to optimize as we move forward. Thomas Moll: I wanted to follow up with a question on macro. Erik, I'm looking back at some of your comments. I think you talked about some of your verticals you're seeing some firming up, maybe even some pockets of improvement. It's hard to parse though because clearly, you have some internal initiatives that are helping on the core customer side that may not apply ex MSC. And if we look at the national account data, down again quarter-over-quarter. And I think the comment there was that's primarily a macro phenomenon. So there's a lot of speculation in the market about where we have potential for some kind of short-cycle recovery. I'm just curious on your thoughts about how we can parse the results today and better understand the macro environment. Basically, the question is, how much of this is self-help where you're clearly benefiting versus a broader macro, where there's still some acute challenges. Erik Gershwind: Yes, Tommy, it's a really good question in a very murky environment. I think the headlines that we were trying to get across this morning are a couple. One is, I would say, I wouldn't necessarily call things firming up, but we have pockets and end markets that are meaningful to us that we would refer to as stabilizing. So take heavy machinery and equipment, ag-related end markets where things have been really soft for the last couple of years. And it's not like things have inflected that much positively, but they're at least stable. So that, in a sense, is up from where we've been. What I would say is you then have pockets, Tommy, of, look, there continue to be pockets of strong growth, i.e., aerospace but also there remains some pockets of acute softness. So a great example of that. I actually think you called this out in your note, is heavy truck. That would be an example of an end market that when we talk about the influence on our national accounts program would be weighing us down. So as it relates to national accounts. I would say we're seeing some encouraging signs here in September and October. We definitely so the numbers we shared slightly down year-on-year for have turned positive in September and October thus far. You can imagine October, especially with public sector moving from healthy positive to negative with the shutdown, core and national accounts actually are doing better and better. So I think that's turning. But overall, stable look, an overhang of uncertainty that's there. If you're trying to parse out how much of this is macro versus micro, there's probably some of both going on, Tommy. I would say, hopefully, you could hear in our prepared remarks, we're encouraged by what's happening in the core customer and particularly is probably more self-help and micro than it is macro. Obviously, there's a little bit of price benefit, too. But clearly, when we track back the inflection in the improvements, they do go right back to the initiatives that we've been talking about now and what got put in place sort of midway through our fiscal year with the website upgrades and marketing. So I think that part of it is a good deal of self-help. And then I described the rest as stabilizing with still an overhang of uncertainty. Ryan Mills: And Tommy, maybe where you can see a little bit of that self-help if you think about the core customer consecutive months of year-over-year growth. And then you look at the MBI, it still remains below 50. So that's starting to break that trend a little bit might show some of that self-help and that shining through. Operator: Your next question for today is from Chris Dankert with Loop Capital Markets. Christopher Dankert: I guess I just have the congratulations to both Erik and Martina here. I guess, Martina, on your comments around the level of price increases we've taken here being on par with 2022, I guess, does that imply that we're talking about 5 points or more of pricing in 2026. Can you kind of give us some context for how we think about pricing into the new year? Martina McIsaac: Yes, I think it's so uncertain. I don't know that I can give you a good answer on that. I think we our intention is obviously to meet the inflation as it comes. I think we've done that now with our actions in Q1 but it's so uncertain, I really I don't know what to tell you. Ryan Mills: And Chris, what I would say is if you think about where we the price increase we put at the end of June, low single-digit range, we talked about another low single-digit increase in in 1Q. So if you assume 1.5%, 2%, you're in that 4% range. And as we said, we'll make additional pricing moves as warranted. . Christopher Dankert: Got it. That color that's really helpful. And then I guess just on the kind of $30 million to $40-ish million of SG&A growth in the new year, and again, obviously, that's something to change, but does that assume digital investment and marketing investment are kind of leveling off here? Maybe kind of walk through some of the components of what you're thinking about for SG&A growth? Erik Gershwind: Yes, Chris, so when Ryan referenced that, that sort of ties back to the idea of how we get to a roughly 20% incremental margin and mid-single-digit growth. And really, what that's reflective of is the variable expense to service the growth, the normal inflation we experienced in the business, the investment spending that we do and then offset by the productivity that Martina is driving through the business. It does. So there are certain pockets of investments that we'll be leveling. So e-commerce is a good example of that, although we are we talked about a DNA step-up, that's part of it is our digital investments that are now value and improving core customer growth. I will call out, Martina mentioned in Q1, part of the OpEx build is a step-up in marketing expense so that would be an area where we're actually increasing investment, and we're doing it because we like the returns that we're seeing, quite frankly, it's part of the driver behind core customers. So as Martina mentioned, we're channeling those investments where we're seeing the highest return. Operator: Your next question for today is from Ken Newman with KeyBanc Capital Markets. Katie Fleischer: This is Katie on for Ken. I wanted to dig in a little bit more on the supplier price notifications. What's the risk that it's more difficult to pass these on to customers as we go through the year, especially if they accelerate, like I know tungsten prices are up a lot year-to-date. Just curious how you're thinking about that in the context of further increases from your suppliers? Martina McIsaac: Yes. Thanks, Katie. So far, we have been really pleased with the price realization. So I'm not I'm not worried that we're going to be able to pass it on in a constructive way with our customers. We're obviously working with them always to optimize their costs as part of our technical value proposition, and I think we're in a great place right now. So we were happy with price realization, and we continue to be we do see more inflation coming, obviously, and it is it will put pressure on us. But that part of the equation, I'm not worried about. Erik Gershwind: And maybe I'll just chime in Katie, funny, you mentioned 1 of the raw materials that obviously, we're keeping our eye on and we're hearing about from suppliers in tungsten. So's it's almost like there's a knock-on effect here from the tariffs which is out of the gate, what we've been experiencing from our suppliers is direct tariff-related inflation, and we do see bubbling, the knock-on effect being impacts on certain raw materials that are drivers of the products that we sell. So tungsten is a great example for cutting tools. As Martina said, our experience with price realization has actually been quite good. Should there be further inflation? If tungsten pricing sustains, I think you're right, we would expect more pricing from suppliers, it's an unknown. But if it does, we would and we'd expect to pass it along. One of the things we tried to highlight in the prepared remarks, customers are understanding right now because the headline everything is going up. The key is, number one, we have to be transparent about it, which is why Martina and team made the choice to stick with our pricing cadence and not react in Q4, being clear and transparent. And the other is the other side of the conversation is how are we as a distributor, bringing productivity to our customers. And that's something that's right in our sweet spot. So for all those reasons, if the inflation does sustain in this uncertain world, we do feel confident in the ability to pass it along. Katie Fleischer: Great. That's really helpful color. My follow-up is regarding the government shutdown. How do we think about any impact year-to-date from this? I know the lower end of your guide implies that it should last through the remainder of 1Q. But any way to think about what you've seen year-to-date within the business? Martina McIsaac: Yes. I'm sorry, you broke up in the middle, Katie, but I think you're asking how do we see the government shutdown impacting the business? What are we forecasting? So we had as you heard in the prepared remarks, we had a very strong fourth quarter in the public sector, and that growth continued into September. We've seen some softening now with the shutdown. That will have a positive a small positive mix effect. We don't expect that to be more than about 10 basis on our margin. And the outlook that we gave really is predicated on both ends of the scenario. So the high end of our growth range if the shutdown ends and the low end of our growth rate if the shutdown continues to the end of the quarter. Erik Gershwind: And then, Katie, the additional color I'll add there is just who knows when the shutdown is. But 1 thing we can be pretty sure at some point, it will end. And as I look back on my career in some of my recent years here, 1 of the things really proud of is the performance of the public sector team. I mean, they continue to deliver and to outgrow markets and to take market share. And we don't see any of that changing. Obviously, Martina mentioned, we went from double-digit growth in September to negative in October. That's just a reduction in spend. So the exciting thing for us is, at some point, that restores. We expect our share capture to continue. And then if our momentum in core and national accounts continue and public sector goes back to doing what they've been doing for a while, it creates a potentially encouraging picture. Operator: Your next question is from Patrick Baumann with JPMorgan. Patrick Baumann: I'll echo comments from others, congrats Martina on the new role. And good luck, Erik, it's been great working with you over the years. I appreciate all the help. So on the OpEx side, maybe I missed this, but it looks like the head count that you report in the earnings deck came down a bit at year-end. Just wondering what drove that? And then what's the outlook for head count in, I guess, fiscal '26. And then on the marketing side, wondering if you could give some perspective on where your spend levels are today and where you think you might need to take that to sustain better results that you're seeing currently in the core? Martina McIsaac: Okay. Thanks, Patrick. I'll take the head count piece. So our cost structure is too high right now for the size of our business. So obviously, the best and the highest way to remedy that is for us to accelerate growth, and we're at full speed ahead on those initiatives. But in the meantime, we're taking a look at how we perform work, and we're taking a look at performance. And so what you see in those head count numbers are 2 sets of actions. One of them was a reduction force in our sales force. I believe strongly that we owe our sellers good territory design. So we point them at the right potential we owe them a strong sales management process with clear expectations and good coaching and when you put those 2 in place, you can fairly and quickly assess performance. So we took out our underperformers and our sales territory optimization, just moved right in. And that's why in the prepared remarks, we told you we're actually covering more customers more effectively with fewer people. I'm very happy about that. And then on the other side of the business, which is the rest of the head count change, we have an operating system, same thing. We're setting clear expectations. We know how to measure performance, and we action. Asking me about head count for the rest of the year. I mean, we will continue to self-help, and we'll continue to look at our processes as we go forward. Erik Gershwind: And then maybe Yes, I'll take the marketing, Pat. So what I'd say there is we're at our Q1 levels, obviously, we're going to be at a level that's up from where we were running in fiscal '25. And Hard to say, to give you a clear outlook. And the reason it's hard to say is our investment in marketing, the beauty about the way we're investing, number one, it's been a driver of the core customer we see the return profile on our investments relatively quickly. And so that number will be fluid based upon the returns that we see. So put another way, if we continue to see the returns in the form of improving growth rates with core customers, will continue to ratchet up marketing. And if for some reason, those returns subside, you'd see us tone it down. But either way, it would be captured in our outlook on incremental margins. Patrick Baumann: Got it. And then a couple of cleanups. Just a follow-up on the government shutdown impact. Can you remind me like your federal exposure? I didn't think you had like a big exposure to federal government. So I'm just wondering why you saw the slowdown in sales in public sector from, I think you said double digit to negative in the October period. Ryan Mills: Yes, Pat, our government exposure is about 2/3 of federal and more weighted towards military and defense, just to give you some color around that. Patrick Baumann: So are you seeing pullback in military like where in federal are you seeing pullback. Erik Gershwind: We're seeing so the pullback from September to October was pretty much all in federal, Pat. And what I would say, it was not I mean I won't get too specific here. It was not across the board. But there were pockets the negative in October is an average across our roughly if we're a 10% public sector, I'm rounding here, but around 7% being federal. It wasn't down consistently across the board, but we saw pockets of federal that are off like 50%, 60%, where there's clearly no sign of market share loss. So yes, we did see a pretty quick drop. And look, again, at some point, that's going to reverse end and reverse. Patrick Baumann: Yes. That makes sense. And then last cleanup, just on price. Can you give any color on any particular product categories that stand out in terms of the increases you're taking, whether it's are you seeing more inflation in metal working in certain MRO products and exclusive brands? Any color on the pace of price inflation among those different categories. Erik Gershwind: Yes, Pat, I would say it wouldn't be shocking to you as to where basically the more you get to things that come out of China and the more you get to things that are made of steel the more inflation we're seeing. So for instance, fasteners and our OEM business are seeing really high levels of inflation. Some categories like safety, if we've done a lot of sourcing Asian sourcing, China sourcing, we'd be seeing it. So it wouldn't surprise you. Interestingly, some, of course, in our private brands. But remember, 1 of the things that we've been talking about, a good percentage of our private brands particularly in cutting tools are made in U.S.A. So those have been shielded and that's been another kind of quiver in our marketing arsenal, if you will, is focused on our maiden USA offering. But it wouldn't be shocking where we're seeing the increases. Operator: Your final question for today is from David Manthey with Baird. David Manthey: Congratulations to Martina. Erik I'll for my fair well I see you in Chicago in a few weeks here. Yes. So my first question is, you mentioned direct ship orders. And I guess, I'm just trying to get a read on what percentage of your sales does that represent today? And maybe if you could outline the types of products that are primarily affected by direct ship. Erik Gershwind: Yes, Dave, I'll take it. So we don't really break out specifically direct ship orders as a percentage of sales. I'll tell you it is the minority but particularly, it's grown in recent years as we've penetrated customers more and more. whether it's our implant program, whether it's some of our public sector relationships where we're doing more and more sourcing and value add for a customer. So typically, as those programs ebb and flow, so goes our direct ship volume. So I don't think there's anything sort of structural systemic that I call out, like if you're looking forward, is something to note as a major headwind or tailwind, but we did see and look, the team mentioned that sequentially from Q3 to Q4, our public sector business was up considerably. There's a correlation there. So when it comes in the form of public sector, you can imagine it's a lot of MRO product. more so than metalworking. And so that's a little color. But I wouldn't make that much of it for the future, but it did we brought it up because it was a piece of the 50 basis point gap versus where we thought it was a piece of the story. David Manthey: Okay. But it sounds like it's measurable. And if you're saying it's driven by government and implant or things like that, it does sound like we should see that continue to at least gradually move up over time, right? . Erik Gershwind: Yes, I guess, I mean, it has been certainly. But the 1 thing I would say to counter it is, remember, this is really if I look back over the past few years, you've had areas like implant and public sector growing and core or at least core growing at less than the company average. So counterbalancing would be if the traction we're seeing on the core customer continues, that would be somewhat of an offset. Ryan Mills: And Dave, if you're getting if I think what you're getting at, I don't think you would hear us call out the rec ship going forward when it comes to our gross margin performance. David Manthey: Okay. Fair enough. And then second, reshoring, are you seeing any benefits for reshoring at this point? And when you talk to your core metalworking job shops, are they relaying any optimism on that front? Or it's still vaporware at this point? . Erik Gershwind: So I would say if Dave, if the definition of reshoring is new plant build out, we're not seeing it. If the definition of reassuring is an existing global manufacturer that has capacity in multiple locations inclusive of the U.S. shifting manufacturing to the U.S. that we are there's tangible data points there, some of which were releases, I think, this week and last week. So that we're seeing, we're not seeing new greenfield build out. David Manthey: Right. Yes, I was thinking that if not necessarily that you're selling directly to that factory that's reshoring or expanding in the U.S., but your machine shops and the metalworking job shops might be seeing an increase in business as they're selling more product to domestic manufacturers. But yes, I don't know, I was just seeing if you're hearing anything along those lines. Erik Gershwind: I don't think we're seeing it like we're not seeing it in the numbers yet. I would say that there is there does remain some optimism about more production coming to the U.S. though. That headline is still there, right. Ryan Mills: Dave, I think about areas about auto. You heard some from some releases this week shifting more capacity manufacturing capacity into the U.S. I think as that comes to fruition, you'll start to hear some of that optimism trickle through into the job machine shops. Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Ryan Mills for closing remarks. Ryan Mills: Thank you, everyone, for joining us on today's call. Our next earnings call will be on January 7. In the meantime, we look forward to seeing you all at upcoming investor conferences. Have a good day. Bye. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the CBRE Q3 2025 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Chandni Luthra, Global Head of FP&A and Investor Relations. Please go ahead. Chandni Luthra: Good morning, everyone, and welcome to CBRE's third quarter 2025 earnings conference call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks, and an Excel file that contains additional supplemental materials. Today's presentation contains forward-looking statements, including, without limitation, statements concerning our business outlook, business plans and capital allocation strategy, as well as our earnings and cash flow outlook. These statements involve risks and uncertainties that may cause actual results and trends to differ materially. For a full discussion of these risks and other factors that may impact these statements, please refer to this morning's earnings release and our SEC filings. We've provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. Throughout our remarks, when we cite financial performance relative to expectations, we are referring to actual results against the outlook we provided on our second quarter 2025 earnings call in July, unless otherwise noted. Also, as a reminder, our resilient businesses include facilities management, project management, property management, loan servicing, valuations and other portfolio services and recurring investment management fees. Our transactional businesses comprise property sales, leasing, mortgage origination, carried interest and incentive fee in the investment management business and development fees. Before we begin, a brief technical matter. We want to note that we recently responded to a comment letter from the SEC regarding our presentation of net revenue. Going forward, while we will continue to provide supplemental information to help you understand the portion of our revenue that is pass-through in nature, our formal reporting will focus on gross revenue. I'm joined on today's call by Bob Sulentic, our Chair and CEO; and Emma Giamartino, our Chief Financial Officer. Now please turn to Slide 3 as I turn the call over to Bob. Robert Sulentic: Thanks, Chandni, and good morning, everyone. CBRE continued to produce excellent results in the third quarter. All 4 segments delivered strong growth and operating leverage, and we exceeded expectations we had going into the quarter. We often talk about our breadth and depth across asset type, client type, line of business and geography. This breadth and depth gives us scale that supports our strategy in many ways. These include recruiting from inside and outside the sector, developing integrated solutions for clients, making capital investments and creating an information advantage. Our scale is particularly helpful in driving growth in areas that are either secularly favored or cyclically resilient. This came through clearly in our third quarter results. The data center asset type and related client group provides a good example. We produced nearly $700 million of revenue from data centers in the third quarter, 40% more than in 2024's third quarter. This contributed to profitability in all 4 segments accounting for about 10% of overall EBITDA for the quarter. From a geographic perspective, Japan and India are particularly well positioned for sustained secular growth in commercial real estate services. We have large businesses in both countries, and in Q3, their combined revenue rose more than 30% to nearly $400 million. Given our results year-to-date and momentum in our business, we are raising our full year core EPS outlook to $6.25 to $6.35, from $6.10 to $6.20. Emma will discuss our outlook after she reviews the quarter's highlights. Emma? Emma Giamartino: Thank you, Bob. Good morning, everyone. Our third quarter results exceeded expectations across the board, highlighted by 34% growth in core EPS and 19% in core EBITDA. We delivered double-digit revenue gains in both our resilient and transactional businesses, underscoring the balanced strength of our business. Throughout my segment discussion, I will cite growth rates in local currency. This does not reflect the 1% to 2% FX benefit to the USD growth rates. As Chandni mentioned, we will no longer report net revenue. However, internally, we continue to focus on revenue excluding pass-through costs as our primary growth metric as we believe it best captures the value of the services we deliver to our clients. Now I'll detail our performance for each segment, beginning on Slide 4. In Advisory Services, revenue growth exceeded expectations, rising 16%, led by outperformance in both leasing and sales. Global leasing revenue rose 17%, accelerating from the second quarter despite a tougher year-over-year comparison. In the U.S., leasing reached its highest level for any third quarter, growing 18%. U.S. industrial increased 27% as third-party logistics providers continued to take more space and larger occupiers came back to the market. Data center leasing picked up materially, resulting in a more than doubling of revenue over last year. In addition, U.S. office leasing once again rose by double digits. Outside the U.S., APAC leasing was strong driven by India, Japan, while results were mixed in Europe. Our property sales business delivered 28% revenue growth. Like leasing U.S. sales saw strength in office, industrial and data centers. Outside the U.S., we saw particularly strong sales growth in Germany, the Netherlands and Japan. High-teens mortgage origination revenue growth was driven by an increase in origination fees, primarily from CMBS lenders, banks and debt funds. Advisory SOP grew 23%, reflecting strong operating leverage. Turning to our Building Operations & Experience segment on Slide 5, we saw 11% revenue growth. In the enterprise business, growth was driven by work for data center hyperscalers as well as new client wins and expansions in the technology, life sciences and health care sectors. Our local business achieved a mid-teens revenue increase, supported by continued growth in the U.K. and the Americas. Revenue in the Americas was up 30%, reflecting strong market share gains for this business. BOE SOP grew 15%, delivering operating leverage driven by continued cost efficiencies across the segment. Please turn to Slide 6. In the Project Management segment, revenue increased 19%, while pass-through costs rose 23%. We achieved broad-based double-digit revenue growth supported by the U.K., the Middle East and North America. Legacy Turner & Townsend revenue in North America has more than doubled since 2022, demonstrating the benefit of being part of the larger CBRE platform. And we see significant runway for further gains in this large, lightly penetrated market. Across client sectors, we saw strong activity with the U.K. government, reflecting a large national health care mandate and ongoing demand for hyperscalers for data center projects. This growth was slightly offset by continued softness from certain technology clients that are focusing capital spending on AI investments. Project Management SOP grew 16%, delivering operating leverage when viewed as a percentage of revenue excluding pass-through costs. In Real Estate Investments on Slide 7, segment operating profit was up 8%, in line with our expectations. In investment management, we raised $2.4 billion of new capital in the quarter and are on track for a strong fundraising year. AUM ended the quarter at approximately $156 billion, up $500 million for the quarter. AUM growth in the quarter was tempered by currency headwinds. Absent these headwinds, AUM increased $1.3 billion. In development, operating profit also met expectations. Our strategic land acquisitions in recent years coupled with our land development and entitlement capabilities position us to capitalize on demand for large data center development sites. We expect to monetize several of these sites later this year or next year. We continue to believe our development portfolio has more than $900 million of embedded profits that will be monetized over the next 5 years. As always, the timing of asset monetization, especially between quarters, can be difficult to predict with precision. Now I'll turn to our balance sheet and capital allocation on Slide 8. In keeping with our expectations of better full year performance, we now expect to generate approximately $1.8 billion of free cash flow for the year. Net leverage stood at 1.2 turns at quarter-end, and we continue to expect to delever through the end of the year. Please turn to Slide 9. As Bob mentioned, we've raised our full year core EPS guidance to $6.25 to $6.35, reflecting our outperformance to date and confidence in our fourth quarter pipeline. Our outlook includes contributions from the data center site dispositions in our development business. The midpoint of our new guidance range reflects 24% growth and would be more than 10% above our prior peak EPS. This is a notable outcome produced within only 2 years of the commercial real estate market trough. With that, I'll turn the call back to the operator for questions. Operator: [Operator Instructions] Our first question today is coming from Anthony Paolone from JPMorgan. Anthony Paolone: Just have a question as we start to look to the rest of the year and just the strength that you had in 3Q. Do you feel like anything got pulled forward from the fourth quarter, or perhaps how we should think about when or in what business lines do comps start to get more challenging or start to normalize from these pretty high levels of growth? Emma Giamartino: So Tony, we haven't seen a significant pull forward across our segments. We are seeing strong momentum. But as you noted, we are starting to come up against some tough comps. So going through each segment, starting with Advisory. On the leasing front, we are -- we had a tough comp in Q3, and that continues in Q4. On the sales front, that you've seen that pick up pretty significantly in the third quarter, going into the fourth quarter, we continue to see strong activity. But just as a reminder looking against 2024, Q3 sales growth was 14% and Q4 sales growth was 35%. So that growth rate is going to start to decelerate somewhat into Q4. And then on the Project Management front, I do want to note that we have a very tough compare in the fourth quarter. In the prior year, our SOP grew 30% in the fourth quarter. Anthony Paolone: Okay. And then just my follow-up, can you maybe comment on the M&A pipeline, especially given the free cash flow? And also whether that had any impact on not buying back stock in the quarter? Emma Giamartino: So Tony, our capital allocation priorities remain as they've always been. We prioritize M&A and co-investment into REI, and we use the remainder of the free cash flow that we generate for share repurchases. We do continue to believe that our share price is undervalued, and we'll buy back shares in the absence of M&A. As you know, I can't comment on particulars of what we're targeting, but we continue to focus on the areas of our business that are resilient, that can benefit from secular tailwinds. And we're looking for targets that are extremely well operated that can really benefit from being a part of the CBRE platform. We're extremely patient to find the right deals. We're actively advancing our M&A approach, improving our integration, improving our identification of new deals. And we're very confident that we will find the right targets over time. Operator: Our next question today is coming from Julien Blouin from Goldman Sachs. Julien Blouin: Congratulations on the quarter. Bob, I wanted to ask you, Advisory sales results were very impressive again this quarter. But just taking a step back, there appears to still be this latent need to transact from both older vintage real estate funds that need to return capital to investors to start their next fundraising cycles, and then more recent vintages are still sitting on a lot of dry powder. So I guess, taking stock of all that versus what's sort of happening in the macro, where are we in the CRE transaction market recovery? And how much more room is there to run? Robert Sulentic: Well, we think about that a lot, as you would expect, Julien. And I think in general, we would say that we expect a longer, slower recovery in the sales part of our business than we've seen historically. And we're early into that recovery. We expect it to run for some time. Obviously, when -- I mean, September when interest rates ticked down, sales activity picked up. But we do have strong pipelines. People talk about pent-up demand. There's pent-up demand on both sides. There's pent-up demand from buyers. You mentioned the capital stores that the real estate investors have. And there's a lot of owners of assets that are ready to sell the assets. And the gap between buy/sell expectations has closed pretty significantly. So we expect a nice, strong, steady recovery investment sales over the next couple of years. Obviously, if something happens in the micro -- macro economy that would interrupt that in one direction or another, it could change our expectations. But that's where we are right now. Julien Blouin: Okay. And Emma, maybe following on from Tony's question, turning to the fourth quarter, as you mentioned, there's tougher year-over-year comps. But I guess, how would you describe the deal activity so far in the fourth quarter? How do pipelines compared to this time last year? And then also if I could take another one, on the Advisory segment. It looked like maybe the incremental margins this quarter were a little bit lower. Is there something happening maybe on the hiring side? Emma Giamartino: So to take your first question, pipelines are strong. We're continuing to see strong activity in the beginning of the fourth quarter through October, both on the leasing and sales side. I do want to say that we provided a guidance range up to $6.35, and that largely incorporates the flow-through from outperformance in the third quarter. But if everything goes as we're expecting, if transaction activity continues as we're seeing right now and as we expect, and at these development sites that we have a high confidence we'll monetize this year to turn out, we will be at the high end of our EPS range. On the margin side within Advisory, our incrementals were a little over 25% this quarter, which is lower than what we've seen earlier in the year. And the major impact there was an increase in incentive comp because of the deferments of the overall segment and business. Operator: Your next question is coming from Ronald Kamdem from Morgan Stanley. Ronald Kamdem: Just sticking with the Advisory segment a little bit, clearly, where the outperformance came this quarter. Maybe can you talk a little bit just about sort of the talent in terms of people? Does this -- are you appropriately staffed? Do you want to hire more people? What's competition like? Just sort of color on how you're thinking about this gradual recovery and your positioning. Robert Sulentic: Well, again, something we focus on all the time. And I would say we are appropriately staffed, but we're also adding where we find the right talent. We've got capacity in our leasing brokerage team to do more, and we've got considerable capacity in both our sales team and our mortgage origination teams. So we have had a really good run with talent across our brokerage business, but in particular, in the leasing business. And when you look at -- and we've taken considerable market share over the last couple of years and improved our leasing product. And what's gone on there is we've, around the world, made significant upgrades to our local leasing leadership teams. We have a managed brokerage platform that we use that's supported by a technology tool that helps us identify where in the market -- we have holes in our coverage, and we aggressively try to close those holes. We also use it to manage our interface with our clients. The tools we support our leasing business with, the technology tools, the data we support our leasing business with, the research we support our leasing business with, the advisory tools like workplace design, labor analytics, have allowed us to move ahead in that business, not only in landing new business, but in landing new talent and retaining the talent we have. So we're in a really good place with our brokerage talent. We've made some significant recruits on the investment sales, and especially on the mortgage origination side of the business also. So we're well-staffed. We have plenty of capacity in that staff, but we're also looking to add talent. Because as we've already talked about on this call and in our prepared remarks, the market is strong and our pipelines are strong and we are expecting growth. Ronald Kamdem: Helpful. My second -- my follow-up, I guess, would be, just going back to the Project Management business. I think we noticed you didn't break out Turner & Townsend versus the legacy. Just any comments there? And then if you could just update us on the thoughts on the margin opportunity sort of near and long term, that would be helpful. Robert Sulentic: Well, the reason not to break it out is because we're now well into that integration and the operating model that supports that business has been pretty much integrated around the world. And not surprisingly, the operating model we're using is the Turner & Townsend model, which we think is the industry's best, a big part of the reason why we made that deal in the first place. Now we're starting to move on to integrating the financial platform around the world, integrating human resources platform, as we call, the people platform around the world, et cetera, technology platform, that's an area where we'll use the CBRE platform. And so we expect that part of the integration to yield some cost synergies for us next year. I will say, and I've personally been involved in the interface with our clients in a number of areas, the market's recognition of those 2 businesses coming together and the new capability we have is starting to become pretty noticeable, and it's showing up in our new business wins. And an area where it's particularly showing up in is clients we already had that gave us a certain type of project, that are now giving us bigger, more complex projects and giving us cost consultancy work because of this combined capability. But all of that leads us to now look at that business as one integrated business going forward. Operator: Our next question is coming from Stephen Sheldon from William Blair. Stephen Sheldon: Just starting on data center monetization. It sounds like you're seeing strength in that class across a lot of different service lines. So just as we think about the next 2 to 3 years, where do you see the biggest avenues for CBRE to grow supporting data centers? And should investors be expecting monetization around data centers to continue becoming a bigger part of the overall business mix versus the 10% of EBITDA that you called out this quarter? Robert Sulentic: Well, Stephen, we expect data centers to be around 10% of our earnings this year, and more next year. And it's really important to know what's going on. There is this big bump-up in activity right now, and we're enjoying the benefit of that. I'm sure everybody that's in the real estate business or the data center services business that reports earnings is going to comment on that very favorably. But in addition to enjoying the benefit of the current pop in activity, we are building businesses that we believe will be sustainable as the cycle with data centers unfold. And inevitably, it's going to be a big build cycle over the next 5 years, maybe longer. And then beyond that, it's going to be a big operate cycle. We don't, except in an indirect way through our investment management business, we don't invest in a big way in the ownership of data centers. We do have significant land investments within Trammell Crow Company. And Trammell Crow Company's real strength, and has been for years, is they're phenomenal at identifying, acquiring, entitling and improving land sides. And they've turned their energies in a significant way to data center land sites, and we expect to see significant monetizations that will be at the front end of that cycle, the build part of that cycle. Turner & Townsend does a lot of Project Management work, cost consultancy for data centers. That will extend on for years. And as data centers then go into a redevelopment phase, upgrade phase, et cetera, that project and program and cost consultancy work will continue on. So that's a big, enduring opportunity. We have a very large data center brokerage business in our advisory business. And we finance them, we sell them, we lease them. We've coordinated our -- we've put the Chief Operating Officer of our Advisory business over that effort to coordinate it, and we see that as an enduring business. And then within our BOE segment, we have 2 lines of business that we're bringing together. One is the management of data centers. And we've talked about that, we manage something like 800 data centers on an ongoing basis. And then the small project improvement work in data centers inside the white space with the business we acquired called Direct Line. We're merging those 2 and forming a digital infrastructure services line of business that will carry separately within BOE. And that business is particularly well suited to perform well, not only now as data centers are being built, but we think that the actual operation of data centers and refit of data centers as that life cycle evolves will really play to that business. So we're enjoying the benefit of the big pop that's going on in the short run, but we're building businesses, similar to the strategy we've had with our other resilient businesses, that we think will endure well into the future in data centers. Stephen Sheldon: Got it. Yes, very helpful context. It seems like there's a lot to be excited about there. Maybe as a follow-up, just as you think about CBRE's relationship with occupiers, I think you've been talking more about how you can create better touch points with them and hopefully drive more wallet share gains over time. So any update on what you're doing there and the time line, if some of these things work, the time line to potentially see wallet share gains? Would large occupier prior clients pick up even more? Robert Sulentic: Our relationship with occupiers is evolving pretty rapidly right now, and our view as to how we serve the big occupiers has evolved. A big part of that is driven by our acquisition of Turner & Townsend and our acquisition of Industrious. And when you look at what we provide to big occupiers, we provide things for them across all 4 segments. So obviously, in BOE, we provide facilities management. And obviously, in the Turner & Townsend or the Project Management segment, we provide program management, project management, cost consultancy. So you look at where those 2 businesses are today where they were historically, we went out and spent the better part of $1 billion to buy an experience business, Industrious. We now have that as part of our facilities management as part of that -- part of our occupier offering. And it doesn't exist elsewhere in our segment, and it is proving to be a real advantage as we go to market in that business. We now have a Project Management capability and a cost consultancy capability to do a different kind of project work than we or others in our sector were able to do previously. And that is appealing to our clients. In our brokerage business, we've talked already today about the gains we've made in leasing. Leasing is a huge business for us. Leasing is a very, very important part of what we do for occupiers. That business has pulled away from where it's been historically. And then in our development business, in Trammell Crow Company, we have something that's important to the occupiers that doesn't exist in a significant way elsewhere in the segment, and that is our build-to-suit capability. And we do a lot of build-to-suit work for big occupiers around the world, particularly here in the U.S., but some around the world. And what we've decided to do in that business is to go at our clients and say, "We can offer any 1 of these 4 things to you in a way that we think is unique and advantages you." And if you want to buy them that way, we'll sell them to you that way. And if you enjoy the benefits of what we sell you because it's better than you can get elsewhere, we know you're going to buy the other stuff. And we've learned a lot of these clients like to buy that way. They want to just buy facilities management or project management or build-to-suit services. But the cross-sell that comes is, when they're satisfied with each of those, they're more likely to buy the others. And then in certain cases, we will have clients, and we've had some recent experience that's been very compelling, that will say, "You know what, we want to buy some of this on a bundled basis." And that's how we're thinking about that today. Operator: Next question is coming from Alex Kramm from UBS. Alex Kramm: Yes. Not sure if this is on the same topic, but maybe can you just talk about your BOE outlook and pipelines a little bit more. I know earlier this year with all the tariffs, et cetera, I think there was maybe some uncertainty and maybe things took a little bit longer. So just wondering how pipelines have trended and if you think things have generally normalized on the BOE side. Emma Giamartino: Yes, absolutely. I'd say normalized and improved even beyond that. So within our BOE segment, especially within enterprise, our pipelines are very strong, and we're expecting to have a volume of sales that is at a significantly elevated level. As you mentioned, Alex, there is a decent lead time between a sale and when that shows up in our revenue when that contract is converted because these are very large contracts. And so that elevated volume of sales should start to show up in our BOE revenue towards the second half of next year. Alex Kramm: All right. And then a very quick follow-up. On the data center divestment, I don't think you've sized that. Can you just -- the one that potentially is going to slip into 2026, what -- how should we think about the EPS impact, if it comes through or not? Emma Giamartino: So think about the range of outcomes for EPS that -- we've cited the $6.25 to $6.35. The bottom and top end of that range is really dependent on the development monetization. Operator: Your next question is coming from Steve Sakwa from Evercore ISI. Steve Sakwa: Yes. And I just want to maybe go back on the buyback. I just am trying to understand if maybe there were some deal activity that was maybe being kicked around internally that, I guess, precluded you from buying back stock in the third quarter or that was more of an active decision kind of not to buy back stock in the third quarter? Emma Giamartino: I will say it was not an active decision not to buy back stock. We feel, as we've always said, we feel that our share price is undervalued. We continue to believe that it's undervalued. And so when we have cash flow available, or in our projections, it's available, we will be buying back shares. But as you know, it's difficult to talk about our M&A pipeline or our activity there until we get something done. Steve Sakwa: No. Understood. And then, Bob, I guess, a question that we get a lot is around the facilities management business, and I guess, maybe the ultimate TAM of that business, and I realize, depending on how you size it, it's a couple of billion dollar business. But how do you think about the ultimate TAM of facilities management or how do you think about your market share in that business globally? Robert Sulentic: Well, Steve, we've forever tried to measure that TAM, and you can get some pretty crazy large numbers. What I will say is we've consistently expanded our TAM. So the work we do with data centers definitively has expanded the TAM. We operate a lot of data centers and we're positioned to operate more and that's a growing asset class. The J&J acquisition, which moved us into government work in a bigger way in the hospitals expanded our TAM. And of course, that dimension is very, very large potentially. The Direct Line acquisition, where we do work inside the white space and data centers, expanded our TAM. So right on down the line, the things we've done in that business have expanded our TAM. And each one of these, depending on how you measure it, could have a huge impact. That's one of the things that has made us increasingly optimistic about our ability to grow CBRE is, A, we've expanded our TAM in a