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Operator: Hello, and welcome to the Twin Disc, Inc. Fiscal First Quarter 2026 Conference Call. We will begin with introductory remarks from Jeff Knutson, Twin Disc's CFO. Jeffrey Knutson: Good morning, and thank you for joining us today to discuss our fiscal 2026 first quarter results. On the call with me today is John Batten, Twin Disc's CEO. I would like to remind everyone that certain statements made during this conference call, especially statements expressing hopes, beliefs, expectations or predictions for the future are forward-looking statements. It is important to remember that the company's actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in the company's annual report on Form 10-K, copies of which may be obtained by contacting either the company or the SEC. Any forward-looking statements that are made during this call are based on assumptions as of today, and the company undertakes no obligation to publicly update or revise these statements to reflect subsequent events or new information. During today's call, management will also discuss certain non-GAAP financial measures. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. Now I'll turn the call over to John. John Batten: Good morning, everyone, and welcome to our fiscal 2026 first quarter conference call. We begin the year with strong momentum, delivering another quarter of profitable growth and meaningful progress on our strategic priorities. Sales and margins improved year-over-year, supported by steady execution across our global operations with healthy demand across all 3 core product groups, contributing to our robust backlog. Our performance this quarter underscores the strength of our diversified portfolio and the operational discipline that continues to define our success. As we move through fiscal 2026, we are encouraged by the resilience of our end markets and by the growing contribution from areas such as defense and hybrid propulsion. These growth vectors position us well to sustain outperformance and deliver strong profitability amid an evolving macroeconomic environment. That said, we remain mindful of potential tariff developments and expect a 1% to 3% tariff impact on second quarter cost of sales versus roughly 1% previously. This increase is temporary and will not affect the remainder of the year. And as such, we expect tariff impact to return to roughly 1% of cost of sales in the second half of the fiscal year. Now let me take you through the quarter's highlights. Sales grew 9.7% year-over-year to $80 million, marking another quarter of steady top line growth led by our marine and propulsion business, along with the integration of Katsa and Kobelt, which continues to advance ahead of plan and together are broadening our capabilities and expanding global reach while driving meaningful synergies. On an organic basis, net sales increased 1.1%, which excludes the impacts of acquisitions and foreign currency exchange. We continued to streamline operations in the quarter, efforts that effectively help us deliver 220 basis points of gross margin expansion year-over-year as gross margins increased to 28.7% for the quarter. EBITDA margins remained strong despite the impacts of nonoperating and noncash items such as defined benefit pension amortization, stock-based compensation and currency translation loss in addition to costs from recent acquisitions. We also delivered a robust 6-month backlog of $163.3 million, driven by sustained demand across our end markets, illustrating a strong start to fiscal 2026. Defense momentum remains exceptionally strong. Orders continued to accelerate during the quarter, and defense-related projects continue to represent a growing share of total backlog, increasing by $4 million sequentially and up 45% year-over-year, comprising 15% of total backlog. In the U.S. and Europe, we are actively supporting multiyear government initiatives to modernize both marine and land-based platforms, while our recent acquisition of Katsa continues to generate strong demand in Europe. Our work includes contracts tied to NATO vehicle programs and U.S. Navy patrol vessels, where we're serving as a trusted propulsion and systems partner. With a defense-related pipeline that continues to expand, we see significant runway ahead, supported by elevated government budgets and increased focus on marine and hybrid applications. Now let me walk you through product group performance. Our marine and propulsion business continues to perform exceptionally well, and sales increased 14.6% year-over-year to $48.2 million, driven by work boat activity, government programs and demand for Veth Elite thrusters. Record new unit bookings, combined with the growing demand for hybrid and autonomous vessel solutions continue to underscore the strength of our products and market position. In September alone, we booked $20 million in new unit orders, surpassing previous records. Orders supporting the unmanned U.S. Navy platforms class continue to build, and we are excited about our entry into the new class of autonomous patrol vessels, extending our presence on higher-value platforms. In addition, we are seeing traction with the U.S. vector thruster market with backlogs increasing across workboat and cruise applications. Lastly, aftermarket remains resilient with steady utilization of military and commercial fleets were flat when compared to a year ago. Within land-based transmission, sales were stable, up 1.6% year-over-year to $17.6 million. Oil and gas shipments were nearly flat as China continued to decline. North American customers also remain cautious with a focus on rebuilds and refurbishments. However, we are seeing an emerging tailwind as the rebuild cycle matures and replacement demand begins to materialize. ARFF demand remains strong, and we continue to advance next-generation e-frac solutions, securing an initial order during the quarter, representing 14 units totaling $2.3 million. Overall, we continue to remain well-positioned to capture emerging opportunities as activity improves. Our industrial business grew 13.2% year-over-year with growth supported by acquisitions and broad-based customer activity. Steady demand for higher content solutions is reinforcing our mix and helping sustain momentum as we extend Katsa's engineering and parts capability across the portfolio. Our backlog of $163.3 million, up 13% year-over-year and 9% sequentially, provides solid visibility for the balance of fiscal 2026. Inventory is up slightly because of our strong demand and pre-buys. As we look at the remainder of the year, we remain focused on further optimizing inventory levels with delivery schedules as we convert our backlog and maintain flexibility across our manufacturing footprint to support demand while protecting margins. As we look to the balance of the year and beyond, I want to reaffirm our strategy centered on global footprint optimization, operational excellence and disciplined capital allocation. Our near-term priority remains reducing debt and strengthening our balance sheet while continuing to invest in targeted organic initiatives that enhance productivity and margin expansion. We have made great progress streamlining our business into more agile and globally integrated operating model, one that breaks down silos, drives collaboration across our end business units and going to market as one consolidated company, which leverages our scale and shows the power of our consolidated platform. This starts with the business units and their leadership, which is now reporting through Tim Batten, our Executive Vice President. These efforts are improving execution speed, driving margin improvement and laying the foundation for sustainable growth. With these ongoing efficiency and integration initiatives, Twin Disc is well-positioned to deliver strong results through the remainder of the year and to achieve our long-term targets, driving sustained profitability and lasting value for our shareholders. With that, I'll now turn the call over to Jeff to discuss our financial results in greater detail. Jeffrey Knutson: Thanks, John. Good morning, everyone. During the quarter, we delivered $80 million in sales, up 9.7% from $73 million in the prior year period. which was primarily driven by strength in the marine and industrial product groups and supported by the addition of Kobelt. On an organic basis, adjusted for M&A and FX, revenue increased approximately 1.1% in the first quarter. First quarter gross profit rose 18.7% to $22.9 million and gross margin increased 220 basis points to 28.7%, reflecting the benefit of incremental volume and successful margin improvement initiatives in addition to improved mix in the marine propulsion product groups, specifically within Vet products. ME&A expenses were $20.7 million in the first quarter compared to $19.5 million last year. The increase reflects the addition of Kobelt as well as ongoing wage and professional services inflation. We continue to focus on cost discipline and operational efficiencies to support long-term margin expansion. Net loss attributable to Twin Disc for the quarter was $518,000 or $0.04 per diluted share compared to a loss of $2.8 million or $0.20 last year. The year-over-year improvement reflects higher operating income and lower expenses, driven by reduced currency losses, partially offset by higher pension-related amortization. EBITDA was $4.7 million for the first quarter, representing a 172% increase versus the prior year as expanded sales and profitability together drove strong results. From a geographic standpoint, sales growth was driven primarily by North America, where continued demand for Veth products and contributions from our recent acquisitions supported a higher share of quarterly revenue. The overall mix shifted toward North America, while Asia-Pacific and the Middle East accounted for a smaller portion of total sales, reflecting the impact of order and shipment timing of our customers. Net debt increased slightly in the first quarter, primarily reflecting seasonal usage of our revolver. We ended the quarter with a cash balance of $14.2 million, down 14.8% from the prior year. As expected, cash flows during Q1 are seasonally lower due to net working capital dynamics and slightly elevated inventory levels, as John described, heading into the year to satisfy robust demand. We continue to maintain a conservative net leverage ratio of 1.3x. Our strong financial position provides flexibility to navigate the current macroeconomic environment with discipline while continuing to evaluate targeted bolt-on acquisitions that align with our innovation strategy and broaden our product portfolio. As noted earlier, gross margin expanded by roughly 220 basis points year-over-year to 28.7% in the first quarter, reflecting the ongoing benefits of our cost reduction initiatives, improved operational execution and higher sales volumes. We continue to build on this momentum by sharpening our cost discipline and pursuing margin-accretive growth opportunities across our portfolio. Enhancing profitability remains central to our strategic priorities. Our capital allocation strategy remains focused on balancing growth investments with disciplined financial management. We maintain a focus on prudent capital deployment, pursuing targeted M&A that strengthens our marine and industrial technology platforms alongside organic investments in R&D, geographic expansion and hybrid and electrification innovation. Supported by a healthy balance sheet and clear strategic priorities, we're positioned to deliver sustainable growth and long-term value creation. I'll now turn the call back to John for his closing remarks. John Batten: Thanks, Jeff. In closing, I'm encouraged by the strong start to fiscal 2026 and the consistent execution across our global organization. Our teams continue to demonstrate focus, adaptability and discipline in navigating complex market conditions while delivering measurable progress on our strategic priorities. With a robust backlog, a solid balance sheet and a clear road map toward our long-term objectives, Twin Disc is well-positioned to drive profitable growth and strengthen its leadership across core and emerging markets. I remain confident in our ability to sustain this momentum and deliver lasting value for our customers, employees and shareholders. These conclude our prepared remarks, and we're now prepared to take questions. Operator: [Operator Instructions] We will take our first question from David MacGregor from Longbow Research. David S. MacGregor: Congratulations on the results, strong quarter. Let's start off with military just because you really called that out, and I appreciate the detail behind the strength and kind of how that is evolving. Can you just help us with the timing of shipment acceleration here as well as the expected margin impact? John Batten: Yes. It's John, David. I'll start with just the expected shipment. I would say in Finland for the NATO vehicles; it's really very much early in the beginning. I would expect that business for us, let's just say that we're in the 150-unit range right now that in a year from now, that will be double and then it will continue to grow from there. And then in the U.S., primarily the one that's driving it are the autonomous vessels. And I think whatever volume we have this year, again, will be double in '27. So, it's -- and continuing from there. So, I don't want to say it's the 2 main programs are going to be doubling every year, but that's kind of the pace that we're on is that we can expect high, I would say, on average, at least for the next couple of years, 50% growth in each program. David S. MacGregor: And do you have sort of the capacity to support that kind of a ramp right now? Or would that require a pickup in incremental CapEx spending? John Batten: It would -- let's just say it reevaluate our CapEx spend -- excuse me, CapEx spending. We certainly have the capability here in the U.S. to meet the demand for the U.S. Navy, shuffling some stuff around. And we're working on the plans. We certainly -- I would say we have -- and in Europe, we're probably good with everything the way it is for the next 18 to 24 months. But yes, we're looking at what we do in the facilities in Europe so that we can capture that demand and maybe do some of that volume in one of our other facilities in Europe and not just all in Finland. But the answer is yes. And the CapEx, it's more focusing on test stands and assembly