way that we think is pretty hard for others to do; and B, we've grown into that space as we've expanded it. So I would tell you that we've done all kinds of work with our strategy group in-house. We've done a bunch of work with very, very top strategy people outside. And there's not a single view of that that would suggest we're anywhere near bumping up against our total addressable market. And we believe we can continue to expand that market. Operator: Your next question is coming from Seth Bergey from Citi. Seth Bergey: I guess my first one is back on the data center development side. So do those have access to power, or is that kind of a constraint there? Robert Sulentic: Well, that is without a doubt the constraint, and it's become more of a constraint. It's a constraint for anybody that's doing land work in data centers. It's a constraint for the co-locators. It's a constraint for the hyperscalers as they try to expand. And what we do is we put ourselves in a position by acquiring land or securing control over land, getting entitlements to that land, making certain improvements to that land and putting that land in a position where the ultimate users of the land, who are often hyperscalers, are well positioned to work with the utility authorities to gain power. And that's really how our strategy in that part of the business works. And it tends to work well. But it's very competitive to get power. Seth Bergey: And then I guess my second one is just back to the leasing. Is the -- specifically for office, is that -- are you seeing broad-based kind of activity there? Or is that concentrated in like more gateway cities or different classes of office there? Or any color you can add on the pipelines you're seeing there would be helpful. Robert Sulentic: Well, it is broad-based, but it hasn't been the same every quarter. So last quarter, we talked about secondary and tertiary markets being relatively strong compared to the gateway markets. We were a little surprised by that. And I got a question or we got a question at the beginning call about what we were surprised by. But I think what we were surprised by in the third quarter was the resurgence on a relative basis of the gateway markets. They were really strong. New York, in particular; San Francisco, in particular. But if you look over the course of the last 12 months and you look at our pipelines, I think our expectation -- it's fair to say our expectation is you're going to see broad-based growth in office building leasing. And we don't believe we're borrowing from the future. What we believe is -- there's a lot of different ways to look at it. People still talk about return to the office. We don't really talk about it that way. I think what I would say is it's more of a return to the mean, number one. In other words, COVID is so far in the rearview mirror, all the arguments pro and con on office space have kind of disappeared and people are thinking about it more like they thought about it before. But secondly, and this is true of real estate in general, which is another reason why we're so excited about our opportunity, real estate facilities have become much more critical to companies than they used to be. And I spend so much time with occupiers, they're all talking about the importance of their real estate to their cultures, to their -- the way their people work together, to their productivity. That is a very big theme out there today. If you go out and look at our warehouse business, our distribution center business, it is so much more strategic to our clients than it ever was historically. I started leasing warehouses, they were just big shell buildings, not nearly as big as they are now, but they are just big shell buildings where people stored stuff. And you go in to those buildings now, they've got thousands of robots in them and they've got miles and miles of conveyor systems. The buildings are very technical, and they're core to what those companies do to serve their clients, they're strategic. So real estate has become a much more -- obviously, data centers, it's not even worth talking about, that's become so obvious. Real estate has become a much more strategic asset class than it used to be. And that's true of office buildings, just like it is other aspects of commercial real estate. Operator: Your next question is coming from Jade Rahmani from KBW. Jade Rahmani: To follow up on office, can you talk about the strength in the sector in the U.S. and if you're seeing the recovery being driven by Class A and Class A-plus premier workspaces plus new development that has robust leasing? Or if you believe it's becoming more widespread and that below Class A, Class B such assets, in secondary submarkets, is the next leg of growth that you see coming? Robert Sulentic: Yes. Well, what's going on, Jade, is kind of what we thought might go on a year ago. So when the very best main and main buildings get filled up and there's still demand for really high-quality space, then you see people starting to convert buildings that are of lesser quality to a higher quality. That's really happening here in Manhattan. The demand has clearly moved into secondary and tertiary markets where there are a lot of good buildings available, or at least were available, they're quickly going. And you are starting to see new development now. And I'll give you a perfect example, from our own business. So for years and years and years, we've had one of the very best office site in Uptown Dallas, and you can develop between 0.5 million and 0.75 million square feet of space on that site. And we've been sitting on that site. We own it on our balance sheet. We're not in a hurry to do anything with it. And we now have a couple of large users, high credit users, that are very interested in that site. Pretty good odds we'll go ahead and kick that site off and bring 500,000, 600,000 square feet of new prime Class A space into the market. And we're not the only ones doing that. Three years ago, if we were having this conversation or 4 years ago, that wouldn't be part of the conversation. But it is now. And if you look here in New York, some of the prominent developers are either -- have either announced new things. We'll be in that and we're confident what we know enough about sites that they will be announcing. And again, that's going on in markets around the country. So it's spread. It's spreading from Class A buildings to lower class buildings that are being upgraded, starting to see new development, and it's a very real trend. Jade Rahmani: And then on the industrial side, it had been oversupplied and dealing with, not just tariff uncertainty, but negative absorptions due to that excess supply. It seems like the market has clearly turned a corner. Could you comment on what you think drove the growth in the quarter? Robert Sulentic: Well, big leases in the best buildings. There's a lot of interest in those. And then on the smaller leases, in the smaller buildings, there were a lot of renewals. Those tend to be shorter leases, older spaces, second-generation spaces. So you saw that coming from both ends of the market. There has been a higher vacancy than usual the last couple of years. We know that. We think that the vacancy is going to start going down by midyear next year. And I think what's happening in part is these big sophisticated users, whose large spaces are critical to their business, have figured that out and are starting to take -- obviously, there's others that report their numbers in our sector that have done quite well in the last quarter and are expecting to do quite well going forward, and that's what you're seeing here. You're not only seeing that here in the United States, you're seeing it around the world. Jade Rahmani: If I could ask one follow-up, it would be on EBITDA margins. Are you expecting kind of steady-ish full year EBITDA margins going forward? Or do you believe that there's still areas of growth that -- areas of margin expansion beyond 2025? Emma Giamartino: So Jade, we look at our margins within our services segments. And as you know, the development margins are -- can be pretty lumpy. And so within Advisory, for the full year, I think we're very close to our peak margins, at least going back to 2019. And we think that that's a pretty healthy margin, and we expect that to be sustained. Within BOE, we're going to deliver, as you know, good margin expansion this year. And as Bob noted, across facilities management, property management, we're going to see more synergies next year. And so you should expect that margin to continue to increase. And then Project Management as well as those cost synergies start to come in. And so you should expect to see some incremental margin expansion going into next year. Operator: Thank you. We've reached the end our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Robert Sulentic: Thanks for joining us, everyone, and we'll talk to you next when we report year-end earnings. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Thank you for standing by, and welcome to American Airlines Group's Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. I would now like to hand the call over to Neil Russell, Vice President, Investor Relations. Please go ahead. Neil Russell: Thanks, Latif, and good morning, everyone. Welcome to the American Airlines Group Earnings Conference Call. On the call with prepared remarks, we have our CEO, Robert Isom; and our CFO, Devon May. In addition, we have a number of senior executives in the room this morning for the Q&A session. After our prepared remarks, we will open the call for analyst questions, followed by questions from the media. To get in as many questions as possible, please limit yourself to 1 question and 1 follow-up. Before we begin, we must state that today's call contains forward-looking statements, including statements concerning future events costs, forecast of capacity and fleet plans. These statements represent our predictions and expectations of future events, but numerous risks and uncertainties could cause actual results to differ from those projected. Information about some of these risks and uncertainties can be found in our earnings press release that was issued earlier this morning, form 10-Q that was filed with the SEC earlier this morning, as well as in our Form 10-K for the year ended December 31, 2024, filed with the SEC on February 19, 2025. Unless otherwise specified, all references to earnings per share are on an adjusted and diluted basis. Additionally, we will be discussing certain non-GAAP financial measures, which exclude the impact of unusual items. A reconciliation of those numbers to the GAAP financial measures is included in the earnings press release, which can be found in the Investor Relations section of our website. A webcast of this call will also be archived on our website. The information we are giving you on the call this morning is as of today's date, and we undertake no obligation to update the information subsequently. Thank you for your interest in American and for joining us this morning. With that, I'll turn the call over to our CEO, Robert Isom. Robert Isom: Thanks, Neil, and good morning, everyone. This morning, American reported an adjusted pretax loss of $139 million for the third quarter, or a loss of $0.17 per share. This result was at the higher end of the guidance provided in July and was driven by stronger revenue performance. We see that performance continuing and have adjusted our fourth quarter and full year guidance accordingly. I'm proud of the team's hard work and resilience throughout the third quarter. They executed well despite tough operating conditions. . At American Airlines, we're proud to be a premium global airline with an enduring legacy of innovation and a commitment to caring for people on life's journey. We've built an airline position to excel over the long term and are focused on delivering for our shareholders, customers and team. That said, we recognize there's significant revenue opportunity ahead of us and we're excited about the good work underway to accelerate our revenue growth and view that as considerable upside as we move into 2026. The revenue momentum we've seen and the opportunity ahead is a product of our sales and revenue management initiatives, scaling our new agreement with Citi, restoring capacity in our hubs, and using consistent improvements in the customer experience as a value multiplier to everything we do. Much of this foundation has been laid thanks to the efforts of our commercial team and Steve Johnson. Last year, I asked Steve to step in and lead the commercial organization to quickly stabilize and reenergize this part of our business. We knew we'd hire a new Chief Commercial Officer in the future, and I'm grateful to Steve for taking this on. . He and the team has strengthened our commercial position, and we're now in a great spot to make a transition. And today, we've named Nat Pieper, as American's new Chief Commercial Officer. Nat has more than 25 years' experience in leading commercial and financial teams at Alaska, Delta and Northwest Airlines, and most recently, the Oneworld Alliance. He is a seasoned airline executive who understands the complexity of highly integrated organizations. I've known Nat for more than 20 years, and he's exactly the kind of leader we want at American. He will officially join us on November 3, at which point Steve will return to his role as our Vice Chair and Chief Strategy Officer. So with that, let's talk more about some of the work that the team has delivered. Leading off with our focus on sales and distribution, we continue to build out our sales organization and are aggressively using our loyalty program to win back customers, especially in competitive markets. In the third quarter, we grew our corporate revenue by 14% year-over-year. This result is further confirmation that our sales and distribution efforts are being well received by our customers. Exiting this year, we expect to have fully recovered the revenue share that was lost by our prior sales and distribution strategy. We'll now shift our focus to growing our share beyond those historical levels, which we believe that, combined with revenue management investments and retailing optimization will produce significant value for the airline. Next, deepening our relationship with Citi and expanding our co-brand card portfolio will further the growth of our industry-leading loyalty program. We're excited for our exclusive partnership with Citi to begin on January 1. The teams at American and Citi have been hard at work, executing a successful cutover of our in-flight acquisition channels to Citi earlier this month. In addition, we've recently launched our new mid-tier Citi AAdvantage Globe MasterCard, expanding our card offerings to meet travelers at every level. Our partnership with Citi will provide more benefits to our customers and is designed to drive growth in our credit card acquisitions and penetration over the coming years. The upside is significant. As we approach the end of the decade, we expect remuneration from our co-branded credit card and other partners to reach approximately $10 billion per year. At that time, the incremental annual benefit to operating income is projected to be approximately $1.5 billion compared to 2024. On the loyalty side, active AAdvantage accounts increased 7% year-over-year in the third quarter with our highest growth in enrollments coming from Chicago, which was up approximately 20% year-over-year. AAdvantage members are more engaged, generate a higher yield versus nonmembers and are a key driver for premium cabin demand. In the third quarter, spending on our co-branded credit cards was up 9% year-over-year as customers continue to favor AAdvantage Miles as their preferred rewards currency. We remain focused on strengthening our network by scaling our hubs. We're proud of our hub network that we have with 8 of our hubs located in the 10 largest metro areas in the U.S. This year, our growth was focused on Chicago, Philadelphia and New York. American has a long history in all 3 cities with a base of corporate and premium customers that are loyal to the American brand. Our improved schedules, along with our new sales and distribution strategy and other product improvements are helping us win local high-value customers. Performance continues to track in line with our expectations. This targeted expansion will continue through the fourth quarter and into 2026 as we add more cities and more frequencies to improve our offering for customers. Our ability to grow capacity in premium markets will be further supported as we take delivery of new aircraft and reconfigure our existing fleet. These efforts will allow us to grow our premium seats at nearly 2x the rate of main cabin seats and grow our lie-flat seats over 50% by the end of the decade. Additionally, we're excited about the significant investments in airport infrastructure happening throughout our system, headlined by rapid construction of the new Terminal F and enhanced Terminals A and C at DFW. When complete, DFW will be a world-class facility and the largest single carrier hub in the world. All of this is intended to deliver a consistent and elevated travel experience for our customers, whether on the ground or in the air. And it's not just facilities. The investments we continue to make in customer experience are the value multiplier on top of everything we're doing. With the ongoing rollout of our new flagship suite designed to elevate privacy, comfort and luxury, we're continuing to reimagine and advance the premium travel experience. Customers have responded very positively to this product on our new Boeing 787-9 Ps, which led American wide-body aircraft in customer satisfaction. We will offer the same product on our 321XLRs and our 777 fleets in the coming years. We're also investing in the onboard experience of our regional aircraft, including the installation of high-speed satellite WiFi to maintain a consistent premium experience across our fleet. We're proud to offer high-speed gate-to-gate satellite WiFi on more aircraft than any other airline, keeping our customers connected while traveling. Thanks to our new sponsorship with AT&T, this amenity will be complementary for our AAdvantage members starting in January. We announced several exciting updates to our leading lounge network, including plans to open new flagship lounges in Miami and in Charlotte, and we'll expand our Admirals Club Lounge footprint in both markets as well. We also introduced several additional premium enhancements, including new amenity kits, improvements to our food and beverage offerings and a new partnership with Champagne Ballanger. We continue to explore partnerships to elevate the art of travel, like our new coffee partnership with Lavazza that aligns with our focus on refined offerings and exceptional service throughout the travel journey. Nothing matters more to our customers than flying on a reliable airline. While this quarter presented challenging operating conditions, the American team quickly recovered, minimized disruptions and maintained a resilient operation for our customers. Thanks to continued investments in technology, including the expansion of our Connect Assist platform, we've enhanced the connection experience and successfully preserved customer connections. The team is focused on investing in the right areas, and we're committed to executing on our initiatives to deliver on our revenue opportunities. Before closing, I'd like to take a moment to recognize the dedicated aviation professionals who continue to uphold the safety and security of our industry during the government shutdown. We're hopeful that action will be taken to reopen the government as soon as possible. And now I'll turn the call over to Devon to share more about our financial results and outlook. Devon May: Thank you, Robert. Excluding net special items, American reported a third quarter adjusted loss per share of $0.17, a 50% beat versus the midpoint of our prior guidance. We continue to progress on our commitment to deliver on our revenue potential. We produced record third quarter revenue of $13.7 billion, which was about 1% ahead of the midpoint of our initial guidance. Domestic year-over-year PRASM improved sequentially each month and turned positive in September. While premium continued to outperform Main cabin, we've seen improvement in the main cabin since its low point in July. That momentum has continued into October, and we're encouraged by the bookings we have taken for November and December. Our international entities performed in line with the guidance we gave in July. After a very strong second quarter, unit revenue in the Atlantic region was down year-over-year due in part to the macro uncertainty during the peak booking window and a continued seasonal shift in demand from the third quarter to the fourth quarter. That said, Atlantic was our most profitable region during the quarter, and we expect Atlantic unit revenue to be solidly positive in the fourth quarter. In Latin America, unit revenues were down year-over-year as the short-haul Latin market was oversupplied during the quarter. American's presence in the region, the premium services we offer and the scale we have in Miami and our other Southern hubs allow for profitable results in this environment and a continued long-term competitive advantage in the region. Lastly, Pacific year-over-year unit revenue declined mid-single digits in the quarter. We expect fourth quarter unit revenues to be approximately flat year-over-year off a very strong 2024 base, supported by strength in the premium cabins. Premium continues to perform well with year-over-year premium unit revenue outpacing main cabin by 5 points in the third quarter. Capitalizing on this demand, American is continuing to invest in expanding our premium offerings across the customer journey. While already recognized amongst the U.S. network carriers for having the highest rated and most consistent lie-flat product across our long-haul fleet, we are elevating this experience with the investment in our new flagship suite, which we launched with our high premium Boeing 787-9s. As Robert said, in the coming quarters, we'll expand this product further with the introduction of our A321 XLRs and the retrofit of 20 777-300 aircraft, which will increase premium seats on this fleet by over 20%. We're excited to announce that we'll continue scaling our new flagship product on our 777-200 aircraft. These aircraft, which will be receiving a nose-to-tail retrofit, will see a 25% increase in lie-flat and premium economy seats, along with new in-flight seatback entertainment system. Additionally, we continue to expand premium on our domestic aircraft. We are retrofitting our A319s and A320s, where we will grow first-class seating by 50% and 33%, respectively. With these investments in our existing fleet, along with our new deliveries, our premium seat growth will outpace our non-premium offerings. Our total capital expenditures in 2025 are expected to be approximately $3.8 billion, which includes the delivery of 51 new aircraft this year. Longer term, capital expenditures remain consistent with our prior guidance and our current expectations for 2026 are approximately $4 billion to $4.5 billion of total CapEx. We continue to make progress in strengthening the balance sheet. Total debt at the end of the third quarter was $36.8 billion, down by $1.2 billion from the second quarter. We ended the quarter with $10.3 billion of available liquidity. At the start of the year, we made a commitment to reduce total debt by approximately $4 billion to less than $35 billion by the end of 2027. Just 9 months after making that commitment, we are more than 50% of the way to achieving that goal. Now on to our outlook for the remainder of the year. For the fourth quarter, we expect capacity to be up between 3% and 5% year-over-year as we continue to build back our hubs and adjust our schedules to meet evolving seasonal demand trends. We expect fourth quarter revenue to be up between 3% and 5% year-over-year. If we achieve the midpoint of our guidance, we'll deliver flat unit revenue in the quarter after being down 2.7% in Q2 and 1.9% in Q3. Fourth quarter CASM ex is anticipated to be up 2.5% to 4.5% year-over-year, in line with the guidance we provided in July. We are continuing our multiyear reengineering the business effort to utilize technology and streamline processes to enable an improved customer and team member experience while driving a more efficient business. These efficiencies are being realized through best-in-class workforce management, efficient asset utilization and procurement excellence. These efforts have resulted in $750 million of annual savings versus 2023. As a result of the investments and process improvements we have made, most mainline work groups are operating at higher productivity levels today than they were in 2019. With labor cost certainty through 2027, American is able to focus on our long-term efficiency efforts while executing on our commercial and customer initiatives. With this fourth quarter guidance, we expect to deliver an adjusted operating margin of between 5% and 7% and earnings per share between $0.45 and $0.75, over 2x higher than the midpoint of our implied fourth quarter guidance from July. This brings our full year EPS guidance to a range of $0.65 to $0.95 per share. Based on these earnings and capital projections, we expect to generate free cash flow of over $1 billion for the year. I'll now hand the call back to Robert for closing remarks. Robert Isom: Thanks, Devon. We're positioning American for long-term success. Our commercial efforts in sales and distribution and revenue management are taking root, driving business and premium revenue outperformance. We're poised to take advantage of the new relationship being launched with Citi in 2026 to grow the world's first and largest airline loyalty program at unprecedented rates. We started down the path of restoring our network presence, further expanding our industry-leading footprint in North America, the world's most important aviation market, all powered by the youngest and most fuel-efficient fleet. These efforts are being bolstered by our focus on elevating the customer experience, evidenced by the continual announcements this year of exhilarating upgrades. Finally, we'll always remain focused on efficient capacity production. We've been a leader in this space for years, and we'll continue to make smart investments that drive efficiencies in our business. We're looking forward to closing out 2025 in strong fashion, and with this groundwork, we plan to deliver meaningful long-term value for our shareholders in 2026 and beyond. Thank you for your interest in American Airlines. Operator, you may now open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Scott Group of Wolfe Research. Scott Group: So I think I saw you said that September unit revenue was positive. Fourth quarter guide is sort of flat. So maybe just explain that change. And then within that, I think I just heard you say domestic unit revenue, you think is flat in Q4 as well. Maybe just some thoughts premium versus domestic and how that shakes out. Robert Isom: I'm sorry, Latif, I think we were on mute there. So we'll start this over. Steve, do you want to take this question? Stephen Johnson: Sure. Latif, can you hear me now? . Operator: Yes, sir. Please proceed. Stephen Johnson: Yes, Scott, thanks for the question. What we've seen, I think, is what you've heard from the other airlines is July was a really very difficult month for the industry. August was better than July, September better than August, and indeed, we did inflect positive during the month of September. October looks better than September and the fourth quarter looks strong. That has been driven interestingly, largely by improvements in -- for us, anyway, in main cabin revenues. The premium revenues, as we've discussed, have been strong all year long, really not faltering notwithstanding any of the economic uncertainty we went, but that economic uncertainty and Liberation Day and all of that has played a very -- it's been very difficult on main cabin revenue, the demand from our most price-sensitive customers. In any event, the projection that we have for the fourth quarter of being flat year-over-year is a sequential improvement -- quarterly sequential improvement. Something we're excited about is a combination of good performance, I think, in the domestic entity, good performance across the Atlantic, in the North Pacific, and in South America, and a little more uneven performance in the South Pacific largely because of capacity, and then year-over-year, not great performance in short-haul Latin America, again, a capacity issue. That entity, while down year-over-year, remains a really important part of our business and a profitable part of our business as we have real network strength from Miami and DFW and Phoenix into those regions. So I think we're excited about the sequential improvement being able to project a flat unit revenue year-over-year. Scott Group: Okay. And then I want to see if you want to provide any sort of early thoughts for next year. So if I look at Q4, right, we've got capacity up 3% to 5%, what are you saying unit cost up 2.5% to 4.5%. Is that sort of the right way to think about capacity and unit cost for next year? And ultimately, what I'm trying to figure out is what's the visibility or confidence in sort of a price cost inflection next year? Devon May: Scott, we're just in the planning process for next year as we sit here today. So we're not guiding to capacity or unit cost performance at this point. But we'll stay consistent with what we've been saying on that front is we have this fleet plan that can allow us to grow somewhere around mid-single digits. Our guardrails on capacity production are at one end, we just want to understand what sort of economic growth and what sort of demand growth we're seeing, and we like where we're at on that front. The other side is where the competition is at. And lastly, just what sort of growth opportunities we have. We're really excited about the growth we put into the market this year, primarily in Philadelphia, Chicago and New York. Those markets will continue to grow in 2026, and we're also excited about growth opportunities in Miami and in Phoenix. On the cost side, I think you see it in our numbers. We believe we manage cost and efficiency better than anyone. It's been a very formal and long-standing effort. And so next year, we look out, yes, we're looking for margin expansion as we head into 2026. Operator: Our next question comes from the line of Sheila Kahyaoglu of Jefferies. Sheila Kahyaoglu: Maybe digging a bit deeper into the capacity and premium investment comments now that you have also the 777-200 fleet going, the schedules are loaded up 5% in the first half of next year. The fleet grows a similar amount, assuming no retirements. So how are you thinking about the mix in premium versus main cabin and short haul versus long haul? Robert Isom: So I'll start. Thanks, Sheila. Well, first off, in terms of capacity mix, international, domestic, it takes a strong domestic and very strong hubs to support a thriving international operation. And so we'll keep a balance in terms of that growth. It's really exciting in terms of premium offerings. So our premium seating, we expect, especially now with the 787-9s, 9Ps, the XLRs, the reconfigurations we're making, the premium seating is going to grow roughly at twice the rate of what our non-premium offerings would grow. And even more specific in terms of our live flat international capable seating, that is going to grow by 50% as we look out towards the end of the decade. So we feel really excited about it, and it all plays into what we're seeing in the marketplace that people are willing to pay for experience. And we're going to make sure that we have a hard product that they enjoy. Sheila Kahyaoglu: Great. And then maybe if I could ask another one on just domestic hubs. You mentioned Chicago enrollments are up 20% year-over-year for AAdvantage. Lots have been said about this market. When you look across domestic hubs, where are you seeing the greatest level of unit revenue improvement, either sequentially or year-over-year? And how are you thinking about capacity next year? Robert Isom: Well, I'll just start. Look, we're pleased with our efforts in Chicago. Certainly, we've done a nice job in growing that back. And as you look towards next year, that's a hub that will be over 500 departures. And we have just an incredible base of customers that are waiting for us to really get back in the marketplace. Those AAdvantage enrollments overall, we grew 7%. But in Chicago specifically, 20%. I mean that's a really remarkable number. We're going to take advantage of that desire for our product, as I mentioned. And as we look out into the future, we anticipate that Chicago will return to its rightful places as one of our largest and more profitable hubs. So capacity, at least in Chicago, as we take a look at, we're going to fly what we can. It will be, again, over 500 departures. Capacity throughout the rest of the system, it's really focused on restoration of flying in Philadelphia, Miami, Phoenix. We've already have DFW and Charlotte appropriately sized. So we're really excited about what we're going to be able to bring back to markets that, quite frankly, because of regional aircraft and delivery delays, we haven't been able to serve as thoroughly as we'd like. Operator: Our next question comes from the line of David Vernon of Bernstein. David Vernon: I hate to bang the same drum, but maybe I'll ask the same question in a slightly different way. If we think about what percentage of premium seats are in the mix kind of as we end 2025? And how does that change? If you can put a number on that, that would be helpful as well as any sort of commentary or directional commentary on the relative buy-up from what would be considered a non-premium versus a premium seat. I think what we're trying to all kind of model out here is what kind of unit revenue lift you could get because the product mix is changing so much next year. I appreciate the twice the normal seat growth rate, but I think what we're trying to do is really kind of help handicap what kind of margin expansion should be coming from that product investment. Stephen Johnson: Thanks, David. Great question, even if it is bang in the same drum. This is a really good story for the industry, really good story for American. As I've said earlier and the guy said in the opening remarks, premium has been strong all year despite economic uncertainty. If we look back a long time, some of us have been around in the business for a long time, I can just remember discussions about whether we could ever, as an industry, find a way to get people to pay more for better products and services. And I think the answer to the question these days is a resounding yes. Part of what we're seeing is -- and I have to say it feels like a post-pandemic new normal. It's just been so consistent and so consistent through difficult economic circumstances. But it's -- premium has always been driven by -- and there remains a component of that, that's business demand. But business doesn't always let their employees fly in premium. And so really, what we're seeing is, I think, a renaissance or maybe a new beginning for premium leisure. And this goes to my comment about our customers being willing to pay more for better services and better products. Our premium cabin is now 65% load factor is -- we think is premium leisure. It's outperformed the main cabin by 5 percentage points, 5 RASM points year-over-year. Our paid load factor in premium is up 2 points year-over-year. It is now nearly 80%. And we were selling on a paid basis only in the mid-60s before the pandemic. Nearly 50% of our ticket revenue comes from premium. And in recognition of those market dynamics, our focus is on taking advantage of that and growing that. Robert and Devon talked about the additional premium seats that we're adding to the fleet. We're designing better products. We have easier ways and super simple digital ways to upgrade and lots of opportunities to upgrade on a wallet-friendly basis. It's really, I think, becoming just a really important and really exciting part of our business. David Vernon: Okay. And then maybe as you think about beyond the hard product investment, right, and that -- however that mix shift is going to change in the number of seats, Robert, when you're talking to the team or maybe and working with that as he's ramping up, when you think about the product investments or experience investments that you need to make, what are the 2 or 3 areas that you are most focused on with the team? Robert Isom: Thanks, David. Well, the good news on this is that we're really bringing to fulfillment a number of investments we made over time. And then adding to that this reimagined and reinvigorated customer experience effort here. As you know, we launched a new team that has been taking a look at just in-flight amenities and products. And so whether that's, again, relationships with great brands for coffee or champagne, whether that's getting back into the creature comforts with amenity kits and things like bedding and duvets, those things are all happening. We're mixing that on -- so that in-flight experience is then being mixed with an on-the-ground focus. And so whether it's the investment in the facilities that we're making throughout the system, notably our premium lounges, which, again, we have already the biggest network of premium lounges. We're just only going to add to that in places like Charlotte and Miami. So I'd say that that's the second thing. And look, you do need to have the hard product. And so as we've talked before, first off, no one has a more consistent lie-flat product than we do. I'm super excited about the new deliveries of 787-9s and the XLRs. But on top of that, whether it's our A320s, our A319s, our regional aircraft and how we're equipping them with satellite WiFi, that's all fantastic. And then what we announced today, the 777-200 reconfigurs, that is a big deal for us because extending the lives of those and putting those into service really gives us a capital spending holiday in terms of fleet replacement. So it's a win-win-win for our customers, for our company and most certainly our investors. Operator: Our next question comes from the line of Dan McKenzie of Seaport Global. Daniel McKenzie: Congrats on the outlook here in the quarter. Going back to an earlier question on Chicago and the response that you expect it to return to its rightful place as the largest and one of the more profitable hubs. That, of course, is pretty different messaging than what we heard from one of your chief competitors there. So just a couple of questions. One, can the airport support 2 strong competitors longer term? And what does history tell us? And then finally, with the 20% improvement in enrollments, is that enough for you to help close that margin gap there in '26 or 2027? Robert Isom: Thanks, Dan. I'll just again, restate what we've been saying all along. Of course, Chicago can support 2 hub carriers. It's been doing it forever. American has served Chicago now for almost 100 years. And so we're looking to serve it well into the future. I've talked about a hub. It's going to be our third largest hub. There aren't many 500 departure hubs out there. It's critically important to our customers in Chicago and those that connect in the region. It ensures that there is service, competitive service. And I think that, that's probably the thing that maybe a competitor doesn't like that we're going to be there. We're going to be investing in Chicago. And there aren't going to be really any impediments to us building out the network and the footprint that we need there. So thanks for the question. Really excited about Chicago and what's coming up in 2026 and beyond. Daniel McKenzie: Yes. Very good. And then, Robert, you mentioned a $1 billion cost labor disadvantage to competitors on CNBC this morning. Is it your sense that this cost disadvantage should go away in '26, at least in theory? And can the domestic supply backdrop support the higher fares needed to offset that increased cost or whether or not more capacity needs to exit? Robert Isom: Well, you'll have to ask that question of our competitor that is obviously has profits that are built off of a labor cost advantage. And it's a labor cost advantage that is in just rate. And so I can't imagine that, that is something that moves into the future. It's not -- certainly not something that we would ever contemplate at American over the long run. Now in regard to ultimately improving margins in the business, this is where American, I think, has a tremendous opportunity. So first off, we already have market rates built in. We already have labor cost certainty. And I think that, that enables us to launch the efforts that we're undertaking. And so whether that's the restoration of our network, we know that we have the pilots and flight attendants and everybody that is going to be -- are going to be situated to fly the network and to rebuild some of the places that we've, quite frankly, lost some share in. We know that we're set up well as we move into 2026 with our new Citi deal, which is going to produce a tremendous improvement in terms of net income going forward. And I mentioned earlier about sales and distribution, and I gave Steve credit for helping set the team up. We've made tremendous progress. One of the things I'm so proud of is that from a managed corporate revenue perspective that we performed 14% better year-over-year. Nobody else is doing that. And the good news on that front, we're not all the way there. We have not only some share left to catch up as we exit the year, but we're not going to stop on that front. And underscoring all of that is the work that we're doing in premium that we've talked about. And so I feel really positive about American's positioning no matter the economic backdrop. And everything that I see bodes well just in terms of what we do well. I think domestic supply and demand is coming back into balance. I think that the places that we serve are the fastest growing in -- certainly within the country, and we're poised to really take off as we go into 2026. Operator: Our next question comes from the line of Jamie Baker of JPMorgan Securities. Jamie Baker: First question probably won't come as much of a surprise, reminiscent of what I've been asking this season. So this whole idea of premium leisure yields eclipsing corporate yields, at least in some markets, is interesting to me because I think most investors still think of corporate yields as kind of the gold standard. So my question to American is, how prevalent is this across your domestic -- well, across all markets, I suppose. And does it make you think any differently in terms of how aggressively you pursue corporate share if premium leisure yields may be the future? Any thoughts on that? Robert Isom: Jamie, thanks for the question. And this is one where I think we've learned some lessons. Quite frankly, corporate travel is incredibly rich in terms of yield. And while we love what's happening from the premium space, premium leisure, we need both. And that's why we're doubling down in terms of our investment in our sales team. We like what we see, and we think that there is upside for American. Now I'll note one other thing, which is we talk about business travel, and it has not recovered in terms of passengers to the levels that it was in 2019. I think that there's a lot more room for growth. I don't know if we ever get back to the total percentage of business as a percent of total revenue, but there's a lot more that can be gained. And as we take a look at what's going on in the world right now and with even continued return to office and this desire to meet face-to-face and renew connections, I'm very optimistic on that front. Now from a premium leisure perspective, yes, we've got to be ready for it. And that's why we have a fleet that I think is tailored to meet those needs. And we're going to make sure that we have a great product offering to attract those customers, and that will be a key to margin expansion. And it's -- look, American is a premium carrier to begin with, and we're only going to become more... Stephen Johnson: And Jamie, I'd just add that while we do see the phenomenon right now where there's a lot of premium leisure demand, it's really good yields. We got to remember that business has been with us forever, and it's going to be with us forever. It's really important to remember that business travelers are very frequent travelers. Even if they're a little bit less than our premium yields now, they're still 1.5 to 2x the yields we get from other sources. They tend to be AAdvantage members and AAdvantage members give us more business. They tend to be co-brand cardholders. And the regular business travelers in an effort to accumulate miles and participate in loyalty programs tend to move their leisure travel to the airline that they fly on business. And in some ways, you can even think of our business travelers as being some of the source of our premium leisure demand. So I think a really exciting part. Robert mentioned, right now, I mean, we calculate that business travel is only 80% of what it was in 2019. And that's an absolute number, not adjusted for the size -- for the growth in the economy. So very significant upside. And as Robert said, I mean, we'd love to fill the airplane with business travelers and premium leisure travelers. Jamie Baker: Got it. And Devon, while I have you, a quick follow-up on the air traffic liability. Your drawdown from the second quarter to the third quarter was the most modest that I've seen, at least going back a decade. And it was quite a bit less than the drawdowns at Delta and United. I assume the American's domestic international balance may have something to do with that. Maybe it's attributable to some of the second quarter challenges and subsequent recovery. Whatever the case, it jumped out at me, maybe it shouldn't have any thoughts? Devon May: Well, I think it's in part due to some of the seasonal trends that you're seeing. So a strengthening fourth quarter just means there's going to be more bookings for fourth quarter travel that happened in the third quarter, so less of a drawdown on that front. Relative to United and Delta, there may be some entity mix there and perhaps just some of our relative performance in the quarter. But I think more than that, it's just the seasonal trends we're seeing in demand. Operator: Our next question comes from the line of Tom Wadewitz of UBS. Atul Maheswari: This is Atul Maheswari on for Tom Wadewitz. First, on the shape of the fourth quarter RASM or yield, you mentioned that September RASM turned positive and October looks better than September. So implicit on those points is that November and December would be a little worse than October for you to be flattish for the full fourth quarter. So the question really is the expectation around November and December being a bit slower than October. Is that simply due to American being cautious given difficult compares you and the industry have from the demand strength that you saw during the holidays last year? Or is there something in the current booking data that suggests that December or the holiday yields are tracking lower than what you're seeing for this month? Stephen Johnson: And really good question, and I'm sorry that I wasn't more clear about that. I mentioned October as being part of a sequence that we're seeing and I think that the industry is seeing. I didn't mention November and December because we just don't have a lot booked at this point in time. And so I just didn't pick up on it. We're -- I will say about November and December, I think we're getting very encouraged by the way the holiday periods are booking and seeing as we have throughout the year during trough periods seeing a little bit of softness there. But we're, I think, focused on our best estimate right now of where the quarter is going to end up is flat year-over-year. And we'll take another look at that as we see more bookings for November and December come in. Atul Maheswari: Got it. That's helpful. And then just as a quick follow-up. As you run rate the normal historical share in the indirect channel that you expect to get back to in the fourth quarter, how much revenue lift does that provide next year, especially in the first 3 quarters of the year? I guess another way to ask it would be, like in the past, you mentioned like about $1.5 billion of shortfall due to the prior strategy. How much was recovered this year and what's left to be recovered in '26? Robert Isom: Well, Tom (sic) [ Atul ], thanks for the question. we don't have a full run rate of our recovery in because it's something that progressed over the course of the year. As we take a look out into next year, it's going to be built into any of the guidance and the forecast that we give. I think a good indication, though, is just the level at which we're outpacing some of our principal competitors in things like managed corporate travel. So I feel really good about that. And as we exit the year, where I do think we'll be fully restored, then the objective is moving on to actually doing better than that. And from that perspective, what we will measure ourselves on going forward, okay, will be overall unit revenue production. And of course, we'll always break out from a corporate perspective. Stephen Johnson: Yes. And just to think about it, as we've gone through the year and improved our sales improved our share indirect channels. You've seen that sort of step up over the course of the year. So next year, we're going to have the benefit of that continued step-up plus the run rate of that, which we've already captured and returned to American. Operator: Our next question comes from the line of Catherine O'Brien of Goldman Sachs. Catherine O'Brien: I wanted to ask more of a theoretical question on CASM. So you guys have done a lot of work on building efficiency into the system. And just wanted to understand, is the fourth quarter a good example of what the business can do, like low to single -- low to mid-single capacity growth drive low to mid-single CASMex? Or there's more to go here and CASMex could ultimately be lower on that level of growth? Just really trying to get a sense of what you think CASMex could look like on the base case mid-single-digit capacity growth over the next couple of years, understanding there's always going to be some lumpiness year-to-year. Devon May: Yes. And I appreciate you kind of starting the question with -- it's at least somewhat dependent on the level of capacity growth that sits out there. Right now, we're working through the 2026 plan. What I will give some color on is just the lines of the P&L right now where you are seeing some costs growing at a greater rate than inflation and some areas maybe where we're going to see some potential goodness. But labor right now, as we've talked about, we have contracts with all of our large frontline team members. So the step-up in labor isn't much more than inflation, although we do have a couple of labor groups, pilots, for example, that will get a 4% increase next year. That's consistent with the industry. So if it's going to outpace inflation, it won't be by much. Other areas like airport rent and landing fees will continue to grow at a rate greater than inflation. Maintenance is kind of TBD at this point, but that will kind of come and go depending on the year. What you're seeing in the fourth quarter right now, I think we can do better than that longer term, but let us work through the plan for 2026, and then we'll work to get some longer-term guidance out there. Catherine O'Brien: Great. And then, Devon, probably a second one for you. You've made great progress on the balance sheet even in a tough year demand-wise. I think looking back at my notes from the 2024 Investor Day, the longer-term goal is to get to net debt below $30 billion and leverage below 3x in 2028. I guess, is that still the goal? And really, is that your ultimate goal? Or do you believe there's a benefit to taking leverage lower than that over time? I realize this is a longer-term one, but just trying to get a picture of how you're thinking about capital allocation over the next couple of years. Devon May: Yes. Well, just one step at a time. We're incredibly excited to have hit our first goal of total debt reduction of $15 billion. We did that a year earlier than planned. We completed that last year. The next goal we set out for total debt was that it would be inside of $35 billion by the end of 2027. That's another goal we brought in by a year. We're really pleased with the progress right now. It's happening because we have pretty limited capital needs right now. We talked about being able to grow the airline at 5%, but we're doing that with aircraft CapEx in that $3 billion to $3.5 billion range. That's a really nice spot to be in. And in a year like this, even where earnings aren't exactly where we want them to be, we're producing really nice free cash flow that we're using to improve the balance sheet. So that's where we're at now. We fully expect to hit our $35 billion goal. That would, to your point, put us inside of $30 billion of net debt and hopefully well inside of that. We have this goal at that point, obviously, to be within net debt-to-EBITDA leverage ratios of about 3x, which you get to that BB credit rating. To get there, we have to continue to focus on improving margins and improving earnings. And I think we're focused on all of the right things there. right things there. Where we go beyond that point, we'll see. I think a BB credit rating puts us in a really good spot with the borrowings we're going after. Operator: Our next question comes from the line of Conor Cunningham of Melius Research. Conor Cunningham: Just talking about thinking about building blocks for 2026. I think a big one is just the loyalty component. I was curious if you could just remind us what you think the incremental dollar value is from just the loyalty step-up alone. It seems like a pretty big lever for you all and a pretty massive driver for earnings in general. So just any thoughts around that would be helpful. Robert Isom: Yes. Conor, we'll just go back to what we've been saying. The new Citi relationship, I think, launches us into an opportunity to grow cash remuneration by 10% per year. Ultimately, we see -- as we go out towards achieving $10 billion of remuneration, we see another $1.5 billion of net income flowing through. So that's all -- those are all really sizable numbers. Conor Cunningham: Agreed. Okay. And then maybe we could talk about just -- there seems to be a lot of talk about just like CASMex and RASM and all that stuff. And I think that the industry in general probably needs to move more towards if we're going to invest in the product, we should expect margins to improve in general. So if you could just talk about how you're thinking about investment spend in the customer service product and what that could mean to -- are you earmarking a sizable chunk of costs associated with that, knowing that you'll get paid back for it on the customer side? Just any thoughts around the investment spend that you need to have in the product going forward? Robert Isom: So Conor, yes, the name of the game here is to grow margins, increase profitability. and ultimately increase shareholder value. So everything we do, we've been incredibly thoughtful, diligent, efficient in terms of when we deploy capital. But as Devon said in his comments, we have, look, a capital expenditure profile that others would love to have. What we are spending, I believe, is going to, number one, drive the revenue benefits that continue to drive revenue benefits that we see. And if you take a look at our guide and the outperformance or the improved performance in the third quarter and what we're anticipating in the fourth quarter, that's a result for us of revenue performance. Now again, we'll continue to be incredibly efficient in terms of how we deploy our capacity. But the opportunity for us going into next year, I think, look, we have better opportunity than most. Domestic capacity, I think, is more in balance. That benefits American. We've got catch-up to work to do from a sales and distribution perspective. That benefits American. We finally have our Citibank deal that's coming into play. That will start in January. We have a network that is fantastic, but again, hasn't been able to serve all of our customers' needs. And as we restore in places, we're going to be a more formidable carrier from the perspective of premium and business traffic and a better carrier for all of our alliance partners to deal with. So there's a lot of opportunity for American. And I think in many respects, that will benefit American more than others. Operator: Our next question comes from the line of Michael Linenberg of Deutsche Bank. Michael Linenberg: I guess a question to Devon. Just given the age of your 777-200ER fleet, how much of the decision to make the nose to tail investment was a function of just lack of new wide-body availability? And what is the cash payback period of those investments? Devon May: Michael, you know what, this has actually been something we've been planning on doing for a while. This is an aircraft we think we can run well into the next decade. And obviously, it's time to go through a cabin refresh. We have a nice product on there right now, but the new flagship suite is going to be a fantastic addition to it. We think it pays back really nicely over the useful life of the airplane and sets us up well for our CapEx requirements in the next decade. Robert Isom: And I'll just add that there's a lot of capital that has to go in this business from the perspective of aircraft, certainly facilities. And we're going to get full use out of what we buy. I think that's something that's paid off for certainly one of our competitors over time. We're not looking to have the youngest fleet forever. We like what we have. We're looking to have a product that appeals to customers and one that is -- we're really smart about in how we get full use out of it over its lifetime. Michael Linenberg: Great. And then just a second question, given that we're day 23 in the shutdown, and I know you guys have a sizable presence at Reagan, we have seen the volumes really trend down, especially the last week at Reagan. What are you seeing there? And is it just really contained to the D.C. area on the government shutdown? Robert Isom: Well, first off, I just -- I'm going to start with -- I've been in constant contact with Secretary Duffy about the impact of the government shutdown and doing everything we can to mitigate. And from that respect, a huge shout out to TSA, CBP, our air traffic controllers. For the most part, they've been keeping the air system running and airports running fairly well. In terms of the business impact, government travel, it's important to us, but it's something that is certainly less than $1 million a day in terms of revenue. So the impact, while it's there, is something that I'm quite confident when the government reopens, there's going to be some pent-up demand. And hopefully, we get back on track pretty quick. In terms of Reagan, overall, we have had some difficulties in terms of operating delays and issues with air traffic control. I'm also confident that those are things that are temporary. And that as we progress through the year, that should also be a benefit to American as we go into 2026. Operator: At this time, we will be taking media questions. [Operator Instructions] Our first question comes from the line of Leslie Josephs of CNBC. Leslie Josephs: Just wondering with the push to premium, what is your end goal? Is it to catch up to Delta United margins? And what would you be satisfied with? And what inning would you say American is in, in that transformation? And is there any limit to the amount you're willing to spend to get there, thinking of everything from onboard amenities to eventually a new plane? Stephen Johnson: Thanks, Leslie. Good question. I would just frame it in the way we frame all questions about how we think about the business and how we invest. We're interested in providing a service for our customers and meeting demand. And we're very excited about the growth in premium demand, again, because it allows us to serve our customers better and allows us to earn higher yields. And we are going to invest and provide product and grow the number of the capacity of our premium cabins as our customers demand us to do. And we'll invest as much capital in that as is appropriate and will allow us to earn a return and will allow us to provide the service that our customers are demanding. As I said earlier, we spent a lot of time way back when in the ancient days of the airline industry, wondering if our customers would pay more for a better product. And the answer to that question is a resounding yes, and we're going to respond to that and respond to it for so long and to the extent that our customers demand it. Leslie Josephs: And where do you think American is in that process? And also, if I could add about the operation, do you have any idea of the cost of improving the operation and what steps you want to do to improve reliability? Robert Isom: So Leslie, thanks. Well, the great thing about the airline business, we run every day, and we're going to run this year and for the next 100 years. So there is no end of the game. And so in terms of where we're at right now, really excited about getting the hard product up to par and beyond, love what we're doing with our lounges, you'll just see continued attention and investment. And from -- I want to talk about the investment side of things. From the hard product side of things, the reconfigurations, the new aircraft deliveries, those are built into our capital plan. So that's nothing necessarily extreme. What we're doing from an operating expense perspective is we're taking a look at where we can take expenditures today in the case of our new coffee brand. We've always provided coffee. We have a much better brand now associated with it in Lavazza. And in terms of overall expenditures, while there may be some differential in brand, it's not considerable. And so when we take a look at other aspects of our operation, we're doing things in a more efficient way and yet at the same time, able to provide our customers with a much better experience. So I'm not looking for a number specifically. I look at our entire P&L, maybe save fuel and look at the entire expense category as something that is dedicated to improving and taking care of our customers. Stephen Johnson: And Leslie, I'd just add, over the course of the last year, we've added customer amenities and improvements and responses to our customers in advance at a dizzying pace. But it's just -- as Robert said, it's an infinite game. It's going to continue. I probably have 3 dozen new ideas for customer experience improvement just sitting on my desk that I'm going to look forward to hand off to my successor here in a week or so. But this is going to go on, and I think it is a part of the business that is going to address a lot of the questions that people had here today about how we're going to afford to pay the labor bill, how we're going to afford to pay for the increased cost of operating the airlines. I think it is through these ideas of just providing a better customer service, more opportunities for customers who enjoy better products, more premium, more amenities that customers look forward to enjoying on American Airlines and throughout the industry. Operator: Our next question comes from the line of Niraj Chokshi of New York Times. Please go ahead, Niraj. Niraj, please make sure your line is unmuted. And if you are on a speaker phone, use your handset. Niraj Chokshi: Sorry about that. I was just wondering if you could talk a little bit about how you're balancing sort of the focus on kind of core hubs with opportunities to grow in sort of the non-hub markets where there might be populations and demographics that you want to -- that might be beneficial. Robert Isom: Sure. First off, we were fortunate to have our hubs positioned in the fastest-growing metro areas. And our hubs, I think we represent 8 of the 10 largest metro regions, and that's something that we're going to benefit from going forward. And then I just take a look at what we've done recently. We made sure coming out of the pandemic that DFW and Charlotte were restored as fast as we could. And we've done a nice job of that. DFW has some new capacity coming on with new Terminal F and remodeled Terminals A and C. We're going to take full advantage of that. American will continue to be the largest carrier in DFW, and we think that we're only going to grow our presence there. Charlotte, we've taken a little bit of a break in terms of growth there. We definitely need to make sure that, that operates efficiently and runs well. But then as you take a look at opportunities for growth in 2026, the near term and even right now, it is going to be focused. This past year 2025 was on New York and Chicago. As we take a look into 2026, it will be those 2, but along with Phoenix and Miami and Philadelphia. And I'll note that while Miami operated one of its largest schedules, both Phoenix and Philadelphia are far from being to the size that they were. And the cool thing about that is we're not building $100 million gates to go fly there. That's an opportunity for us and you'll see substantial increases in terms of deployment. But of course, as we always talk, we operate with the guardrails of making sure that we're paying attention to the supply and demand environment, overall GDP and also at the other side, making sure that our market share and our presence is competitive with our primary competitors. Niraj Chokshi: Since you mentioned GDP, I'm just curious, do you feel like is that relationship as steady as it's always been? There's some talk about it's maybe not as closely tied? Or I'm just sort of curious what your thoughts are on that. Devon May: I'd say for some revenue streams, it's not as closely tied. And there's some parts of GDP growth that don't drive air travel. But in general, there's still a large component of our travel that's somewhat dependent on the economic environment and economic growth. So it's a component of how we think about revenue. We obviously do a lot of other things as we go through our forecast, but airline revenues aren't completely disconnected from economic growth. Operator: This concludes the Q&A portion of the call. I would now like to turn the conference back to Robert Isom for closing remarks. Sir? Robert Isom: Thanks, Latif. We appreciate everybody's interest in American, and we look forward to getting back to work and delivering on our commitments. Thanks. . Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to the Union Pacific's Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's website. At this time, it is now my pleasure to introduce your host, Mr. Jim Vena, Chief Executive Officer for Union Pacific. Thank you, Mr. Vena. You may now begin your presentation. Vincenzo Vena: Thank you very much, Rob. Listen, thanks, everyone, for joining us. Beautiful 36-degree day here in morning in Omaha, Nebraska, absolutely perfect day to be railroading this type of [ data ] that I love, not too hot, not too cold. It's just [ a slam dogs ] so Eric and team should continue to deliver what they've delivered this past quarter, and we'll get into that in a minute. So here with me, we're going to review the third quarter 2025 numbers. Here with me is Jennifer, our Chief Financial Officer; Eric, our Operations Chief; Marketing Sales Chief, Kenny Rocker. As you'll hear from the team this morning, our third quarter results serve as a proof point that we are successfully executing on our strategy. We are focused on driving continued improvements in our pursuit of what's possible. Now let's dig into our results on Slide 4. Union Pacific reported 2025 third quarter earnings per share of $3.01, excluding $41 million of merger-related costs, our adjusted earnings per share of $3.08 increased 12% versus last year. Core pricing gains and continued operational efficiencies drove the strong financial results in the quarter. Freight revenue excluding fuel, grew for the sixth consecutive quarter and set a best-ever record. In addition, we set best-ever quarterly records in workforce productivity, fuel consumption, terminal dwell and train line. As a result, our third quarter adjusted operating ratio was 58.5%, a 180 basis point improvement versus last year. Importantly, our safety and service results also improved, demonstrating the team's commitment to our goal of running the safest and most reliable railroad in North America. Next, the team will walk through the third quarter in more detail, and then I'll come back and wrap it up before we go to Q&A. And with that, Jennifer Hamann, you are up. Jennifer Hamann: Thank you, Jim, and good morning, everyone. I'll begin with a walk down of our third quarter income statement on Slide 6, where our operating revenue of $6.2 billion increased 3% versus last year. Digging into the top line further, freight revenue totaled $5.9 billion, up 3%. Volume was down slightly in the quarter, driving a 25 basis points reduction in freight revenue. Fuel was also a modest headwind with surcharge revenue of $602 million, down $33 million as lower fuel prices impacted freight revenue 50 basis points. Strong core pricing, combined with a more favorable business mix to drive a 350 basis point improvement in freight revenue versus 2024. Importantly, our ability to yield pricing dollars net of inflation that are accretive to our operating ratio is directly supported by a consistent and reliable service product. Wrapping up the top line, other revenue declined 2% to $317 million. Lower revenue from the transfer of Metro operations was partially offset by a favorable comparison to a onetime contract settlement of $12 million in 2024. Switching to expenses, our appendix slides provide more detail, but I'll walk through the highlights as operating expense increased only 1% to $3.7 billion. Compensation and benefits decreased 1% as 4% lower workforce levels and record productivity more than offset the impact of wage inflation. Compensation per employee increased 2.5% versus last year, and we expect full year compensation per employee and up around 3%, which is consistent with the increase we've seen year-to-date. Fuel expense grew 1% driven by a 3% increase in gross ton-miles, partially offset by a 2% decrease in fuel prices from $2.60 to $2.56 per gallon and a 1% improvement in the consumption rate. In fact, our fuel consumption rate set a best ever record in the quarter as we yielded benefits from our fuel initiatives. Purchased services and materials expense increased 6% due to merger-related costs and equipment and other rents declined 11%, driven by favorable contract settlements of $13 million, improved cycle times and lower [ fleet ] costs were partially offset by higher state and local taxes. Reported operating income grew 6% to $2.5 billion. Below the line, other income grew 10% to $96 million on real estate gains. Our reported net income totaled $1.8 billion with earnings per share of $3.01. When you exclude the $41 million of merger costs in the quarter, our adjusted earnings per share totaled $3.08 and our adjusted operating ratio came in at 58.5%. Overall, really great quarterly financial results enabled by successfully executing on our strategic priorities. Turning to cash generation and the balance sheet on Slide 7. Third quarter cash from operations totaled $7.1 billion, up 6% or $381 million versus last year. As we discussed when we announced our merger with the Norfolk Southern, we have paused our share repurchase program. We are prioritizing the reduction of debt and paid down $1 billion in long-term notes during the third quarter. With that, our adjusted debt-to-EBITDA ratio finished the quarter lower at 2.6x. Our cash balance ended at just over $800 million after funding our capital program and paying the increased third quarter dividend, our 19th consecutive year of providing our shareholders with an annual dividend raise. As we close out 2025, we expect our cash balance to steadily grow with our strong cash generation. Looking now to the remainder of the year on Slide 8. With just over 2 months left in the year, we are proud of how we have executed on our strategy this year. We've handled volume growth while improving our service and efficiency. Notably, the third quarter continued this trend as we handled the highest absolute volumes of the year while setting several best ever operating records. Meanwhile, some of the key economic indicators like automotive sales and housing starts, are generally softer than when we established our Investor Day targets last September. Against that backdrop, we have achieved very solid results with reported year-to-date EPS growth of 8% and 80 basis points of operating ratio improvement. For the fourth quarter, volumes are currently running down 6% as international intermodal volumes reflect the tough comparison against last year's strong growth. This level of decline plus merger cost and pause share repurchases obviously creates a headwind to earnings and margin expansion compared to last year's record fourth quarter. The team understands the task and is working hard to drive more volume to the railroad in a safe, efficient manner. Despite the somewhat challenging close to the year, we still expect to achieve our 3-year EPS CAGR view of high single to low double-digit growth. We also are reaffirming our view on accretive pricing, industry-leading operating ratio and return on invested capital. It is an exciting time at Union Pacific as we execute on our strategy and deliver for our customers in a way that I have not seen us do in [indiscernible] Kenny Rocker: As Jim mentioned, set a best ever quarterly record. Eric and the operating team continue to deliver excellent service, enabling our commercial team to lead with confidence and deliver strong pricing results. Let's jump right in and talk about the key drivers for each of these business groups. Starting with our bulk segment. Revenue for the quarter was up 7% compared to last year on a 7% increase in volume. Strong core pricing gains were partially offset by lower fuel surcharges and business mix. Strength in coal was driven by strong customer demand due to favorable natural gas pricing and the continuation of Lower Colorado River Authority shipment, which started in April. Lower domestic grain demand was more than offset by strength in export lead shipment and business development in Mexico along with increased volumes from new grain products facilities. Lastly, increased [ potash ] shipments drove favorable year-over-year volumes in the fertilizer market. Turning to Industrial. Revenue was up [ 3% ] for the quarter on a 3% increase in volume and a 1% increase in average revenue per carload. Strong core pricing gains were partially offset by business mix and lower fuel surcharges. Demand and business wins increase petrochemicals, construction and metal shipments. However, these gains were partially offset by decreased volume in our energy and specialized markets. Premium revenue for the quarter declined 2% on a 5% decrease in volume and a 3% increase in average revenue per car, reflecting business mix and lower fuel surcharges. Overall, intermodal volumes were challenged by [ Lower of West Coast ] imports, resulted in a 17% decrease in international volumes. However, our domestic segment delivered record-breaking volumes this quarter, driven by exceptional service and business lines, reduced autoparts production and OEM quality hold contributed to lower automotive volume. Turning to Slide 11. We expect continued strength in some of our bulk and industrial segments, which is encouraging. However, we will be -- it will be outweighed by lower -- international volumes and tough comparisons. The commercial team's strong focus of first 9 months of the -- year-over-year challenges with soybean exports. Moving to Industrial. We're positioned to finish strong in our petrochemicals market. That's driven by the investments we've made in our Gulf Coast franchise and the strength of our service product, which continues to help us win with new customers. In fact, we recently won new petrochemical business that began earlier this month. It's a meaningful addition that reinforces our competitive position in the region. We also anticipate solid performance in the metals and minerals markets, where our team is laser focused on business development to outperform the market. On the other hand, our energy and specialized markets are expected to remain challenged, primarily driven by fewer petroleum shipments as we continue to balance volume at the right margin -- is expected to continue facing challenges driven by reduced auto parts production and OEM quality holds. As we look ahead, our strategy is clear and our confidence is grounded in our outstanding service performance whether it's powering growth in bulk, driving wins in industrial or unlocking new opportunities in premium, execution is what set Union Pacific apart. Together, we are building a stronger, faster and more competitive railroad, and we're just getting started. And with that, I'll turn it over to Eric. Eric Gehringer: Thank you, Kenny, and good morning. Starting on Slide 13, where our results do an excellent job, demonstrating the team's unwavering focus on our strategy to lead the industry in safety, service and operational excellence. Our vision is clear. And fundamentally, the railroad is operating exceptionally well, showcasing robust fluidity, consistency and reliability. Most importantly, we are achieving these results safely. Our safety-first mindset is delivering measurable progress as both personal injury and derailment rates continue to improve versus our 3-year rolling average. Rail is the safest land-based freight transportation method, and we will continue doing our part to make it even safer through ongoing investments in our network, employees, technology and communities. Freight car velocity, the best measure of fluidity on the railroad improved 8% to 226 miles per day, a third quarter record. Further, September marked our best ever. Let me repeat that, our best ever monthly performance at over 230 miles per day. Driving the performance was a record terminal dwell of just over 20 hours, increased train speed and the continued reduction of daily car touches across our network. These improvements are not only driving strong productivity gains within our operations, but also delivering significant efficiencies to our customers, reducing equipment cost and accelerating the delivery of their products to market. On the service front, both intermodal and manifest service performance improved year-over-year to 98% and 100%, respectively. These strong results reinforce our strategic approach and underscore the importance of maintaining a proactive buffer of resources. As Kenny and his team bring business to the railroad, we aren't waiting weeks to react. We have the locomotives, crews and freight cars prepositioned and ready to provide the high quality of service we sold to our customers. Now let's review our key efficiency metrics on Slide 14. As noted earlier, strong network fluidity is continuing to drive productivity across our railroad, and that's evidenced by the results on this slide. Locomotive productivity improved 4% versus last year, reflecting the continued benefits associated with our efforts to reduce locomotive dwell time. Last quarter, our team set a goal to reduce locomotive dwell below 15 hours. And this quarter, we delivered, achieving a record 14.9 hours. This underscores our dedication to maximizing asset efficiency. Workforce productivity -- which includes all employees, improved 6% and marked an all-time quarterly record. Our active train engine and yard workforce decreased 4% against flat volumes versus last year. We remain focused on effectively leveraging technology to optimize our workforce, while also recognizing the importance of balancing our resources as we plan for the future. Train length in the quarter grew 2% versus last year to just over 9,800 feet, an all-time quarterly record, a remarkable accomplishment when you consider the mix headwinds associated with softer international intermodal shipments which were down 17% year-over-year. We will continue adapting our transportation plan as we harness technology and infrastructure investments to safely generate mainline capacity for future growth. Wrapping up. Operationally, the team continues to raise the bar, delivering exceptional results quarter after quarter. It's the perpetual dissatisfaction that I've spoken about before. That's our mindset. It's imperative we continue driving efficiency while demonstrating consistent and reliable service. This enables Kenny and his team to be more competitive in the marketplace with a new long-term business. While we do have a historic opportunity ahead, the focus remains on today, further optimizing the best rail franchise in North America, I'm confident we'll continue improving in the pursuit of industry-leading safety, service and operational excellence. Jim? Vincenzo Vena: Eric, Jennifer, Kenny, thank you very much. Okay. I think you did a great job. But why don't we just turn to Slide 16, I'd just like to wrap it up before we get the questions. So first, as you heard from Jennifer, we are executing our strategy of driving strong financial results. In the third quarter, we handled the highest absolute volumes of the year while setting several best ever quarterly operating records. Kenny highlighted how the team is focused on outperforming our markets while pricing to the value we're providing our customers. Eric and team have the network operating extremely well as evidenced by our record operating results. Over the past several quarters, we've demonstrated agility with our buffer of resources. We will continue driving efficiencies while providing consistent and reliable service to win with our customers. To wrap it up, we are confident in our ability to lead the industry in safety, service and operational excellence. In the upcoming weeks, we will hold our special meeting and shareholder vote. We'll also be filing our merger application with the STB. At that time, we will provide more details on the opportunity with the Norfolk Southern to create America's first transcontinental railroad. Our results today demonstrate we are focused on the day-to-day business of optimizing the great Union Pacific franchise. And with that, we're ready to take your questions. Rob? Operator: Thank you, Mr. Vena. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Tom Wadewitz with UBS. Thomas Wadewitz: I wanted to see if you could offer some more thoughts on just how you see the merger application, the process of building support from shippers [ from unions ]. Just how that process is progressing? I think the deal you had with Smart, the agreement was a nice win for you. I don't know if you expect any more of those coming or if you expect kind of any gains on the shipper side? Or is it more like we're in a waiting period for the filing? And then I don't know, you said a couple of weeks for the filing, any more kind of just expectation of when that filing will come with STB. Vincenzo Vena: Well, Tom, listen, you're a smart guy. I think you covered just about everything to do with the merger and 1 question. We could be up here for 15 minutes. But let me -- let's just quickly summarize where we are. When we started at Union Pacific looking at whether what we do next and what the future looks like, we needed to make sure there were certain things fundamentally that where Union Pacific was as a railroad and how our business was. And we needed to have a service level that was high enough that customers could see what we could do and that they were assured that when we merged, we would be able to provide a real high level of service. And the entire team, and I give Eric as the leader and everybody from the operating department at Union Pacific, and it takes more than that. It takes fundamentally spending the right money, making the right decision. So it truly is a company we are delivering at the levels of service close to 100%, okay? You can never get to 100%. You're always going to have some problems, but close to 100%. So we have that as a foundation, Tom. On top of that, we wanted to make sure financially, we have a company that's in a good place. And you could see Jennifer say we paid back $1 billion of debt in the third quarter, so -- and we're down to a [ 2.6 multiple ], which is great, and we'll continue to use the cash or store it instead of buying back shares. So when you put the foundation of who we are and on safety, our -- we don't like to talk about it on a time and place number, but I'm going to give you a number. We're down into the -- like the [ 0.6 ] something between [ 0.6 and 0.7 ] this year, which is industry-leading at this point and the best safety numbers for people that come to work and go home. So we needed to have a safer railroad. Our accident numbers have dropped substantially. We need it to be financially in a good place, and then we needed to move ahead. And I think what you've seen from the people that truly understand railroading, they understand the value of what we're proposing. And the value is we look at it not only on what the STB tells us we have to do and what we have to present, okay, the rules that were set up 20-some years ago. But we feel, is it better for our customers. And absolutely, for the majority of our customers, it is going to improve with the speed and how many assets they're going to have to have and how fast we can move anytime anybody that crosses that today hands off. And remember, we hand off a huge percentage of our originations to somebody else to go do the final mile or vice versa. So it's good for our customers. And our customers understand that we are competing against the world, Tom. This is not just we compete against Canadian ports. There is going to be 5 or 6 or 7 trains that come across Canada that should be, and we think they should be handled by U.S. ports, but instead, they're handled the Canadian ports by Canadian railroaders across the country to drop into the U.S. And if we can become more efficient even than where we are today and more fluid and be able to have a different product, we can move some of that traffic. So we have more American jobs and more people working for Union Pacific, the combined company. So when I look at everything, what we've done is we've guaranteed jobs for every unionized employee on the day that we -- that the merger closes. And why would we do that? We are absolutely sure we can grow the business because of the watershed area of the United States that's underserved and a railroad that is seamless. Listen, I'll quote one of the other CEOs when they went through their merger. And I'll give you the quote off the top of my head, but I could easily pull it up on my phone because it's one of my favorite ones to read whenever I see somebody write from another railroad how it's not real good for us and they're worried. It was -- even though [ UP ] has a great franchise coming out of Chicago, and it's a great way to get the Mexico, nobody can beat and compete, and they're going to have to compete hard to win with our single line where we don't have to hand off to somebody else. So Tom, when you frame that, the SMART-TD agreement, it would just formalized what we had in place that we had already guaranteed. And we're in discussion with other unions to formalize it and I'm more than willing to formalize it. So it's not just my word and it's not just my -- what we've been saying, we're willing to put it on paper and say what we're going to do with our unionized employees. And we'll work through that. And in fact, Tom, we took this round of negotiations that we wanted to negotiate directly with our unions because our employees are really important to us, and we wanted to make sure that we were doing the right thing, so it's a win-win for our employees and ourselves. And I can tell you, right now, we have an agreement, either in principle, not yet out for ratification or sorry, they're going to go up for ratification with every union. So basically, we have finished this round of negotiations, and we have -- because the unions understand how beneficial overall this deal is and how it's going to help us move ahead. So we're real happy with where we are. So Tom, listen, unless I missed something and you wanted me to cut in -- you talked about the timing. So what I can tell you about the timing is it sure will not take us into January to get this done, okay? We're into getting the deal done as soon as possible. If you ask Jim Vena, I want it in, okay, before the 1st of December, the application. If you talk to some people on the team, they're saying, Jim Vena, would you give us a little bit of time? And the answer is no. So I'm hoping that we can do everything we can to have it in by the end of November or the latest in early December so that we can have the application in and get that process moving. So Tom, hopefully, I answered everything there. Sorry for the long answer. Thomas Wadewitz: No, on the shipper side, anything new there? Or is that -- that's the only thing you didn't hit. And thanks for all the perspective. Vincenzo Vena: Yes. Listen, Kenny, why don't you say where we are with the customers and how many letters of support we have already? Kenny Rocker: Yes. I just want to reaffirm something you said, Jim, about 40% of our business either comes into or moved out of Union Pacific that we're competing globally. But absolutely, I mean, we have over 1,200 stakeholders. Those are ports, government officials, they're short lines. But if you just look at the customers, we've got over 400 customers that have sent in a letter of support and there's still a pipeline behind that. And they run the gamut, they represent all the industries that we serve. Vincenzo Vena: Okay. Tom, thank you very much. Operator: The next question is from the line of Ken Hoexter with Bank of America. Ken Hoexter: So Jen, you talked a little bit about sequential OR or I guess, fourth quarter, you threw out some initial thoughts there. Can you talk to the puts and takes? You mentioned the favorable equipment settlements, the lower mix impact, your revenue thoughts. So maybe just talk about all the puts and takes that we should expect in the fourth quarter. If we're starting with volumes down mid-single digits, ultimately, should we see earnings flat, down, up year-over-year in the fourth quarter? Jennifer Hamann: So thanks for the question. And I know this won't surprise you, Ken, but I'm not going to give you specific guidance about the quarter, but I can give you context around it. And you hit many of the high points. So when you think about the top line, right now, volumes are down 6%. And that's -- it's really mostly that international intermodal piece that we've been talking about and quite frankly, expecting all year when we knew against the tough comp that we had against last year. Now with that, though, we do expect to have -- mix was a little bit positive in the third quarter, although we did have very strong intermodal in July, and so that probably was a little bit of a mix headwind versus what we would have been expecting coming into the year. But I would say fourth quarter, we're certainly seeing a better mix rotation with the international Intermodal coming down. But we do still have coal, which is below the system average arc that is going to be very strong in the quarter. We like all our business, you know that, Ken, and we're diligent in making it all profitable, but there's some that contribute more to that top line than others when you're looking at the arc. And then below the line, talk about expenses. We'll continue to have merger costs, probably not quite to the level that we had in the third quarter, but that will be there. But Eric and team, as you've heard, are running very well. And so we feel very good about the ability to be productive, although productivity, as you know, also is challenged when you have volumes coming down. And so the team accepts that challenge knows that they have that there, but that will create a little bit of a headwind. And so that's why when we look at it, would we like to have volumes up and blue skies and 37 degrees, as Jim said, great railroading weather throughout the quarter, you bet. But we will have some challenges, and that's going to make it tough when you think about stacking that up against what was a record quarter for us in the fourth quarter. But when you peel all that back and look at how we're running fundamentally, the railroad is running extremely sound fundamentally, and that will absolutely continue in the fourth quarter. Ken Hoexter: And then specific to the [ rent ] question? Jennifer Hamann: So we just had a couple of small -- I said I called it out $13 million some contract settlements. Those were unique to the third quarter. Operator: Our next question is from the line of Brandon Oglenski with Barclays. Brandon Oglenski: Since you guys announced your merger agreement, it seems like your competitors are maybe collaborating a lot more than they have in the past. Do you view this as potentially a risk, especially as you're going through a pretty complicated process with the STB here? Vincenzo Vena: No. In fact, that proves our point about competition. If you take a look at it, I'm surprised they weren't doing it before, if that was out there. So what happens is when you have a competitor that you know is going to be stronger and is going to give a better service product and probably at a better price, okay, because of less touch points that we have when you remove the touch points that everybody else needs to compete. But truly, I'm surprised that it took us announcing, okay, a merger for other people to say that they were going to do special moves and cooperate. So I think it bolsters our position in front of the STB. Remember what the STB needs to take a look at it. You talk about enhanced competition and this merger provides enhanced competition and you just see it the way the railroads are reacting. Nobody would react in business if it was bad for the railroad that was merging and good for themselves. Listen, we're competitive. If anybody thinks that another railroad would come out and be, all no, UP better not merge if it was actually worse and better for them let's get -- let's put that on the table. So there's only 1 reason that the railroads are complaining a couple of them is because they see the competition and they need to step up. When we do that, it's helpful. So I'm looking forward to this as we go through and work through on the merger. We're covering every point on the merger, and we're very comfortable that the STB is going to see how good it is for America and how it changes the paradigm of railroad versus truck. Brandon Oglenski: Thank you, Jim. Operator: Our next question is from the line of Jonathan Chappell with Evercore ISI. Jonathan Chappell: Thank you. Good morning, everyone. Eric, Jennifer just noted in one of her prior answers, productivity is challenged and the volumes are coming down. In your prepared remarks, you said you had the locomotives and the labor position for new business wins. We look at Kenny's outlook slide and there's actually more minus signs than positive signs for 4Q. So when we think about your ability to be nimble, your productivity or efficiency, as you're going through kind of a choppy macro backdrop but with all eyes on the UP and your service during this merger review process, can you be as nimble and reap as much productivity if volumes continue to be weaker than expected? Or do you need to have a little bit more slack in the system at the present time? Eric Gehringer: Yes. Thanks, Jonathan, for that question. So you're right in your characterization of what Jennifer mentioned. When we are faced for temporary volume being down, we know that playbook, and it's important that all of you understand that. And you start with what you won't do. And what we won't do is sacrifice anything related to our buffers, whether that's locomotives, crews or railcars. So could we be a little bit more conscious about that? Honestly, I don't think we are because we do that every single day. We focus on making sure all 3 buffers are intact and prepositioned across the railroad. Now what do we do? Of course, we'll react to the markets. We'll act promptly. You first start with your transportation plan, making adjustments that typically drive productivity in the areas of train starts and crew starts. Then from there, you do as what you said, which is go to your locomotive fleet, make sure you've rightsized your locomotive fleet for the volume and the mix that you have on the railroad. You adjust your car fleet. You've seen us do that many times. Heck, we do that 4 or 5x every single year just due to the seasonality of intermodal business. Then you go to your hiring and you look carefully. We go through that process every single month. I'm personally involved in that process. But if we were to see volume being weaker in certain markets, certain geographic areas for a