fixtures. So thankfully, it's not necessarily machining capabilities, longer lead time pieces of equipment. It's more on assembly and test fixtures. David S. MacGregor: Well, that's all very encouraging. Let me turn to the oil and gas business. I know you're less dependent on oil and gas now than you've been in the past. But can you just talk about what you may be seeing in the way of changes in business conditions and order activity? And given what you've been working on in the way of costs and productivity and pricing, do you need a volume recovery in '26 in order to see year-over-year upside and profitability? John Batten: So, the answer is no, but it would make it a lot nicer. It's a very good part of the business. But thankfully, David, it goes back to the last, I would say, major downturn for us in oil and gas kind of coming off the 2018, 2019 high going into COVID that it was a conscious decision to accelerate our move away -- not to diversify away from oil and gas. It's still a very good business. I think China -- the tariffs just happened, I think, to coincide with, again, China tends to, at times, overbuild and they have to absorb the volume that they have. And I think there was a slowdown. They didn't need as much equipment and most of the equipment comes from the U.S. So, it was also a double reason for them to slow down on purchases. We see that demand, I can see the ray of right there where that demand is going to start to come back. And then the rebuild activity in the U.S. has been still pretty good. It was down in '25. So, I don't think it's going to be hard to surpass that in '26. And as we mentioned, we've got the e-frac orders coming online. I don't think those are the first couple of spreads. I think that will take us through this year. But I imagine sometime during this fiscal year, we'll get follow-on orders for '27. And I'm cautiously optimistic on some natural gas opportunity. But the macro, David, the macro levels -- and again, I would say most of our units that go out in the U.S. and North America are heavily weighted towards gas, whether it's wet gas or dry gas. And the demand for gas, I mean, everything you read about data centers and what's going to power them, natural gas plants are one of the most likely options. I still think we're years away from nuclear being deployed. And I just don't think renewables can keep up with the concentrated demand of what you need near the AI data centers, so AI data centers. So, I'm pretty optimistic on the macro level, and I think we're well-positioned to capture growing demand. David S. MacGregor: Interesting. I wanted to ask you about land-based transmissions because the double-digit growth in marine and propulsion and industrial, but relatively flat in the land-based transmissions. Can you just talk about the puts and takes within that business that led to the relatively flat top line? John Batten: Yes. I would say it's -- again, it's steady. I would say it's fairly steady. In ARFF, the demand, we're full. Our customers are kind of at their capacity. That's been full year-over-year. And really, the puts and takes have been small projects with different outside of ARFF, some are falling in like railway maintenance things. We're folding in some of the products at Katsa, fall into the transmission business. And oil and gas has been -- I would say some of the -- like we've traded some unit volume in China for unit volume in North America. So, Jeff, I don't know if you have any more. Jeffrey Knutson: Yes. No, I think that's right, David. Oil and gas in general was down a couple of percent from last year's Q1. And then there's just timing of our shipments. It's a steady demand that we have for several months and even years in front of us, but there's some shift between quarters depending on the customer schedule, et cetera. So yes, pretty steady demand, I would say. David S. MacGregor: I want to ask about gross margins. We normally see kind of seasonal pressures with European shutdowns. And can you bridge the first quarter gross margins of 28.7%, you were up 220 basis points, I think. Maybe separate seasonal versus kind of the incremental volume versus the margin improvement initiatives that you referenced, Jeff? And also, I guess the investments were a factor and maybe the mix of businesses as well, I guess, because you talked about the strength in call. So just help me kind of proportion-wise, how I should think about those various factors. Jeffrey Knutson: Yes. So, I think the good news for us, and we've talked about this on previous calls that the Veth business wasn't delivering the kind of margin that we were expecting. And there were some definite drags on the margin coming out of that. The thruster business, right? So, coming out of COVID, they were carrying a backlog that had pretty low margins in it, very competitive project bidding during COVID, where there wasn't a lot of activity. And we worked through that over the course of the few years coming out of COVID and really focused them on driving profitability, operational discipline, et cetera, pricing. And so, they delivered their best margin quarter since we've acquired them. So, it was really 2 things. It was the incremental volume at kind of our normal incremental drop-through. So, we look at around 40% drop-through on incremental volume on a global basis. And then incremental to that, driving the -- probably about another $1.2 million of favorable margin was Veth delivering better margin results than they had in prior years. John Batten: Yes, David, I'll just add a little bit of color on Veth too, is one of the things coming out of COVID and the Russia-Ukraine war was our supplier of permanent magnet motors for L drives. Our supplier had almost all of their supply base for raw material in Ukraine or Russia. And what they couldn't get from Russia was destroyed in Ukraine. So, we had some pretty heavy surcharges and cost increases as they were just scrambling to get us motors that unfortunately, we had contract pricing and couldn't pass that on. The Veth team has worked tirelessly for almost 2 years to develop different suppliers. And so, we're starting to see those suppliers come online and go back to the pricing when we were quoting these projects. So, they've done a great job on lean principles and finding new suppliers. So yes, if there's one entity that drove the improvement, it's really going to be Veth then everybody else is just working on their constant continuous improvement projects. And it all came together. It was a very nice bump in the first quarter, which is typically a very hard one for us just on shutdowns and available days of shipping. David S. MacGregor: And so how much of that 220 basis points do you think is sustainable going forward, John? John Batten: Yes. I mean if we can -- it's same mix, I think we can do that on a trend line. And as I mentioned in the call, one of the tough things that we're dealing with in this quarter, and thankfully, we've gotten some relief is our first shipments in the Trump 232 tariffs of 50%. We got in containers of marine transmissions from Europe and from Japan, and those were tariffed at 50% after feverish activity and explaining to Department of Commerce and anybody else and our codes, thankfully, those have come down to 15%. So, we're going to have to deal with that like in the second -- that happened in the first month of the second quarter. But I think once we can get through the initial negotiation of tariffs with customers, I think the trend line, I think we can sustain that. I think the second quarter right now, given the massive jump in tariffs that were impacted, passing it on. I'd be happy to maintain that in the second quarter for sure. But the trend line going forward, the team and the mix and what they've done, it's all very positive. And our flexibility of being able to move product and assemble and test in different regions is definitely a competitive advantage for us. David S. MacGregor: Very encouraging. Last question for me is really on free cash flow for this year. And you talked about your plans for inventory, and you made a couple of comments around CapEx. But how are you thinking about kind of conversion, either EBITDA conversion or net income conversion, however you want to look at it? Jeffrey Knutson: Sorry, I'll answer the question I think you're asking, David, and maybe you can clarify. So, I think the way we look at profitability as we drive growth is delivering our sort of benchmark is 40%, like I said. We expect as volume grows; we're delivering 40%. Right now, we're tracking -- our target is to get double-digit EBITDA. So, say, 11% EBITDA would be, I think, a target for us this year, some improvement from where we've been. But as we grow, I think what we have in our minds is to get to that 15% EBITDA margin level. And that's going to take additional volume and additional margin improvements as we delivered this quarter. So, I think we're on a good trend to get to some of those targets. David S. MacGregor: Right. And so, can you help us at all in terms of the free cash flow model for this year in terms of what that might ultimately look like? Jeffrey Knutson: Yes. So free cash flow is -- yes, certainly, it was a difficult Q1 for a variety of reasons. We have a typical step back in Q1 with some payouts that naturally follow our Q4. We had some inventory growth with the demand, the increase in backlog, maybe some prebuys with the anticipation of tariffs. So difficult Q1, but we still -- we're targeting 60% free cash flow as a percent of EBITDA. That's our target. That's our goal. I think that's still deliverable. We would hope to get close to breakeven and recover that Q1 in Q2. So, we're focused on managing that incoming inventory in light of the growing demand. I think what we don't want to do is in any way, hamper our ability to grow and disappoint customers, let's say, as we're delivering this volume growth we have in front of us. So yes, that was sort of the drag on Q1. Operator: [Operator Instructions] We have not received any questions from the audience. I'll be turning the call back over to our CEO, John Batten, for closing remarks. John Batten: Thanks, Justin. And thank you for your continued interest in Twin Disc. If you have any follow-on questions, please contact either Jeff or myself, and we look forward to speaking with you in February after our second quarter call. Justin, I'll turn it back to you. Operator: Thank you.
Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lineage Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ki Bin Kim, Head of Investor Relations. You may begin. Ki Bin Kim: Thank you, operator. Welcome to the Lineage discussion of its third quarter 2021 financial results. Joining me today are Greg Lehmkuhl, Lineage's President and Chief Executive Officer; and Rob Crisci, Lineage's Chief Financial Officer. Our earnings presentation, which includes supplemental financial information, can be found on our Investor Relations website at ir.onelineage.com. Following management's prepared remarks, we'll be happy to take your questions. Turning to Slide 2, before we begin, I would like to remind everybody that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our filings with the SEC. These risks could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. In addition, reference will be made to certain non-GAAP financial measures. Information regarding our use of these measures and a reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this morning. Unless otherwise noted, reported figures are rounded, and comparisons of the third quarter 2025 are to those of third quarter 2024. Now I'd like to turn the call over to Greg. W. Lehmkuhl: Good morning, everyone. Thank you, Ki Bin, and welcome to the Lineage family. We're thrilled to have you. As many of you know, Ki Bin joined us from a distinctive career at Truist, bringing 20 years of experience in the real estate industry, most recently as a leading sell-side analyst. He's now 2 weeks into his new role, and we are already feeling his positive impact. Let me start by walking you through our agenda for this morning. First, I'll recap our third quarter performance, which came in slightly ahead of our expectations. Then we will review occupancy and price, followed by our latest view of supply and demand for our industry. We know this is an important topic that many of you are interested in. Following my remarks, I will turn it over to Rob Crisci, who will walk through the details of segment performance capital structure and our updated guidance. I'll then return to share closing comments before we open up the line for your questions. Turning to our quarterly performance on Slide 4. Total revenue increased by 3% and adjusted EBITDA increased 2% to $341 million, which is a quarterly record for the company. Total AFFO grew 6% year-over-year, and we delivered AFFO per share of $0.85, which declined 6% year-over-year. As a reminder, our IPO occurred in the third quarter of last year, which impacts the comparability of these periods. Looking at our business segments, global warehousing performed in line with expectations, consistent with the outlook we shared on last quarter's call. Same-store physical occupancy improved sequentially by 50 basis points to 75%, and we anticipate further occupancy gains in the fourth quarter, consistent with the muted seasonal pattern we discussed last quarter. Same-store NOI increased sequentially to $351 million from $340 million, although it declined 3.6% year-over-year. Same warehouse storage revenue per physical occupied pallet remained stable as expected, growing at 1%. Our Global integrated solutions business saw a year-over-year NOI growth of 16%, led by our U.S. transportation and direct-to-consumer businesses. In the quarter, we invested $127 million of growth capital, primarily in our development projects. We're pleased with the continued progress on these projects. As a reminder, we have 25 facilities that are in process or ramping. We expect these assets to deliver $167 million of incremental EBITDA, once stabilized. In Q3, we delivered in-line same-store NOI and exceeded our adjusted EBITDA and AFFO per share guidance. However, we expect a lower fourth quarter than previously anticipated and are, therefore, moving to the lower end of our full-year guidance range for both EBITDA and AFFO per share. This is largely driven by a $20 million decline in our outlook for same warehouse NOI due to two primary factors. First, tariff uncertainties impacting import, export container volumes, leading to softer year-end services revenue. Second, while our total occupancy outlook for the fourth quarter is unchanged versus our previous guidance, U.S. occupancy is slightly lower due to import, export volumes and less-than-expected U.S. new business hitting in the quarter. This is being offset by higher occupancy outside the United States, where we are in lower margins. Despite these near-term headwinds, we remain focused on providing world-class service to our valued customers by leveraging our industry-leading network and cutting-edge technologies. I'm confident that we are well positioned to grow as the food industry normalizes, new capacity is absorbed and our LinOS labor management and energy efficiency initiatives accelerate. Moving to Slide 5, as I mentioned, Q3 and Q4 total occupancy are in line with our prior forecast and pricing remains stable as expected. Note that we typically see a sequential decline in storage revenue per pallet in the fourth quarter due to normal seasonal mix changes. Additionally, we saw a sequential 180 bps increase in our minimum storage guarantees to 46.7 as our customers continue to want to secure space across our network. Turning to Slide 6, we understand that our industry is a specialized part of the real estate landscape with limited publicly available data. Accordingly, we continue to collaborate with CBRE to provide insights into new supply growth for the cold storage industry. At this point, our analysis is focused on the U.S. where we have the most successful data and in certain markets, are seeing the most acute supply, demand imbalance. Let me quickly walk through this slide. The upper left-hand chart, labeled A, shows from 2021 through 2025, public refrigerated warehouse supply grew at approximately 14.5% on a square foot basis, which is weighing on occupancy and pricing in certain markets. Importantly, CBRE's outlook for new capacity in 2026 is down substantially from recent levels to 1.5%. The upper right-hand chart, labeled B, is based on Nielsen and Circana data for fresh and frozen food volumes in both the retail and foodservice channels. The data shows demand for the food category stored in our network grew cumulatively by 5% during the 2021 through [ 2025 ] time period. To be clear, in spite of continued pressure from tariffs, consumer price inflation and other headwinds, end-consumer demand for the products that flow through our network has been and continues to grow. On the bottom left-hand of the slide, we bring these two concepts together to calculate estimated excess capacity of approximately 9.5% for the U.S. market over the last 4 years. Despite this nearly 10% imbalance, our 2025 total estimated average physical occupancy is 75%, down only 3 points from 78% in 2021. We are using our network size and the strength of our operations to perform relatively well in a very challenging environment. Looking forward, CBRE is expecting less new supply, which we believe is logical, as further speculative development is not supported by current industry dynamics. Before handing it over to our CFO, Rob Crisci, most of you are aware that he announced his retirement in June and we'll be handing over the rents to our new CFO on Monday. I just want to take this opportunity to sincerely thank Rob for his numerous contributions to Lineage over the last few years, helping to lead us through the IPO process with a lot of passion in building an excellent finance team here at Lineage. It's been a pleasure getting to know you, both personally and professionally. Also cannot thank you enough for all your help in making this a smooth transition. I look forward to getting together in Sarasota and wish you the very best in retirement. Robb LeMasters, our incoming CFO, what we call BB because he spells his first staying with two Bs, has been with us in an unofficial capacity over the last few weeks shadowing our earnings process. He has an exceptional background with 2 decades of finance and buy-side investing experience, including a very successful run as a public company CFO at BWX Technologies. He has a lot of great experience managing complex financial operations at asset-intensive businesses. Robb has already been out to visit a bunch of our sites, and I know he is very excited to officially get started next week. Welcome, Robb. We're excited to work with you and expect great things. With that, I'll turn it over to Rob Crisci. Robert Crisci: Thanks, Greg, and good morning, everyone. I greatly appreciate the kind words. My colleagues at Lineage have also become great friends, which is a testament to the culture you, Kevin, Adam and the team have built here. Robb LeMasters is a great fit for Lineage, and I've really enjoyed getting to know him. The finance organization is an excellent hands. I'm here to help as needed my advisory role, but I doubt Robb will need much. I'd also like to add, we are incredibly excited to add Ki Bin into the team. It's been great having you as part of our process the last couple of weeks. Turning to our global warehousing segment, total revenue grew 4% and total NOI grew slightly to $384 million, in line with our expectations. Same warehouse NOI declined 3.6%. We continue to focus on operating efficiency. And to that end, we saw our same warehouse cost of operations decline 1%. We will dive deeper into this on the next slide. Looking to the fourth quarter, we now expect the same warehouse NOI decline of the 3% to 6%, a reduction of approximately $20 million at the midpoint versus our prior implied Q4 outlook. Greg already outlined the main drivers behind this reduction, including the impact of tariffs on the import and export activity. We've been monitoring the tariff situation closely and are cautiously optimistic about some of the recently announced trade agreements, which should benefit both our customers and Lineage. We continue to fight through the competitive environment, as Greg discussed earlier. We feel good about the positive trend in occupancy and the return to more normal seasonality this year, albeit somewhat muted loss. Turning to Slide 8, diving deeper into warehouse efficiency. As we all know, the current inflationary environment has driven labor cost increase. As a reminder, labor is, by far, our largest controllable cost of $1.5 billion per year. On a same warehouse basis, we've been able to hold labor costs flat over the last couple of years. This year, throughput has declined low single digits, making the progress our operations team has made on labor per throughput pallet even more impressive. You can see this on the right-hand chart. We remain hyper focused on lowering costs and increasing warehouse efficiency. This benefits us both in the short term and will drive strong operating leverage by the incremental growth. Next slide. Shifting to Slide 9 and covering our global integrated solutions segment, revenue was flat and NOI grew 16% to $65 million. Our NOI margin was up 250 basis points to 17.9%. We're continuing to see strong momentum in our U.S. transportation and direct-to-consumer businesses due to the value these integrated solutions provide to our customers. For the fourth quarter, we expect the strong momentum to continue with 10% to 15% growth. Notably, we benefited in the third quarter for approximately $4 million of NOI that was previously expected for the fourth quarter. We now see full-year NOI growth of 8% to 10% versus prior range of 8% to 12%. The slight reduction at the midpoint is due to less trade services also associated with lower import export activity. Really great year overall and solid execution by Greg, Brian and the global GIS team. Turning to Slide 10, we ended the quarter with total net debt of $7.55 billion. Total liquidity at the end of the quarter stood at $1.3 billion, including cash and revolving credit facility capacity. Our leverage ratio defined as net debt to adjusted EBITDA, was 5.8x at the end of the quarter. We remain highly disciplined on future capital deployment. We continue to actively manage our interest rate exposure in light of our existing SOFR hedges that expire at year-end. We have been opportunistically executing new hedges and working to further optimize our investment-grade balance sheet. Given these year-end expirations, we are providing a very early look for 2026 forecasted interest expense to help with your modeling. At this time, we see approximately $340 million to $360 million of total interest expense in 2026, which is approximately $80 million higher than this year. A little more than half of the increase is due to the expiring hedges, and the remainder is due to our recent capital deployment, which we anticipate will drive attractive risk-adjusted returns and further support for customer-driven growth. Turning to the guidance slide. We are initiating Q4 with EBITDA of $319 million to $334 million, an AFFO per share of $0.68 to $0.78. For the full year, EBITDA is $1,290 million to $1,305 million and AFFO per share at $3.20 to $3.30. In short, we are going to the lower end of our of previous ranges on adjusted EBITDA and AFFO per share. We see total and same warehouse NOI about $20 million lower than previous guidance for the reasons mentioned earlier. With that, I'll turn it back over to Greg to wrap up before opening up to your questions. W. Lehmkuhl: Rob has walked you through our updated guidance, and I want to reaffirm that while we are operating in a challenging environment, we believe Lineage remains positioned to win. As outlined in detail on our prior earnings call, we're focused on driving competitive differentiation across three key areas: delivering customer success, leveraging our network effects and enhancing warehouse productivity. Before summarizing and turning it over for your questions, I'd like to provide a quick update on LinOS, our proprietary warehouse execution system. As of today, we've deployed the platform in 7 conventional sites. And the results have exceeded our expectations. We're seeing double-digit productivity improvements in key metrics like units per hour, translating to higher output and lower unit costs. We expect to complete 10 deployments by year-end, setting the stage for an accelerated rollout in 2026. We look forward to sharing more details at NAREIT, where we'll be hosting an in-person and webcast-ed investor forum on Monday afternoon to separate. The presentation will focus on operational excellence and our LinOS technology. Turning to Slide 13 and in summary, it's obviously been a very bumpy road since our IPO last July for our external investors and for our Lineage team, who are also owners of our company. But when I take a step back and look at the company, I see the largest, best positioned player in a mission-critical business where underlying consumer demand has been growing, even in the face of some of the worst food inflation in decades. This is a great company in a resilient long-term industry that is clearly facing short-term challenges due to excess supply and macro headwinds like tariffs. The cash flow generation of our company remains strong, our trading valuation is currently about half of the replacement cost of our assets, and we believe we have an unmatched portfolio of buildings in critical markets for our customers. While Q4 will be challenged due to near-term headwinds, there are green shoots of optimism, including less new supply coming online, growing demand and potential global trade policy resolution. We grew this business successfully for 15 years leading up to the IPO. And while we can't predict the moment of inflection, we believe in this industry's fundamentals and that stability is on the horizon. In the meantime, we will continue to focus on the areas of our business that are under our control, becoming a leaner, smarter company, investing in our people, processes and technology. And when the industry does inflect, we will come out stronger than ever. Finally, I want to thank our global team members for their dedication and commitment to our customers. Operator, I'd like to open it up for questions now. Operator: [Operator Instructions] And our first question comes from the line of Caitlin Burrows with Goldman Sachs. Caitlin Burrows: I was wondering if you could talk a little bit more about that expected lower U.S. new business in 4Q. I guess, how important is new business versus existing business throughout the year and in 4Q specifically? And how has new business fared to date? And are you suggesting some change for 4Q? Or is it more of the same? W. Lehmkuhl: Thanks for your question. So let me just provide a little more color on the lower -- on both the tariff and the new business front. So I think we're all sick of hearing about tariffs at this point, but we're definitely seeing the tariff uncertainty impact import export, volumes more than we did earlier this year and certainly more than when we were guiding last quarter. So this has been specifically impactful in our West U.S. business unit, where the ocean import, export container volumes are down about 20% from where they were trending most of the year through July and back when we gave guidance. And this is lucrative business with substantial accessorial revenue like services for customs documentation, bonded fees, [ glass freezing ]. For example, in our seafood category, many customers ordered back in the summer and are bleeding down their inventory right now awaiting tariff resolution. And they're telling us that there's -- while there's a possibility they'll reorder by year-end, it's more likely going to be after the first of the year, and that's what our guidance is based on. We're also forecasting that this impact of container volume, not only it's warehousing same-store NOI, but also it's GIS in the fourth quarter as we provide a lot of drayage around the ports for our customers in our GIS segment. To your question more specifically on the new business side, competition in certain U.S. markets is impacting new business. And while we continue to expect to have a record new business year overall and we continue to have a very strong pipeline, we're just forecasting a little bit less than we were previously guiding to hit in the fourth quarter. And obviously, the contribution margin on new business is very high, given the fixed cost nature of our business. And therefore, a relatively small change in new business revenue has an outsized impact on NOI. And that happens the other way when we land a lot of new business,as we get the