prolonged period, we would make adjustments to hiring. So I could keep going through the rest of the playbook. I don't even have it in front of me. I know it so well, and so does the team. So we will make adjustments to ensure that we continue to provide the great service we're providing, but also at the lowest cost so we keep Kenny and the team competitive in the market as they go and win volume. Jonathan Chappell: Thanks, Eric. Eric Gehringer: Thank you, Jonathan. Operator: Our next question is from the line of Scott Group with Wolfe Research. Scott Group: So maybe just, Jim, like to ask it more directly, like [indiscernible] rail that seems like publicly opposed to the merger. Like in the past, maybe that has mattered, like do you think that rail opposition matters today, given all the other sort of puts and takes as it relates to this merger? And then maybe just separately, if I can, Jennifer. The yields ex fuel were up 3.5%. I know there's maybe a little bit of mix here. But it feels like we're like now more clearly in a positive price cost backdrop? Like does that continue? Any reason to think that, that isn't sustainable looking ahead? Vincenzo Vena: Okay. I might as well start and then Jennifer, you can jump in. Appreciate the double question there, Scott. It was pretty slick. That's what I like about you. So let's talk about the other railroad, and you specifically talked about BN. [ Unless ] BN is a great company as a great franchise, has a long history, and we compete with them every day, and we compete hard. And if I was in their shoes, if I was the leader of both in Northern Santa Fe or I guess, just like Union Pacific Railroads, a subsidiary of Union Pacific Corp., they're a subsidiary of behemoth called Berkshire with $350 billion. So they can do whatever they want, whether they want to buy something or not buy something. And maybe if I was there, I would phone up the big boss and say, we need to do this because it's better for the country and better for us. But that's -- but if I take a look at it like I started, Scott, is -- they have to react to what we've done. We're the first mover to truly deliver. And they can -- I would see the benefit if I was outside of this merger, and how do I gain the most for myself. And that's what [indiscernible] Northern or Berkshire is doing is, is at this point, they don't want to do anything. So they're looking at it as a way, and that's what the other railroads are doing is looking at a way that they can benefit. The problem that they have is this time, it truly is an end-to-end bolt-on. It is not a big overlap. So that story of I need access to the railroad just doesn't fit. On top of that, Scott, as an industry, too long, we wanted to open up a coffee shop inside of Starbucks because we're afraid to spend our own money to build in. So you think about that. I want a new coffee shop in New York City. And I'm going to walk over to the Starbucks and say, [indiscernible] you've got a real nice store, would you let me open up my own counter in your store? No, open your own counter because if you have enough money, open it across the street, if you want, but you pay your expenses. So the way we look at it is when the railroads come up and save very sort of misleading positions, it helps us. The STB and the members that are there now are very smart. They know we're not going to remove 300 lanes of traffic, okay? They know that we're going to have more options for our customers, not less. So at the end of the day, they're fighting a good fight trying to make the noise, but the STB in our case is so strong that I'm very comfortable that unless they change their strategy, then they actually help us because it doesn't make sense when things are out there that don't add up the fact. Finally, as we are more than willing to sit down and have arrangements and have discussions because we have a very small amount of customers that are going to go from 2 to 1. In fact, it's less than 10 customer locations, not even just customers. So what we've agreed to is we are going to provide access to those locations to another railroad to give them the optionality that they had before so that nobody in this merger loses anything. So we'll talk to all the railroads and see who wants to sit down and have a discussion about it. Finally, Scott, I mean I know I'm being along with it this morning, but it's sort of fun. Isn't this a fun thing to be doing, talking about a great quarter that nobody really is paying attention to, okay, world-class quarter, with a world-class team that delivered, but nobody is going to ask us too much about that. And then the merger that we're going to change the industry and move it forward the way we should. So bottom line is I'm very comfortable where we are, and I think that we end up with a -- at the right place with the STB because they're smart and they're going to work through the issues that are on the table. And also just a final point, Scott, we haven't even put in our merger, okay, application that talks about all the things we're going to do and people are already talking about what we're going to do, truly amazing. They must be mine readers. They must be looking at our brains here and saying that wonder what Eric is going to do and Kenny and Jennifer and Jim and the entire team, okay? So we'll wait until we put the merger application in at the end of November. And then at that point, we'll sit down and talk to anybody who wants to sit down and talk to us. Sorry for the long answer, Scott. The second part, Jennifer? Jennifer Hamann: I've forgot it. No. I'm kidding. Vincenzo Vena: I [ won't ] speak as many words. I promise you all. Jennifer Hamann: I'm sorry. You asked about price going forward, Scott. So -- and then you referenced the 3.5%, the price/mix yield that we had on our freight revenue in the quarter. So we did get some positive benefit in the third quarter from the mix. And as we look forward, we do think, obviously, it will depend on how the business comes through. But as we're sitting here today with intermodal going down, we definitely think mix should be a positive in the fourth quarter, tempered maybe a little bit on the coal side. In terms of price, the pricing environment has remained, I'd say, challenging, but Kenny have done a really good job supported by the service to go out there and talk with our customers about the value that we're providing them through faster cycle times, more reliable service, and they're doing a good job yielding some very positive price. We're not getting any support from the intermodal side of the world. That truck competitive market is still very, very challenging. And I would say, as we move into the fourth quarter and into the first part of next year, you're going to start to see some tougher comparisons for us on the coal side of the world as well, when you think about some of the flexibility we have in those contracts with natural gas. But you put kind of some of those, what I'll call, [ manufactors ] aside and you just look at what the team is doing and the combination of driving value to the customers and being very value motivated, profit driven in terms of what we can do for the company and for our customers to grow the business and get solid price, we feel good about that. Vincenzo Vena: Thank you very much, Scott. Sorry for the long answer, but I thought we'd cover off a few points there. Scott Group: No, that was great. Operator: Our next question is from the line of Brian Ossenbeck with JPMorgan. Brian Ossenbeck: Maybe a quick 1 for Kenny, and then a follow-up for Jim. So Kenny, just looking at the intermodal, it looks like there's some share shift between yourself and other Western competitor, if we look at just an originated basis. I know there's a lot of moving parts with international and domestic, but wanted to see if we're reading that directly. And then, Jim, you mentioned that the customers are lining up, there's a good amount of support, but 1 that's been pretty vocal, obviously, [ maybe this is ] the Starbucks example you're referring to. But the chemical shippers in the Gulf Coast, they've been a lot more vocal winning enhanced competition. Is that something -- I'm sure we'll hear about in the application, but is that something you can deal with directly? Or do you take that to the STB and have them weigh on it? And just how should we think about how that progresses since it's a pretty big and important in vocal group. Vincenzo Vena: So Kenny, do you want to talk about the... Kenny Rocker: Yes, I'll start off. Thanks for the question. We've seen a little bit of a market degradation for sure. Those are tough comp comparisons. We did see quite a bit that's pulled ahead earlier in the year. And at the same time, with all the investments that we've made in our intermodal market, the new markets for international and Arizona and Twin Cities and some other areas in the service product that we have, we're going to make sure if we move the volume that it's going to move at the margins that reflect both the service, the investments in the infrastructure that we've made and the overall products. And so that's what you're seeing. You're seeing both of those right now. Vincenzo Vena: Okay. So on the associations, the chemical association that you mentioned, last time I looked, they don't pay any of our bills. They don't have a direct relationship with us, and we are dealing with our customers, and that for me is really important. Do we have to understand what the associations are saying and what they're doing in Washington, D.C. and what their story is. But again, it's truly amazing that they know already that gives you an idea of where they're coming from, what we're putting into the merger document and what we're doing with access to CSX, access to Burlington Northern or Berkshire on the way westbound and access to the other railroads whether it's the short lines that we operate [ with ] and handle, whether it's Canadian National or Canadian Pacific. So at the end of the day, we'll deal with them, and we're more than willing to sit down with the associations and explain the benefit. And the benefit is 15% to 20% on their merchandise traffic, okay, moving. History will show them that the railroads have not increased price, and this is in general for all of the railroads at the same level as the liability issue has crept up and what that would cost us and also how -- what we're pricing for the product that they're selling. So that's why we like to talk to the big shippers that we have. And when we talk to the big shippers, they understand it. But you know what, it's a little bit and especially for the associations is there's a trough out there, and they're trying to see what they can get with it. We've spent a lot of time with the -- and when we explain what we're doing with the political and regulatory people, they start to see -- so you're talking -- Jim and Kenny and Eric and Jennifer, so you're saying you're going to be faster, really so they need less cars. They need less expense, less inventory expense. Hold it, you're going to be able to move across the country, 15% to 20% quicker. You mean you're going to remove 1,000 trucks of rail-to-rail or our portion of it in Chicago and other places that today runs on the highway instead of going rail to rail. So we have less trucks on the road. Oh, you're looking at forward on how we're going to do, okay, to compete against trucks, where technology is changing quick if anybody wants to go take a look at what trucks are doing now to become more autonomous as they move ahead. Let's go to Texas, let's go to places where they're being used right now. If we don't move ahead, the associations okay, we'll find themselves in a place where they'll be asking us railroads to do what we're doing without their push. So that's where I'm at with it. It's complicated, but I don't know Brian, real interesting, but you would come out so strong when you haven't even read what the merger document is, okay, is the merger application is makes you wonder where the heck are coming from. They just must be negative all the time. I guess what they probably are looking at our third quarter and find some dirt on the third quarter where we've really delivered strong as a company. Kenny, anything you wanted to add? Kenny Rocker: Yes. I just want to say, our first approach is to talk directly with customers, not necessarily through the association. At the same time, we have -- we've already done and we already have meetings on the books to talk to those customers through those associations. But again, the main approach is sitting down with our customers, large and small and talking to them. We're covering it from all angles. Brian Ossenbeck: Jim, the 15% to 20% increase, just to clarify, that's a speed or a throughput? What does that number referred to? Vincenzo Vena: Yes. So what I'm talking about, Brian, is that what people miss [ that don't railroad ], okay? And I'm trying not to be [ flippant ] this morning because I woke up just flippant. I looked at our numbers and I was trying to find some dirt on Eric to make sure I pushed him and the team real hard. So that's the attitude I woke up with this morning after about 4 hours of sleep last night like I was ready to go. So let me not be flippant. Bottom line is if you understand railroading, if you can remove touch points of touch points through a yard, our average and we're the best in the industry is 19.9 hours this month, okay? So you're going to add 19.9 hours if you're going to move railcars and have to touch them. We touch them now before we hand them off. On top of that, Brian, we don't build blocks for other railroads because history has always said that railroads always look internal as soon as they get into the slightest bit of trouble. So you cannot rely on railroads to do what's better when they've agreed to build blocks for you. So when you add that up and we've looked at the railcars, that's where that number comes from 15% to 20% quicker because when we build the block coming out of Houston for the chemicals, we'll build the block that goes all the way to Philadelphia or build a block that goes all the way to the Northeast. If the new Union Pacific is building a block with lumber coming westbound, okay, we're going to build the block that goes all the way through and remove touch points. We work on touch points every day. So that's what I'm talking about, the 15%, 20% on the merchandise business, let alone what everybody looks at and likes to talk about the intermodal business, which is really important to us that we remove touch points and have speed. So sorry for the long answer, but I'm putting the points out there this morning, Brian, okay? We might not get through everybody. I think there's only room for another handful of people. That's about it. Brian Ossenbeck: We appreciate those details, Jim. Thank you. Vincenzo Vena: You're welcome. Operator: [Operator Instructions] The next question will be coming from the line of Stephanie Moore with Jefferies. Stephanie Benjamin Moore: Thank you. Good morning. When you look at your service metrics, as you noted, they're about the best they've ever been or 100% or so. Can you talk about your level of confidence and the steps you can take to implement your service best practices to [ NSE ] post-merger? And Jim, just the time line do you think realistically for some of these world-class levels to convert over? Vincenzo Vena: Eric, why don't you take this? But real simple is I think we have a history of doing this. I've been real [indiscernible] for a long time. You [ have me in a way you go ], you answer it. Eric Gehringer: Absolutely. And thank you for that question. So you're absolutely right. Definitely world-class level is definitely best in the industry. Now being able to take that over and partner with the NS inside the merger, that's what we do every day. It's just a bigger scale, right? We look every single day. It doesn't matter if I'm looking at a terminal or a service shoot at an interchange point. Every single day, we're looking for what are the issues or the opportunities dissecting the performance and individual terminal, how do we get 2 hours off of dwell, how do we get the trains out 5% faster. It's going to be the same thing just at a broader scale. And look, I've been working with the NS for nearly 15 years. I've had a relationship with them in lots of different roles. They're good railroaders. Their knowledge of their network and our knowledge of our network combined aligned with the goal of being able to move cars faster in the most efficient way to be most competitive in the market. That's the job. We all know it. We're all going to do it. Vincenzo Vena: Stephanie, I grew up working for CN did 40 years there. And when I came over to Union Pacific, I didn't know that there was 2 [ Green Rivers, ] okay? There's a Green River on our East West Main and there's a Green River in Utah. So at the bottom line is the way I look at it is, I think you can see from example of real life examples. We don't make up stories Union Pacific. We want you to judge us on what we've delivered. And you can see since I joined in 2019, what we've been able to do with this operation, and we will optimize. They're great railroaders, they're great people, the people I've met at that Norfolk Southern. But I've always said that every railroad should be able to have their operating ratio within 100 basis points of each other. So I'm looking forward to getting the magic that's at Union Pacific and doing the same magic with all those employees and with them at Norfolk Southern. Operator: Our next question is from the line of Jason Seidl with TD Cowen. Jason Seidl: I totally get the perpetual dissatisfaction comment, but hopefully, you guys can take a day to enjoy some very, very solid results for the quarter. My question is going to be on yields, but Jennifer is going to actually be happy that I'm not looking for guidance here. How should we think about your ability to sort of directionally change domestic intermodal yields if sort of the market starts to inflect on the truckload side, sort of given all the governmental actions taken against foreign drivers right now? And also, when we look into [ ag ], can you help us sort of frame up how to think about near-term ag RPU. And so how does export RPU compare historically versus sort of domestic ag RPU? Jennifer Hamann: Let me start off here, Jason. When you talk about the intermodal side of the world, as you know, when we expanded our portfolio of domestic partners, we did some market-based pricing there. And so when we see that truck market improve, that will have a direct impact on us. And we've also been very successful in converting business even in a very weak truck environment, and doing that in a way that has been contributing positively to our bottom line and feel great about those partnerships and our ability to grow that business. It really is service based, it's market-based with our great reach and as you know, that's an exciting part for us when we look at the Norfolk Southern merger and their vast intermodal network. When you look at the ag side of things and you ask about export, it really comes down to length of haul. And with some of that business, particularly when it goes to the PNW, that's a good length of haul. We're seeing more export today go to Mexico, and that's a good length of haul. I would say the only caveat to any of that is, particularly when the business is going into Mexico versus the PNW, that does slow the cycle times down somewhat when you think about the turns on those cars and bringing them back. Kenny, anything you want to add? Kenny Rocker: Yes, just the fact that we have structurally changed the network and the intermodal. If you look at the ramps and the products, Inland Empire, that's out there now. I talked about Phoenix but then also there's other services. I mean, we've added new services. You look at moving out of L.A. in the Kansas City, you look at the West Coast going in the Louisville. So we've transformed that. You already talked about the portfolio, Jennifer. The only thing I'll say about the grain business is the team has done a heck of a job growing infrastructure inside Mexico through business development, giving us an outlet when there is nothing there, on the soybean market. So we've been flexible and adaptable. Jason Seidl: Okay, if I could follow up there. Just how do you think about the timing? Like if the market inflected on the truckload side, is it going to be a couple of months lag? Is it going to be a couple of quarter lag with your ability to adjust price on the domestic side? Kenny Rocker: I can't get into the actual contracts. But what... Vincenzo Vena: [indiscernible] Kenny Rocker: It is. But what else is what we're really looking at is what's happening with truck production. So truck production is down about 28%. We're waiting for that to turn. And we remember this since we've added these new portfolio of customers, we've been on a flat market. So I've said this now for [ 3 years ]. We haven't seen any uplift. And when we do, we're going to take advantage of it. The [ last thing, ] Jim, we've had a record intermodal revenue on the domestic side. [indiscernible] Vincenzo Vena: I got it. Listen, I've asked them the same question, okay? So it's sometimes hard to get that out of them. But what I do like and [indiscernible] surprise you can't come back is, listen, our revenue is up 3% and all this sort of stuff. But okay, Kenny. [ You didn't get a better ] answer than I can, Jason. Jason Seidl: I appreciate it anyway. Take care, guys. Operator: The next question is from the line of Chris Wetherbee with Wells Fargo. Christian Wetherbee: Maybe sticking with Ken, I guess I was curious about sort of the pricing environment as we move into next year. So I guess, do you think as you go through contracting at the end of the year, that pricing is kind of [indiscernible] is better in '26 than '25? Is it kind of the same? I know the backdrop from intermodal really kind [indiscernible] trucking environment hasn't done much here just yet. And then just kind of curious or generally speaking, the response from customers, I don't know if it's sort of the conversation tones have changed at all in the last couple of months? Or are they still relatively constructive and as you think about next year? So just any thoughts around pricing would be great. Kenny Rocker: Yes. So without talking about 2026, it really does start with a strong service product. We lead with the metrics both to and from industry and over the road industry as we're working through those contract renewals. And we're very [ clear about the ] pricing levels that reflect the service that we're delivering and we sold to customers. And I said this in my remarks, we are confident because the service product is so strong. Now the question about what we're hearing from customers as they look forward. They're still looking for a little bit more clarity on the market. When we talk to our customers and when we look at our business, we're looking at the current metrics that are out there are, the indicators and we're judging ourselves on how we perform against those. So regardless of what they're seeing, we look at are we outperforming in those key markets. Christian Wetherbee: Just in the context of the service product that you're putting out there, I guess it's a little unclear. Does that drive better pricing sort of conversations as you go into next year? I guess, it may be -- is kind of what you've been doing. Vincenzo Vena: [indiscernible] this is the way and we've had this discussion pretty black and white. The entire time I've been a railroader, every marketing and sales group will always tell you that the reason they can't [indiscernible] and price properly and win new business is because the service product is not high enough. Well, our [indiscernible] service product is so high that, that should not even be part of the discussion. There might be 1 or 2 customers out of the whole thing that could say, listen, you're not perfect. But at the end of the day, it's high. So that's their challenge. That's why we have a marketing and sales department as they go out there and go get business. It brings you business online because we have a great service product and price it at the value that we're giving the customer. So go ahead, Kenny, any disagreement with me on that point? Kenny Rocker: Not at all. And all I want to say is absolutely the service product helps us. So we appreciate that, and we're pricing based on that service product that we're delivering. Vincenzo Vena: Chris, how do you like to work with -- for me? Christian Wetherbee: Good characterization of the service product. Appreciate it, guys. Operator: The next question is from the line of David Vernon with Bernstein. David Vernon: So Kenny, a couple of months ago, UP and Norfolk put out some marketing material around enhanced collaboration in the network. I was wondering if you could maybe just talk a little bit about how those changes are being made and how that level of integration is -- would compare to maybe a post-merger world. And then if you have any comments on kind of what you're thinking about doing with the UMAX program longer term, we'd love to hear kind of some more perspective from you on that. Kenny Rocker: Yes. So let me just first off and say we have alliances that we're working with, with all the rail players. I mean, we have the Falcon out there with Canadian National that's working well. We have the same lanes, same markets that with the CSX that we do with Norfolk and [indiscernible] . So I want to make sure that's clear, and we aren't doing anything prior to the actual merger that takes place. Having said that, at the same time, yes, we are able to look at new markets out there. We talked about -- or I talked about just recently, the market into Louisville. Again, that's all aimed at over-the-road traffic that we're trying to win. We have the same approach with all the rails. The second thing is, and I want to be crystal clear on this. Absolutely, we want to make sure our customers have optionality. We're going to completely support UMAX. That product is a strong, viable product that our customers are utilizing the day, that's not going away, and we see it as a viable option in the marketplace. Vincenzo Vena: Thank you very much. Thanks for the question. Operator: The next question is from the line of Walter Spracklin with RBC Capital Markets. Walter Spracklin: Thanks for the detail today. I just want to double-click a little bit on next year. And I know, Jennifer, you don't have guidance out there, but you do have that S4 document that we normally wouldn't have this time of year and the numbers are out there. They are below -- you reiterated your high single-digit, low double-digit multiyear guide today. Those numbers are notably below range. I guess my question here is whether you can give us some context on how we characterize what you put in that document, what's changed or what's different from the assumptions that underpin them again because you did reiterate the guide and those numbers are below Street. So I'd love to hear any color you can provide there. Jennifer Hamann: So thank you, Walter, for that. One of the things that is, I think, stated very explicitly in the [ S4 ] is that those numbers are not guidance. Those are our guidelines and those are particularly when you look at the out years, they are what I would call unstressed financials. I mean, we're looking at market indicators. We're looking at kind of run rates, those types of things. It is by no means what I would call a detailed look talking with Kenny's team about where are you getting new customer wins, where are you getting greater penetration. It's not doing a deep dive with Eric's team to say, with that business overlaid, how can you drive greater productivity. And I could take you on through the [ West ]. So it's directional, certainly, but it's also something that didn't include merger costs when you think about particularly some of the 2025 numbers, considered that we were still doing share repurchases. So it's directional. But beyond that, I would not try to extrapolate from that S4 numbers. Operator: The next question comes from the line of [ Richa Harnain ] with Deutsche Bank. Richa Harnain: So Jim, you said that no one is really talking about this world-class quarter. I guess after that, a couple of people did, but maybe we can tie a bow on it. This past quarter results were pretty remarkable. You managed 12% EPS growth with virtually no volume help. Labor productivity continues to be a strong driver. I think you had like another 3.5% drop in headcount. [ You're coming out ahead on ] comp per employee. I think [indiscernible], you said 3% for the year. And last quarter, you guided at 3.5%. Eric, you talked about the overall records and various measures of productivity. But I think is this really the pricing lever starting to kick in Jennifer that you've talked about in earnest in the past around repricing contracts like [indiscernible] the work you're doing to reflect the good service you guys are introducing. And if yes, what inning are we in there? And then just like why shouldn't the high end of your long-term high single-digit to low double-digit EPS target be more appropriate, especially into 2026. Again, that 12% on 0% volume growth really stands out. Jennifer Hamann: Thanks. You did a great job summarizing our quarter and some of our very strong results. When we laid out our targets back in September of last year, we put some baseline macroeconomic numbers that underpin that. And we said that if we reach those numbers from a macro standpoint, we expect it to be kind of at the low end. So at the high single kind of range and that it would take a better macro environment to be at the double-digit side. Unfortunately, a lot of those macro indicators, I called out the housing starts and the auto sales on the call have actually gotten a little bit worse. The good thing about UP and our great franchise is and the way that we are running today and the way that we're executing on the fundamentals is we're being very agile. We're taking advantage of every opportunity that comes our way, and we're pushing ourselves daily. And whether it's improving on the safety front, whether it's driving greater service, working with our customers to drive more value to them and then pricing for that value. What you're seeing is us executing on all of those fronts and the end result is great financial results. And so that's our mindset. That's what we're going to keep doing. But there is a macro backdrop that underpins that, that we're fighting against a little bit right now, which is Kenny say it's kind of 3 -- year 3 -- to our improvement. And we're going to keep pushing. But we also have to do that within the context of where the economy is at and how we're performing against that. Vincenzo Vena: Thank you very much for the question. Appreciate it. Operator: The next question is from the line of Bascome Majors with Susquehanna. Bascome Majors: One for Jennifer here. You've got a little over $2 billion of debt maturities between now and the first half of '27, call it, $10 billion to $15 billion in debt to raise to fund the deal when it hopefully is approved and closes. And you don't have a potential on financing. So you're on the hook to go through to that no matter how the capital markets play out between now and then. And so how do you think about sort of hedging your bets on managing the balance sheet for that capital need between now and in 2027. If you could just kind of walk us through debt pay down and do it all at once versus kind of opportunistically chip away at that over time, I think that would be helpful. Jennifer Hamann: So Bascome, thanks for that question. So there's a number of things that we're looking at and planning towards over the next year as we progress through the application period and move towards having the merger approved. You mentioned paying down debt. We're certainly going to do that as debt comes due, that is our intent. We'll do that with the available cash that we're generating. We'll also be looking at because, to your point, when the day comes, we're going to need to come up with that cash. So what are the different levers that we can pull to protect ourselves on the interest rate side, what can we do in terms of facilities to be ready to be able to access the cash because when you look at the calendar and you consider different blackout windows, et cetera, we were not going to be able to control exactly when that timing is. So we're planning for that. We're making sure that we have the cash available to us to close that, working closely with our bank groups and feel very good about the plans that we have underway there. But then also structuring it to I think the last part of your question in a way that will allow us to quickly pay down some of that debt so that we can get back into a position when we're in the market and repurchasing shares. And we believe that we'll be able to do that sometime in year 2, which, for us, looking at it based on when we believe the transaction will be approved will be in 2028. So that's how we're looking at it. That's our plan, and we feel very comfortable about our ability to execute that. Vincenzo Vena: Thanks for the question, Bascome. Operator: The next question is from the line of Ari Rosa with Citigroup. Ariel Rosa: Team, congrats on the strong network performance, really, really impressive to see UP running so well. So Jennifer, you were talking about some of the weakness in some of these macro indicators, housing starts and other things. I'm just curious to hear your perspective on kind of the overall economy, where you see risks? And specifically, I wanted to hear, is there any kind of level of deterioration in the macro that would cause you to either reassess your synergy targets for the NS or even, I mean, in kind of an extreme scenarios or any level of deterioration where you would think about walking away from the deal? Vincenzo Vena: [ One of the few of us get into that gave real ] quick. You always have markets that are going to be up and down. We look at what the consumer overall is doing. And so far, the consumer is staying in a pretty good place. So we're very comfortable. Now there's some specific markets underneath. [ Automobile and parts have ] gone up and down, whether that's been positive or not, there's going to be changes with what's happening as far as where the production is going to happen, that's going to change. So at the end of the day, we're very comfortable and we don't see anything that changes our idea of what's possible at Norfolk Southern. We think the merged company -- I know -- I think, personally, on the operating side, there's a lot of value that we can drive, okay, productivity and value for the combined company just because of its combined network. But why don't I let Jennifer and Kenny jump in and talk about the overall market and where you see the economy? Jennifer Hamann: Yes. I mean, we're still working through our plan for 2026. But just to build on Jim's point, I mean this [ $85 billion ] investment we're looking to make is for the long term. That's for our generation and the generations to come. It's not based on a short-term economic play. And certainly, long term, I think, American industry, American manufacturing, there's just tremendous potential there. So the near term will be what it will be, and we'll work with that. As I said, we're still putting our 2026 plan together. But we will control the fundamentals of how we run our railroad, which is very productively, very efficiently and very safely. Kenny Rocker: Yes. I'll just say that because of our franchise, there are some natural benefits when you combine that with a strong service product to go out there and win [ where that the rock ] network, whether it's our petrochem network, whether it's everything that we're doing to invest in intermodal, that gives us a lot of confidence. And again, remember, we're out there trying to penetrate and create our own wins, whether it's put in new facilities on our network or going out there and selling where we've invested, we want to control what we can control. To Jennifer's point, we'll see what happens [ with how and start ]. We'll see what happens with auto. We're excited that we've got a strong network and a strong portfolio of customers [indiscernible] it will change. But once it does, we feel confident that we'll be able to capitalize on it. Vincenzo Vena: Yes. And the final point I would add is, listen, the economy is going to give us what the economy gives us. We need to also have a railroad that operates efficiently and has the capability to flex up and down properly so that we win in the marketplace at a high service level. So we want to win market share, for sure, stand-alone until we have the approval mid next year, hopefully, of the merger. I know our Chief Legal Officer is looking at me sideways right now when I sit mid next year. So that's my dream, but it could be a little bit later. But at the end of the day, that's a win on both sides for us. And that's fundamentally why -- who we are at Union Pacific. All right. Thank you very much. Operator: Last question is from the line of Brady Lierz with Stephens. Brady Lierz: Kenny, in your fourth quarter volume outlook slide, the word business win or contract win or just really win in general is used a couple of different times. Can you help us understand what's driving these wins, particularly at a time of economic and trade uncertainty? And how does your pipeline of wins per se look as we start to turn our attention to 2026. Do you think these wins can drive volume growth in '26 even without help from the macro? Just any clarity there would be helpful. Kenny Rocker: Yes. I appreciate that. Some of those wins are actually wins that occurred a few years ago, we're realizing them as you have plant expansions. We had a couple of plant expansions that took place in the last part of 2024 that has helped us in 2025. We've had a few this year that have come on. And some are immediate, just wins that we've gone out because we have a very strong network and the infrastructure [ therefore ]. The other part of that, and we've talked about and I talked a little bit about it at the Investor Day is that the team has done a really good job of adding new facilities onto our network. In some markets that are mature, like the grain markets, you call it, over the last couple -- few years, 20 new facilities on the renewable side over the last few years, 18 different facilities. So that's how we're creating that value. That's how we're creating that revenue. As we look ahead and look at the pipeline, is still a strong pipeline as we look at the facilities that are set up to come on and expand. So that's encouraging to us. Vincenzo Vena: Thank you very much. Operator: Thank you. This will conclude our question-and-answer session. I'll turn the call back over to Mr. Vena for closing comments. Vincenzo Vena: Great. Listen, Rob, thank you very much. Pretty exciting times here at Union Pacific. I love the fundamentals of what everybody delivered and then I have to give our team the accolades. It's not one person. It's the entire team that delivers and operationally on the marketing sales, I know I like pushing Kenny, but he does need to go get us more business. But at the end of the day, and Jennifer and the entire team and what everybody has done. So what's some key dates and what we see coming up. Fourth quarter is what the fourth quarter is, we'll deliver as good a quarter as we possibly can with everything that's in the mix, and we've talked about that. And next year, truly, we have an opportunity to put together a franchise with the great team over at Norfolk Southern. I've spoken to [ Mark George ] a few times. We need to legally keep it high level. I never tell them what to do. But at the end of the day, they're focused, they're on it. They know what they have to do, generate cash and be able to run a real good railroad so that we can show everybody what the combined railroad is going to look like to win, and we're very excited about that. So next big date is November 14, special meeting and with our shareholders and see where the boat comes in. We're very confident that the vote will come in to support this. There's no reason shareholders will have any problem with it. So with that, let's tie up this call, fantastic job by our team. Thank you very much for the good questions. And I apologize for the length of my answers, but I was ready to go this morning, okay? And you could tell by where I was at. So November 14, I'm sure we -- you can listen in or ask us questions once we put out where the vote ended up. Thank you very much, everyone. Have a great day. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.
Operator: Thank you for standing by, and welcome to the Honeywell Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Meakim, Vice President of Investor Relations. Please go ahead. Sean Meakim: Thank you. Good morning, and welcome to Honeywell's Third Quarter 2025 Earnings Conference Call. On the call with me today are Chairman and Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the third quarter, share our guidance for the fourth quarter and provide an update on full year 2025. As always, we'll leave time for your questions at the end. I'll turn the call over to Chairman and CEO, Vimal Kapur. Vimal Kapur: Thank you, Sean, and good morning, everyone. Honeywell continued its strong 2025 performance in third quarter. Growth in organic sales took another step up and finished ahead of expectations, driven by our commitment to developing new solutions that solve our customers' most challenging problems. Better top line results translated into earnings well above our guided range, while strong orders across the portfolio demonstrate early results of our focus on innovation. Our excellent third quarter performance is powering another increase in our full year guidance. We are raising our 2025 EPS guide for the third time this year even as we incorporate the impact of impairing spin-off of Solstice Advanced Materials. Barely a year since we announced our intent to separate Advanced Materials, today, we are a week out from Solstice's first day of trading as an independent company. Our swift progress to this point demonstrate our ability to diligently execute carefully crafted work plans with speed and efficacy. We have the right resources in place to deliver on both our portfolio transformation and our businesses, financial and operational targets. We will carry the learnings and momentum from Solstice to next year's separation of Aerospace. As we look to our future as 3 independent companies in 2026, we are proactively planning to realign the structure of our automation business at the beginning of next year to reflect how we will operate going forward. This move is another significant step in our simplification of Honeywell, which will provide the strategic focus, organizational agility and tailored capital allocation to grow faster and drive value for all our stakeholders. Please turn to Slide 3 for the latest update of our separation. A couple of weeks ago, Solstice held a well-attended Investor Day in New York, where David Sewell and his new management team presented a compelling vision for the new specialty materials company and how its rich history and new independent strategy will unleash its growth potential and unlock long-term stakeholder value. A week from today, on October 30, Honeywell shareholders will receive new shares of Solstice, which will begin trading as a separate public company. I want to thank the teams that achieved this important milestone well ahead of the original schedule to complete by early 2026. I'm extremely excited for the opportunities in front of Solstice, and I will be cheering on the success in the years ahead. As our planned separation of Aerospace in the second half of 2026 approaches, our Board has been intently focused on assembling a Honeywell Aerospace leadership team with the right mix of industry, company and capital market experiences to maximize value for our customers, partners, employees and our shareowners. We expect to make an Aerospace leadership and headquarter announcement later this year. The separation of Aerospace brings the opportunity to further simplify Honeywell Automation. As a result, we have proactively designed a new, simpler structure aligned to the future of the business, which I will discuss in more detail in the next slide. As we seek to better position the future independent aerospace and automation companies for success, we have opportunistically completed transaction to simplify the legacy liabilities left on our balance sheet. During the third quarter, we entered into an agreement to divest all our Bendix asbestos liability on attractive terms for all parties. We also terminated an indemnification and reimbursement agreement with Resideo in exchange for $1.6 billion in cash. In combination, these transactions resulted in net cash inflow and will simplify and derisk our balance sheet, providing the company with fewer administrative burdens and greater financial flexibility to focus on creating value for our core business. On Slide 4, I will go over segment realignment in more detail. We announced yesterday that we are planning to reorganize the Honeywell Automation segment into a simplified structure focused on cohesive, synergetic business models. I'm pleased to take this next step in evolving Honeywell's streamlined portfolio with the aim of unlocking incremental value and driving long-term growth and margin expansion. As such, effective beginning of first quarter of 2026, we plan to report 4 business segments: Aerospace Technologies, Building Automation, Process Automation and Technology and Industrial Automation. Ahead of upcoming aerospace separation, this new structure serve as an elegant way to continue simplifying the RemainCo portfolio and align our external segment to the way we are increasingly driving our operation through consistent business models. Our differentiated approach underscores our ability to grow our installed base in 2 ways: by selling mission-critical products through channel and by delivering strategic projects for our customers. We then mine this installed base by providing customers with high-value outcome-based solution with a combination of software and services. The 3 RemainCo reporting segments will be organized into 6 strategic business units with each of our businesses aligned to our unified automation strategy, enabling us to solve enterprise-level challenges and help our customers achieve new level of optimization with the Honeywell Forge platform. Aerospace reporting is unchanged ahead of separation in the second half of the next year. The new structure will allow us to better prioritize R&D efforts, capital expenditure and go-to-market strategy with a growth mindset. Building Automation will continue to be a leading provider of unified building automation solution, delivering safer, more sustainable, integrated buildings and infrastructure assets and maintain its Products and Solutions business unit structure. Process Automation and Technology is a combination of core Honeywell Process Solutions and UOP, the global leader in process technology. These businesses have developed powerful commercial synergies, enjoy leading position in process market globally with vast installed base and share very similar business model characteristics. PA&T will report projects and aftermarket business units. Industrial Automation's portfolio of products and solutions businesses include mission-critical offering with proven reliability and tenured channel relationship, positioning us to benefit from ongoing global reshoring thematics. With this realignment following the separation of Aerospace next year, Honeywell will be a premier pure-play automation company, leading the future of automation through high ROI outcome-based solution for customers across a large addressable set of markets. And as we continue our journey of transforming the portfolio, I would like to highlight another lever of value creation with the recently announced Quantinuum capital raise on Slide 5. Four years ago, we formed the world's most advanced full-stack quantum computing company. It has rapidly progressed quantum technology along the path to universal fault-tolerant computing, a more than 2-decade pursuit then it is soon to be realized. Technological progress has driven fundraising momentum. Less than 2 years after completing an equity capital raise at a $5 billion pre-money valuation, the company announced in September a second raise at double the prior valuation. As important as the capital contributions will be to advancing the development of quantum computing