operating -- the positive operating leverage. Operator: Our next question comes from the line of Michael Goldsmith with UBS. Michael Goldsmith: Greg, can you provide an update on the pricing strategy during the quarter, just given some of the demand headwinds that you talked about and then also the supplies? So I'm just trying to get an update on how you've approached pricing as a lever to maintain occupancy. W. Lehmkuhl: Yes. We've been -- so first of all, I want to start by saying, in Q2 we provided, for the first time, a multiyear revenue per pallet chart, both on services and rent storage and blast. And I think it's really important that I reinforce this every quarter that the metric that we all look at externally is going to be volatile quarter-to-quarter, driven by a number of factors. Rate is certainly a piece of it, but volume guarantees, inventory turns, [ blast ] freezing rising volumes, commodity mix, exchange rate seasonality, all play into that metric, and it caused a little volatility in the short term. That's why we provide that multiyear view to show that our pricing is making progress over time. And so in the quarter, there was no change to our pricing strategy. We will achieve -- in some challenged markets, we did have to talk about volume versus price as the year progressed. But overall, we'll see a net price increase between 1% and 2% this year. And so we -- nothing changed in the quarter. We're not -- one of our core strategies is not to trade volume for price. We're talking to each customer uniquely. And again, in aggregate, we saw net price increases this year. Operator: Next question comes from the line of Steve Sakwa with Evercore ISI. Steve Sakwa: Greg, I appreciate the added color you provided on the excess capacity. And it's nice to see that you guys didn't take as big of a hit on occupancy. But given that there's still a lot of excess capacity, I guess, in the market overall and there's still some new supply to come on in '26, I guess just sort of what are your expectations looking forward kind of on that physical occupancy? And how is that excess capacity kind of being absorbed and priced in the marketplace against the existing stock? W. Lehmkuhl: Yes. Great question. So at this point, the new supply is really just trickling in. You saw the CBRE forecast for next year is 1.5% new capacity. We think that will stay the same or go down over time as it just doesn't make sense to add more capacity speculatively in this market. And so when we look at our -- this is really a U.S. phenomenon, it's not really the same situation outside of the U.S. And some markets remain challenged, like I've talked about Jacksonville and Miami in prior calls. Chicago has had a lot of new capacity, and we're having to work through that new supply getting onboarded. But we are actually more optimistic about some key markets that have had new capacity delivered in the last couple of years, like New Jersey, Dallas and Houston, we basically absorbed that new capacity. We worked through our book of business. We've kind of fought the fight, and now we're building back inventories in those markets. And so I think it's market-by-market. And once the supply gets delivered and we kind of have those discussions with our book of business in that market, we think it's kind of a reset and we can build up from there, and that's what we're seeing in the markets that I just discussed. Operator: Next question comes from the line of Craig Mailman with Citi. Craig Mailman: Just as we think about the third consecutive guidance cut we've had, I'm just kind of curious, if you guys are having this much trouble underwriting your own portfolio, like how do we get comfortable with yields on the capital you're deploying into development and potential acquisitions that we're not going to be a couple of hundred basis points kind of below pro forma here because looking at your schedule, you still have a lot to stabilize in terms of the portfolio? I think only about 15% kind of stabilized here. And just a second one to sneak it in here. Just have you guys thought about -- is a REIT maybe the right structure for this company, given the fact that you guys are more of a 3PL than you are a real estate company and it might be beneficial for you to be able to retain capital and redeploy that? Just some thoughts there. W. Lehmkuhl: Yes. So certainly, the last thing we want to be doing is sitting here lowering the fourth quarter. And the fact is our industry has been challenged and -- with the new supply and very, very hard to predict, given we talk to our 15,000 customers every month about them forecasting their volumes and what they're going to do. And it's very difficult for them to predict and you heard that from the producers in their quarterly releases. So it's -- we're the recipient of that short-term volatility. Again, the underlying demand for our products is growing, not shrinking. And we think that's good for the long term as we absorb this new supply and get back to kind of equilibrium in the market. And as I mentioned in the prepared remarks, we're not sure exactly when that is, but we feel very good about our positioning, about our technology, about all the things that we can control are going well. On the new developments, I mean, we track this every quarter. It's one of my KPIs for by bonus every single year, and we performed well versus our underwrites for many years and continue to do so. Those developments are very -- are generally customer-led developments. Many of them have strict volume guarantees and revenue guarantees, and we're not out there building spec buildings where we don't have certainty that we're going to get the returns that our expecters expect. And so is there pressure around are things uncertain? Absolutely. That's why we -- things performed pretty much exactly how we thought they would in the third quarter. And here, we are looking at the fourth quarter, and our customers are telling us their container volumes are going to be down 20% in our largest business unit. And that's the -- those are the type of things that we -- that are very, very difficult or impossible to predict. And all we can do is execute our plan, control our controllables, treat our customers great, treat our team members great and work through this challenging time. Robert Crisci: Yes. And I would say we do believe REIT is the right structure for us. We have an incredibly valuable real estate portfolio. We think the benefits outweigh the -- there really aren't very many negatives to being a REIT. So we're very, very happy to REIT. W. Lehmkuhl: Yes. I mean we -- if you can choose to pay taxes or not, we're going to choose not. Operator: Next question comes from the line of Ronald Kamdem with Morgan Stanley. Ronald Kamdem: just a lot of really helpful breadcrumbs on 2026 with the interest guidance and so forth. I just -- going back to the question of excess capacity. I was just wondering if you could sort of think about the next 12 to 18, and in this sort of environment, what can you control? And what do you think sort of the pricing versus occupancy impact can be and so forth? So what have you sort of seen in this sort of environment? W. Lehmkuhl: Sure. So on the pricing side, looking forward, we are -- a lot of our volume guarantees, for example, got reset in '25 earlier this year in the first and second quarter after the big destocking from COVID that I talked about in the last several quarters. And now we're kind of in a new -- we're kind of in a more stable point. We are having conversations with customers already about '26 pricing. Those conversations obviously haven't been wrapped yet. But despite the new supply we discussed, we were targeting inflationary-level increases, and we believe that we're going to be able to achieve net increases in the low single digits for '26. And we don't think we'll have to give up occupancy to achieve those low single-digit price increases. Our customers do understand that we have to pay our people more and there is inflation out there. And I don't -- we're not going to get 10%. But low single digit, we think is very achievable. Even now the supply. Operator: Next question comes from the line of Michael Carroll with RBC. Michael Carroll: Greg, can you give us some color on how Lineage was able to push their guarantee contracts up a little bit this quarter? I mean, is it abnormal to do this in the third quarter? And is that the reason why economic occupancy was up bigger sequentially in 3Q versus fiscal occupancy? W. Lehmkuhl: It was the reason. And the reason for the volume guarantee progress is some new customer-led developments include long-term contracts with higher volume guarantees than our average. Also, our sales team, I said that -- I mentioned on the last question that our volume guarantees got reset at a lower level in the first and second quarter this year. We've kind of been through that pain, if you will. And now on new business, our sales team is doing a phenomenal job broadening the customer base that are utilizing volume guarantees. So our new business, despite the challenges in certain parts of the U.S., we're seeing new business come in with higher volume guarantees than our average. And so those are the two impacts. Operator: Next question comes from the line of Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: And first, Robb with the BB, welcome aboard. Rob with the single B. Congrats on retirement. And Ki Bin, welcome to the inside. Greg, you mentioned that international is performing much better versus the U.S. Is it simply a matter of the excess supply, and that's really the difference? Or are there other things at work? I mean, there are always trade disputes from country-to-country. There are always geopolitical things, inflation tension, whatever happening overseas. So I'm just trying to isolate what the key difference is for why global is performing well versus the U.S., and I wonder if it's simply the supply or if there's other factors at work? W. Lehmkuhl: Alex, good question. So I don't want to overemphasize this. I mean the occupancy in the U.S. is a little bit lower than we were forecasting back in -- after Q2, and Europe is a little bit higher. That's the difference. And the impacts are -- really are exactly what I laid out, Alex. And that's container volume, which is mostly seafood, which I think everyone knows we love that business. It's 13% of our book, we were trending at literally like our customers are telling us that we're seeing right now as the quarter progresses, a 20% reduction in import, export volume, and that's impactful. And just more broadly, certainly in the U.S., in certain markets, like the one I mentioned -- the ones I mentioned earlier, there is competitive pressure. And those are the two big impacts versus what we thought before. But again, I mean, it's isolated markets that we are absorbing this capacity. We are keeping our occupancy up despite the new supply. And we're getting that price increases despite the new supply. So we think, in a very unpredictable and very challenged environment, the company is executing as well as possible. Robert Crisci: And it's another benefit of having a very diversified global footprint, right? So we can benefit from growth in other markets to help balance out our performance. So I think it's a positive for Lineage overall. Operator: Next question comes from the line of Tayo Okusanya with Deutsche Bank. Omotayo Okusanya: Yes. Ki Bin, welcome aboard. Rob with the BB, also welcome aboard. First quarter in a while you guys really haven't done much on the acquisition side. Just curious what you're seeing from that perspective. I know I kind of curious, again, is it just really more tied to your overall cost of equity right now that you slowed down or kind of how you're kind of looking at acquisitions going forward? W. Lehmkuhl: Yes. So we're highly disciplined as always on capital deployment. We're cognizant of developments that we're working on. We see our leverage ratios, they're in a really good spot. We don't obviously view our equity as a place anywhere but very, very undervalued. So we're not interested in issuing equity, and so we're managing the portfolio, and we'll be really smart on capital deployment. There's obviously a ton of opportunity out there, and there's more things becoming available in the market. So we'll be opportunistic, but we're going to be very disciplined. Operator: Next question comes from the line of McGinniss with Scotiabank. Greg McGinniss: Greg, I was hoping to get some more insight into the earnings commentary regarding improvement in fresh and frozen demand that Lineage is seeing. Is that in reference to the Q2 seasonality trend? Or is there something more broadly that you're seeing in the market? W. Lehmkuhl: So it's third-party data that -- yes, that's going. It's not our view, it's third party. Robert Crisci: Yes, this is third-party data from Nielsen, which is the retail data, and then Circana is the rolled-up food service data. So it's the full picture of food consumed in the United States from the two best sources that we purchased this last quarter because we had -- our data showed that underlying demand was growing, but we didn't have third-party data. So we want to provide that every quarter. And what that shows is continued growth in the categories that we supply in fresh and frozen. It's -- we very much believe it's accurate, and that's what we thought. Despite the -- again, despite the elevated food inflation, the underlying categories continue to grow. Operator: Next question comes from the line of Dan Guglielmo with Capital One. Daniel Guglielmo: You all mentioned the stronger international trends versus the U.S., which does align some with what we've seen for other global brands this earnings season. Can you just remind us what the rough revenue breakdown is between the U.S. and international? And then are there certain international markets where you see opportunities to lean in? Unknown Executive: Yes. So overall, we're 70-30 sort of U.S. versus Rest of the World. W. Lehmkuhl: Yes. I think Europe overall, our European team is crushing it and winning it in a lot of different markets in Europe, and we're excited about continued growth there, both in same-store and non same-store. Operator: Next question comes from the line of Vikram Malhotra with Mizuho. Vikram Malhotra: Congrats to everyone on their new roles. I guess just two clarifications. One, on just the numbers, maybe you can share some color on what you've seen in October, specifically to keep sort of the occupancy seasonal uptick. Your peers sort of assume the occupancy does an uptick. So why are you still assuming occupancy upticks? And just on the comment on you can get pricing next year, I mean if there's still supply volumes are muted, like what gives you confidence on pricing? So that's just the first. And then second, do you mind sharing some specific examples -- like all the acquisitions you've done in the past 5 years, maybe just give us some overall sense of how underwriting -- how actual performance has trended versus underwriting in terms of whether it's NOI growth or yields or anything else, just to give the sense of what those properties recently acquired are doing? W. Lehmkuhl: Sure. So on the occupancy front inter quarter, it's pretty much spot on what we thought it would be after last quarter. So our total occupancy guide and the seasonality that we predicted is happening in our network. In fact, on Monday, I get the occupancy report every week. And for the first time in, I don't know, 8 quarters maybe, the occupancy was higher than prior year, total, in the same store. So that was great to see. And so we're seeing that trend. It's a combination of the new supply kind of settling and us performing well in the marketplace. And again, on the pricing front, what gives us confidence that we can get price next year is we got it this year. And there was probably no harder year in our industry's history than this year, given the new supply that's been delivered over the last couple, and we were able to get net increases in price, and the initial conversations with customers are for next year that they're open to very modest price increases, and we think we'll get that price. On the M&A front, we bought 70 companies in the last 5 years. It's varied by region and facility. Overall, we're certainly happy with the acquisitions of the network we built as we think it's irreplaceable and industry-leading. We don't break down each individual past acquisitions, we roll that in up into global [ Avnet ]. And a lot of things change when we buy. But we certainly made progress on cost productivity, occupancy as we roll companies into Lineage family. Operator: Next question comes from the line of Blaine Heck with Wells Fargo. Blaine Heck: Just following up on guidance. With respect to the fourth quarter, it's a relatively wide range between $0.68 and $0.78. So can you just share your thoughts on what key drivers or line items are kind of the biggest variables that could result in AFFO coming in towards the upper or lower end of the range? Robert Crisci: Yes. So the bigger thing, obviously we can manage is the recurring maintenance CapEx. And and for the fourth quarter, it's always typically our seasonally highest quarter. We expect that again that certainly can move $5 million or $10 million based on spending. Obviously, same-store NOI is the thing we care about the most. And we're working hard to, as Greg mentioned, we -- so far, October is looking okay, but that's embedded in our guidance. But certainly, if we have more year-end activity, that will help because really services revenue and a lot of that is related to these tariffs and containers; and so as Greg mentioned, that could certainly get a lot better at the end of the year. But we're just being very, very cautious based on what we see right now. And it's hard to predict November, December end-of-year activity. And so that was our thought process on the guidance. Operator: Next question comes from the line of Michael Lewis with Truist Securities. Michael Lewis: Great. Thank you. Well, we're welcoming people. I'll welcome Robb. I'll, of course, welcome my good buddy and pal, Kevin and maybe welcome myself to covering this name as well. My question, I wanted to ask, I don't think anybody asked about this lapsing SNAP benefits, right? So it will be a temporary thing. I just wonder if there could be any impact on 4Q from that. Surprisingly to me, I guess, 1 out of every 8 Americans is on food stamps. Is there any potential for that to cause anything in the numbers in 4Q if this drags on? Or is that not really a concern? W. Lehmkuhl: Yes. And Ki Bin's concerned because part of this comp package is food stamps. So let me start with the SNAP, but I'll talk more broadly about the government shutdown. So just a little context on SNAP in overall food consumption, so in '24, U.S. consumers spent roughly $2.7 trillion on food and the SNAP benefits from the federal government were about $100 billion or about 4% of total food expenditures. But the data shows that for every dollar in change in SNAP benefits, the total food spending only changes about $0.30 because consumers just change their budgets and they're going to continue to eat. And so who knows what's going to happen here if the courts are going to step in or the states are going to pick up the tab or it just goes back to normal. But even in the most dire case, where SNAP benefits are completely eliminated, the impact on total food consumption would only be about 1%. And so we do not see this being a meaningful impact in the short, medium or long-term, as we don't think it will totally go away. And even if it did, it's 1% of total consumption. More broadly, on the government shutdown, we are seeing other impacts -- for example, the USDA cold storage survey that the holdings report that you all report on every month or most of you do isn't being issued during the shutdown. We are seeing import, export order delays. So while customs is operational, the FDA, the EPA, the USDA all have reduced staffing, leading to delays in inspections and certifications and documentation. So we are seeing, as a result of that, some increased dwell times in the ports and terminals. We're also seeing delays in export license approvals. But I think most importantly, though, the USDA and the FDA actual food inspections have been unaffected. Operator: Next question comes from the line of Samir Khanal with Bank of America. Samir Khanal: I guess, Greg, I was looking at this chart on Page 30, which is the presentation you have up there, where you show economic and physical, an 80% economic today; I mean do you have data going back prior to, let's say, '21 and even 2020? Just trying to see if there was any other time before 2020 or '21, where occupancy was below 80%. It's clearly been a problem forecasting occupancy in this business. So I was trying to figure out how today's levels compare to historically before 2020. W. Lehmkuhl: Yes, good question. And the second half, we are -- we did forecast occupancy accurately, to be clear. But you're right, it is very, very challenging to forecast it in this environment. And the answer is it's very challenging to go back prior to 2020 because we bought so many new companies in that time frame and the same-store pool is so different. And so I do think just from my memory, not supported by like-for-like data. There were certainly times prior to 2021 where our occupancy was lower than it is today. I'm thinking about 2016, '17, '18, back when we were just kind of still a young company and much smaller. Obviously, different footprint, we weren't in Europe yet. But yes, there were times in our core business where economic occupancy was lower. Operator: Next question comes from the line of Michael Mueller with JPMorgan. Michael Mueller: Curious, what are your larger customers telling you at this time about volume expectations for 2026? And have you seen any customers wanting to shrink their fixed commitment agreement yet? W. Lehmkuhl: So 2026 is very difficult to predict. And I think that's what our customers are telling us. We're just in the midst of our -- we don't even have October numbers finally yet. We're just in the midst of -- our business unit presidents are working on their '26 budgets right now and -- with the finance team next week, and I'll see a roll up in a couple of weeks. And certainly, puts and calls as I sit here today, but hard to predict. And that hard to predict is driven by all the conversations we're having with our customers worldwide, who see their business as hard to predict. And so it's -- we'll see, we'll be continuing to have those conversations through the budget cycle. And -- but as far as the volume guarantees, as I mentioned, Michael, a lot of them got reset in the first half of this year, and we think that we're at a very healthy level of volume guarantees now. We're actually kind of -- we kind of reset the bar, and now we're making a little bit of progress. I wouldn't see those dropping a bunch more. I don't think we have kind of an overhang of incremental resets. And new business that we're earning, as I mentioned, is coming in with slightly higher volume guarantees than our average. Operator: Next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Todd Thomas: Just in terms of the tariff uncertainty that you cited and the decrease in container traffic, it seems like some of this is just lost business, but is there an impact on inventory levels as a result of this decrease in container traffic that you mentioned that might create some pent-up demand to the extent that there's improved visibility or if there's some change around tariffs here? How could this sort of play out in the quarters ahead? W. Lehmkuhl: Yes. The answer is yes. I mean we were seeing consistent container volumes through July bounce around month-to-month, but it was pretty consistent. And then we saw a drop through September and that lower level is being [ steep ], as of this point. And again, 20% in our Western business unit is not small, and it is not driven by new business. It is driven by predominantly our seafood customers that are holding off to reorder. And that's the impact. So yes, are they going to reorder some point for [indiscernible] Easter? Absolutely. We're just not predicting that's going to be in the fourth quarter at this point. Operator: Next question comes from the line of Nick Thillman with Baird. Nicholas Thillman: Good morning, everyone. Just as we think about the excess capacity you all highlighted within the presentation, we're hearing a lot from the food manufacturers on restructuring, rationalizing supply chains. I was wondering if there's anything Lineage just been doing on their own network, whether it be closing underutilized facilities or just rationalizing their footprint within the U.S. being a large player that could maybe close that gap with excess capacity we're just seeing from a national picture. W. Lehmkuhl: Yes. Great question. So there's kind of two things going on with customers. The first big one, the huge impact over the last couple of years was the destocking from COVID. We think that's behind us, that's really good, kind of back to normal inventory levels or bouncing across the bottom, but certainly, there's not more excess inventory that's being depleted at this point broadly. There's customers who have been optimizing their supply chains across my 30-year career, and we are their partners in helping them position inventory properly to satisfy their customers' requirements, and help them determine how much to store where and how to transport those products into our facilities and out to their customers. And so Tyson is a great example of that. We were right in the middle of their optimization. And we're the recipient of core business, given that optimization. We're having those conversations with customers all the time. On the new supply as far as kind of how it could come out, it's an excellent question. We've idled 8 buildings so far this year. We know some of our competition has as well. And we do that for obvious reasons. We take out the labor, we lower or eliminate the energy costs, and we're able to move that business into the adjacent facilities, and that's part of what's so great about having such a large debt network is that we have the opportunity to do this where much of our competition doesn't. And so if you look at other ways that capacity is going to come out, we're idling -- others are idling old buildings that have higher maintenance CapEx where that are not needed, where we can move that product elsewhere. We also feel that some of the new operators are really struggling as they have a high basis in their properties if they own the assets, and they're paying very high leases if they lease them. And because they built it peak construction cost timing. And so we believe that some of these companies are going to not succeed and we plan to assess these opportunities for consolidation and bring those facilities into our network as they present themselves. I think an important caveat to that is that not all warehouses are created equal, and we're pretty good at making strategic acquisitions for the capacity only when it makes sense for our network. We also believe that some of the inventory that's been added was just added in the wrong locations or it was built in a way the actual development itself and the configuration of the building makes it fundamentally disadvantaged and we think it will just fail in the medium term. And so we think capacity will come out that way as well. And we did see we are hearing directly from some competitors that they're struggling in a big way and there is instances where companies and close our doors as well. Operator: Next question comes from the line of Tayo Okusanya with Deutsche Bank. Omotayo Okusanya: Yes. Could you talk a little bit about sort of labor on your same-store pool, kind of pretty well managed; but on the non-same-store pool, some kind of large year-over-year increases kind of understanding, you've added kind of new assets over time? But just kind of curious, are these new rule assets have, again, lower occupancy assets but already fully staffed or kind of what's kind of happening on the nonsame-store side to kind of have these really large jobs with the increased number of facilities? W. Lehmkuhl: Yes. Good question. Obviously, on the non-same-store pool, frankly, I wouldn't focus on it because there's so much going on there. We have 25 buildings either ramping or in development. And we have to -- for example, in that labor line is our General Manager and our Assistant Manager and our supervisors, and we hire them before a pallet even hits the building. And so all these are in different phases of the J-curve. And so you'll see kind of abnormalities in that labor line until they move into the same-store pool. Operator: And our last question comes from the line of Caitlin Burrows with Goldman Sachs. Caitlin Burrows: I had a question on the pricing side. So one of the concerns I've heard from investors is that I think it's like half of your portfolio 1-year agreements. So those were recently reset in '25. But the other half, that means, they're on leases from a few years ago. Maybe you could tell us how far back they go. But what's the risk of rent roll outs from those older contracts that were established a few years ago in '26? And is that incorporated into your view of low single-digit rate increase in '26? Or is that '26 low single-digit price increase only related to those 1-year agreements and the rest could be an incremental headwind? W. Lehmkuhl: Great question. We don't see an overhang from long-term agreements that are going to get reset at lower levels. And definitely, all those are included in our projections of low single-digit net price increase. Operator: That concludes the question-and-answer session. I would like to turn the call back over to Mr. Ki Bin Kim for closing remarks. Ki Bin Kim: Thank you. On behalf of the entire Lineage team, thank you for joining us today. We hope you will be able to attend our [ NAREIT ] Investor Forum on Monday, December 8. where we will highlight our operational and excellence and unique LinOS list platform. We look forward to speaking with you again. Thank you, everyone. W. Lehmkuhl: Thanks, everybody. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.