at scale, the collaboration with new shareholders such as Quanta and NVIDIA in addition to others like JPMorgan, Amgen and Mitsui may prove even more critical. Quantinuum's fundraising efforts have led to a new partnership that will support the development of critical applications for improving drug discovery, government and military cybersecurity and encryption for large financial institutions. While we are tremendously excited about the future of the business, we recognize we are not the best long-term owner, and it will eventually need its own capital structure to fully exploit its growth potential. As a result, Honeywell will seek to begin monetizing its stake in the company at the appropriate time in a manner that will create meaningful value for Honeywell shareowners. The most recent capital raise will sustain Quantinuum through that point in time. I will now turn the call over to Mike to go through our third quarter results beginning on Slide 6. Mike Stepniak: Thank you, Vimal, and good morning to everyone joining us. Honeywell delivered exceptional third quarter results, again, exceeding the high end of organic growth and adjusted earnings per share guidance as we have done each quarter this year. Organic sales accelerated to 6% year-over-year, led by return to double-digit growth in Aerospace and fourth straight quarter of high single-digit growth in Building Automation. Orders grew 22% organically from the previous year to $11.9 billion. While wins for long-cycle aerospace and energy projects led the way, the increase was broad-based with order growth accelerating in each of our 4 segments and an overall book-to-bill above 1. The results are encouraging and an early demonstration of our focus on growth through innovative new products and the impact of our increased R&D investments. This impressive commercial performance pushed our backlog up to yet another record, which positions us well for future growth. Segment profit increased 5% from the prior year, with segment margin meeting the high end of our guidance range, led by ongoing margin expansion in Building Automation. Earnings per share in the third quarter was $2.86, up 32% from the prior year. Adjusted earnings per share was $2.82, up 9% year-over-year as strong segment profit growth and lower effective tax rate more than offset higher interest expense. You can find additional information on the year-over-year changes in the third quarter adjusted earnings per share in the appendix of our presentation. Third quarter free cash flow was $1.5 billion, down 16% from the prior year because of the capital expenditures timing and modestly higher working capital to support our sales growth. We maintained our disciplined capital allocation approach in the quarter, returning $800 million to shareholders while committing $400 million to high-return capital projects and completing 2 technology tuck-in acquisitions. Now let's move to Slide 7 for a discussion on our third quarter segment performance. I will provide a brief overview of results with additional commentary included on the right-hand side of the slide. Aerospace Technologies grew 12% organically, led by strength in both commercial aftermarket and Defense and Space. Commercial OE returned to growth as expected as our sales recoupled to the delivery rates of our large customers. Orders momentum continued with strong double-digit orders growth across all 3 end markets and book-to-bill of 1.2. On a year-over-year basis, segment margin decreased 160 basis points to 26.1% as commercial excellence and volume leverage were more than offset by cost inflation and acquisition-related headwinds. However, sequentially, margin improved 60 basis points on strong quarter-over-quarter volume supported by improved supply chain performance. Industrial Automation sales returned to growth in the third quarter, increasing 1% organically and exceeding our guidance range, led by continued strength in our Sensing business. Segment margin in Industrial Automation declined 150 basis points from the prior year to 18.8% as commercial excellence and productivity benefits were more than offset by inflationary pressures. Building Automation again delivered high single-digit growth for the quarter. Organic sales increased 7% from the previous year, driven by strength in both building solutions and building products. Regionally, North America and the Middle East led while Europe grew organically for a fourth consecutive quarter. Margin expanded 80 basis points year-over-year as we leverage our strong volume performance. Energy and Sustainability Solutions performed in line with expectations in the third quarter, down 2% organically. Strong refrigerants performance in Advanced Materials was offset by licensing and catalyst delivery delays in UOP. Segment margin was flat versus the prior year at 24.5% as onetime government reimbursement for past legal costs and the lift from margin-accretive acquisition offset cost and volume headwinds. Let's turn now to Slide 8 to discuss our updated outlook for the year. Our guidance for the year now incorporates the impact of Solstice's separation from Honeywell at the end of October. The spin is expected to reduce 2025 sales by $700 million, adjusted earnings per share by approximately $0.21 and free cash flow by $200 million. Even with this impact, we're again raising our 2025 organic sales and adjusted earnings per share guidance as we fully pass through our strong third quarter segment profit and net income growth into our improved outlook. On a like-for-like basis, our free cash flow expectations for the year remain unchanged. Now I'll turn to Slide 9 to provide more details on fourth quarter and full year guidance. We are taking up full year organic sales growth guidance by 150 basis points from the midpoint of our previous range. We now expect growth of approximately 6% for the year or 5% when excluding the prior year impact from the Bombardier agreement. This new outlook builds upon our strong sales momentum in recent quarters while maintaining a pragmatic approach in the face of elevated geopolitical tensions and macro uncertainty. Full year sales are now projected to be $40.7 billion to $40.9 billion. We anticipate a fourth quarter organic sales growth of 8% to 10% or 4% to 6%, excluding Bombardier, which translates to sales of $10.1 billion to $10.3 billion. For the full year, we now expect our company segment margin to be up 30 to 40 basis points or to be down 40 to 30 points excluding Bombardier. We're anticipating modestly lower margins versus prior guidance, a result of reduced expectations for project licensing, catalyst shipments and certain short-cycle Industrial Automation products, which carry high incremental margins. We are offsetting most of these headwinds by leveraging our strong volume growth and utilizing our accelerated operating model to implement productivity actions. In the fourth quarter, we expect segment margin to be in the range of 22.5% to 22.8%, up 160 to 190 basis points or down 120 to 90 basis points, excluding Bombardier. We now anticipate full year earnings per share of $10.60 to $10.70, up 7% to 8% or up 5% to 6%, excluding the impact of both the 2024 Bombardier agreement and the impending Solstice spin-off. Earnings per share in the fourth quarter is expected to be $2.52 to $2.62, up 2% to 6% from the prior year or down 6% to 3%, excluding the effects of Bombardier and Solstice. I will give additional details on changes to the full year EPS guidance later in my prepared remarks. We expect free cash flow between $5.2 billion and $5.6 billion, down 2% to up 5%, excluding the effects of Bombardier and Solstice. We provide additional information on the changes in the year-over-year free cash flow in the appendix of the presentation. For the first 3 quarters of the year, we have deployed $9 billion for share repurchases, acquisitions, dividends and capital projects. Going forward, we will continue to be opportunistic in allocating additional capital beyond debt already committed to the highest return opportunities. Please turn to Slide 10 for details on our segment level outlook for the year. In Aerospace Technologies, we are raising our expectations for full year sales growth to be low double-digit range or high single digit when excluding the impact of the 2024 Bombardier agreement. We expect robust Defense and Space growth to continue as our supply chain is improving and our global demand is benefiting from ramping national defense budgets. Commercial aftermarket sales should expand at a healthy rate with air transport growth outpacing business aviation. We anticipate commercial OE sales growth to accelerate for the remainder of the year as our shipments progressively realign to build schedules. For the fourth quarter, we expect Aero organic sales to be up double digits or high single digits, excluding Bombardier, led by Defense and Space. Commercial aftermarket growth should moderate from third quarter levels towards the longer-term trend. Excluding the year-over-year impact of Bombardier, commercial OE should grow faster than the prior quarter. We anticipate the second quarter marked the low point of Aerospace margins and fourth quarter margins will be comparable to the third. For the full year, margins are expected to be approximately 26% as volume leverage is more than offset by transitory integration headwinds from the CAES acquisition and cost inflation from tariff pressures temporarily outpacing pricing. In 2026, as pricing aligns with tariff costs, OE shipments of electronic solutions recouple with build rates and integration costs from the CAES acquisition subside, Aerospace margins are well positioned to increase from 2025 levels. For Industrial Automation, third quarter outperformance is compelling us to raise our full year top line expectations for a second consecutive quarter from down low to mid-single digits to down only low single digits. Positive order growth in the third quarter was encouraging, though it was uneven within both long- and short-cycle businesses, such that it would not yet be prudent to confirm a sustainable upward trend. As a result of these mix dynamics and a more challenging prior year comparison, we expect fourth quarter sales to be down low single digits. Continued momentum in smart energy and steady performance in Sensing and warehouse automation should offset modest demand headwinds in productivity solutions and services and short-term project pushouts in core process solutions. We now expect to see margin contraction in Industrial Automation for the full year on increasingly unfavorable mix with similar margin performance in the fourth quarter. In Building Automation, we continue to anticipate full year organic sales growth in the mid-single-digit to high single-digit range, supported by strength in the U.S., Middle East and India and highlighted by robust demand in data centers, health care and hospitality. For the fourth quarter, we expect sales to be up mid-single digits with momentum from strong orders across both products and solutions. We anticipate a fifth consecutive quarter of organic growth for products to be broad-based across fire, BMS and Security. Solutions should continue to drive solid year-over-year growth in both projects and services. We expect margins for the full year and the fourth quarter to expand meaningfully as tailwinds from volume leverage and productivity actions continue. In Energy and Sustainability Solutions, we will limit our guidance commentary on Advanced Materials given its pending separation as an independent company. We are maintaining our full year ESS sales growth guidance of flat to up slightly and anticipate fourth quarter sales to be down low single digits year-over-year. A difficult macro backdrop for energy has weighed on our near-term guidance, but the long-term outlook remains strong. A third quarter increase in UOP orders of 9% is a signal of growing underlying demand from our customers, and we have good visibility into projects order strength continuing. On segment margin, we anticipate a meaningful fourth quarter contraction, resulting in a roughly 1 point reduction for the full year. Lower high-margin catalyst and licensing sales are offsetting commercial excellence and uplift from the LNG and Sundyne acquisitions. While cost inflation and market headwinds have presented a margin challenge in 2025, we're taking meaningful steps to address ESS cost structure and expect to return to margin expansion in 2026. Let's move to Slide 11 to go through updates on our 2025 EPS walk. Our earnings growth attribution comments separate out the year-over-year impact of Solstice spin-off at the end of the month, which is anticipated to reduce adjusted earnings per share by $0.21. We now expect segment profit growth, both organic and contribution from acquisitions to add $0.63 to adjusted EPS for the full year, $0.10 better than our previous view as we fully flow through better-than-anticipated third quarter operating results. Third quarter outperformance versus the midpoint of our guidance range benefited from a lower effective tax rate and reduced below-the-line expenses, which were also benefiting the full year. Fourth quarter segment profit contributions to earnings are in line with our prior expectations as better Aerospace growth offsets margin headwinds in Energy and Sustainability Solutions and Industrial Automation, as discussed earlier. We anticipate reduced year-over-year below-the-line headwinds of $0.39 per share as repositioning will be at the low end of our prior range. Additional below-the-line details are available in the appendix of the presentation. We now expect our full year effective tax rate to be 19% compared to 20% previously, adding $0.13 to adjusted earnings per share. To summarize, we anticipate 2025 adjusted EPS to grow at a mid-single-digit rate when excluding the impact of the Solstice spin and Bombardier agreement. Now I'll hand the call back over to Vimal to finish our prepared comments on Slide 12. Vimal Kapur: Thanks, Mike. Honeywell again exceeded its initial commitment in the third quarter as Aerospace execution returned that business to double-digit year-over-year growth. With orders increasing in each of our 4 segments, we are getting good returns from dedicating the right level of resources to creating new solutions to sell into our large global customer base. As just one example of our recent commercial success, Gulfstream recently announced that Honeywell's engines and avionics will power its new super midsized G300 business jet platform, which will offer superior range, efficiency and safety to current comparable aircraft. This win is a testament of our ability to stay at the forefront of leading-edge technologies that matter most to our customers. We are going into the final quarter of 2025 from a position of strength with operating momentum leading us to raise our guidance for the third time this year even as a shifting macro environment requires a high level of agility to deliver these results. We are pleased by the performance of our acquisitions since 2023, which continue to help us shape our portfolio and deliver higher growth and margins. Our commercial and operational momentum are building into 2026, which will be a historic one for Honeywell. At the same time, we are operating with the same commitment to operational excellence that has defined Honeywell for decades. While 2025 was affected by a number of headwinds, including heightened economic uncertainty, incremental tariffs, and significant cost inflation, we have already begun taking action to position our aerospace and automation businesses to return to underlying margin expansion in 2026. As we prepare Aerospace to begin its journey as a leading independent company next year, we expect to begin 2026 operating under a new structure that aligns to how we will deliver the future of automation, giving us a running start post separation. Increasingly, customers across end markets face similar structural challenges such as skilled labor shortages, aging infrastructure, operational inefficiencies and elevated energy and maintenance. As value creation shift towards harnessing the power of data to solve enterprise scale challenges and achieve new level of transformation, we are streamlining our business units centered around cohesive business model for addressing these issues. This segment realignment exemplifies our effort to simplify our whole organization to focus on actions that creates the highest value for our stakeholders. Reducing distraction from legacy liabilities, reviewing strategic alternatives for parts of our portfolio that do not fit our business model and acquiring complementary technology through bolt-on and tuck-in acquisitions all demonstrate our commitment to optimizing our business for future growth and value creation. And finally, Quantinuum's recent capital raise and technological leap forward, delivering the promise of quantum computing, which the company will demonstrate in coming weeks, move Honeywell closer to realizing the value of its pioneering investment in this space. With that, Sean, let's take questions. Sean Meakim: Thank you, Vimal. Vimal and Mike are now available to answer your questions. We ask that you please be mindful of others in the queue by asking only one question and one related follow-up. Operator, please open the line for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: Just wanted to maybe kick off with the 4Q margin for ESS. And I'm just doing the quick math here, it implies 3 to 4 points of decline year-over-year. So I just want to make sure, number one, that math is correct. And secondly, is the Advanced Materials Solstice spin losing 2 months of that? Is that having a material impact on that year-over-year? Mike Stepniak: So I would first highlight that within the ESS, we see LNG doing extremely well in that business. So that we see really good project activity, and that's progressing well. Orders are up. What do we see in the fourth quarter, we see a little bit of transitory, I would say, softness in margins, and that's predominantly driven by mix. So we see catalyst pushouts to continue. It's affecting us in the fourth quarter. But generally, I would say that ESS will normalize as we progress through 2026, back to its historical margins. And then on Advanced Materials. Advanced Materials was a little bit, I would say, accretive to the overall portfolio, but we're working for that as we are setting up for 2026. Sean Meakim: And Nigel, this is Sean. I'll just remind you that the ESS business in Europe, in particular, typically has a seasonal build and both volume and mix favorability from 1Q to 4Q. If you recall, we had an unusually strong second quarter, which we called out at the time. And so really that full year fourth quarter impact is not that severe. It's really just a timing factor of where things came in at second quarter versus traditionally being higher in 3 and 4Q. And so I emphasize just the timing is more of a factor than anything else. Nigel Coe: Okay. That's actually my follow-up question. Number one, did we see these pressures in 3Q and this government service -- the government settlements maybe offset that? Just wonder if you can maybe quantify that. And then do you think that this -- we see that mix shift in the back in the first half of next year? Or do you have that visibility at this point? Mike Stepniak: So like I said, I think from the order activity standpoint, the order activity on big new projects is quite strong, and we'll continue to see that in the fourth quarter. From a revenue conversion standpoint, given these are big capital projects, they start converting to revenue probably in the second and second quarter and then the second half. From a catalyst standpoint, based on how customers order and ordering pattern, we see that improving next year as well, but don't see that volume in the fourth quarter. And like Sean said, we usually see fourth quarter seasonality in the business, and we didn't see it this year because a lot of that volume came to us in the second quarter. So there will be a little bit of a gap in the fourth quarter as far as ESS margins. Vimal Kapur: But all things said, Nigel, we expect ESS margin to expand in 2026. It's a transitionary thing. At the end of the day, we are positioning the business for growth. The LNG segment is doing extremely well. Sundyne is doing extremely well. The overall projects, as Mike mentioned, is performing at an order rate of 8% growth in Q3. We expect solid Q4. So it's just really a transitionary effect on the catalyst volume. And we think that will adjust in 2026 and we should have a more year more on expected lines, we're expanding our margins in 2026. Operator: Our next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start with the IA segment as it seems there's a lot of different moving parts inside it. You flipped to organic growth in Q3, I think, for the first time in a couple of years, but it sounds like that will reverse in the fourth quarter. So just trying to understand, is that a function of something moving the wrong way again in short cycle lower? Or is it more a function of the large project delays in the longer cycle business? And trying to understand on margins, I think there was a comment on similar margin in Q4. So does that mean it's a 19%-ish margin? And are there any onetime kind of headwinds on that as we're thinking about next year? Mike Stepniak: Yes. So I would say from IA standpoint, the orders are looking -- I would say, they were looking strong in 3Q. But as you know, we have a lot of timing variability as far as the larger orders, especially in our warehouse automation business. So we're monitoring that. But generally, I would say, vis-a-vis where we started the year, we feel much better about the business and the progression. So from a margin standpoint, margins should grow sequentially in the fourth quarter for IA. There aren't really any one-timers, and the team is positioned to expand margins in 2026 as well. So we have good visibility to margin expansion in IA going to 2026. Backlog is improving. that's giving us, I would say, good leverage from a fixed cost standpoint, and we have good visibility to pricing. Julian Mitchell: That's helpful. And then just my quick follow-up on the Aerospace division. Maybe give us some update on where we stand on that destocking? Do you think it's largely behind you now on the commercial aero side? And should we assume that, that 26% margin rate, again, that's a good placeholder into next year, barring violent swings in mix? Mike Stepniak: Sure. So super happy with how the Aero team performed in the third quarter, and I think you will see more good news from Aero team as we go to fourth quarter and next year. I would say, from a margin standpoint, 2Q '25 was probably the bottom, and you should continue to see sequential improvements on margins going to 2026. And on recoupling, I think that's largely behind us. I think commercial, we will sequentially improve growth rates in the fourth quarter as well. And we should have a good print on Aero in 4Q and going into 2026. The setup looks really good. Orders, again, were extremely high, high double digits. And our past due backlog, even with us outputting at these rates continues to hang over $2 billion. So we still have a lot of, I would say, to work with going to 2026. Operator: Our next question comes from the line of Steve Tusa with JPMorgan. C. Stephen Tusa: Can you guys just talk about the trend in the BA margin? It's been really strong in the last couple of quarters, maybe a tad bit weaker this quarter than we were expecting. What's the -- what are the moving parts there? And how do you feel about that going into '26? Mike Stepniak: Steve, so super happy with the BA performance. And I think as we talked about it before, BA team still has a lot of runway. As far as the 3Q, it's really just a matter of mix between projects and products. Nothing, I would say, concerning there. And like I said, sequentially, BA will continue to expand margins. And in 2026, they have a really good -- I would say, really good setup and plan to continue to expand those margins. So no concerns on that business. Vimal Kapur: I was going to reinforce that the BA just reinforces the overarching Honeywell strategy on how we are pivoting our business through higher growth and margin expansion. So they are ahead of the curve on executing that, and I'm very confident that other businesses are going to demonstrate the same. So we do expect 2026 to follow the trend line you have observed in BA in 2025. C. Stephen Tusa: And then just lastly on the profile of the income statement. You guys made -- obviously, Solstice is coming out, you guys made these changes around the liabilities. Any thoughts around changing the pension accounting and how you're reflecting that in your income statement? And is that something that could happen before aerospace goes or that kind of reevaluation of the earnings format? Mike Stepniak: So it's definitely on one of our agenda items as we go over into 2026. We're actively discussing it. We understand your concern and your thoughts on pension treatment. I would say, just based on what you see, we'll continue to simplify our balance sheet and how we report earnings to make sure you have a better visibility to cash flow conversion and EPS. So it's definitely on our agenda, but we're not ready to speak about it today. Operator: Our next question comes from the line of Scott Davis with Melius Research. Scott Davis: I can't -- I know this can be a little bit lumpy, but I can't remember a quarter with 22% order growth. I know you gave some per segment granularity, but was there any kind of discrete projects or anything big that generally move the needle there? Or was it more across the board as kind of indicated in your slides? Vimal Kapur: It's more across the board, Scott. I mean I think Aero continues to do extremely well, and they're maintaining their momentum of continuing to increase their win rates and backlog. We had a strong orders growth in building automation, which flows a lot of that into the revenue stream, which you have seen. ESS orders growth were very good and also in IA. So I would say that the order growth is across all segments. Long cycle, even stronger than short cycle, but short cycle is also growing. And I do expect the trend to continue in Q4. We don't expect any substantial change in the trajectory. And that's the foundation of the growth-oriented Honeywell we have been focusing on over the last 2 years. the effort we have put in, in terms of our portfolio revitalization and focusing on the R&D spend on the right set of projects, you can see the early effect of that, and I'm confident that things will get better as we go along into 2026. Scott Davis: Okay. That's helpful. And then just switching gears slightly. You guys have done 6 pretty meaningful deals in the last 2 years. And I think you previously said that was kind of 1% to 2% tailwind accretion in '25, I believe, somewhere in that ballpark. How does that flow through on '26 given what you're seeing in the deal models? And it sounds like you're a little ahead of the deal models on that group of transactions overall. Vimal Kapur: Yes. So overall, Scott, I would say the M&A deals are performing very well. On an average, our deals are -- all the deals we did since I started at 12x multiple, and we are either on TBA or ahead of TBA in majority of them. And the foundational strategy we had that they will help us to grow our organic growth rates and margin expansion, they're really working very well for us. So I'm really encouraged Maybe, Mike, do you want to add some specific feedback further on this? Mike Stepniak: Sure. So like Vimal said, I think majority of these deals starting actually fourth quarter and going into next year is becoming organic for us from a growth standpoint. And like Vimal said, they continue to be accretive and TBAs are ahead of plan, both on revenue synergies and on cost synergies. So we feel really good about these acquisitions and how they fit the portfolio, not only financially, but also from a technology complementary standpoint. Operator: Our next question comes from the line of Amit Mehrotra with UBS. Amit Mehrotra: Vimal, I wanted to ask if you can just talk about the pricing strategy across the organization. You made a comment recently around pricing vis-a-vis wanting to preserve or protect volume. I forgot the exact wording, but it was something to that effect. And the question is really in the context of if I look this year, revenue expectations are increasing, margin expectations are coming down a little bit. Fully understand there's mix, there's acquisition, there's timing. But just wanted to understand if there's maybe a pricing opportunity in the future that is not being exploited today, either because of the R&D investments you're making or maybe just a more surgical focus on that post the spin-off of the businesses. Vimal Kapur: So thanks, Amit. I would say that fundamentally, our strategy has been that we want to preserve our margins. while we keep our volumes to our expectations. So that has been the North Star we have been focusing on, and we have demonstrated that for the most part. I would say that if I look ahead in 2026, pricing will become a good enabler for 2026 margin expansion. The only headwind we faced in pricing, I'll call out in 2025 was just a lag effect. It's just the timing. We're learning something and we can lag 30 days, 45 days. We are not going to face that event in 2026. So overall, I do remain confident that our model of getting our margin expansion through pricing while we're protecting our volume is really working. And some of the margin expansion we have seen in this year, the margins have been more flattish. It's primarily our focus has been growth. And there are some transitionary issue items which have happened at this point, whether it is tariff-related cost hitting us in some pockets and M&A impact, et cetera. I'm very confident those are transitionary. And we're going to see strong impact in our margin expansion into 2026. Mike, anything to add? Mike Stepniak: That's exactly right. I mean we've been now with the teams focusing on 2026 pricing for about 1.5 months. We have a really good plan and strategy laid out across our segments and regionally. And based on everything I see, pricing will become stronger next year. And a lot of that is really driven just by tariffs stabilizing and that picture on inflation being much more clear. So the teams know what they need to deploy, et cetera. And then I would say if you just look at segments, Aero was behind on price this year. It's going to be a tailwind for them next year. And other than that, I think teams are generally caught up at this stage on pricing going to next year. So I'm really positive on price being better incrementally next year versus this year. Amit Mehrotra: Okay. That's very encouraging. And just one follow-up related to that, just on margins. You're very clear about the trajectory for margin in Aero next year. If I look at all the different pieces, they're all kind of converging Industrial Automation kind of sticks out a little bit in terms of structurally lower margins in building automation and Aero. I think, Vimal, you've talked about maybe some self-help opportunity there, but maybe kind of talk about a little bit of the Industrial Automation margin opportunity from kind of the high teens, where you see that maybe structurally the opportunity for that? Vimal Kapur: I mean, I look at Industrial Automation margin expansion more the normal way. We are -- as you have seen our segment announcement last evening, we are going to focus in Industrial Automation on primarily the product businesses by taking process automation out and reforming a segment of Process Automation and Technology, I think this really positions us extremely well. And on Industrial Automation, that simplification now allows us to focus on how we have executed well on a classical product business model in Building Automation, really playing that playbook in Industrial Automation. So I do expect the pricing is going to play. We've talked about it a few minutes back. On the productivity side, we will see positive effect of both fixed cost and variable cost productivity. On the variable side, we feel confident on direct materials. And on the fixed side, baselining the cost structure of the business aligned to the volumes we are seeing, we feel good about that where we sit today. So overall, the setup is good. for IA. I think the -- what I'm really focusing upon is getting the business more to the higher growth momentum compared to what we are exhibiting right now. And at the right time, we also start looking at the M&A optionality, which we can bring to the business to further strengthen our portfolio. Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe first question on Aerospace. And I realize some of it will fall in the next leadership team, which you'll announce later this year. How are you thinking about the biggest opportunities and the implications for margins as we think about '25 being a transitory year with some headwinds and just the evolution of OE mix next year? Vimal Kapur: Sheila, I would say the transition which is occurring, we spoke about that in the last quarter, too. We definitely see the OE mix becoming less intense compared to how we started the year. So that certainly a benefit to us. The tariff-related pressure, which came into the cost under the margin rates of Aero would be less of a factor in 2026. And then the CAES acquisition, which was acting as a headwind for our margins in 2025 would not be a factor. In fact, it will be a tailwind. So as I look ahead, all these factors, the confidence that we bottomed out in 25% margins in quarter 2, and then we are lapping towards 26% and higher. That direction is very clear, and we are working hard to demonstrate towards that and better in '26 and beyond. Sheila Kahyaoglu: Great. And then maybe if I could follow up on the aftermarket, just nice acceleration there. And you called out, I think, some moderation in Q4. What kind of surprised to the upside in the quarter on the commercial aftermarket? Was it commercial aviation, business aviation, was it recurring revenue? If you could just talk about that. Mike Stepniak: So I would say it was on the aftermarket, the growth is really broad-based. And a lot of the growth is -- demand has been very stable. A lot of the growth is also driven by us being able to unlock our supply chain. And I hope that continues. But from a demand standpoint going into fourth quarter, this business should grow high single digits on a normalized basis. So demand is still strong across the industry and not really any particular drivers with the exception of supply chain performing much better than it did in the second quarter. Operator: Our next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: First, I'd just like to say congrats to the team on getting Solstice to the finish line or the starting line, depending on your perspective. We've seen multiple spins by companies, and we know all the work that goes into it. So congrats. Vimal Kapur: I appreciate the good word there, Deane. And the teams have worked really, really hard to get it done ahead of time. Our earlier estimate was Q1 '26, and we pulled it forward by at least 1 quarter. Deane Dray: Great. And then I missed the very beginning. Did you have any update on the process of looking at strategic alternatives for productivity solutions and services and warehouse automation? Any update on potential timing? Vimal Kapur: We kicked off the process of strategic review. I would say that in the Q1 in 2026 first quarter earnings call, we should be able to provide you a much more definitive path forward. I think the work is in progress, but I do not have any additional details I can share with you right now. So we expect to -- when we are back in about 90 days, we should have more information for you. Deane Dray: Got it. And then on Industrial Automation and your comment that's more of a product focus, it was interesting to see the call out about sensors being in their fourth quarter of growth, and you called out health care sensors in particular. So we're now getting some additional insight into these businesses. Can you comment on the growth opportunity in the sensor business? Vimal Kapur: Yes. So if you look at our Industrial Automation look ahead, depending on what decision we make on our scanning and mobility business and warehouse automation business, the balance IA would be a product-oriented business where products are critical. These are related to compliance. These products are certified. And that's a fundamental model we're really working towards. And we also are conscious that IA would also become a pivot towards our U.S. onshoring growth. So all those items are in play as we are thinking ahead about the IA portfolio moving forward. Now sensors is one of the biggest business there. We have positioned in 3 verticals in sensors, aerospace, medical devices and industrial. And we have good run-up to this business in 2025. We expect to maintain that momentum in 2026. And we expect to provide more segment-specific details in IA as we have simplified the segment. And as we have more conversations and discussions in the future, I look forward to providing you more details. But fundamentally, sensors is one of the key part of the business, and we remain very optimistic on how this will perform in the times ahead. Operator: Our next question comes from the line of Chris Snyder with Morgan Stanley. Christopher Snyder: I wanted to follow up on the Industrial Automation portfolio. And specifically, I guess, the realignment Slide from 15. I mean, I guess it seems like the only -- or I guess the only full business line being put into the new Industrial Automation segment, is that sensing business, assuming warehouse and PSS get divested. So I guess maybe any color on how much revenue is kind of being maybe pushed out of the process solutions bucket into that new Industrial Automation portfolio? And then more broadly, how do you feel about the scale of this Industrial Automation business? And is it an area where you could be looking to add assets? Vimal Kapur: Yes. So Chris, what we provided yesterday is more a cumulation of our 2 years of work of simplification. We have been working on our portfolio, the spins work we have done, some of the strategic reviews, et cetera. I see the definition into 3 end markets, 3 verticals is an outcome of all of that. So we are pleased, first of all, where we have landed ourselves, buildings, process and industrial. Clearly, buildings and process have higher scale today compared to industrial, to your question. And -- but we are starting from a position from which we want to build upon in industrial from a -- on a very product-oriented business. And we'll continue to see more opportunities on how we strengthen that. So more to come there. This is -- I first want to finish the unfinished task of the strategic review of scanning and mobility, warehouse automation. We yet to complete that work. We also want to focus on organic growth return of industrial automation to its baseline. And I'm confident all that is going to take shape well in 2026. And then we'll turn our focus into what else we need to add to this portfolio so that it becomes a meaningful part of Honeywell. Christopher Snyder: I really appreciate that. I guess maybe to follow up on Building Automation. And specifically, could you provide any color or comments on the data center exposure or opportunity there? I mean our channel checks, we're hearing more and more about controls needing to be more complex as the facilities get bigger and more complex. I think historically, that has not been a big vertical for you guys, but it seems like you've done a better job breaking in there over the last year. So can you maybe talk about how you broke in and what is the opportunity? Sean Meakim: Yes. So increasingly, Chris, data center is becoming a bigger part of our building automation business, certainly now contributing to the growth rate to a certain degree. We are -- I would say that our position in safety and security in data center is -- we are well positioned in that. You're talking about more like 2% spend of data center is in this space. So spend-wise percentages are small, but we have a good position in our fire safety systems. We have a good position in our security system. We are increasingly improving our position in the building management, and we continue to work our way through to gain more share in that market. So certainly, a lot of hyperscalers, a lot of REITs are becoming our customer. You may have seen a recent announcement also in our partnership with LS ELECTRIC on which we want to work more joint solution between electrical system and control system because we see a need for that by our customer. So we continue to improve our strategy, continue to improve our portfolio. And I remain confident that data center end market growth, which is occurring, will certainly have building automation business as additional -- as a vector to maintain their growth momentum. It's -- we were starting from a very low position, but we are certainly gaining more and more momentum there. Operator: Our next question comes from the line of Joe Ritchie with Goldman Sachs. Joseph Ritchie: So look, Vimal, you've done a lot from a portfolio perspective. A lot has been announced. I like this new structure. I think it very neatly separates the different businesses. I guess the question is, as we head into the Aero spin in the second half of '26, could you potentially see additional announcements on the portfolio? Vimal Kapur: I would say that, as we mentioned a few months back that based on the current portfolio assessment, actions we have done, they are completed. But in a company of our size, you never say you're done. I think the portfolio revitalization is a continued activity. So I do expect us to do more additions, which are bolt-on to our portfolio, which fits into the core of buildings, process and industrial. And if your question is, is there any more exit plan, we feel good about the portfolio of what we have at the position we are today. These are all mission-critical parts of automation. They drive very similar common outcomes like safety, operational excellence, reliability and they really help us to gain a lot of mining installed base through our Forge platform. So that commonality we have achieved with a lot of effort. And I don't see that there will be any material change we want to make on what we own, but certainly like to consider adding more on a bolt-on basis or maybe tuck-in sometimes as we finish our spins, and we'll continue to report to you if we make any progress on that. Operator: Our next question comes from the line of Andy Kaplowitz with Citigroup. Andrew Kaplowitz: Vimal, maybe just back to the macro. Can you talk about the cadence of orders and revenue in Q3? Did you see any changes in your short-cycle businesses as the quarter shook out here into Q4? And are there any particular trends you're seeing by region? I think you mentioned some recovery is continuing in at least BA in Europe and China, but what are you seeing overall for Honeywell? Vimal Kapur: I mean I would say the biggest change, Andy, I saw was that we have growth across all parts of the world. That's not happened for a while. We have a solid growth in U.S. Europe is performing more like low single digit to mid-single depending on the business. So Europe is returning to an reasonable growth. Middle East, India does always very well for Honeywell. And China is more flattish for Honeywell less Aero. But if you add Aero, we are growing high single. So it's -- I think that is a distinctive part of what we are observing. I think it's the diversity of our portfolio in the end markets we serve is certainly helping us. And our focus on growth and creating new products, mining installed base, all those strategies are coming together. And I do expect, I mentioned earlier, a good Q4 also for the orders ahead. So it's not a onetime. We do expect to maintain this momentum for the rest of the year. Andrew Kaplowitz: That's helpful. And I know you mentioned lower energy prices have continued to lead to some delays in HPS and UOP. But as you just said, improved orders, does it give you more confidence that these businesses are going to turn higher in '26? And maybe what are your customers telling you about their CapEx expectations for '26? Vimal Kapur: I mean if you look at our ESS business, Andy, the positives are strong demand in LNG and gas. We certainly have a lot of demand and order strength in those. We also see investments made by our customer for more localization of refining and petrochemical capacity. So we see investments made across in India and parts of Africa, parts of Middle East. So those continue there. The only lack of momentum we have seen, which we discussed before, was catalyst demand. I think it's partly impacted by the oil price, partly impacted by some overcapacity. And we do expect things to settle as the year progresses in 2026. So long-cycle demand is strong. That is evident in our orders rate of ESS. I think short-cycle demand is more flattish, but we do expect it to recover during course of 2026. Sean Meakim: Melissa, we'll take one last question. Operator: Our final question comes from the line of Nicole DeBlase with Deutsche Bank. Nicole DeBlase: I guess I'll just ask one since we're running over time. I'm curious how short-cycle industrial trends kind of shaped up throughout the quarter. Did things kind of remain stable versus how you exited 2Q? Or any notable trends that you would highlight? Vimal Kapur: I would say short-cycle trends were actually better in 3Q versus 4Q. And we do expect similar trends. As you've seen in our guide, we are not expecting any substantial change quarter-on-quarter. But we always remain prudent in our guide. We don't know what we don't know. So -- but I think an overarching theme is very similar dynamics in the end markets, which Honeywell serves in -- between quarter 3 and quarter 4. Operator: Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Kapur for any final comments. Vimal Kapur: Thank you, operator. As always, I would like to express my gratitude to our shareholders, our customers and all the Honeywell Future Shapers across the world, driving our stellar results in the quarter. And our path ahead is promising, and we look forward to sharing more with everyone in the quarters to come. Thank you all for listening, and please stay safe and healthy. Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning. Welcome to Hasbro's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I would like to turn the call over to Fred Wightman, Vice President, Investor Relations. Please go ahead. Frederick Wightman: Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Gina Goetter, Hasbro's Chief Financial Officer and Chief Operating Officer. Today, we will begin with Chris and Gina providing commentary on the company's performance, and then we'll take your questions. Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual report on Form 10-K, our most recent 10-Q, in today's press release and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I'd now like to introduce Chris Cocks. Chris? Chris Cocks: Thanks, Fred, and good morning. Hasbro delivered another strong quarter in Q3, extending our growth trajectory in 2025. Net revenue and operating profit both showed robust year-over-year gains, underscoring the power of our Playing to Win strategy, which positions Hasbro as a diversified digitally forward play company uniquely resilient in today's tariff-sensitive market. Key drivers were MAGIC, Marvel, MONOPOLY, PEPPA PIG, Beyblade and G.I. JOE. Brands exemplifying durable, diversified growth that differentiate Hasbro from traditional competitors. Year-to-date, revenue is up 7% and adjusted operating profit has increased 14%. We anticipate full year revenue growth in the high single digits and adjusted operating profit growth exceeding 20%. MAGIC continues to outperform expectations, posting 40% growth year-to-date. This success is fueled by unprecedented new player acquisition and standout collaborations with brands like Spider-Man and Final Fantasy. Our Universes Beyond strategy, leveraging MAGIC's depth with beloved IPs is generating extraordinary engagement. Looking ahead, we'll build on this momentum in 2026 with original MAGIC IP sets and blockbuster collaborations, including Teenage Mutant Ninja Turtles, The Hobbit, Star Trek and Marvel Superheroes. Interest indicators like event attendance, search metrics, MagicCon participation, sales in new channels like mass and convenience and player growth are all at record levels. We expect momentum to continue into the fourth quarter, fueled by upcoming MAGIC releases, including The Last Airbender and Final Fantasy's holiday set, alongside sustained momentum in Secret Lair and backlist offerings. Wizards of the Coast is more than MAGIC. The refreshed 2024 additions of D&D's Monster Manual, Players Handbook and DM Guide are off to the strongest ever start for D&D books. D&D Beyond's new accessible virtual tabletop has driven weekly traffic up nearly 50% since the September launch. Meanwhile, our digital licensing business, highlighted by Monopoly Go! and our recent launch of SORRY! WORLD with Gameberry Labs continues to outperform with both games topping mobile player charts. In Digital Gaming, the game awards this December will showcase some new announcements from Hasbro, including updates on our upcoming sci-fi RPG EXODUS, further cementing our commitment to innovative digital play experiences. Consumer Products met our Q3 expectations, although retailer shifts pushed some revenue into Q4. We anticipate a solid bounce back in the fourth quarter, driven by innovation, entertainment tie-ins and strategic partnerships. Key highlights include momentum from PEPPA PIG and Marvel's blockbuster content lineup, steady growth from Beyblade, G.I. JOE's rebound post supplier transition and solid traction for new products like Nano-mals, DJ Furby, baby Evie, Star Wars Kyber Forge Lightsabers (sic) [ Star Wars Lightsaber Forge Kyber ], Priorities and PLAY-DOH Barbie. Retail shelf resets since late August have led to a mid-single-digit POS increase entering the holiday season and share gains for Hasbro across our focus categories. We expect Consumer Products to finish the year down mid-single digits, primarily impacted by tariffs. However, because of our proactive supply chain diversification initiatives, we expect that by year-end 2026, no single country outside the U.S. will represent more than 1/3 of Hasbro's supply chain. Additionally, new vendor and manufacturing partnerships will unlock attractive pricing opportunities globally from Bodegas in Santiago to Dollar stores in Peoria, expanding our retail footprint and total addressable market significantly. After a long turnaround effort, we expect Q4 to be the start of a long-term growth period for our toys business, driven by innovation, a killer entertainment slate and new partnerships. Just this week, we announced an exciting collaboration tied to Netflix hit film, KPop Demon Hunters. Product is expected to hit shelves in 2026, but for fans who can't wait, preorders are already live for our MONOPOLY deal card game inspired by the film. In summary, Q3 reinforces that Hasbro's Playing to Win strategy is delivering results. We're confident in our ability to sustain long-term growth through diversified digital initiatives, strategic partnerships and resilience against external pressures. Before I close, I want to thank our incredible employees and partners around the world. Hasbro's return to growth is a direct result of your creativity, focus and belief in inspiring a lifetime of play. Now over to Gina. Gina Goetter: Thanks, Chris, and good morning, everyone. We delivered another solid quarter, outperforming expectations on revenue and profit while operating with discipline in a dynamic macro environment. Our results reflect the strength of Wizards, ongoing cost transformation and continued progress toward our 2027 profitability goals. Net revenue in the third quarter was $1.4 billion, up 8% versus last year, driven by double-digit growth in Wizards and steady execution across Consumer Products. Adjusted operating profit increased 8% to $356 million with an adjusted operating margin of 25.6%, holding steady versus last year despite increased cost pressure. Adjusted earnings per diluted share were $1.68, down 3%, driven by a higher tax rate and FX impacts. Year-to-date, total Hasbro revenue is up 7% and adjusted operating profit has increased 14%, underscoring the strength of our diversified portfolio and the impact of our transformation efforts. The growth in MAGIC, coupled with sequential improvement in Consumer Products is fueling our overall financial performance. Turning to our segments. Wizards once again led our performance in the quarter. Revenue grew 42% to $572 million with broad-based gains across both tabletop and digital. MAGIC revenue increased 55% to $459 million, driven by engagement with our Universes Beyond sets, our core IP Edge of Eternities as well as continued momentum across Secret Lair and backlist products. Operating profit rose 39% to $252 million, delivering an exceptional 44% operating margin, reflecting the positive benefit of scale and mix within the MAGIC portfolio. Consumer Products navigated a complex quarter, and the team demonstrated agility as we adjusted to delayed on-shelf days from retailers and lapped a difficult comparison last year in licensing. Revenue of $797 million was down 7% versus last year, with growth in Europe offsetting softer performance in North America. Adjusted operating profit was $89 million with an 11.2% margin compared to 15.1% last year. The margin change was driven primarily by tariff expense and unfavorable mix, offset in part by productivity improvements across our supply chain and expense management. The Entertainment segment delivered revenue of $19 million, up 8% and an adjusted operating margin of 61%, which is consistent with the asset-light model we're building in this segment. Year-to-date adjusted EBITDA stands at $989 million, up 11% versus last year, demonstrating the combined impact of top line growth, operational excellence and disciplined investment. Year-to-date, we generated $490 million in operating cash flow, returned $294 million to shareholders via the dividend and spent $120 million on debt reduction through the combination of bond repurchases and prefunding our 2026 maturity via treasuries, a proactive step that provides flexibility while keeping us ahead of our long-term leverage targets. We continue to see tangible benefits from our cost transformation efforts. Through the first 9 months, we've delivered approximately $150 million in realized gross savings, keeping us on track to achieve our full year target. Operational efficiencies, expense management and productivity gains across sourcing and logistics are driving strong margin performance even as we absorb higher royalty costs at Wizards and trade-related headwinds in Consumer Products. These savings are translating directly into margin resilience and giving us the flexibility to reinvest behind our highest return growth engines. We're executing our tariff remediation playbook decisively, mitigating risk and protecting profitability. Maintaining our assumption that the China tariff rate stays at 30% and Vietnam at 20%, we continue to expect $60 million of impact in our 2025 P&L. Owned inventory levels remain healthy and firmly aligned with our year-end targets. We believe we have appropriate inventory in our warehouses to fulfill the anticipated holiday build and replenishment orders. With a robust entertainment lineup scheduled for 2026, we remain laser-focused on exiting the year with clean company-owned and retail inventories. We are continuing with our diversification efforts to build resiliency across the supply chain and coupling those with the incredible growth in MAGIC. By 2026, we expect approximately 30% of our total Hasbro toy and game revenue will be sourced from China and 30% of our revenue will be based in the U.S. as we opportunistically lean into our U.S. manufacturing capacity. As we enter the final quarter, our momentum remains strong, and we are raising our full year guidance. We now expect Hasbro revenue to grow high single digits with an adjusted operating margin between 22% to 23%. This results in our adjusted EBITDA increasing to approximately $1.25 billion at the midpoint. For Wizards, we expect full year revenue growth between 36% to 38% with an operating margin of approximately 44%. This improved guidance reflects the MAGIC over delivery in Q3 and sustained engagement and high demand through year-end releases. In Consumer Products, we are holding our latest guidance and continue to expect revenue to decline 5% to 8% year-over-year with margins between 4% to 6% as productivity works to mitigate cost pressures. Our capital allocation priorities are unchanged. And with our updated outlook, we will likely achieve our 2.5x leverage target at the end of this year. The Board has declared a quarterly dividend of $0.70 per share, consistent with our capital allocation priorities to return cash to shareholders. We remain focused on execution and operational efficiency in our core toy business. At the same time, we're thoughtfully investing for the future with a disciplined returns-driven approach, particularly in Digital Gaming and with strategic partners who help bring our brands to new audiences and categories. We are on track to close the year from a position of strength, delivering profitable growth, deepening engagement in our most valuable brands and advancing toward our long-term financial and strategic goals. And with that, I'll turn it back to the operator for questions. Operator: [Operator Instructions] Our first question is from Megan Clapp with Morgan Stanley. Megan Christine Alexander: Maybe Gina, I wanted to start with just ending with your comments there just on the implied 4Q outlook, at least on the EBITDA line, it does seem to be above what The Street was expecting. And from a profitability standpoint, implies that your growth accelerates versus the third quarter. It does seem like versus the third quarter, both segments are contributing. So can you just walk through some of the puts and takes by segment as we think about 3Q versus 4Q profitability? And related to that on the top line for CP, I think the guide implies flattish sort of top line growth for the fourth quarter. I think you talked about, Chris, POS accelerating. So how should we think about kind of the timing of retailer ordering shifts into the fourth quarter and POS being positive in the context of what I think is a flat guide for the top line? Chris Cocks: Megan, I'll start, and then I'll turn it over to Gina. I think for CP, we do expect modest revenue growth. I think toy and games will have a little bit more robust, and it will be offset by some licensing comp headwinds we have last year related to MY LITTLE PONY, which had just an amazing quarter based on MY LITTLE PONY trading cards, which has since settled into more of a run rate. We also expect Wizards is going to have a heck of a quarter as well. The early reads on Avatar: The Last Airbender look terrific. And then we have another bite at the Final Fantasy [ Apple ] with our holiday set. So overall, we're expecting pretty good top line growth and some nice operating profit growth as well. I'll turn it over to Gina to kind of dig into point B C, D and E of your first question. Gina Goetter: Megan, all right. Let's start. So you're correct. Like we're raising guidance. A lot of it is driven by the strength that we're seeing play through and continue to play through really all year on MAGIC in Q3 and really firming up our outlook for consumer products as we move into Q4. When you peel apart Wizards, the increase or the raise there is all based on revenue. So we've continued to see momentum. And as we look out at the set releases that we've got planned in Q4, coupled with -- remember, we have a holiday release this year that drives nice revenue. It also drives leverage throughout the P&L. The one thing that we've talked about a lot as we came into the year on Wizards is the royalty expense. So just from a modeling standpoint, what we saw in royalty expense in Q3 will largely be the same as what we see in Q4. So the raise in Wizards is really all due to the revenue momentum that we're seeing and just the trickle on the positive benefit that, that has down the line in the P&L. On our CP business, to your point, a relatively flat outlook. I mean, depending on which range you go, you could see us getting to some growth within the quarter. We have seen our POS momentum accelerate as we came out of Q3. We've continued to see that as we've moved here into Q4. And with the whole retail order shipments, we -- many in the industry were talking about these later shelf resets that absolutely impacted Q2. We started seeing their shipments pick up in Q3. And again, we've seen that continue into Q4. So our expectations for CP as we move through kind of the holiday period is that we're going to have shipments outpacing what our POS is. So that benefit will help, again, create some leverage within the P&L as well from a margin standpoint. Did I hit all of your points? Megan Christine Alexander: Yes. A quick follow-up just on the balance sheet and capital allocation. So you said leverage target by the end of this year. Free cash flow growth has been quite strong, and I think that should continue into '26. So how are you thinking about capital allocation priorities as we head into '26 with the balance sheet now at your leverage target? Gina Goetter: Yes. Where we sit today without getting too much into '26 guidance, unchanged priorities. We continue to, first and foremost, want to invest back into the business and invest into our growth drivers. So you'll continue to see us do that. Obviously, we have the dividend, and we're committed to the dividend. And then lastly, we will continue to pay down debt. So we feel great that we're going to be at a point from a leverage ratio standpoint that we'll be at 2.5x. We still think there's opportunities for us to bring that down even further to just create more optionality and flexibility for us as a business. So as we turn the corner into '26, we'll come back and see if any of those are changed. But for now, we're sticking with those. Operator: Our next question is from Arpine Kocharyan with UBS. Arpine Kocharyan: What do you think is driving this acceleration in retail POS for you and for the industry? And what are some of the indicators that you look at to decide whether this holds up in the next 40 days if you compare it to sort of prior holiday seasons or what do you know about the consumer? And then I have a quick follow-up. Chris Cocks: Sure, Arpine. I think a couple of things. Each product is a little different. For instance, with G.I. JOE, we just didn't have supply because we were going through a supplier transition for the first half of the year. And so we're in catch-up mode. On others, I think it has to do with just great innovation, Nano-mals, DJ Furby, some of our new board games are hitting the mark and hitting what we think players want. And then still others, I think, just are kind of buoyed by fantastic brands and really strong content. Marvel, in particular, is one that's really doing well this year, and we expect that to continue moving forward. Transformers has been benefiting from that throughout the year. Even though we don't have new content this year, last year's Transformers One has had a nice long tail for us. So we've been pleased with it. We've been seeing acceleration in POS for probably the last 7 to 8 weeks. And usually, what we see in September and October is a pretty good harbinger for what's going to happen throughout the holidays. Arpine Kocharyan: Very helpful. And then -- sorry, go ahead. Gina Goetter: My one add that I would have is on, just as you think about the overall category and pricing as a dynamic, we really haven't seen overall huge increases in ASPs. We've seen some mix shift, but not big increases in ASPs. And as you look at where the consumer could be heading and how our portfolio shapes, roughly, call it, 40% to 50% of our portfolio is priced under that $20 kind of MAGIC price point. So as we're innovating, as we're executing with our retailers, our prices are staying in that nice zone for consumers heading into the holidays. Arpine Kocharyan: That's very helpful. So just a quick follow-up. You have had incredible growth in MAGIC this year and will likely finish the year on a strong note. There is a bit of concern how you lap that next year. And arguably, Marvel's strength in the second half of this year has probably legs well into the first half of next year, I would imagine. But this business is very much driven by the timing of set releases. Anything you could tell us to help think through how you left these very strong numbers from this year into 2026? And Gina, just a quick question for you. The licensing expense under MAGIC for the back half, you had raised that from $40 million range to closer to $60 million plus. Is the updated number now $70 million plus, just given the outperformance in that segment? Gina Goetter: Is that -- are you talking about the Digital, MAGIC Digital? Arpine Kocharyan: Correct. I'm talking about the royalty expense within Wizards tied to third-party IP. Gina Goetter: The royalty expense, I see. Yes, the -- just the back half of the year was always going to be back weighted in terms of expense just given the timing of the universes beyond set releases. So we had Avatar and the Spider-Man are falling in the back half of the year, whereas it was just Final Fantasy in the front half of the year. So that's why you see that weighting. It will be roughly, call it, $50 million, $60 million of royalty expense in the back half of the year. And then, of course, will be accrued in the front half. I think total royalty expense change is $80 million year-over-year, I believe. So it's a pretty sizable step-up in expense. Chris Cocks: Yes, Arpine, in terms of your question about the underlying durability of MAGIC's growth, I think there's a couple of things going on. At the easiest level, this year, we had, call it, 6.5 sets because one of our sets was a little bit of crossover in terms of sell-in between Q4 and Q1. Next year, we're going to have about the equivalent of 7 sets. So just you're naturally going to have more content to sell, which generally is correlated with higher sales. Then when you look at kind of like the momentum that we have on backlist, I think we continue to see that as being kind of like a nice kind of floor for the business that will -- is continuing to raise. I mean our backlist business, I think, is 70% ahead of what it was last year already for the full year basis. And last year was a record. And then I think like the last one is Universes Beyond is just working. The whole theory of the business was it's going to increase our distribution. It's going to increase our number of active players. It's going to bring in new fans that were adjacent to MAGIC, and that has just worked. Like basically, every set we've done in Universes Beyond has set records in terms of new player engagement, in terms of search queries, in terms of number of people who are going into stores, in terms of sales in nontraditional outlets like mass and convenience for us. And we don't see that slowing down. If anything, I think there's potential to accelerate it just with the quality of partners we have next year and the early reads we're getting on those partners. Teenage Mutant Ninja Turtles, Marvel Superheroes, The Hobbit, Star Trek, which for a big nerd like myself, is near and dear to my heart. I think all of those have had excellent initial reactions and bode well for continued robust sales. Operator: Our next question is from Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: Maybe first on Consumer Products for Chris and Gina. Just be curious to get your latest thoughts on higher prices and just generally how they're being digested by retailers and consumers. Curious what you're seeing so far, the types of conversations you're having with retailers this fall. And if that's influencing your strategy as you look at promotional activity into the back part of the year and then maybe opportunities to take pricing if needed in 2026? Chris Cocks: Yes. I would say pricing so far has been relatively muted in the category. We started seeing evidence of it like in July, August. I think you'll see more of it in September and October. We've been pretty surgical in where we've chosen to price. We've chosen to put it usually against brands that have some pretty robust content and latent demand associated with it and trying to hit price points where we think the consumer tends to be a little less price sensitive, particularly under that kind of $15 threshold, maybe the $20 threshold. And we haven't seen a tremendous amount of elasticity so far based on the early reads. In terms of ongoing pricing, I think we just kind of have to see how the holiday goes and how the consumer holds up. Right now, I think it's really kind of a tale of 2 consumers. The top 20% -- particularly in the U.S., the top 20% of households continue to spend pretty robustly. We've got a nice fan business with them. We've got a nice trading card and gaming business with them. The balance of households are watching their wallets a bit more, a little bit more promotional and price sensitive. And as Gina mentioned, about 50% of our items that we're selling are under that $20 price range. And we think that's going to expand as we go into 2026 with some of the new suppliers we're working with and some of the new product we're working with. So net-net, so far, so good. Stephen Laszczyk: That's great. And then maybe one on 2026 around EXODUS. Gina, it sounds like we're about a year from EXODUS being released. I was just curious if there's any way you can maybe help investors size the cost impact expected from the game next year, perhaps over the course of '26 and '27. I appreciate we'll probably learn more in December, but anything or any frameworks you could provide at the moment to help set the frame of mind looking into next year? Gina Goetter: Got it. Yes. Good question. And you're right, we'll provide more specifics when we get to December. So I'll give you a some tidbits on the framing and how to think about it from an accounting standpoint without getting too deep into unit expectations. But when you look at our balance sheet, you'll see that line that says capitalized software, and there's roughly $350 million that's sitting on our balance sheet. This includes development costs for EXODUS as well as all of the other games that are within our portfolio. So it is not just an EXODUS charge. It's the entire pipeline of games that we're working on. And how that will come off of the balance sheet through the P&L. So as EXODUS ships and we launch the units, that cost will depreciate alongside with units. It will flow through our cost of goods. So that's where you'll see it. It will impact our gross margins. That's what you'll see it flow through. And then the other important thing to call out is because it is a product development cost, it's an input cost, it will not be an add-back into EBITDA. So it will show up as a depreciation charge within cost of goods, but it's not going to be added back on an EBITDA basis. In terms of EXODUS and how to think about the dollar impact, when we're modeling it out, roughly kind of rule of thumb, 65% of that development cost is going to hit in the quarter that we launch the game. And in the 4 quarters in that first year, roughly 85% of that development cost will have been worked through the P&L. That's right now how we're modeling it out. Obviously, as we get sharper on the absolute units and the absolute time line for when we're going to launch, that will impact it, but that's the good rule of thumb. In terms of how we're thinking about the overall expense standpoint, you've heard us talk about how AAA video games, some of them can be very, very expensive. We are not playing in that range. You've heard us talk in the previous calls that our development budgets are anywhere from, call it, $100 million if we're working with partners up to, call it, $200 million, $250 million. So that's the range of outcome in terms of absolute expense and absolute [ depreci ] that you'll see come through the P&L. Now obviously, that's the P&L impact. As we launch the game, as we have the units, have the revenue, there's going to be a pretty material uplift in our cash flow. So we kind of have to look at it through what's going to happen in the balance sheet, that capitalized asset comes down, P&L, the depreciation hit goes in, but then we have a nice uptick in our operating cash. Does that help, Stephen? Operator: Our next question is from Christopher Horvers with JPMorgan Chase. Christopher Horvers: So maybe talk a little bit about what the gross net headwinds from tariffs were in the third quarter. As you turn through more sales, does that dollar headwind actually worsen as you get into the fourth quarter? And then stepping back, thinking longer term about the potential profitability of the CP business, is the expectation ultimately that you can get the tariff rate pressure back over time through pricing? Or does the long-term outlook for CP profitability change? Gina Goetter: Got it. So the tariff pressure in Q3 was roughly, call it, $20-ish million of cost. As we look into Q4, there's a bit more. So it's a bit of a heavier quarter. Still the net impact is going to be $60 million-ish within 2025. As we look into 2026, we are fully running our tariff playbook. And so as we calculate the various scenarios of where that absolute rate will play out, we're really putting all of our levers to work from how we think about pricing, how we're thinking about our product mix, how we're thinking about our supply chain and how we're managing all of our operating expenses to mitigate and offset the impact. Christopher Horvers: Got it. But I'm guessing just is the net headwind next year smaller than the $60 million? Or do we have to lap through something similar? I would think just based on the seasonality of the business that it would be less? Gina Goetter: It will be less next -- overall, for the year, the tariff cost itself will be bigger just because we'll have a full year. But the impact, we're still working through what the net kind of impact is as we put all of the levers to work. But the actual tariff cost itself, obviously, with 4 quarters' worth, we really didn't start seeing that impact to the P&L until third quarter. Chris Cocks: Yes, Chris, I think as you think about the midterm in terms of CP and total company, I think at a total company, we're very confident in our operating profit guidance. Our games business is performing very well, well ahead of plan. Our licensing business continues to perform very well and frankly, at or ahead of plan. Toys, we're, I think, in the early innings of getting to the growth portion of the turnaround, which is great. And so from a top line perspective, I think we feel good about the guidance we gave in February. I think from a margin perspective for the CP business, if tariffs persist at a 20% and 30% range, it probably carves off a couple of points of margin from the expectations for that business. So low double digits probably becomes high single digits. If nothing changes on the tariff front and nothing changes on the nature of the business. I think it's a little too early for us to call that ball for CP. We feel pretty good about the partnerships we're inking, KPop Demon Hunters just being the first -- that's probably one of the hottest new entertainment properties of the year. We love what's going on with Star Wars and Marvel in terms of their content and how those brands are coming roaring back. So I think we'll have a more fulsome update come February when we talk about 2026 and an update to midterm. Christopher Horvers: Got it. And then my follow-up is a follow-up to a prior question about MAGIC next year. Can you talk about how big is Final Fantasy this year? Obviously, it's played out exceptionally well and you have this holiday set. And as you think about the content that you have for next year, is the strategy a little bit of like all of those UB sets combined are sort of like in aggregate, become bigger? Or do you think maybe the Star Trek set, for example, could be actually bigger than Final Fantasy? Chris Cocks: Final Fantasy is a record-breaking set. It's already the biggest set in MAGIC's history. I won't tell you which one next year we think could rival or beat Final Fantasy, but we definitely see at least one that we think can do that. I think I'll stick it there. And then we haven't shared with you guys the content lineup that we have for 2027 and beyond, but we also feel pretty darn good about the partners we have lined up. I mean this is a great deal for MAGIC in terms of, hey, we get access to some of the premier IP in the world. It's a great opportunity for the partners because really, there's never been an opportunity for them to access the trading card business, certainly at the scale MAGIC: THE GATHERING is delivering for them. And so we pretty much have had our pick of partners. And so I think if you can conceive of a collaboration that we could do with MAGIC, we probably have inked the deal or in conversations on a deal on that. So I think, again, we're still at the relatively early innings of what Universes Beyond can do. I think there's upside in terms of what the sets can do in the future. And then I think that's also just going to be buoyed by a very long and lucrative backlist as well, which we've been seeing play out in 2024 and definitely in 2025. Gina Goetter: We should probably say that our owned MAGIC IP is also performing quite well. Chris Cocks: Yes. I mean that's a great point. People aren't just coming in and buying Final Fantasy. People are coming in and buying Edge of Eternities. They're buying other sets. And so we've also been setting records with what we've been doing with our own sets as well. So there's a nice halo here. Operator: Our next question is from James Hardiman with Citi. James Hardiman: So to that last question, Chris, I'm not going to ask you which sets you think can be Final Fantasy. It sounds like -- but I am curious, this KPop Demon Hunters' press release did mention Wizards of the Coast. would curious what the thoughts are there, how those 2 could integrate. And then just on the margin side of Wizards, we came into the year thinking that margins would be down pretty materially. And obviously, that's not going to be the case. Any thoughts on how to think about Wizards margins into next year? And any color on the royalty piece would also be helpful. Chris Cocks: Yes. We're pretty excited about KPop. I remember the weekend it came out, I watched it and sent a text over to Tim, who runs our toy business. And I'm like, why haven't we talked to these guys because this thing is awesome. If you look at my Spotify playlist, it looks like a 12-year-old kids. I got Soda Pop, that Golden on there along with some other stuff. So I'm pretty jazzed for KPop. We're working with Netflix. Mattel is doing basically dolls and figurines. We're basically doing just about everything else, plush, games, trading cards, as you mentioned, for something like MAGIC as well as electronics and role play. So I think that's going to be a pretty lucrative license that's been -- had incredible staying power. And frankly, it's just the first new partnership inside of our toys business that we're going to be really excited to share more details about over the coming couple of quarters. I think there's a lot of reasons to believe that our toy business is in the early stages of a long-term growth from entertainment to toy partnerships, to new licenses. So I think that's good. And on your question about MAGIC, I think MAGIC has proven that it can fit a large number of IPs. One of the best-selling Secret Lair products of all time was SpongeBob SquarePants. And if we can figure out how to get people jazzed up about SpongeBob SquarePants collectible cards, I'm pretty sure we can do it with one of the biggest movies of all time. Gina Goetter: And if you look at our -- the margins, we're not going to get into 2026 guide today. But we've always said that our Wizards segment is going to be in that high 30s, low 40s. If you look back over our recent history, you'll see that we're dancing around those levels over multiple years. And this is where we're going to expect to run that business, and that's what we're asking our teams to deliver, even knowing that, that is our growth engine. So we're going to continue to make sure that we're making the appropriate investments back into the business. But I would say, without giving guidance, we've always talked about a high 30s, low 40s Wizards segment. And that's what you should expect from us over time. James Hardiman: Got it. That's helpful. And then just real quick on the inventory front, there's a lot of discussion, obviously, about shifting orders between 3Q and 4Q. Where are retailers with respect to your product versus last year? I'm assuming there's a deficit versus a year ago and that we'll ultimately sort of bridge that deficit as we make our way through the fourth quarter. So maybe speak to that a little bit. Chris Cocks: Yes. Our retail inventories were down kind of mid- to high teens in the U.S. coming into fourth quarter. Our order book has accelerated versus what we've seen in previous fourth quarters. Domestic is actually doing pretty well. DI is maybe a little bit behind. But everything kind of augurs towards continued robust kind of replenishment from our retailers. And I think we would expect that, let's use the mid-teens as kind of like the anchor point. We think retail inventories will be down by the end of the year. But if current trends persist, it's -- we probably cut that ratio in half. And that's kind of what underscores our belief that fourth quarter will be a pretty good quarter for CP. Gina Goetter: I think this is our first quarter that we've talked about actual restocking happening as we've moved into the fourth quarter. So we're definitely seeing that. We can see that play through in our early October shipment data. Operator: Our next question is from Alex Perry with Bank of America. Alexander Perry: I guess as a follow-up to the last line of questioning, but more consumer products focused. Could you help us think about the building blocks for next year for the EBIT margin on the CP segment with the cost saves versus tariff impact versus potential volume leverage? And then I guess on the content side for Consumer Products, what are you most excited about next year thinking about that? Gina Goetter: Thanks for the question, Alex. We're not going to get too much into the building blocks for 2026 quite yet. We do think we've got some nice tailwinds as we're exiting the year that set us up nicely from a top line perspective. Obviously, we've talked about how not having top line creates a delever impact on the P&L. So as that flips to positive next year, that becomes a benefit for us. We're actively working all of our levers to offset the margin impact, and we continue to stay on our -- the margin impact from tariffs. And we continue to stay on our trajectory to deliver that $1 billion of cost savings in 2027. So as we get -- obviously, the next time you talk with us in February, we'll give a lot more detail on where the CP kind of outlook will be for '26. Chris Cocks: I mean I think a couple of bread crumbs that are public. Certainly, we are bullish on the potential of KPop. We've got a lot of really cool ideas. It's been fun working with Netflix on it in a fairly quick order. We already have a product that's got for sale with the MONOPOLY deal. And hopefully, we'll have a couple of preorders up for some cool items for fans before the end of the year. And then the content lineup that we have, particularly from the Walt Disney Company is amazing. You have Toy Story 5, which always helps to drive Mr. Potato Head sales in a big way. You have a new Star Wars movie with Grogu and the Mandalorian. you have a new Spider-Man movie and you have the Avengers returning to form with Robert Downey Jr. in the role of Doctor Doom. I couldn't imagine a much more stacked content lineup than what we have kind of forming a tailwind for us next year. Alexander Perry: That's very exciting. And I guess my follow-up question is on MAGIC. And specifically, could you talk through the MAGIC growth that you're seeing in the mass channel, especially how the Universes Beyond strategy sort of plays into it? And I think based on some of the disclosure, the retail distribution network for Wizards continues to grow nicely. I think store count sort of up 7% sequentially versus the last quarter. Can you talk about sort of where that is coming from and where you're seeing the growth there? Chris Cocks: Yes. So hobby store growth continues at pace. I don't think it's so much that there's more hobby stores. I think it's just more that are qualifying to become part of the Wizards Play Network and leaning into MAGIC. And what we tend to find is when a hobby store really adopts MAGIC, it becomes a big section of their mix, and they help to propel player growth and player engagement in a positive way. And then mass, it's just a very easy sell with mass when you go in and say, "Hey, here's a video game that you've sold tens of millions of copies of like Final Fantasy, there's obvious demand for it. Let's expand distribution inside of MAGIC" or "Hey, here's a superhero that is beloved and everyone from 2 years old through adulthood wants to collect and play with like we have with Spider-Man." So that's just caused us to be able to have both incremental placements within the store, new promotion within the store as well as opening up new doors for us, especially in underserved markets for MAGIC like a lot of Europe, where we haven't had as robust of a mass offering, and we've been able to do things with the Tescos of the world and the Carrefours of the world with some pretty meaningful and enduring results. Operator: Our next question is from Kylie Cohu with Jefferies. Kylie Cohu: You kind of already touched on this, but I was curious what you're seeing specifically in terms of promotional cadence. One of your peers might have said that it's intensifying heading into the holidays. Just kind of curious what you guys are seeing. Chris Cocks: Yes. Yes. So we've been pretty choiceful with our pricing through this year. And so that's benefiting us in terms of incremental promotion opportunities with basically every major U.S. vendor, Amazon, Walmart and Target in particular. And so that kind of underscores some of the order growth that we think we can see and the sustainability of our point of sale for this holiday as well. And then last year, we had some replenishment outages for things like board games that we won't be lapping this year that, again, we think will kind of help to underscore it. So as we've leaned in on trying to provide value to consumers, especially in hot categories where we're the category leader in like board games, like action figures, like compounds, the retailers have responded in kind, leaning back with us and giving us extra opportunities to share that value with consumers. Gina Goetter: Yes. And I think it's a bit early to say the quality and kind of when your word intensifying because of the shelf reset and that moving back, we're really just starting to see the impact of promotions start playing through. So obviously, everyone -- from a retail standpoint, they were really concentrating on all that sitting within Q4. Kylie Cohu: Got you. And then I know this is kind of small potatoes, but I was curious a little bit if you could expand on your expectations for the Entertainment segment, both in Q4 and then beyond in like steady state as well. Gina Goetter: Yes. Good question. Overall, you should expect more of the same on Entertainment. It's going to be roughly that same revenue base at roughly that, call it, 50% to 60% margin as we're moving forward. And really think about that, that is all the -- either the content that we're creating for brands like PEPPA or it is rights that we are giving to other studios to develop our IP. The delivery of the revenue gets a little bit lumpy just because it's based on when deals are inked. But overall, that's how you should think about the mix of how it's going to play out through this year and the balance of next year. Chris Cocks: Yes. I think we think of Entertainment as a long-term brand development pipeline. There's some revenue associated with it. It kind of -- it's advertising that pays for itself with fantastic content partners. And I think at last count, we have something like 45, maybe 50 shows and movies and reality TV offerings in development across a range of partners. And we work with the best of the best. We're working with Paramount, Warner Bros., Netflix, Universal, Disney, you name it, Lionsgate. So we'll have more to share on that as those kind of deals matriculate. We tend to not announce like a development deal. We tend to wait until it's actually in production. So those are starting to kind of go through and probably in 2026, there will be a lot more to share. Gina Goetter: But we're going to continue with the asset-light model. That's why you're going to see just a high margin within that segment moving forward. Operator: Our next question is from Jaime Katz with Morningstar Research. Jaime Katz: I was hoping to touch on product development spend. It has stepped up a little bit in 2025. But I think given everything that you guys have said about content and innovation coming on, can we think about this staying sort of structurally higher than it maybe has been in the past? Gina Goetter: Yes. I mean you hit on it. The increase or the step-up that you're seeing is largely driven by Wizards and Digital. There's some this year within toy just as we've kind of revamped our innovation pipeline as we started going out. You heard us talk about KPop and securing some of these new licenses, but the bulk of the uptick has been within Wizards. As we look into next year and kind of we're probably at that right watermark level. Like we've been slowly increasing that cost over time. And we're probably in that zone as we think about next year. Jaime Katz: Okay. And then D&D hasn't really been discussed, but there's obviously a little bit more emphasis on the brand as you guys expand into more space. Can you just maybe help us think about what the long-term growth prognosis is for D&D relative to MAGIC or maybe what incrementally it might add to Wizards of the Coast over time? Chris Cocks: Yes. So I think the big thing for D&D is going to be digital games. We have several games in development. We're working with some fantastic creators in that space. And again, like I said, for Entertainment, we tend to be a little gun-shy talking about projects too early. But very likely over the next, call it, couple of quarters, you're going to start to see more of our digital ambitions come to life with D&D and understand some of the things we have in development. And I think they're going to be pretty exciting. Baldur's Gate III was a seminal project. I think it really showed that if we build something that's great, consumers will come. And so there's probably 5 projects in development for Dungeons & Dragons across our portfolio, ranging from more casual and kid-oriented to very high-end action adventure and role-playing games. And that's in addition to a continued focus on building out kind of the core business, the core TRPG with a special emphasis on D&D Beyond as kind of like the best place to play at TRPG. Operator: With no further questions, ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Greetings, and welcome to The Simply Good Foods Company Fiscal Fourth Quarter 2025 Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Joshua Levine, Vice President of Investor Relations. Thank you. You may begin. Joshua Levine: Thank you, operator. Good morning, and welcome to The Simply Good Foods Company's Fourth Quarter and Full Fiscal Year 2025 Earnings Call for the period ended August 30, 2025. Today, Geoff Tanner, President and CEO; and Chris Bealer, CFO, will provide you with an overview of our results, which are provided in our earnings release issued earlier this morning. Our prepared remarks will then be followed by a Q&A session. A copy of the release and accompanying presentation are available on the Investors section of the company's website at thesimplygoodfoodscompany.com. This call is being webcast, and an archive of today's remarks will be made available. During the course of today's call, management will make forward-looking statements, which are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. On today's call, we will refer to certain non-GAAP financial measures that we believe provide useful information for investors. Due to the company's asset-light high cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for a reconciliation of our non-GAAP financial measures to their most comparable measures prepared in accordance with GAAP. The acquisition of Only What You Need, or OWYN, was completed on June 13, 2024. As we have now lapped the anniversary date of the OWYN acquisition, the use of organic refers to year-over-year growth for brands we have owned for more than 12 months on a comparable basis. For Q4, organic growth includes year-over-year growth for Simply Good Foods' business, excluding the period of time prior to the closing of the OWYN acquisition, as well as the impact of lapping the extra week in the fourth quarter of fiscal year 2024. Finally, all retail takeaway data included in our discussion today, unless otherwise noted, reflects a combination of Circana's MULO++C measured channel data, and company estimates for unmeasured channels for the 13 weeks ended August 31, 2025, as compared to the prior year. I will now turn the call over to Geoff Tanner, President and CEO. Geoff Tanner: Thank you, Josh. Good morning, everyone, and thank you for joining us. Fiscal year 2025 was a solid year for Simply Good Foods. We delivered 9% reported net sales growth, including 3% on an organic basis and grew adjusted EBITDA by 3%. On a pro forma basis, including OWYN, but excluding the extra week from the prior year, net sales increased over 4% with adjusted EBITDA up approximately 6%. We largely completed the integration of OWYN, invested in our people and capabilities, and put our cash to work, paying off $150 million of debt and repurchasing more than $50 million of our stock. Our vision is clear. To be the scaled leader in high-protein, low-sugar and low carb food and beverage. There is a generational shift towards these products that is quickly mainstreaming. One of the most impactful trends in food and beverage today. This is best highlighted by the continued strength of the nutritional snacking category. Our traditional aisle, which includes on-trend, high-protein performance nutrition, as well as adult nutrition and several other fast-growing subcategories. In aggregate, this broader category has grown at least high single digits for the past 5 years and grew plus 13% this year, reinforcing how relevant it is today and supporting studies that show more than 70% of Americans are actively seeking more protein and less sugar, as well as fewer carbs in their diets. In support of our vision, we have been on a journey to rapidly evolve our organization to win in this exciting and dynamic space. In the last couple of years, we have rapidly shifted our portfolio. Quest and OWYN now represent nearly 3/4 of our net sales with both growing double digits in fiscal year 2025. Quest, which generated almost 2/3 of the company's net sales in Q4 is the category disruptor, flipping the macros on large mainstream snacking categories. Over the past 2 years, we have accelerated the pace of product innovation while broadening our reach with marketing up about 50% since fiscal 2023, and household penetration now approaching 20%. Our recent acquisition of OWYN enhanced our presence in the fast-growing ready-to-drink shake segment, while positioning us to become a leader of the rapidly accelerating clean label movement. To support our fast-growing Salty Snacks business, we're expanding capacity for the second time in 2 years with construction on an additional production line now in progress. We increased our investment in innovation, strengthening R&D, and reducing time from concept to launch. We invested in new sales talent and selling capabilities, expanding our opportunity to drive distribution, both within and beyond our core aisle, and to deepen penetration within channels. And we ramped up productivity initiatives to combat inflation and free up funds to fuel our growth. Additionally, to compete and win in our space, we have consciously increased our organizational output across all facets of the company. We have challenged our [indiscernible] to reduce lead times and innovation and marketing, embrace agility in our supply chain, and evolve our marketing playbook to incorporate an insurgent mindset to compete against brands large and small. The goal is an organization that combines the agility and speed of an insurgent challenger with the advantages of scaled R&D, supply chain and selling capabilities. I am excited by the improvements we have made and how these actions position our company to win. In the near term, however, we must address two important challenges. We understand the magnitude of each have plans against us and are confident we will work through these headwinds as we continue to evolve the company. First, as we've discussed in the past, Atkins is losing shelf space in the highly competitive nutritional snacking aisle. Over the last several years, as sales for this category doubled in size with space at a premium, Atkins large distribution and merchandising footprint has come under pressure, with sales declines in recent periods, mainly driven by distribution cuts at several retailers, especially at [ clubs and MAX ]. 