Operator: Greetings, and welcome to the XPEL, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. John Nesbett of IMS Investor Relations. Sir, you may begin. John Nesbett: Good morning, and welcome to our conference call to discuss XPEL's third quarter 2025 financial results. On the call today, Ryan Pape, XPEL's President and Chief Executive Officer; and Barry Wood, XPEL's Senior Vice President and Chief Financial Officer, will provide an overview of the business operations and review the company's financial results. Immediately after the prepared comments, we'll take questions from our call participants. A transcript of this call will be available on the company's website after the call. I'll take a moment to read the safe harbor statement. During the course of this call, we'll make certain forward-looking statements regarding XPEL, Inc. and its business, which may include, but not be limited to, anticipated use of proceeds from capital transactions, expansion into new markets and execution of the company's growth strategy. Such statements are based on our current expectations and assumptions, which are subject to known and unknown risk factors and uncertainties that could cause actual results to be materially different from those expressed in these statements. Some of these factors are discussed in detail in our most recent Form 10-K, including under Item 1A Risk Factors filed with the SEC. XPEL undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Okay. With that, I'll now turn the call over to Ryan. Go ahead, Ryan. Ryan Pape: Thank you, John, and good morning also. Welcome to our third quarter call. Q3 was a record quarter for us for revenue, which grew 11.1% to $125.4 million. Performance was led by the U.S. region, which grew also 11.1% to a record $71.7 million. We saw double-digit revenue growth in both our independent and dealership channels in the quarter. So that's encouraging. That's good momentum. Our EU region had a good quarter, revenue growing 28.8% to $16.5 million, which was a record there as well. As you recall, we saw headwinds in Q3 last year, so it was also an easier comp, but good performance. And as you likely know, we completed our long contemplated acquisition of our Chinese distributor in early September. Given the acquisition closed late in the quarter, we didn't see much material financial impact, but you will see elevated SG&A from acquisition-related professional fees in the quarter. And then, of course, added SG&A expense for the month of September under our ownership. We've hit the ground running and the integration is underway. I was with our team 2 weeks ago. I can tell you that we've added amazing people to the team. Both our team and our customers are very excited about this and what it means for our business in the country. The customers were very receptive, and so it was -- is incredibly encouraging. We have a lot of work to do from the integration perspective, but obviously see a huge opportunity and really we'll continue our focus to pursue the OEM and 4S business in China. With this acquisition, along with our acquisitions of Japan, Thailand and then India prior to that, we really rounded out our footprint that we see in APAC, but then beyond. We continue to see similar trends affect all the regions at different times similar to the slowness we saw in the U.S. to start 2024. Canada revenue declined from the prior year, continuing a trend of a slow market in Canada for this year. We saw really slow Q1. Q2 was better. Q3 was not as good as Q2. I wouldn't call out anything in particular, except just a broad-based slowness across the whole portfolio of customers. And then as I mentioned, Europe was up meaningfully. India and Middle East grew modestly, but this market is more tied to distributor sales. So there's a little bit of sell-in, sell-out noise there. But we're really bullish on what's happening there. It's a priority market for us, and there's a lot more to come. Latin America was flat due to weakness in Mexico, but really from a switch to a direct model in Brazil from a distribution model. Our expectation for Q4 revenue to be in the $123 million to $125 million range with sort of the normal cyclicality we see in U.S. and North America. Assuming we hit those numbers, that would take us to year-over-year annual growth for '25 in the 13% to 14% range. On the gross margin front, we did see a little pressure to gross margin in the quarter relative to our overall trend. We had unfavorable price increases that were out of line with the market, which cost us about 170 basis points of gross margin in Q3. Absent this specific impact, you've actually seen gross margin grow from the prior year. These aren't tariff related, and we've mitigated that going forward and we expect to see that reverse starting in Q4 and into Q1. The other item that has an impact on gross margin in the near term is the nature of our China distributor transaction. We're selling through inventory acquired in the acquisition. And as we do that, we're only recognizing roughly the former distributors portion of the margin as the inventory is now on our books at an amount that approximates the distributor's former cost. So obviously, a key rationale to buy your distribution is to increase gross margins, which it will do for us in a meaningful way, but only as we sell through existing inventory. Barry will discuss a little bit more the unique structure of the transaction relative to inventory. But we did add on the order of $22 million plus or minus in inventory as part of the purchase. So you'll see inventory increase on our balance sheet, but really, that's a function of this transaction and it's structured in a way that's very favorable for us. So our underlying inventory trend and our improving inventory turns remain solid and would not interpret the balance sheet on face value to say anything else relative to inventory. With that said, we'll have great cash flow as we sell through that inventory, because the turn times to replace it and the total inventory needed to supply the customers both on our side and the former distributor side will reduce. So we'll see -- start to see relief from that in Q1 when we have both halves of the margin as both the supplier and distributor for the first time. So as we get into Q1 and Q2 of next year, we'll see record gross margins for the business at the consolidated level based on these investments and changes. The SG&A continues to run hot as we invest in the channel to support these new countries. We've got some optimization to do in our corporate cost structure, but most of the costs added in the past 18 months is in the channel and in the distribution business. And now that we've really completed the build-out of those, save a little bit more investment in Brazil, we'll start to see leverage on that. China, as an example, with this acquisition will add $5 million plus or minus in annual SG&A, including intangible amortization. But once we see the full gross margin, we'll pick up approximately $10 million in operating income from China on an annual run rate basis. So I just remind everyone that you have to consider the SG&A and the gross margin interface together when looking at the trajectory of the business, especially as we start to realize that gross margin into next year. And I think from our perspective, there's no better time in history to make these really final investments in these countries where we want to operate the most. This is a very tough environment for many people, for many of our competitors. You see a lot of folks pulling back where we're investing. And I think that's what you want for the long term. The investments in SG&A in these countries is very much front-end loaded. But these are the best markets in the world, and they're ones that are impossible to develop in any meaningful way without our direct participation. So investing now sets up perfectly for going forward. And certainly, as you see demand in the environment recover and we see different performance in different places, obviously. We spent the better part of 18 months on our capital allocation strategy, which we've discussed pretty freely on these calls. And this has included evaluation of a number of approaches, including expansion via M&A into adjacent products and services, really in the broader industry in which we participate. And this is looking at things that aren't directly related to what we do, but could ultimately bring more demand by bringing other customers into the fold. After a thorough review, our Board decided that continuing to invest in the core of the business is really the best strategy. There may be other adjacencies in the future. There are plenty of opportunities in our core today, and we've yet to hit the full operating potential of the existing business. So once we hit that full potential, we can reevaluate those concentric rings that surround our business, but to do so today is premature. And at the end of the day, much as we like those other opportunities for growth and our desire to build a bigger business, we don't like them better than our core business. And that will guide our near-term decisions. So to that end, we will be investing more in our manufacturing and supply chain via varying approaches, direct CapEx, M&A or JV relationships. We have a goal of increasing gross margin by approximately 10 percentage points to around 52% to 54% by the end of 2028 through those activities. We -- with that extra gross margin running through our various businesses, particularly where we control our own distribution and get full margin, we have a goal of realizing operating margins in the mid- to high 20s. Commensurate with that, even with the cost of any of those things we'll do. We would consider investment in the range of $75 million to $150 million over this period, pretty wide range, but we've got a number of options about how we do this. And it's -- either way, it's a very favorable return without the risk or complexity of adding additional lines of business relative to our overall strategy decision. Secondly, we will continue to pursue service business acquisitions within our core with a focus on dealership services with our current product set. Those opportunities are comparatively few in number and relatively small in scale for the most part. But as we can identify and acquire them, this will remain a core part of the strategy. Finally, even with the aforementioned investments, we do expect to have excess cash considering healthy balance sheet, strong cash flow and appetite for modest leverage. Assuming all that remains true, there'll likely be an opportunity to return cash to shareholders. Share repurchases look particularly attractive at the moment, given our view of the valuation of the business. Turning to business. We have a number of exciting things going on. We've talked in the past year about our product line additions, color films, windshield films. And we'll spend the next year getting these to their full potential. We have a very robust product line now, and our focus will be less on adding additional products and more on selling more of what we already have and iterating to the next generation of the products that we already have, like entering new channels, new products and the launch of new products and the development of new products are expensive, and our focus will be getting a return on the investments that we've made. Our OEM business interest is strong with the global car manufacturers. Although our bottom line performance from our existing programs has missed our expectations and it's certainly a drag on results due to disruptions that plague the manufacturers or creating consistent spikes in demand, which challenge us on the cost side. We get better at how we manage this environment with each passing month and a subsequent project, and it remains an important focus for us and an important growth driver of the business going forward. Part of that is our referral personalization platform where we're selling installations online to consumers on behalf of our partners, namely some of the OEMs. We've been driving increased volumes to our aftermarket network for installations in a model that no one's ever done before. We continue to have more interest from others in expanding this program, and it's become quite valuable to many of our installer partners as a source of volume, while the retail aftermarket remains very sluggish. We expect to continue to expand this going into next year and beyond. And finally, a discussion of our investments in DAP. Our SaaS platform has taken a back seat to other initiatives. The work on this continues unabated. We received -- we redirected some of our team to our personalization platform as we've launched that in earnest, but we continue to advance on DAP in a way that we know will make our customers more efficient and ultimately sell more products benefiting them and us. Our view is even in the aftermarket channel, due to the friction and inefficiency of how the channel operates, there is substantial consumer demand that