75% of Atkins' retail sales today come from approximately half of its SKUs, which turn in the top 2 quartiles of the category velocity rankings. As we enter fiscal '26, our tail SKUs that turn in the bottom of category velocity rankings have been trimmed back at [indiscernible]. As we consider potential future distribution risk across our top accounts, it's important to note that only approximately 10% to 15% of Atkin SKUs on average are still in the bottom quartile today. While painful in the short term, this process will better align Atkin shelf space with sales in support of a sustainable business powered by a strong core assortment. Encouragingly, at a large retailer, where we recently saw a double-digit decline in distribution, our average velocities are up nicely across the reset, giving us confidence we're on the right track. To help strengthen the brand and attract new consumers, in September, we began to flow into market several initiatives. These include new advertising that reorients Atkins from a more general lifestyle brand back towards weight management, as well as modernize packaging, innovation and an updated website. We've also brought to market a smaller pack size within our bar portfolio, providing consumers a more attractive entry price point, intended to stem declines in one of the more challenged parts of the business. Our strategy acknowledges the need to rightsize Atkins space rather than trying to prop up our underperforming tail. A key component of this approach is proactively working with senior teams at our key retailers to manage our assortment and flow back to support the continued expansion and prioritization of Quest and OWYN. Again, while these decisions may be painful for the Atkins brand in the short term, we're taking the right decisions and the right actions with the brands, the category, and for Simply Good. Our second major challenge is inflation. In order to ensure we had adequate supply to meet consumer demand, we contracted for cocoa at historically high prices which, in addition to tariffs weighed heavily on our margins in the back half of fiscal 2025. This pressure will continue in the first half of fiscal year 2026. At this point, we're confident our gross margins will improve beginning modestly in Q3 and more meaningfully into Q4, driven in part by the coverage we've already secured on cocoa through most of the second half at rates well below prior year. We continue to monitor the markets and note that current spot levels present further potential favorability as we exit this year and primarily into fiscal 2027. In addition, we've also responded to inflation with aggressive productivity actions and pricing, which we announced to the trade in August, and which will be in market by the end of Q1 of fiscal 2026. I'm pleased with the significant progress our teams have made on productivity, a capability that we significantly expanded over the past 2 years with benefits that will flow into our margins in the second half of fiscal 2026, and into '27. Looking ahead, we're in a strong position. We operate in an on-trend, high-growth category, benefiting from a generational shift towards high protein, low sugar, low cap products. We will lead this shift and create value for our shareholders by accelerating innovation, expanding physical availability of our products and from breakthrough marketing. Our world-class R&D team asset-light model, category leadership role with retailers and enhanced selling capabilities give us a competitive edge, and our strong balance sheet provides optionality for M&A. Turning to Quest, which represented almost 2/3 of our net sales in Q4. Quest delivered year-over-year consumption growth of 11% in the quarter and expanded Household penetration to 19%, up 170 basis points versus prior year. For fiscal year 2025, Quest grew consumption 12% and net sales of 13% on a 52-week basis, helping to deliver a 5-year CAGR of nearly 20% under our ownership. As the brand approaches $1 billion in net sales, we're very pleased with this performance, and we remain confident in our ability to continue to disrupt the nutritional macros across many categories. Credit goes to the Quest team, a nimble and competitive culture and a framework for growth based on disruptive innovation, expanding physical availability and increasing brand awareness. Our Quest Salty Snacks portfolio continues to outperform with consumption up 31% for the quarter and 34% for the full year. From representing 20% of Quest retail sales 3 years ago, [ Salty ] is on target to be our largest platform by the end of fiscal year 2026. The size of the addressable market is large. We have a rich pipeline of innovation. We continue to gain shelf and merchandising space in and outside our aisle. And as mentioned, we've invested to expand capacity. Our Quest [ bar ] business grew 2% in Q4 and for the full year, driven by our [ Hero ] line and our new overload [ bar ] platform. If you recall, our hero or chocolate-covered crispy line of bats and our recently launched overload bars with delicious inclusion heavy offerings are part of the wave of more indulgent protein bars. These products amp up taste and texture while delivering the nutritional macros consumers are looking for. While we're moving in the right direction on bars, our goal is to further accelerate our growth in this space. Over the past 18 months, we've built an impressive pipeline of exciting new platforms, flavors and textures that we'll bring to market in the coming years. Our Quest bakeshop platform continues to perform, and I'm excited for the launch of our first [indiscernible] shop line extension a great tasting, high-protein donut expected to hit shelves during Q1 of fiscal 2026. We're also encouraged by the early performance of our new RTD milkshake platform, which is disrupting the category in a way only Quest can, with leading macros and great taste. With strong commercial execution and more platform expansion to come in the spring, we're confident we can win in the fast-growing competitive RTD category. Lastly, with the recent launch of the second generation of our It's Basically Cheating advertising campaign. Campaign of [ humorous ] ads highlights how Quest uniquely enables consumers to succumb to their food desires by resolving the inherent tension between food that taste great, and food with good nutrition. Ads have already begun on Thursday in our football and will continue to be featured across a range of digital, social and other media properties throughout the year. Quest is our largest and highest-margin brands and the innovation leader in the category. As we rapidly evolve our organization, Quest will be at the forefront, continuing to deliver strong growth. Moving to Atkins. Fiscal year 2025 was a challenging year. Consumption declined 12% for Q4 and 10% for the full year, largely driven by losing distribution at club, and not repeating certain high-volume, low ROI merchandising events principally in math. Challenges continue to be concentrated primarily in bars and confections, whereas shakes were down 4% in the quarter and only 2% for the full year, supported by the success of the 30-gram [indiscernible] RTDs we launched a year ago. In the e-commerce channel, where space is not a constraint, we continued to drive solid growth with a key partner, up mid-single digits. As mentioned, as we evolve our company, Atkins will be a more focused brand around a core assortment, and we are being proactive in our efforts to get there. We acknowledge that there will continue to be short-term pain for Atkins with consumption expected to decline approximately 20% in fiscal year 2022. Consumer research continues to show that Atkins core strength lies in its scientific credibility and proven history of helping consumers achieve their weight loss or maintenance goals. In short, Atkins works. This gives us confidence that even as we are partnering with key retailers to repurpose Atkins space to accelerate growth for Quest and OWYN, we're making the right investments and taking the correct actions to stabilize and ultimately support the long-term sustainability and profitability of the brand. Turning to OWYN. Consumption grew 14% in the fourth quarter and 34% for the full year, with household penetration up 100 basis points to 4.2%. Double-digit RTD retail sales benefited from new distribution gains at a key [ mass ] customer and a tester club. I want to address the somewhat slower consumption growth we've observed over the last few months. The impact of lapping distribution, which I've discussed before, was exacerbated by a product quality issue related to a raw material sourcing decision for [ P protein ] made prior to the closing of the acquisition. Specifically, this [ P Protein ], which was used in a portion of production during Q2 resulted in taste and texture issues on certain lots as the product aged. While the affected product made up only a small minority, I want to be clear that it was 100% safe and met all of our allergen testing protocols. However, the product experience was poor and showed up in ratings and reviews. Therefore, as we ramp distribution and trial coming into Q4, our consumer response was not as robust as we would have liked. And as a result, velocity slowed. We have already mitigated the issue and begun aggressive programming and trade and customer marketing aimed at reaccelerating trial and growth rates. In spite of the challenge, OWYN still grew double digits in Q4, which is a testament to the unique positioning and strength of the brand. And early on here in Q1, OWYN sustained a mid-teens growth rate in September even as it lapped a big event at Club last year. With the integration largely completed, we will now leverage the full scale and capabilities of Simply Good to drive growth of the business. In fiscal year 2026, this will include significantly stepped up trade and marketing investments I spoke about. In addition to leveraging our retail teams to drive displays, both distribution gaps and bring highly differentiated innovation to market. In addition to shakes, powders also represent a huge opportunity for us at 12% of the brand's mix today growing significantly. OWYN's mission is to forge a new standard of clean. Its products are free from the top 9 allergens and have a cleaner and simpler list of ingredients. Simply put, OWYN is built for today's evolving consumer preferences. Recently completed research shows OWYN has leading equities in clean, plant-based nutrition. Aided awareness is low at 20%, reflecting significant headroom with ACV for shakes in the mid-60s and only 26% for powders. This is why we must invest more to drive awareness and build household penetration. We're only scratching the surface for what this brand can be, and we're fully committed to unleash its full potential. To summarize, fiscal year 2025 was a solid year, but much work remains to evolve the company to win in this exciting category. I acknowledge our guidance for fiscal '26 is below our long-term algorithm, and we are committed and confident we're making the right investments and taking the right actions in fiscal 2026 to set up fiscal 2027 for success. Approximately 3/4 of our portfolio through Quest and OWYN is driving strong top and bottom line growth. We're building a fast-paced, agile culture, backed with world-class capabilities necessary to win in this category. With Quest and OWYN driving growth, Atkins being reshaped for the future and productivity and pricing initiatives underway, we're confident in our ability to deliver sustained growth and value creation for years to come. I'll now hand the call over to Chris to provide you with details of our financial results and outlook. Christopher Bealer: Thank you, Geoff. Good morning, everyone. Overall, our fiscal year finished generally in line with our guidance, with some modestly higher costs impacting our margins as we exited the year. Organic net sales grew at least 3% in each of the last 3 quarters. We continue to invest in our brands, our talent and our capabilities to position the company for the long term. And we generated a lot of cash that we put to work. We are operating from a position of strength as we exit fiscal 2025 and assess the challenges facing us in fiscal 2026. I will now discuss our financial results. For net sales, total Simply Good Foods fourth quarter reported net sales of $369 million declined 1.8% versus last year. Excluding the small contribution from OWYN prior to the anniversary date of the acquisition's closing, as well as the lap of the 53rd week, organic net sales grew 3.5%. The key driver of this organic growth was Quest, which grew 15.9%, primarily from strong performance in our salty snacks business. While Atkins declined 18.3% as a result of distribution losses, and related trade inventory reductions. Gross profit of $126.6 million declined 13.3% on a reported basis from the year-ago period, driven mainly by lapping the 53rd week and elevated inflationary costs, most notably cocoa. Gross margin was 34.3%, a decline of 450 basis points versus prior year on a GAAP basis, largely reflecting higher input costs, and the initial impact of tariffs that were only partially offset by productivity and pricing. Excluding the inventory step-up related to the acquisition of OWYN, which was a 90 basis point headwind to gross margins in the fourth quarter of last year, gross margins declined 540 basis points. Selling and marketing expenses of $32.4 million were down 20.6% versus prior year, primarily the result of a planned pullback in Atkins marketing and lapping the 53rd week. G&A expenses of $40.6 million declined 1.6%, primarily due to lapping the 53rd week, that was mostly offset by OWYN integration expenses. Excluding stock-based compensation and onetime integration and other costs, G&A declined 16.6% to $27.6 million, driven by lapping the 53rd week and the initial realization of cost synergies related to the OWYN acquisition. As a result, adjusted EBITDA was $66.2 million, down 14.5% from the year ago period. Excluding the lap of the 53rd week, adjusted EBITDA declined in the high single-digit range. During the fourth quarter, we determined that there were indicators of impairment related to the Atkins brand and related intangible assets. After conducting a quantitative impairment assessment we recorded a noncash loss on impairment of $60.9 million. The impairment is the result of Atkins performance in fiscal year 2025 and updated projections of future revenue. Net interest expense of $3.6 million was down $4.3 million versus the prior year as a result of lower debt balances, while the effective tax rate was 20.2%. Net loss was $12.4 million, down from the net income of $29.3 million last year due primarily to the impairment charge I just mentioned. On a full year basis, reported net sales grew 9%, mainly driven by the OWYN acquisition, which added nearly 8 points of growth, partially offset by approximately 2% impact from lapping the 53rd week. On an organic basis, net sales increased 3%, driven by Quest, which grew 13.4%, as well as a small contribution from OWYN in Q4. Atkins was down 12.9%. Gross profit grew 2.8% year-over-year on a reported basis, driven by net sales growth that was partially offset by inflation, while gross margins for the full year declined 220 basis points as a result of elevated input costs, as well as dilution from the OWYN acquisition. Finally, adjusted EBITDA grew 3.4%, driven primarily by net sales growth, while reported net income declined largely as a result of the loss on impairment and other significant onetime costs primarily related to the OWYN acquisition. Fourth quarter diluted loss per share was $0.12, versus earnings per share of $0.29 in the year ago period, driven primarily by the impairment charge I mentioned a moment ago, which was a $0.45 after-tax headwind in the quarter. Q4 adjusted diluted earnings per share was $0.46, compared to $0.50 in the year ago period. On a full year basis, the company generated diluted EPS of $1.02, a decline of 26.1% versus the prior year, largely due to the aforementioned impairment charge and onetime integration costs. Adjusted diluted EPS of $1.92 increased 4.9% versus the comparable prior year period. Please note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes divided by diluted shares outstanding. Moving to the balance sheet and cash flow. As of the end of Q4, the company had cash of $98 million, an outstanding principal balance on its term loan of $250 million, bringing our net debt to trailing 12-month adjusted EBITDA to approximately 0.5x. Full year cash flow from operations was $178 million, compared to approximately $216 million last year. The decline was primarily due to higher uses of working capital. Capital expenditures finished the year at approximately $20 million, reflecting the timing of initial payments related to the strategic investments we are making to support additional capacity. I will discuss this in more detail in a moment. For fiscal year 2025, the company repaid a total of $150 million of its term loan debt, bringing total repayments from the OWYN acquisition to $240 million, or essentially all of the $250 million borrowed to fund the purchase. We remain very comfortable with our gross debt levels today. In addition, during the quarter, the company used approximately $27 million to repurchase nearly 900,000 shares. For the full year, the company used approximately $51 million to repurchase nearly 1.6 million shares, or almost 2% of our outstanding common stock. Finally, as detailed in this morning's press release and to reflect management's and the Board's continued confidence in the business, the Board of Directors recently approved a $150 million increase to the company's existing stock repurchase program. As of October 23, 2025, the company has approximately $171 million remaining under its revised stock repurchase authorization. Moving on to a discussion of our outlook. Since we last spoke with you in July, here is what has changed. First, as a result of accelerating pressures from inflation and tariffs, we announced the targeted pricing actions that will be in market by the end of Q1, and are expected to be a low single-digit benefit once fully implemented. These actions cover all three brands and will help us restore our margins, but in the near term, will cause our top line trends to be more subdued as a result of initial elasticity. Second, near-term growth slowed for OWYN as a result of the identified quality issue, which will also require incremental trade and brand investment to reaccelerate growth. Third, the impact from tariffs are now generally more certain. Apart from any changes in the prevailing tariff rates for Chinese imports, considering the ongoing negotiations where timing and magnitude remains uncertain. Assuming no significant change in prevailing tariff rates on China, we estimate our total tariff exposure will be less than 2% of our fiscal 2026 cost of goods sold on a net basis, including the benefit of currently identified mitigants against which we are already taking action. Given the trade agreements announced to date, the blended tariff rates will come in slightly higher than we were previously expecting. Fourth, we have a secured coverage on cocoa supply that as we move through the second half of fiscal 2026 will be progressively at prices below prior year, giving us good visibility on cost and margin improvement, as we move through fiscal 2026 and into 2027. We continue to diligently monitor the commodity markets with opportunity to further lock in more favorable costs and ensure supply. And finally, while not a change, I want to point out that we remain committed to investing in our growth platforms for the long term, even while we face higher inflation, especially in the first half. Therefore, for fiscal year 2026, we expect the following. Net sales growth is expected to be in the range of negative 2% to positive 2%, with growth from Quest and OWYN offset by Atkins. Gross margins are expected to decline in the range of 100 to 150 basis points, and adjusted EBITDA year-over-year is expected to be in the range of negative 4% to positive 1%. This includes increased marketing spend on Quest and OWYN to support growth, while focusing on profitability for Atkins. Management is focused on long-term growth for the total company and we'll look to provide more fuel should we find the opportunity to do so. As we look at the shape of fiscal year 2026, the year will be a tale of two halves, with the second half expected to be stronger on both the top and bottom line than our first half. Starting with net sales. We expect growth in the first half to be at or below the lower end of our full year range, with Q2 likely to be our weakest quarter of the year. The first half will be impacted by initial elasticities related to our recently announced pricing actions and the wraparound drag from Atkins distribution losses. While we will see the underlying benefit of recent distribution gains on Quest and OWYN, growth will be muted by the lingering effects from the OWYN quality issue, and a generally tough lap for Quest and OWYN, both of which benefited in the prior year from strong merchandising programs, particularly in Q2. By the second half, we expect trends to improve meaningfully, driven by an exciting slate of innovation launches across our brands, normalizing elasticities, lapping the initial impacts from OWYN's product issues and tailwinds from distribution. Therefore, we expect net sales growth in the second half of the year to be at the higher end of our full year outlook range. Moving down the P&L. The shape of the year will be even more pronounced, driven by elevated inflation and tariffs impacting our margins in the first half, before we benefit from the combination of lower cocoa costs, building productivity and realized pricing in the second half. This lag will be most acute in Q1, when we will have very little benefit from pricing and productivity to help offset the higher costs, including the historically high cocoa inflation and our first full quarter of tariffs. As a result, we expect Q1 gross margins around 32.5%, representing a year-over-year decline of nearly 600 basis points. Beginning in Q2, we expect to deliver sequential improvement in year-over-year trends for gross margin. And by the second half, we expect our gross margins to be in line, or slightly better, than our full year fiscal 2025 gross margins on a GAAP basis, implying gross margin expansion in Q4 of nearly 200 basis points year-over-year. Adjusted EBITDA should generally track the shape of our expectations for gross margins, with pressures in the first half and much stronger results by the second half. Specifically, we expect first quarter adjusted EBITDA to decline by approximately 25% year-over-year. By Q2, we would expect more subdued year-over-year declines in the high single-digit range before we return to growth in the second half. Similar to gross margins, we expect the fourth quarter to be our strongest period of growth, up double digits year-over-year. I would note that our outlook assumes current economic conditions, consumer purchasing behavior and prevailing tariff rates will generally remain consistent across the company's fiscal year. While our outlook includes a number of important assumptions, there remains several uncertain swing factors outside of our control that could represent risk to our outlook. Before we open up the call for questions, I wanted to finish by explaining our plans to spend $30 million to $40 million on CapEx in fiscal 2026. Nearly all of this investment will be to support growth in our most attractive areas and particularly to reinforce our competitive mode in our [ Salty ] business. We have been very clear that there is a big opportunity to drive continued expansion in our [ Salty ] platform. Consumers love the products and retailers are leaning in with us. The investment in incremental and more flexible capacity enables us to support our long-term growth aspirations on the business and has an attractive payback. Strong cash flow generation is a hallmark of this company and next year will be no different. Our low debt levels and high cash conversion rate provides us the optionality to create meaningful long-term value for our shareholders in multiple ways, including by investing in capacity through share buybacks and via M&A. For a comprehensive summary of our full year outlook, please see Slide 17 in our presentation. I want to commend our team for their hard work and tenacity to deliver the year and thank them for their support and collaboration in my first quarter as CFO. That concludes our prepared remarks. Thank you for your interest in our company. We are now available to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Peter Grom with UBS. Peter Grom: I wanted to just pick up on the comments around OWYN and kind of the product quality issues that you alluded to that impacted the quarter. Geoff, it sounds like these are now kind of in the rear view here. So just curious how you think about the path from here, maybe what you've seen more recently from the brand? And then I guess just related, when you think about the full year sales guidance, what's the range of outcomes as it relates to OWYN based on what we know today? Geoff Tanner: I appreciate the questions. As we said on the call, our guidance for the year had always expected Q4 to slow a bit as we were lapping now own distribution wins. However, as mentioned, Q4 was impacted by product quality issue. Related to the raw material sourcing for P Protein, a decision that was made prior to causing the acquisitions. More specifically, the P Protein was used in production during Q2, which did impact taste and texture on certain plots is the product age used in our estimate around 10%. But certainly material enough to impact consumption, and we certainly saw it come through in ratings and reviews. So as soon as we saw it, we jumped on it. I will say the product 100% [indiscernible] within the OWYN allergen-free guideline. A small portion of product was impacted but enough to impact consumption and [ sharpened ] ratings and reviews. So what do we do about it? We have rectified the issue. We've got a newer and more stable formulation that is shipping, been shipping since August will be fully in market by fiscal Q2. Obviously, work with customers that were more disproportionately impacted. We increased trade to reach that trial, and we've increased marketing as part of that. So we've dealt with the issue. It's mostly in the rear-vision mirror. There's probably a little bit of product out there, but that's why we're ramping up our investments in both trade and marketing. We continue to be extremely confident about the trajectory of this business. Strategically, it's expanded our presence in the Shake category. It reaches a new consumer, namely those looking for plant, clean label, feedback from retailers that this is a very distinct incremental segments. The integration has gone well. The synergies are on track. So this was -- this product issue. We've jumped on. We've dealt with it. But as you do look -- as you look forward, I could not be more excited about the OWYN brand. It's the clear leader in clean. And as we sit today, even versus where we were -- when we completed the acquisition, you're seeing the increasing emergence of clean and consumers looking for clean options, and we certainly hear that for retailers. We see distribution upside on the core business. ACV is still low. As you look at brand awareness, with only aided awareness around 20%. That's why we're significantly increasing marketing. But this is not just on the core shakes business. I think as we mentioned on the call, the powders business, smallest portion today, but that's extremely high growth, very incremental. And one of the things we did right at close of acquisition is we integrated the R&D teams. And we've been working -- you should assume we've been working on some exciting platform innovation that will build from there. So we saw the product issue. It impacted consumption. We jumped on it. We've addressed it. It's one of the reasons we increased investment just to really get that trial accelerated. Confident in the near term. Confident in the long term. And we're very pleased we acquired this business. Operator: Our next question comes from the line of Steve Powers with Deutsche Bank. Stephen Robert Powers: Geoff, maybe picking up on where you started the conversation just on the low sugar, high protein macro trends. Assuming it is strong and enduring a structural shift as you discussed in your opening, and I don't -- I think there are a lot of reasons to believe it is. I guess, how do you handicap future competition? Maybe how have those views changed since you first arrived at Simply? And maybe a bit more detail how you've incorporated those allowances and forecasts into your business planning for fiscal '26? If I could also, Chris, just picking up on where you wrapped up on capital allocation. Just given the dynamics that the business is contending with organically this year, both top line and cost related, as well as the decision to lean into CapEx a bit more to drive capacity. Just -- I was curious to see if there's any shift in your appetite or capacity to handle M&A.? It didn't sound like it from your comments, but I just wanted to clarify that. Geoff Tanner: Yes, I'll start, Steve. So to your question on the category and competition, this is a fantastic category, especially versus [ same-store ]. We're seeing now 5 years of high single, or low double-digit, growth. Category grew 13% and fiscal '25 and most of that was volume. To your point on competition, it's not a surprise to us, but it's a very competitive space, particularly with those growth rates. What I will say is competition is not new to us. It's not a new dynamic for Simply. This category has always had a pretty high level of competition. We've always been able to do well. And it's the reason why we've invested so heavily in R&D, more recently bolstered our sales capabilities. We're category captain at retailers. And we've got a very agile and robust supply chain. I think M&A capabilities and the success we've had to play a role there. As you think about the market, though, what I would point out is this -- one of the dimensions, Steve, is if the category is mainstreaming. It's not just limited anymore to the core traditional aisle. And as that category made streams, the addressable market for us is increasing substantially, which is why we're putting much more emphasis on getting out of our aisle. You can see that with chip, the displays we're getting merchandising, placement, secondary placement. And you can see that with the kind of products we're bringing to market more mainstream products like chips, like [indiscernible], like milk shake. So competition [ and ] dynamics, it's something we've always dealt with. What I would say, and then I'll hand it over to Chris, is one of the things I've tried to do at Simply, is to up [indiscernible] output to better handle competition than we have in the past. So that's a more agile organization. Everything needs to be faster. Innovation needs to be faster to market. And marketing more digital, more always on. Our -- the decision-making that -- in the organization needs to be quicker. And this is something that we continue to work on as an organization as we face up to large-scale competitors and [ insurgent ] brands. It has to be part of the DNA of Simply Good, and we're committed to being an organization that combines the best of a scaled organization, with the mindset and agility of an insurgent operator. So I'll turn it over to Chris for the second part. Christopher Bealer: Thanks for the question. So just maybe just to set the table up there. In '25, just to remind you, we generated around $180 million of of cash from operations. We spent about $20 million in CapEx. We paid off $150 million in debt, and we bought back just over $50 million in shares. So as we look at that, this business continues to generate a lot of cash. We're starting our '26 with a very low net debt level, and we're very comfortable with our debt levels. As we look at cash priorities, we're constantly evolving the best use of excess cash through a very structured framework. I would say our priorities have not changed. I would say that we look at these options really as and, and not [indiscernible] So we believe we can buy back shares. We believe we can invest in capital, we believe that if the right M&A opportunity comes along, we certainly have capacity to take that on. And we do look at M&A really through a constant lens. But in the short term, today, we look at our stock, we believe it's attractively valued. And we do think buyback represent a good opportunity for us to create long-term value. Geoff Tanner: That's just the one built on that with me from a CapEx perspective. As you think about our supply chain, Steve, we have an agile supply chain built to follow the consumer, which is a real asset for us. And that is part of our operating model. However, where we see an opportunity to invest, to strengthen a competitive mode, we will, which we've seen on chip. It's obviously the fastest growing part of our portfolio. And in that instance, we're willing to invest capital in partnership with a key strategic [indiscernible] to strengthen our competitive mode. Operator: Our next question comes from the line of Robert Moskow with TD Cowen. Robert Moskow: I just want to make sure I'm getting my math right, because the top line guidance was a thing that I think surprised us being lower, and [ 0 ] at the midpoint, the Atkins decline was not the surprise though. So given that, I think, Quest exited the year at 14% organic growth. And I think you even said that despite the problems on OWYN, you were also double digit there. Just mathematically, it looks like these two are going to be up high single digit in fiscal '26? I just want to make sure I got that math right. And if so, are you forecasting a deceleration in Quest in '26? Is that also part of the guide along with OWYN's issues? Christopher Bealer: Yes. So I think you got the math roughly right. We're looking at Quest up really high single digits. OWYN will be in the double-digit range. And as we talked about on the call, Atkins is going to be down in consumption of about 20%. I think a couple of factors that -- perhaps we'll explain it. We have -- as we said on the call, we have a [indiscernible] increase that we've announced to trade. It's not in market yet. So when we [ show up ] the consumption numbers yet. So we do have a price elasticity effect that will be heaviest in the first half. We're also assuming Atkins trade inventories will come down, driven by the distribution losses, which also helps explain a little bit the consumption versus net sales guidance. And then from a Quest perspective and OWYN perspective, if you look at the first half, they have some tough laps which we will have to work through, which is also why half 1 is a little bit lower, perhaps in the full year. Operator: Our next question comes from the line of Jon Andersen with William Blair. Jon Andersen: I've got several. But I'll just [indiscernible] on this. Maybe big picture. So Geoff, you mentioned earlier that -- and we're seeing this, obviously, too, that the category is mainstreaming to some extent. And as you pointed out, not necessarily constrained to the traditional aisle anymore as a result. So I guess my question is, if kind of the incremental household, or incremental consumer, for these types of products may not may not be in that traditional aisle, maybe more in a mainline aisle. How are you kind of approaching serving that customer, getting in front of that customer, interrupting that path to purchase? What kind of capabilities are you building if you invest in? How do you see the offering evolving and maybe moving around the store? Geoff Tanner: Yes, it's a good question. And we certainly see it if you just look at the increase in household penetration that Quest has experienced and OWYN has experienced. Quest up 19% and OWYN up close to a point. But you're right. So as the category has mainstreamed, as more and more consumers are looking for high-protein low-carb low-sugar options, they're looking for those options everywhere they shop. This is no longer just isolated to the more traditional [indiscernible]. In my opinion, this one of the biggest trends that are shaping this category, the mainstreaming of it. And that is why we -- over the last year, in particular, we've had a focused effort on expanding the physical availability of our products outside our aisle. And so you will see secondary placement in mainline aisles, for example, chips. We've built a new retail team that is focused on driving displays across the store. We have made progress in new channels, particularly in the club space. We've invested in away from home. So I think universities, gem and airports. And what I would say is we're still in the early innings of that. That is one of the biggest growth vectors that we are focused against right now, and we've built the capabilities to do that. The second piece to that is continuing to bring products that are more mainstream. Not just limiting our innovation to bars and shakes. And we've seen that with [ Quest Chips ], and we are in the early innings of [ Quest Chips ]. You've seen that with our Bake Shop launch, which has proven to be highly incremental. And that -- thinking more broadly with innovation and really tapping into what I think possibly the greater strength we have in our organization, which is our R&D team. And disrupting the macros of large snacking category. So this is all in support of mainstream -- mainstreaming. Being available everywhere consumers shop and are looking for our products, and offering them a broader range of products that flip the macros on large unhealthy snacking categories. Operator: Our next question comes from the line of Megan Clapp with Morgan Stanley. Megan Christine Alexander: I wanted to ask about Atkins. Geoff, I think you mentioned at this point, 75% of the brand sales come from SKUs in the top 2 quartiles of category velocity. Are you able to just tell us, are those SKUs growing at this point? Just trying to kind of square with the 20% decline you're expecting this year. Is that concentrated in kind of the lower-velocity SKUs? Are you still seeing some pressure within the core? And just how should we think about kind of that 10% to 15% in the bottom quartile? Is the bulk of the rationalization you think as we get through '26 is going to be behind you? Geoff Tanner: Yes. So -- yes. By far, the majority of the SKUs in the top 2 quartiles that represent 75% of sales are growing and healthy. The issue with Atkins as we've talked about in the past and on the call today, is it had a long tail SKUs that have underperformed. So the declines that have impacted Atkins have been by mostly driven by what you're seeing in the tail SKUs. And if you want to zero in on that 10% to 15% in the bottom quartile of the category. So that's where we're focused. That's where we're focused on rationalizing that tail and working with retailers to drive to a more optimal assortment and more sustainable assortment concentrated around the core. Operator: Our next question comes from the line of Brian Holland with D.A. Davidson. Brian Holland: I wanted to ask about the selling and marketing line, which if we go back, depending on what starting point you want to use, come down about 300, 400 basis points as a percentage of sales. This obviously dates back to when Atkins was the only asset in the portfolio. You talked this morning about leaning into the Owen brand despite the fact that you have margin pressures elsewhere, so you're taking an incremental hit to support that brand. You've had pretty clear success since you rolled out copy on Quest. So you have some proof of concept there back in early '24. And obviously, Atkins maybe is in a different place than it was if we go back 5 or 6 years, as far as what it requires from a support level. But again, just thinking about where that number has come down? And thinking about modeling this business going forward, and the earnings power? Just wondering what the right level of brand support for this portfolio requires? Geoff Tanner: Yes. I'll take it and turn over to Chris. So we've been really pleased with the impact that advertising has had on Quest. Over the last couple of years, Quest is up substantially, up double digit in dollars. And the new campaign that we rolled out just over a year ago had an almost immediate impact on consumption. You could see it. I've been doing this for 25 years. And it's very rare to see such an immediate impact of advertising on the business. Just rolled out, released a 2.0 version of It's Basically Cheating, and the test scores there were terrific. So advertising works for us in the space. As you think about how we're allocating our marketing spend? So Quest up double digits, significant advertising to support that business. And then as we look at the trajectory we see on OWYN, and the future we see on OWYN, and the customer conversations with OWYN, we think the right decision for us is to make a substantial increase in marketing in that business for the long term. You're right, where we have rationalized advertising is on Atkins as we've brought spending back in line with the size of that business and with the trajectory of that business. And then just one more point on advertising, shifting more and more to digital, so social media, winning with influencers, retail media outlets. So there's also a mix shift within our marketing expense. Christopher Bealer: And then the only thing I'd really add to Geoff's comments is, as we find opportunity through the year to invest more in marketing, we absolutely will. And that's definitely a priority for us is to set ourselves up well for future continued sustained growth. Operator: Our next question comes from the line of Kaumil Gajrawala with Jefferies. Kaumil Gajrawala: Wanted to dig into something that you talked about related to the OWYN product issue on -- I don't know if you said it was reviews or if it was something on social. But maybe if you could just talk a little bit about how you might be addressing [ only ] from a brand issue, maybe the product quality issues are resolved. But what impact did it have on the brand? You've talked a lot about sort of incremental marketing, but maybe what specifically are you doing? And perhaps what is the narrative, or has the narrative been impacted in any way from this issue? Geoff Tanner: Yes. So let me just reinforce that the product issue is largely behind us. We've been shipping new, more stable product since August. And that the impact was less than 10% product that notwithstanding, it did have an impact on consumption and ratings and reviews, which did drop. The product and market was a little more concentrated in a few channels. We've overinvested in those channels to get the ratings back up, to drive trial. And I'm confident that this business will be very quickly back to where it was. And to underscore that even with the issue in market, the brand is growing mid-teens. As you look long term, again, we have tremendous confidence in this business. The clean movement is really accelerating. We're hearing it from retailers. We're planning on making significant investments in marketing to drive awareness from a pretty low base. We see distribution opportunities in front of us. And I'm really excited about disruptive innovation we'll be bringing out within the next year on the business. Operator: Our next question comes from the line of John Baumgartner with Mizuho Securities. John Baumgartner: Geoff, you mentioned the price increase that's forthcoming at retail. How are you thinking about elasticity on the back of that? Should it be higher than history given the health of the consumer? And related to that, if you can just please clarify the focus on the entry prices for Atkins bars? Are you finding that absolute prices today after the last few price increases taken, have prices become an impediment to consumption among existing buyers? Or is this more of a mix shift, whereas as the category mainstreams, new households come in, maybe more middle-income consumers, does it require lower prices to attract new households? Geoff Tanner: Yes. So on pricing, we have announced pricing on portions of the portfolio kind of in the mid- to high single-digit range. We expect elasticity to be in line with what we would historically see. But we have seen that. Initially, the elasticity impact may be a little higher and then tends to burn off, which is, as you heard Chris mention earlier, it's one of the drivers of our first half, second half inflection. To your question on have we seen pricing dampen growth? Absolutely not. This has proven to be a category that is pretty resilient to pricing in the long run. You don't get to 5 years of high single, low double-digit growth if that's happening. So this seems to be a category that's very resilient to pricing in the long run. To your question on the Atkins [indiscernible] entry price point. We -- the Atkins products, our entry price point was at a 5 pack, where the majority of competition was in a 4 pack, and that just created a higher absolute price on shelf as we did our research, we identified an opportunity to come out with a 4 pack at a lower absolute price. And it's early, too early to call it. We are certainly seeing the entry price point bring in new users to the brand. Operator: Our next question comes from the line of Matt Smith with Stifel. Matthew Smith: Just wanted to come back to the comments on sales expectations by brand and phasing. First, Atkins consumption is expected to be around -- down around 20%. You also called out that inventories may move lower, given some of the distribution losses. Do you have an estimate for where you would expect that inventory headwind to come in? And second, you called out a tough merchandising comparison in the second quarter, specifically for Quest. Is that related to lapping the large club event last year? And can you provide an update on how your distribution opportunity, or expansion is going within the club channel? I think you had some positive takeaways from a large event last year and you were going through an evaluation period. Curious how you're continuing to see that evolve? Geoff Tanner: Yes. Just address the [indiscernible] Atkins. Yes, we do see Atkins. We think net sales will be down more than 20% in the first half, which is, as you rightly pointed out, is the consumption decline we called out on the call earlier, as well as the distribution impact. That distribution comes down, obviously, will be load at retail for those points. So that will be coming down more than 20% in the first half and a bit better in the second half. In terms of Quest, yes, there is a -- we are lapping some heavy merchandising in Q2 last year. Also remember that as we just talked about, we have price elasticities that will be really an effect -- full effect in the second quarter, which is an impact. But we're very happy with where especially the [ Salty ] business is running, obviously still very strong and lots of momentum left on our business. Christopher Bealer: Yes. I can pick up the question on Quest. You're right. Last year, during New Year -- New Year, we had a test a large club customer where we have really not had any business at all. Quest performed very well. And we've had continued conversations with that customer about how to roll that out. And the way it looks like it's going to phase at this point is that it will be more spread out throughout the year, more consistent distribution versus having all of that distribution as we did in January, February and a little bit into March. So that that's where we're landing right now. We continue to work with that customer and really excited about the new relationship we're building with that customer. It does represent for Simply significant white space from a distribution perspective. And just more specifically back to the Quest [ chips ] and the lapse is the spreading effect of that volume that will now be more spread throughout the rest of the year as the process is concentrated. Operator: Our last question comes from the line of Jim Salera with Stephens, Inc James Salera: I wanted to circle back on the margin component of the guidance. Are you guys able to remind us what percentage of [ COGS Poco ] represents? And if you can give any commentary around kind of the layering of your hedges? There's been a lot of volatility in cocoa. So we're just trying to get a sense if prices continue to fall, could there be gross margin relief maybe earlier than 3Q, or to a greater magnitude in 3Q? Just any comments there would be helpful. Geoff Tanner: Yes. I mean in terms of cocoa, just to remind you, cocoa is -- we do buy cocoa directly. We also have cocoa as a significant component of our coatings layers and inclusions. As a percentage of our overall cost is in the mid-single-digit range. And then from a coverage perspective, which I think was the other part of your question, we do have -- we are covered out quite far into the year, certainly first half, to remind you, I think we talked about it on the call. We are covered in the first half of the year at a fairly high prices that we were -- we took as we were just ensuring supply. As we get into Q3, we'll be transitioning into much lower cost and actually deflationary year-over-year. And then as we go into Q4, that will take even more into effect, lower prices, which will then carry into FY '27. And then the only other point I would say on margins as you started with a more general point is we have pricing. As we said, really starting in Q1, really mostly in fiscal November and rebuilding into Q2. Productivity, we said -- we've always said is on a lag, and that will be really kicking in fully in the second half. So that's why we have pretty good confidence if you look at our costs. Costs are well understood through most of the fiscal year. Pricing is building, productivity is building. And we do see, even in the spot prices, specifically on cocoa, even further opportunity again as we think about Q4 and into '27. Christopher Bealer: The spot has come down quite considerably in the last couple of months, and certainly considerably from the position we have today through the first half. Operator: We have reached the end of the question-and-answer session. I'll now turn the floor back to Geoff Tanner for closing remarks. Geoff Tanner: I just want to thank everyone for their participation today on the call. If you got any follow-up, please feel free to reach out to Josh, and we look forward to speaking to you in January. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to the Bread Financial's Third Quarter 2025 Earnings Conference Call. My name is Kevin, and I'll be coordinating your call today. [Operator Instructions] It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations for Bread Financial, the floor is yours. Brian Vereb: Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer; and Perry Beberman, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Also on today's call, our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta. Ralph Andretta: Thank you, Brian, and good morning to everyone joining the call. Today, Bread Financial reported strong third quarter 2025 results. we delivered net income of $188 million, adjusted net income and earnings per diluted share of $191 million and $4.02, excluding the $3 million post-tax impact from expenses related to repurchase debt in the quarter. Our tangible book value per common share grew by 19% year-over-year to $56.36 our return on average tangible common equity was 28.6% for the quarter. Consumer Financial health remained resilient in the third quarter as evidenced by strong credit sales a higher payment rate as well as lower delinquencies and losses. Credit sales increased 5% year-over-year in the face of ongoing inflationary concerns, a slowing yet stable job market and continuing weak consumer sentiment. The improvement was driven by strong back-to-school shopping early in the quarter with notable improvement in apparel and beauty. Additionally, purchase frequency increase and spending trends improved across all consumer segments amidst these favorable results, we continue to monitor changes in monetary and fiscal policies, including tariff and trade policies and their potential impacts on consumer spending and employment. Overall, a positive year-over-year credit sales trends and gradual improvement in our credit metrics gives us confidence in our outlook as we enter the final quarter of the year. Given current credit trends and slightly better-than-expected performance of our net loss rate year-to-date, we expect that we will be at the low end of our full year outlook range of 7.8% to 7.9%. While the net loss rate remains elevated compared to historic levels, the improving loss rate and delinquency rate trends are encouraging. As I mentioned earlier, we will continue to closely monitor consumer health purchasing and payment patterns and adjust our credit strategies accordingly to achieve industry-leading risk-adjusted returns. More broadly, we have remained consistent in our full year financial outlook as we continue to navigate market volatility. Our expectations around the health of the consumer have not materially changed. We have maintained our long-term focus on responsible growth and executing our business strategy. Given the actions we have taken over the past 5-plus years, we are well positioned to achieve our long-term financial targets and anticipate increasing shareholder value over time. Our focus on expense discipline and operational excellence continues to produce desired results as adjusted total noninterest expense was down 1% year-over-year despite continued technology-related investments, inflation and wage pressures. We will continue to invest in technology modernization, digital advancement, artificial intelligence solutions and product innovation that will drive future growth and efficiencies. Considering the progress we have made, we are confident in our ability to achieve full year positive operating leverage, excluding the impacts of repurchase debt and any portfolio sale gains. With our CET1 ratio at the top of our targeted range of 13% to 14%, we initiated the $200 million share repurchase program that the board approved in August, repurchasing $60 million during September and into October. This morning, we announced a board-approved $200 million increase to our share repurchase authorization. We also announced a 10% increase to our quarterly cash dividend, which is now $0.23 per common share with the goal of increasing our dividend annually as we see growth in our book value. These actions, along with our proven strong capital and cash flow generation underscore our ability to execute all of our capital and growth priorities concurrently, providing a solid runway to deliver additional value to our shareholders. Moving to our new business activity. During the quarter, we expanded our home vertical foothold by signing new brand partners, including Bed Bath & Beyond, an e-commerce retailer with ownership interest in various retail brands. Furniture First, a national cooperative buying group that serves hundreds of independent home furnishings and bed retailers across the U.S. and Raymour & Flanigan, the largest furniture and mattress retailer in the Northeast and the seventh largest nationwide. These new signings provide expanded opportunity for profitable growth going forward. We will continue to leverage our full product suite and omnichannel customer experience to extend category leadership in existing industry verticals, while expanding into new verticals. Strategically, our vertical and product expansion efforts continue to have positive impact on both risk management and income diversification across our portfolio. Finally, as released last week, we are pleased to have earned a credit ratings upgrade and positive outlook for Moody's recognizing the progress we have made in strengthening our financial resilience and enterprise risk management framework. In summary, we are pleased with our third quarter results. Our financial performance reflects steady progress in executing our strategic priorities and our ongoing commitment to return value to shareholders, including in the form of increased dividends and share repurchases. Now I will pass it over to Perry to review the financials in more detail. Perry Beberman: Thanks, Ralph. Slide 3 highlights our third quarter performance. During the quarter, credit sales of $6.8 billion increased 5% year-over-year even with the anniversary of the Saks portfolio addition in late August 2024. The increase was driven by new partner growth and higher general purpose spending. As Ralph mentioned, we saw strong back-to-school shopping in the early part of the quarter with sales growth moderating in the latter part of the quarter. Average loans of $17.6 billion decreased 1% year-over-year. Higher payment rates, coupled with the ongoing effect of elevated gross credit losses, pressured loan growth. In line with lower average loans, revenue was down 1% year-over-year to $971 million. Our revenue growth was also impacted by lower build late fees resulting from lower delinquencies, higher retailer share arrangements, RSA with partial offsets, including lower interest expense and our ongoing implementation of pricing changes and paper statement fees. Total noninterest expenses decreased $98 million attributed to the prior year impact from repurchase debt. Excluding the impacts from our repurchase debt, adjusted total noninterest expenses decreased $5 million or 1% driven by our continued operational excellence efforts. Income from continuing operations increased $185 million, reflecting the prior year post-tax impact from a repurchase debt of $91 million and the current year impact from a lower provision for credit losses, and a $38 million favorable discrete tax item. Excluding the impacts from our repurchase debt, adjusted income from continuing operations increased $97 million or 104%. Looking at the financials in more detail on Slide 4. Total Net interest income for the quarter decreased 1% year-over-year, resulting from a combination of a decrease in billed late fees due to lower delinquencies as well as a gradual shift in risk and product mix leading to a declining proportion of private label accounts, which generally have higher interest rates and more frequently fee assessments. These headwinds were partially offset by lower interest expense the gradual build of pricing changes and an improvement in reversal of interest and fees related to improving gross credit losses. Noninterest income was $7 million lower year-over-year, driven by higher retailer share arrangements, partially offset by paper statement fees. Looking at the total noninterest expense variances, which can be seen on Slide 11 in the appendix, employee compensation and benefits costs decreased $6 million as a result of our continued focus on operational excellence. Card and processing expenses increased $4 million, primarily due to higher network fees driven by our gradual shift in product mix. Other expenses decreased $93 million, primarily due to the prior year impact of repurchase debt. Looking ahead, we anticipate a typical seasonal increase in fourth quarter expenses sequentially from the adjusted third quarter expenses due to increased holiday-driven transaction volume higher planned marketing expenses and higher expected employee compensation and benefits costs. Adjusted pretax preprovision earnings or adjusted PPNR, which excludes gains on portfolio sales and impacts from repurchase debt was nearly flat year-over-year. Turning to Slide 5. Both loan yield of 27.0% and net interest margin of 18.8% were higher sequentially following seasonal trends. Net interest margin was flat year-over-year. A number of variables continue to impact our NIM, including the drivers I noted on the prior slide, as well an elevated cash position and changes in Fed rates. Given continued improvement in payment rate and delinquency rate trends, we anticipate lower billed late fees for the remainder of the year to pressure NIM, while the gradual benefit from pricing changes will continue to be realized over time. On the funding side, we are seeing cost decrease as savings accounts and new term CD rates decline. During the quarter, we completed a $31 million tender offer for our senior and subordinated notes using excess cash on hand to reduce higher cost debt, which also improved our cost of funds. Direct-to-consumer deposit growth remained steady year-over-year, ending the quarter with $8.2 billion in direct-to-consumer deposits, further improving our funding mix Direct-to-consumer deposits accounted for 47% of our average funding up from 41% a year ago. Moving to Slide 6. Optimizing our funding, capital and liquidity levels continues to be a key strategic initiative. As history shows, we will be opportunistic in evaluating and executing plans to continue to enhance our structure. Along those lines, as Ralph mentioned, we are proud to have earned a credit ratings upgrade from Moody's to Ba2 while maintaining a positive outlook. This was a result of the actions we have taken to improve our capital and funding profiles along with our improved enterprise risk management framework and strong financial performance. Our liquidity position remains strong. Total liquid assets and undrawn credit facilities were $7.8 billion at the end of the quarter, representing 36% of total assets. At quarter end, deposits comprise 77% of our total funding with the majority being direct-to-consumer deposits. Shifting to capital. We ended the quarter with a CET1 ratio of 14.0%, up 100 basis points sequentially and up 70 basis points compared to last year. As you can see in the upper right table, our CET1 ratio has benefited by 260 basis points from core earnings. Common dividends and the repurchases of $234 million in common shares over the past year impacted our capital ratios by 146 basis points. Additionally, the last CECL phase-in adjustment occurred in the first quarter of 2025 and resulting in a 73 basis point reduction to our ratios and the impact from repurchase debt accounted for approximately 30 basis points of adjustment to CET1 since the third quarter of 2024. Finally, our total loss absorption capacity comprising total company tangible common equity plus credit reserves ended the quarter at 26.4% of total loans, a 70 basis point increase compared to last quarter, demonstrating a strong margin of safety should more adverse economic conditions arise. We have a proven track record of accreting capital and generating strong cash flow through challenging economic environments. We have demonstrated our commitment to optimizing our capital structure through the issuance of subordinated debt and the return of capital to shareholders. We will continue to opportunistically optimize our capital structure, which includes potentially issuing preferred shares in the future. Our commitment to prudently returning capital to shareholders is evidenced by today's Board authorized announcements of both a 10% increase in our common share dividend and an additional $200 million share repurchase authorization. This $200 million increase to our existing repurchase authorization in combination with unused capacity under the previous authorization means we have approximately $340 million available for share repurchases at this time. We are well positioned from a capital, liquidity and reserve perspective. providing stability and flexibility to successfully navigate an ever-changing economic environment while delivering value to our shareholders. Moving to credit on Slide 7. Our delinquency rate for the third quarter was 6.0%, down 40 basis points from last year [indiscernible] basis points sequentially, which was slightly better than normal seasonal trends. Our net loss rate was 7.4%, down 40 basis points from last year and down 50 basis points sequentially. Credit metrics continue to benefit from our multiyear credit tightening actions ongoing product mix shift and general stability in the macroeconomic environment. We anticipate the October and fourth quarter net loss rates will increase sequentially following typical seasonal trends. The third quarter reserve rate of 11.7% at quarter end, a 50 basis point improvement year-over-year and 20 basis points sequentially was a result of our improving credit metrics and higher quality, new vintages. We continue to maintain prudent weightings on the economic scenarios in our credit reserve model and given the wide range of potential economic outcomes. We expect the reserve rate to decline at year-end before increasing again in the first quarter of 2026 following normal seasonality. As mentioned, our disciplined credit risk management and ongoing product diversification has continued to benefit our credit metrics. As you can see on the bottom right chart, our percentage of cardholders with a 660-plus prime score increased 100 basis points year-over-year to 58%, in line with our expectations. However, macroeconomic uncertainty persists with inflation above the Fed's target rate, evolving trade and government policy impacts to both inflation and labor and continued low consumer sentiment. As a result, we continue to actively monitor these trends while remaining vigilant with our credit strategies. But at this point, we do anticipate a continued gradual improvement in the macroeconomic environment. Turning to Slide 8 and our full year 2025 financial outlook. Overall, our results have trended in line with our expectations and our outlook remains unchanged from the previous quarter. We continue to expect average loans to be flat to slightly down. Our outlook for total revenue, excluding gains on portfolio sales is anticipated to be roughly flat versus 2024. We continue to expect to generate full year positive operating leverage in 2025, excluding portfolio sale gains and the pretax impact from our repurchase debt. Our results underscore our ability to deliver operational excellence and maintain expense discipline while investing in the business. Given the continued gradual improvement in our credit metrics, we are confident that we can deliver a full year net loss rate in our guided range of 7.8% to 7.9%. As Ralph mentioned, based on current trends, we expect to come in towards the lower end of that range. Finally, with the $38 million favorable discrete tax item in the quarter, we have adjusted our full year effective tax rate guidance to 19% to 20%. While there is variability we would anticipate future years to align more closely with our historical target effective tax rate range of 25% to 26%. Overall, our third quarter results underscore the financial resilience and strong return profile of our business model. We remain confident in our ability to achieve our 2025 financial targets and to deliver strong long-term returns. Operator, we are now ready to open up the lines for questions. Operator: [Operator Instructions] Our first question comes from Sanjay Sakhari with KBW. Sanjay Sakhrani: It sounds like you're seeing constructive trends across the portfolio. And I'm sure you've heard of some of the concerns on some cracks we've seen in consumer credit across some lenders and subprime. I'm just curious, as you've looked across your portfolio, have you seen any signs of weakness? Obviously, it seems like things are trending in the right direction. And then maybe, Perry, just related to that, maybe just the progression of the reserve rate and the loss rate as we go forward if things are stable? Perry Beberman: Yes, Sanjay, thanks for the question. So I think it starts with a quick view of the macro environment that I think you mentioned everybody is kind of seeing is that at least through Q3, the consumers and macro metrics have been, I'll say, surprisingly resilient, meaning unemployment and inflation are only slightly different than the prior quarter, which means we've got a pretty stable macro environment. So I think some of the concerns that are out there to set consumers remain nervous about what the future might look like. And that's really showing up in both consumer confidence and consumer sentiment, which is down pretty meaningfully versus last year. So there's going to be more to come on it. But for our consumers, as we've talked about, something that was very important is that wages need to outpace inflation for them to get a handle on their finances and their budgeting. And so that's been good, right? Wages have continued to outpace with -- I think it was August date, it was around a little over 3 -- close to 3.5% like 3.4% growth and inflation only being 2.9%. So that's good for our customers. So again, what does it mean going forward is going to be dependent on what happens around the Fed policy and what that then means to inflation is the tariffs unfold and what happens with labor. So more to come on that. But then within our own portfolio, we are seeing stable gradual improvement. And I'd say that's across all vantage bands. So we -- as you know, we don't have a high concentration of subprime. We focus on pretty much the prime customer, maybe some near prime. But we are seeing across the board really good stability. And that, for us, means we're not seeing the cracks in there at this point. We're very cautious. We're watching it, watching it very carefully. I'll say the entry rates in the delinquency are better than what they were pre-pandemic. So that's a good sign for us, and we're starting to see some improvement in the later stage roll rates. Again, that I think the macro is going to be real important, but I think our credit strategies and the risk mix shift that we've been seeing are starting to play through. On your question on reserve rate. Sorry... Sanjay Sakhrani: Please, I'd love to advance for that. Perry Beberman: Yes. So as it relates to the reserve rate, the only thing that drove the change this quarter was credit quality improving. So as the credit quality improves, that's the core input into it. So the loans we have on the books, similar to last quarter, that's all it was. The macro inputs quarter-to-quarter, very similar. That didn't really drive any change in the reserve rate. And we kept our credit risk mix the overlays exactly as it was last quarter. So that, as you look forward, as we have more confidence in how the current policies the government are going to play forward, I think you'll start to see us be able to shift back off of those adverse and severely adverse scenarios to get into more of a balanced weighting and that will be a tailwind to the reserve rate, coupled with continued improvement that we expect to see in our overall credit metrics as it pushes through into next year. Sanjay Sakhrani: Okay. That's great. That's encouraging. And I guess, like as a follow-up to that, I know there's this push and pull between loan growth and credit quality. But I'm just curious, as we think ahead, knowing what we know right now, do you envision loan growth picking up as we move into next year? And maybe you could just talk about the portfolio acquisition opportunities to the extent there are any? Perry Beberman: I'll ask Ralph to take that one. Ralph Andretta: Sanjay. Good to hear your voice. So if I think about it, if I take a step back, we've seen credit sales move in the right direction, 5% for the quarter. We've seen credit is moving in the right direction, more work to do, and we're signing new partners. We announced 3 new partners today, and we have a really robust pipeline and a consumer that is resilient. So payment rates are higher, obviously, and fees are lower. I'll take a healthy consumer any day of the week in terms of payment and credit -- but given the fact that we're seeing growth, we're seeing the macroeconomic environment kind of be steady and new partners, I think you will see some loan growth going forward. Thank you. Operator: Our next question comes from Moshe Orenbuch with TD Cowen. Moshe Orenbuch: Great. Maybe to just follow up on that and Perry a little bit. In terms of clearly, there's things going on in terms of kind of still temporary moves in payment rate. But if you think about the new mix of your card base, is there like a way to think about the ranges of if you had 5% growth in spend volume, what that would mean in loan growth once that phenomenon is kind of fully kind of played out or what those normal gaps would be given we've got now a different kind of base, more of it being co-brand spending and the like. Perry Beberman: Yes. I think you're asking a question that's really relevant. It depends on the mix of the business that comes on. I mean you heard Ralph mention the new brand partners coming on in the home space. Those would typically be larger ticket probably a little bit lower payment rate, so that would have a mix effect. But then if you have more of a top-of-wallet co-brand card, that have a higher payment rate. So it's really going to be mix dependent on what we have on. So I don't think it's very easy to say that if you had 5% sales growth all through next year, that 80% of that translates into loan growth. But certainly, there's a factor on that, but it is going to be dependent on mix, and some of that is yet to be seen what that will look like as we get into next year. Moshe Orenbuch: Okay. And maybe in terms of some of the commentary on the margin and the impacts of the pricing changes versus kind of lower billed late fees. Just given the way you think about the kind of the credit improvement, I guess, is there a way to kind of dimensionalize how long it's going to take for until you no longer have that or that build length fee kind of bottoms out? And so that the pricing changes actually will start to increase faster and outweigh that? Kind of any way to kind of dimensionalize that thing. Perry Beberman: Yes. Again, another good question. Of course, the way to think about it is the build late fees are obviously going to follow delinquency trends. And that is what we're all eager to see is how quickly does delinquency get to a steady state, we'll get to sort of that through-the-cycle number. So that will be leading and then trailing within 6 months, I guess, you then have the -- that improvement in the build. The reversal of build interest and fees. So those kind of will be some headwind on the lower build late fees with delinquency, you do have the tailwind that goes with the gross loss improvement. Those 2 things come together. Then you also then have a shift in risk mix -- product mix within the business, which when you put on some more higher-quality co-brand has a little bit lower APRs and yield versus private label. So that comes through, but then you do have pricing changes that have been made that continue to build. So there's a lot of moving parts in there, coupled with prime rate reductions, when we're slightly asset sensitive. So I wish there was something to say, "Hey, where is that perfect inflection point. But with all those moving parts, we'll obviously give more guidance as we get closer to January so that we have a better line of sight to exactly what our view is of mix and tie that into what the macro improvement will be as well as the credit improvement within the portfolio. Operator: Our next question comes from Mihir Bhatia with Bank of America. Mihir Bhatia: I did want to just continuing this conversation around credit sales and loan growth. Maybe just -- how are you thinking about credit sales in 4Q and into 2026. I think you mentioned there was a little bit of moderation as you move through the quarter after a strong back-to-school season. So just trying to understand, do you think we're in a little bit of an air pocket right now before you get to holiday shopping? Or just how are you thinking about holiday shopping? What are you hearing from your retail partners? Perry Beberman: Yes. So credit sales, again, we're seeing some pretty good growth in credit sales right now. As mentioned, it was early in the quarter with back-to-school, was stronger. September moderated a little bit, still positive. And we're seeing a similar trend in October, still being up year-over-year. I think we're seeing different reports, but expectation is retailers are going to be pretty aggressive trying to draw the customers in, possibly early. So consumers are looking for discounts. They're looking for promotions and reward programs are going to be really important to make that happen. I mean consumers -- and I think we've said this for a while now, we've been very impressed with how consumers have been responsible with their budgets. And in this period of time, they're going to be looking for deals and ways to make that budget stretch or go further. So if retailers come out early in the holiday season with good deals, I expect consumers will spend on that. But then maybe it could be somewhat like some, I'll say, old historical days when I go to the day before Christmas, I go look for that great deal when we didn't have the money to get things in painful price early. So it really is going to depend on how that looks and what the inventory situation and how motivated retailers are to take care of their inventory. Mihir Bhatia: Got it. That's helpful. When I think about the interchange revenues, a pretty big step up in that one -- in that line item this quarter. I think even if you look at it as a percent of credit sales. Could you maybe just talk about how you expect that line to trend? What are you expecting to happen? I suspect it's got to do with the RSAs and some of the big ticket items. But just how should we be thinking about that line item from here going forward? What do you expect? Perry Beberman: Yes. Again, it's one of the -- I say NIM is hard to forecast. RSAs is another one that's pretty hard to forecast because of the netting that goes on in there. So that the RSA is going to be pressured as we see increased sales and so increased sales, there's some compensation to partners or in the rewards and loyalty funding as well as some compensation. And then also when you have revenue shares, when you have losses coming down, it leads to a higher revenue share, profit share with partners. So you've got sales-based rebates, you've got the revenue share in there, you got the profit share and everything I just mentioned around the rewards funding. In addition, when you -- we've been seeing some lower big ticket purchases, then MDFs are pressured because of that softness. So as the big ticket bounces back, if that happens in some of the verticals, that could be a tailwind. But as the spend grows, you also have some more partner share and revenue share. So there's a lot going on in there. Operator: Our next question comes from Jeff Adelson with Morgan Stanley. Jeffrey Adelson: Just wanted to focus a little bit more on the pipeline and the signings you announced this quarter. It seems like the home vertical was more of a focus for you this quarter. Is that something you're looking to focus on here, maybe creating a little bit more of a network effect around the home area and launching a joint card like one of your competitor has? And then are there any other verticals you'd call out as areas of focus for you going forward? I mean you mentioned the healthy or the robust pipeline. So maybe just sort of focus on what's in the pipeline. Ralph Andretta: Yes. Thanks for the question. The home vertical is a good one for us, right? Because it's discretionary, nondiscretionary. There's home repairs and there's other discretionary furniture. So we view that as a very active vertical for us and very strong vertical. And we'll most likely add to that as we move forward, which I think is positive for us. So we'll, again, be one of the leading contenders in that vertical as we are in beauty and a couple of others. So there's a -- we look across our portfolio. It's diversified now. It's -- we've derisked it in terms not only of product but also of industry. So we feel really good about that. The pipeline is robust across all those verticals. So we're looking forward to adding new partners within this vertical, establishing new ones. We've got a travel vertical that's doing very well. Beauty is still a big contender. And now with this home improvement and home furnishing vertical, we feel that also will move forward. So we are kind of insulating ourselves from any one vertical that there'd be an issue with. Usually, it was if the mall went bad and apparel was a bad vertical, that would throw us off. Now we're kind of insulated from those type of one-off verticals that tend to -- that may be impacted by the economy. Jeffrey Adelson: Okay. Great. And maybe just a follow-up on capital return. You've been on a little bit of a roll here with the buyback authorizations. I guess just maybe any sort of way to think about like what needs to happen for you to move past this medium-term 13% to 14%? Is it just settling the preferred, maybe getting your credit rating up to investment grade. I think you're now a couple of notches away. And have you thought about maybe establishing a larger repurchase authorization? Or do you prefer to be a little bit more on the quarterly cadence or half year cadence here? Perry Beberman: Yes. Real good question. So as we think about capital, one, let me start with -- we've not changed our capital priorities, right? We have always said we're going to fund responsible, profitable growth. So some of what will inform our capital authorizations or share repurchase automations in the future will be based on the growth that we have in front of us. We'll continue to invest in technology and our capability to serve our brand partners and customers. And we'll make sure we maintain those strong capital ratios and obviously return capital as appropriate. And to your point, though, on right now, our binding constraint is CET1 around that 13% to 14%, which we said was our medium-term target. And so we got to the top end of that this quarter. We have confidence in what we see going forward. And the important part was that we want to make sure we had enough authorization out there to provide us capital flexibility should we choose to do something to further optimize our capital stack. And when you talked about what would it take to lower our binding constraint to CET1 down to that 12% to 13%, which is what we said in our Investor Day would be our longer-term target. It does mean introducing some Tier 1 capital in the form of preferreds over time. But really, the rating upgrade is less relevant to that. That's more around what happens with senior debt. Senior notes in the future and other financings that are keyed off of those ratings. we don't need to get to an investment grade to take capital actions. Operator: Our next question comes from Reggie Smith with JPMorgan. Reginald Smith: I was looking through your slide deck and my rough math has like your BNPL sales volume up maybe 100%. That's probably a dirty calculation. But I guess there's a lot of investor interest in the BNPL space, certainly over the last couple of months. I was just curious, do you guys offer or have like a dual BNPL proprietary card today? And is there an opportunity there to kind of do more on that kind of blended dual-purpose cards? And I have one follow-up. Ralph Andretta: Yes. So I think you have to look at our full product offering, right? So I think you have a way to look at it. And so we have co-brand cards. And that's -- I think co-brand cards right now are probably the majority of our spend in terms of going forward, discretionary and nondiscretionary private label credit cards to absolutely have private label credit cards, and we see spend continuing on those cards. And then we have Buy Now, Pay Later. Now, Buy Now,Pay later is a pay in for an installment loan. You have 2 types of buy now pay later out there as well. And then lastly, we have our prop card, right? Our prop card is a small but growing portfolio. So it becomes a basket of products we have, and it's kind of a uniform process that we go through, and we can offer a consumer wherever they are in their in their kind of credit establishing credit where they are in their -- in that journey, we have a product for them. We have a product for them through a partner or directly to them. So we feel very, very good about our diverse portfolio in terms of product and our diverse portfolio in terms of different industry verticals. Reginald Smith: Got it. I guess what I'm getting at is I look at companies like Quanta and Affirm like they're really leveraging that point of sale to bring customers into the ecosystem. I guess what I'm asking is -- what are your thoughts around I know Brett historically has been kind of a white label solution for retailers. But is there an opportunity to be a little more aggressive on the front foot there to kind of bring more customers in into the platform? Ralph Andretta: Yes. Unlike the 2 you mentioned, we are focused on partnerships. That's where we're focused. We're focused on not just bringing people into our ecosystem. We're making sure people are in our partner ecosystem. We can provide the credit products for them for our partners. So that's what's important to us. We have some direct-to-consumer. As you know, we have direct-to-consumer in terms of our credit card. We have direct-to-consumer. Even on breadth on certain sites where you'll see our you'll see our button. But our main focus is ensuring that we provide our partners with the right products for their for their customers to drive loyalty no matter where they are in their credit journey, and we have that basket of products to do it. Reginald Smith: That actually makes sense. Okay. Real quick for me, last one. Thinking about like AI and automation and the potential there, like I've seen some reports that like AI and automation could have a multi triple-digit kind of basis point impact on efficiency ratios in the credit card, the banking space, like how are you guys thinking about that longer term? I guess the I would imagine there's like an opportunity there, but just maybe can you frame that out longer time for us? Perry Beberman: Yes, Reggie, thank you. So we agree there's definitely opportunity with AI, and we've been engaged with it for a while. So for us, we look at AI as an opportunity to accelerate our operational excellence objectives. We've talked about that, right, simplifying and streamlining and automating their business processes driving increased efficiency, allows us to deploy new capabilities that reduces risk and improve controls while enhancing the customer and employee experiences. And it also allows us to accelerate innovation and move things through the tech pipeline faster, and we were able to do that, you're able to drive growth. So it's beyond just efficiency. And as it relates to AI, one thing I'd tell you is our approach is to be a fast follower. So we're learning from the early adopters. We spent a lot of money on both what worked and what didn't work. And so we're very thoughtful in identifying and focusing on those use cases that have the highest likelihood of being impactful to our business. That means we look for immediate business value. We want long-term platform scalability as well being regulated. We've got to make sure it's regulator confidence in what we're doing. And all of this should continue to drive positive operating leverage over time. So the one thing also around Bread Financial and with our terrific technology team that we have, we're nimble in how we can deploy things across the company. And but AI is not new to us. And that's the thing that I think I want to be clear on as well is we have over 200 machine learning models out there across many functions, including credit, collections, marketing and fraud. We have enhanced over 100 processes to date with leveraging robotic process automation. So look, there's a lot of opportunity ahead of us, right, like generative and Agentic AI are exciting developments, and we're going to be ready to go with some of those. And -- but we're excited about what the future holds with this, and there are opportunities but I would look at it as continuing to help contribute to driving growth and driving positive operating leverage and helping with efficiency ratios over time. Ralph Andretta: Yes. I think our approach is very prudent. As Perry said, we're a fast follower. But listen, at the end of the day, we're a regulated industry. So we're going to protect our customers' data. We're going to act all our information. We're going to make sure nothing enters our environment that is harmful in this world of ever-changing technology. But our focus on AI is to enhance the customer experience, make sure our employees have the tools in their hands and better serve our customers and partners. And make sure that we are -- we gain efficiencies across the patch, and that we're using it for better decision-making and better revenue generation. Operator: Our next question comes from Dominick Gabriele with Compass Point. Dominick Gabriele: I don't know what to say. Congrats on the buyback and the execution here. It's many years in the making. At some point, though, when do you think the industry stops using the terminology resilient consumer? Because at the end of the day, we mentioned that across the credit spectrum, all the vintage scores improving. You said that -- actually, it sounds like there's acceleration in the improvement of your delinquencies at quarter end. I mean when do we get to the point when we just say the consumer is solid across the spectrum and credit looks pretty good and it's trending back down. I guess, what are you guys seeing as far as that and then I just have a follow-up. Perry Beberman: Yes, I think I'd go on record saying I think the consumer is stable and credit is improving. Now again, we're still seeing elevated delinquencies and elevated losses. So we're not where we need to be. But I think the caution in there that you're hearing from most folks is they've been resilient in dealing with this prolonged period of inflation, which is compounded. They're getting the handle on it. But it's more what I said earlier. It's caution with sentiment being down everybody is all nervous with the uncertainty that's out there, what's to come. And I think as soon as this certainty comes forward with what the tariff implications would be and other policy things, what it means to labor and businesses can start to invest confidently in jobs I think you're going to see the narrative flip. It's just -- I think it's the uncertainty component right now. That is why you're hearing some a little bit of cautiousness. Dominick Gabriele: Yes, yes. And there's always cracks, right? There's always something that in credit land where there's some sort of issue, but it feels like generally the consumer, I mean, is improving. And I guess when you, Mastercard came out actually with their holiday spend and it looks like they expect some deceleration and year-over-year versus our last estimate, about a 1% deceleration. And so if you think about what you guys are seeing at the end of the quarter, you mentioned that spending has actually decelerated a little bit. That's pretty much in line with what we're seeing on an inter-quarter basis. So do you think that retailers seeing that potential forecast within their own models would trigger more discounts? And how does those discounts kind of affect Bread in a period where maybe versus a period where less discounts were given? Thanks so much guys and great results. Ralph Andretta: Yes. I mean I think you will see the retail is probably push discounts and reward opportunities probably forward more forward in the buying cycle for the Christmas holiday. So pull that forward. But I think consumers are savvy. They're going to look for those discounts. They're going to look for those, how do we monetize and optimize my reward programs out there. So I think that's I don't think that's changed from any year. I think you'll see that. You've seen that in the past, and I think you'll see that in the future. You may see it a bit earlier and maybe a bit steeper by sort of consumers, there are certain verticals, but I think you'll end up seeing that. Operator: Our next question comes from Vincent Caintic with BTIG. Vincent Caintic: And actually, so 2 of them and they're kind of follow-ups to some earlier questions. So kind of to the point about your good credit trends and where you're underwriting. I mean, you're talking about a positive consumer late fees are coming down, but that's an output of the better credit that you're experiencing. And then you're expecting a gradual improvement to the macroeconomic environment. So I'm wondering if you still consider your underwriting to still be tight? And if so, at what point do you lean into growth. Perry Beberman: Yes. So one thing, Vince, thanks for the question. One, we just -- as we said for a long time, we're running the business for a long-term focus. So we've been making targeted adjustments to our underwriting segments as we go, looking at risk and reward, make sure we get paid for the risk we take. And so that's been dynamic as customer behavior to improve both on us as well as office, what you see in the bureaus and as well as macro considerations are all factors into our decision. So we've been executing a gradual unwind of -- that was just there for the macro tightening. But it's been deliberately improving the mix of accounts that's been moving us more towards Prime Plus. But again, it's not this wholesale change. But at the same time, you have tightening happen in other places where you might see a little bit of weakness in certain cohorts. But our underwriting philosophy has remained profit focused. We're looking to deliver some industry-leading ROEs and return on equity and can get our losses down to 6%. But as we think about the improvement that we're looking to see in our loss rate over time. It's not going to be fast and furious getting down to 6%. We're not doing things that would be overly detrimental to our brand partners. So when we talk about trying to get to 6%, we're trying to get each vintage to perform in line with expectations. And we could have taken a more, I'll say, draconian approach and really driven, I'd say, a new vintage down to, say, 4% losses, which get our overall loss rate faster, but that would be detrimental to our brand partners. If we were just mainly a branded business, we could probably do something like that to ourselves. But this isn't the business we're in. So we're very thoughtful about that. And I think you're going to see that consumer health and macro considerations will help drive what we do with underwriting. But we're really pleased with the new accounts that we're seeing coming in, with the average Vantage scores, around 720, with over 72% being prime. And so we're very thoughtful on how we manage line assignments. So obviously, customers that come in the door that are more near prime, are getting a much lower line assignment. But all those things factor in, and that helps with that low and grow strategy we have with credit. So we are a very seasoned credit team and we've been very thoughtful behind this goes. But all this together, as Ross said, we're going to get this inflection point of growth as credit improves, meaning we have less losses, macro improves, the book we're putting on, this is going to start to translate into growth as we start to march into next year. Ralph Andretta: Yes. I think if I had to put a sentence on our philosophy is our underwriting is prudent with a focus on profitability. That's why -- if I had to put a sound bite on our -- how we think about credit. Vincent Caintic: Okay. Great. And then, Perry, just kind of a follow-up, and it's great to see the additional share repurchases and your execution of that. You mentioned that it would take issuing preferreds to get down to the 12% to 13% CET1. And I'm just wondering what you need to see to feel comfortable kind of executing on maybe issuing those preferreds? Perry Beberman: Yes. It's just consistent with what we've said for -- I think since last Investor Day, it's just being opportunistic and making sure that it's the right time and our company is in the right position to do so. It's market dependent. Operator: And I'm not showing any further questions at this time. I'll now pass it back to Ralph Andretta for closing remarks. Ralph Andretta: Well, thank you all for joining the call today and for your continued interest in Bread Financial. We look forward to speaking to you next quarter. And everyone, have a terrific day. Thank you. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day. Thank you.