just slips through the fingers of the collective industry. And our goal with this project is to solve for that. So I think a really important time for us. A lot of moving pieces and different things going on, but we feel very good about the decisions we've made and about our strategy going forward. We're really pleased to have this acquisition in China complete. It was a tremendous amount of work. Obviously, more work to come, but it really helps cement our direct distribution model in the most important global car markets of the world. And so it's quite an accomplishment, and it will pay tremendous dividends for us. And I thank everybody on our team and everybody else who's been involved in getting that done. So very pleased with that. So with that, I'll turn it over to Barry. Barry Wood: Thanks, Ryan, and good morning, everyone. Just a couple more bullet points on our top line performance. our total window film product line grew 22.2% in the quarter, and this continues really to be a nice growth driver for us. Our total installation revenue increased a little over 21% in the quarter. And this includes product and service for our dealership services business, our corporate-owned stores and our OEM business, all had solid performance in the quarter, notwithstanding the OEM choppiness Ryan mentioned. And our corporate store performance, as we've said in the past, is a decent indicator of how the aftermarket is doing. On a year-to-date basis, our total revenue grew 13.1%. Our total SG&A expenses grew 20.8% in the quarter to $35.7 million, and this was 28.4% of total revenue. We did have approximately $1.3 million in added acquisition related to SG&A and approximately $0.8 million in bad debt and some other costs that are not expected to reoccur. On a year-to-date basis, SG&A grew 18.2% to $102.7 million. Our EBITDA did decline in the quarter at 8.1% to $19.9 million, and our EBITDA margin finished at 15.9%. On a year-to-date basis, our EBITDA grew 4.6% to $57.8 million, and our year-to-date EBITDA margin was 16.3%. Net income for the quarter decreased 11.8% to $13.1 million, reflecting a 10.5% net income margin and EPS for the quarter was $0.47 per share. On a year-to-date basis, net income grew 3.7%, reflecting a 10.7% net income margin and our year-to-date EPS was $1.37 per share. I thought it'd be useful to give a brief overview of the structure of the China transaction given its complexity. We -- first, we formed a new entity in which we have a 76% interest. This new entity then acquired the assets of our Chinese distributor. The purchase consideration for this totaled just under $53 million before discounting for time value of money. And there are essentially 3 components to the consideration. First, obviously, there was a cash upfront. Second, there was deferred consideration or really cash payable over a 4-year period. And thirdly, there was consideration contingent on future sales of what we considered as excess inventory as of the close date. This excess inventory was part of the inventory acquired and the contingency is structured such that we pay some consideration if the excess inventory is sold at a profit, but we effectively are not penalized if any of the excess inventory is sold at a loss or has never sold and needs to be written off. As Ryan mentioned, in the overall transaction, we effectively added approximately $22 million in inventory if you consider inventory acquired and inventory contributed by minority holders. The first 2 items, the cash upfront and the deferred consideration are about 75% of the total consideration. And for various customary legal reasons unique to the transaction, only a portion of the cash paid upfront was actually remitted and the rest of the upfront payment will be paid very soon. And this is important to understand when you look at our balance sheet as we've broken these components out there. The remaining upfront payment still payable and the contingent consideration is reflected in the short term. And other short-term liabilities on the balance sheet. The deferred consideration, the cash payable over a 4-year period is reflected in other long-term liabilities. So as Ryan mentioned, we're certainly happy to get this deal behind us. It was somewhat a complicated deal, and there was a lot of hard work done by several people to make this happen. We have a great team in the region, and we are really looking forward to watching them grow that market. Our cash flow provided by ops was $33.2 million for the quarter compared to $19.6 million in Q3 last year, which was a record for us. And you may notice, if you're looking at our balance sheet, a decent size increase in our AP and accrued liabilities line, there's nothing unusual there as this is related primarily to timing. We've got extended terms with most of our raw material suppliers. So timing of payments can create some fluctuation, but it's all in the normal course of business. I'll also add that we did see a slight improvement in our cash conversion cycle in the quarter. So all in all, a solid quarter for us, and we look forward to closing out the year strong. And with that, operator, we'll now open the call up for questions. Operator: [Operator Instructions] And your first question is coming from Jeff Van Sinderen from B. Riley. Jeff Van Sinderen: Just curious if we could circle back to one of the things you touched on in the prepared comments. I think you pointed out that there were some out-of-line price increases you experienced. Maybe you could touch on how those manifest, how you mitigated and -- also then, if you could kind of dovetail that into leaning into taking more of the manufacturing in-house. Ryan Pape: Yes, Jeff, sure. So we did experience some price increases that really manifest in the quarter. I think in our remarks, we called out that was about 170 basis point impact to gross margin. I think that -- I guess the best way to characterize that is, I think if you look at the industry overall, it's been a challenging time for people and a lot of decisions made on how best to run your own business and where you may want to make up margin for lack of demand. Obviously, not impacting this and not impacting us is the overall tariff environment. So that's been a challenge for some suppliers. and looking for extra margin in other places. So I really can't characterize it more than that, except that we've got a very robust set of suppliers. And so where there's outsized price increases, that don't make sense for the market. We have plenty of options on how we mitigate that. And so that was -- that happened, but it's been mitigated. We'll start to see that reverse in Q4. And I think broadly speaking to the second point, we have a desire and see incredible opportunity to invest further to be a highest quality and lowest cost provider of the products. And if you have the best supply chain and the best distribution and the best brand, I think you're in pretty good shape for the long term. And so I wouldn't characterize what we're doing there in a very discrete way. Certainly, there's elements of the supply chain we could take in-house and do that in a number of ways. But we also have a number of really good partners that we could form deeper partnerships with. And so we have a very broad mandate to do that, and we have a lot of ways to win by doing that. And this is not an overnight thought either. This is something that's been in the works for some time in terms of our analysis. And so I wouldn't characterize just one way to do that. But what we know is that we can drive substantial gross margin improvement in this business over time by investing in it. And I think the big picture is that until we've done that and we've maximized the business that we have, we need to prioritize those investments versus pursuing other lines of business in which we have a less competitive advantage and less experience. And so that's the direction and the decision that we and the Board have made, and we have a great team who will now execute on that. Jeff Van Sinderen: Okay. And then curious on the rollout of your colored films. I noticed some marketing around that. It seems pretty exciting. Any color you can give us, I guess, on early dealer embracement of that? And how impactful do you expect the colored films to be to your business over the next year or 2? Ryan Pape: Yes, it's a great question. So the rollout has been great. It's been well received. Our team has done an amazing job, probably the best product rollout that we've ever done in our history when you -- and I say that from external-facing standpoint, but also an internal standpoint, which the rest of the world would appreciate, but I certainly do. I think it's -- our view on it has been relatively conservative. I think the question is what is the growth opportunity within that space given the sort of aftermarket color change business has been around for a long time. So do we see this as something that we can just take share in? Or do we see this as something where the underlying demand is going to grow? Our initial view was there was certainly a market in which we could take share. I think what we're seeing a little bit of is that I think the market is going to grow. I think as the products now are better and they can be delivered in an even better way and marketed better, there's probably more new interest in that than I would have thought. And you see -- I think you'll see more engagement too from whether it's the dealership channel and the OEM channel wanting to offer more options to consumers that maybe you can't do with a limited color palette in a traditional automotive setup. And so I think though if those get traction, you have the opportunity for a substantial expansion of that. So early days for us, but I think I'm quite pleased and we expect to see more from that going forward. Operator: [Operator Instructions] And your next question is coming from Steve Dyer from Craig Hallum. Matthew Raab: This is Matthew Raab on for Steve. In the PR, you called out the mid- to high 20% operating margin by 2028. Given the investment in manufacturing, that implies 10 points of expansion over the next few years. I guess whether it'd be organic or inorganic growth, what are the revenue assumptions underpinning that margin expansion? Ryan Pape: Well, I think we've been pretty consistent that we think that a low double-digit sort of organic revenue growth even with all the noise and the weakness that we see that continuing out for us certainly through the midterm. So it doesn't -- we're not sort of making any change to our kind of midterm view that, that's the sort of revenue growth we think we should be able to generate. Matthew Raab: Okay. That's helpful. And then maybe just a couple of housekeeping items. Maybe, Ryan, if you could just give an update on the sentiment across the aftermarket in dealer channel. Q4 guiding to 15% growth in the quarter, obviously, good. But any other further detail you have there would be great. Ryan Pape: Yes. I mean, I think it's a real challenge. I mean if you look at sort of our peers in the aftermarket and other places, there's a real mix sentiment. What we found interestingly is that the weakness in the sort of trough in sentiment has sort of bounced around globally. Obviously, you had the U.S., you've got sort of Canada now. You had Europe maybe at some point last year. And we've kind of seen it more negative and then recover some. I think if you look at the retail automotive business in the U.S., they're certainly back in the mode of looking for extra gross profit as things are tougher there and just compression in margins and challenges with affordability and tariff impacts into new car pricing and all that. And so that's negative in the sense that, that's still a headwind for the consumer where you have upward pressure on pricing and affordability. Maybe we get some relief from sort of the interest rate situation in terms of the affordability overall. But it's positive for us in the sense that when it's tougher for dealers, there's more push to find other ways to make money in the things that we do provide more value on a percentage basis when it's harder overall. So I think from that standpoint, that's actually quite positive. I just think it's -- we've never been in an environment where you get more differing views on what's happening. I don't think there's this universal consensus that things have substantially improved or that the consumer sentiment is way better. But at the same time, there hasn't been any skies-falling moment. So our approach has been that we have to power through. We've got to be mindful of those dynamics, but we've got to set the company up for the long-term success and make investments where we need to make it. And we know that the consumer and the demand picture, it will all settle out. And I think you've seen some stress. Barry mentioned in his remarks, bad debt, there was an aftermarket chain of some sort that filed for bankruptcy that we had some exposure to. So you see a little bit of signs of stress like that, nothing meaningful or material to the business overall. But I think that's kind of emblematic of what's going on. And then you've also seen an influx of competitors into this space. And this current environment makes it more challenging for them, especially those trying to get rooted and footed, and that's all the more reason why we need to keep the pedal to the metal and maintain and grow our positioning. So long answer to your question, but I think it's a mixed bag overall. Matthew Raab: Understood. And then on gross margin, it sounds like there's a little bit of a drag expected in Q4, just given some of that China inventory and then expect a record in Q1 and Q2 '26, level of the impact there across those 3 quarters would be helpful. Ryan Pape: Well, we -- yes, the sort of drag from China with that higher-priced inventory and then sort of the tail off of some of that price increase, that will remain in Q4. However, on a comparative basis, Q4 of '24 was quite low in gross margin. So the expectation is that we should see some gross margin improvement from the prior year in Q4 on a percentage basis, even though we -- to your point, we'll be off of that sort of full potential until we get into the end of Q1 where we're recognizing all of the margin in China and we fully remediated the cost increases that we've seen. Matthew Raab: And then any commentary on Q1 and Q2 '26, just the level of improvement expected there? Ryan Pape: I think I'm hesitant to quantify it any more than we have, only because we've got to turn the inventory and sell what we've got. But our position is that we will be seeing highest gross margins we've seen as we get into that time frame. Operator: And this does conclude today's question-and-answer session. I would now like to turn the floor back to management for closing remarks. Ryan Pape: I want to thank everybody for joining us today and thank our team for doing an amazing job, and we've got a big contingent at the SEMA Show in Las Vegas, a big annual event and we're on a great display. So thanks, everyone. Operator: Thank you. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you once again for your participation.
Operator: Good day, everyone. My name is Laila and I will be your conference operator today. At this time, I would like to welcome you to MISTRAS Group Q3 2025 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Thomas Tobolski, Senior Vice President of Finance and Treasurer. Thomas Tobolski: Good morning, everyone, and welcome to MISTRAS Group's Third Quarter 2025 Earnings Conference Call. I'm joined today by Natalia Shuman, President and Chief Executive Officer; and Ed Prajzner, Senior Executive Vice President and Chief Financial Officer. Before we start, I want to remind everyone that remarks made during this conference call as well as supplemental information provided on our website contain certain forward-looking statements and involve risks and uncertainties as described in MISTRAS' SEC filings. The major factors that can cause MISTRAS' actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain non-GAAP financial measures that we believe are useful to investors evaluating the company's performance, but that were not prepared in accordance with U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section and on the SEC's website. I will now turn the conference over to Natalia Shuman. Natalia Shuman: Thank you, Tommy. Good morning, everyone. Thank you for joining us today. It is my pleasure to report on our Q3 results and update you on the progress made to date on our strategic initiatives. Let's start with our third quarter results. I'm pleased to report that third quarter was highlighted by consolidated revenue growth of 7% versus the prior year. As we planned and communicated early in the year, our goal was to grow revenue in the second half of 2025 year-over-year and we achieved this in the third quarter. With the improved revenue, we generated an expanded bottom line result in the third quarter with net income of $13.1 million or earnings per diluted share of $0.41 and our record quarterly adjusted EBITDA of $30.2 million. With regards to the performance within our end market, we have delivered year-over-year revenue growth for Q3 in each of our 5 largest industry verticals. Energy market consisting of our oil & gas and power generation industries led the way growing 8.1%. Oil & gas was up $6.2 million or 6.2% and power generation was up $2.8 million representing 24.3% growth year-over-year. These results are attributable to strong turnaround activity, PCMS projects and market conditions in power generation driven by increased demand for rope access services within our renewable business. Aerospace & defense, our second largest market, was up 10.6% or $2.3 million due to a solid volume gain across the private space and defense industries and in addition to the successful price increase strategies. Our largest customers in this market continue to forecast future growth in their businesses over both the short and long term as evidenced by their robust backlogs. With its higher than company average margin profile, aerospace & defense is one of our top strategic priorities for both top line revenue generation and margin improvements. Industrial and infrastructure markets were both up in the third quarter over prior year. We achieved 15.8% growth or an increase of $3.1 million in industrials driven by the increased demand of manufacturing. And we achieved 21.1% growth or a $1.8 million increase in infrastructure driven by the increased activity in construction and capital projects. Overall, this diversified revenue growth across our 5 largest end markets and across geographies, including growth of 5.5% within our International segment was driven by the broad market demand for our services and demonstrates the success of our differentiated solution and our ability to deliver on customer expectations. Turning to profitability. Gross profit increased by $9.3 million or 19% with gross margin expanded by 300 basis points to 29.8% over the prior year quarter. The increase in gross margin was due to favorable business mix, closure of unprofitable labs early in the year and operational efficiencies as a result of a streamlined operational structure and better focus and accountability. Consolidated adjusted EBITDA generated in the third quarter was $30.2 million resulting in a 15.4% EBITDA margin. This represented an increase of $6.9 million or 29.6% versus the prior year period, underscoring the improved operating leverage in our business model. Let's now shift to a brief overview of our progress against our 3 key priorities in our strategic plan, Vision 2030, the first of which is expanding and transforming our current services to a more comprehensive and integrated solutions for our existing and new customers. Our entire leadership team has continued to be keenly focused on meeting with as many customers as possible to hear their voice directly and better understand their perception of MISTRAS. Our integrated offerings and solutions are finding broader adoption and use cases as indicated by the strength of our recent results and there is more to come as we continue to unlock MISTRAS' value. For example, there is an opportunity for many of our field services customers to utilize our proven PCMS solution which, as we demonstrated, would drive efficiency and improve their operational execution. This offering illustrates the value of bringing our whole integrated solution to our customers. Since only a very small percentage of our field services customers currently use our data analytics and software solutions, this is an exciting opportunity for us. And in addition to doing more of existing and new customers in our core markets, we are also winning projects with brand new customers in new and adjacent markets. These efforts form the basis for the second key priority of our strategic plan, diversification, expanding our client base into new industries while protecting our core business. Our recent announcement of wins with Batchelor & Kimball related to data center projects and Bechtel on the Hanford P Project for the United States Department of Energy are examples of recently awarded long-term construction projects outside of our core energy markets. The third strategic priority of Vision 2030 is focused on building operational leverage by doing what we do today, but better through efficiency and productivity gains. Beyond these positive sales efforts and an inflection in our growth, I have continued to strengthen MISTRAS' capabilities and build a scalable leading asset integrity and testing platform as Manny Stamatakis, our Executive Chairman, started last year to ensure long-term sustainability of our results. During the third quarter, I added a new Chief Human Resources Officer and a new Chief Legal Officer. In addition, we have strengthened our sales and marketing team, continued with commercial discipline and have further integrated our sales force. We have also reinforced our operational management team throughout 2025 with several new hires who all bring industry expertise and experience and a fresh perspective to our lab operations. These new managers are already demonstrating early wins and contributing to our operating results. Their early success highlights the intensity, urgency and accountability at each of our locations across all our divisions. MISTRAS has the foundation, technical know-how, proven expertise and people to win. We are advancing our organizational systems, empowering our technicians with digital tools and investing in relationships with our customers to drive ROI and shareholders' value. I'm confident that we will execute with continuous improvement and I plan to be very transparent in assessing and communicating our progress and reporting to you. I will share additional highlights of our Vision 2030 strategy later. But let me now turn the call over to Ed for more details on the financial results. Edward Prajzner: Thank you, Natalia. As shown on Slide 6, revenue for the third quarter was $195.5 million, a 7% increase which exceeded expectations. This growth in the quarter reflects increases across several key areas of our business, including our PCMS offering and the aerospace & defense, industrials and power generation end markets. In particular, our PCMS offering within our data solutions business grew by nearly 25% in the quarter representing the second consecutive quarter of achieving significant growth. This growth was attributed to several implementation projects of PCMS programs. As Natalia mentioned earlier, gross profit increased by $9.3 million in the third quarter with gross profit margin expanding by 300 basis points. This improvement was attributable to favorable business mix and operating efficiencies. On a 9-month basis, our gross profit margin has expanded 180 basis points year-over-year from 26.3% to 28.2%. As a result of our gross profit expansion and SG&A cost control, we generated $20.4 million of income from operations, which is an increase of $8.5 million or nearly 72% growth versus the prior year comparable period. We improved adjusted EBITDA to $30.2 million resulting in a 29.6% increase over the prior year quarter. This significant improvement reflects our proactive cost management, operational efficiency leverage and a shift towards higher margin business. Our adjusted EBITDA margin increased to 15.4% from 12.7% for the third quarter, an expansion of 270 basis points. As noted in our press release yesterday, our results reflect certain overhead and personnel expenses, which have been reclassified from SG&A to cost of revenue. This reclassification recorded within our financials was $5.7 million for the 3 months ended September 30, 2024. The impact of this reclassification for full year 2024 was approximately $20.9 million from SG&A to cost of revenue. This redistribution of overhead and personnel expenses has no impact on operating income, net income or adjusted EBITDA comparability. Selling, general and administrative expenses were essentially flat in the third quarter as compared to the prior year comparable period despite the higher revenue level achieved due to our ongoing cost control management while also making strategic investments in our business. For the third quarter of 2025, the company recorded $1.8 million of reorganization and other cost related to our continuing initiatives to reduce and recalibrate overhead cost in addition to incremental costs of other related actions. Our effective income tax rate for the third quarter was approximately 22% benefiting from discrete items in the quarter whereas we expect the full year 2025 effective rate to be approximately 25%. Interest expense was $3.4 million for the third quarter, down by just under $1 million or 21.4% from the prior year period due to a lower cost of borrowing. For the third quarter, we reported GAAP net income of $13.1 million or $0.41 per diluted share compared to $6.4 million or $0.20 per diluted share in the prior year period. This improved result of doubling year-over-year for the quarter significantly exceeded expectations. Note that the buildup of accounts receivable, both billed and unbilled, on our balance sheet as we discussed in the second quarter has continued to cause a drag on our cash flow generation in the third quarter. As we have shared earlier, this is a working capital timing item due to implementation and adoption of an upgraded ERP system in April, which is taking us longer than anticipated to come up the learning curve. Note that unbilled accounts receivable did decrease as of September 30 compared to June 30, 2025 whereas billed accounts receivable increased over the same time frame. Hence, we anticipate positive free cash flow generation in the fourth quarter of 2025. We will focus on improving our cash flow performance in the quarters to come. Specifically, improvements to our back-office structure, focused tools and accountability will contribute to reduced accounts receivable, both billed and unbilled. Although some improvement is projected in the fourth quarter, we anticipate to normalize our free cash flow generation in the first half of 2026 to more historical levels. In addition to the higher days sales outstanding experienced in 2025, the increased restructuring charges and incremental CapEx investments year-over-year have also adversely impacted our free cash flow. Due to this buildup of net working capital as of September 30, 2025, bank borrowings increased year-over-year with net debt of $174.5 million as of September 30, 2025. On the positive side, we are continuing our investment in our business for the longer term while lowering and maintaining a trailing 12-month leverage level of just below 2.7x. We expect positive free cash flow and debt paydowns in the fourth quarter and we continue to emphasize debt reduction as a priority use of our residual free cash flow. Although strong revenue growth was achieved in the third quarter, we expect full year 2025 revenue to be between $716 million to $720 million. This would represent essentially flat performance compared to the prior year after adjusting an approximate 1% reduction in revenue resulting from our ongoing efforts to voluntarily exit unprofitable business during 2025. Whereas adjusted EBITDA has continued to improve and is expected to increase for full year 2025. Accordingly, we are raising our prior qualitative adjusted EBITDA guidance range of exceeding the 2024 adjusted EBITDA level of $82.5 million. Based on our strong third quarter 2025 adjusted EBITDA performance results and the current fourth quarter forecast, we expect our full year adjusted EBITDA to be between $86 million to $88 million. Our focus for 2025 has been and remains margin improvement and adjusted EBITDA expansion such that we can generate profitable growth and invest further in our growth momentum heading into 2026. We appreciate your continued support. And at this time, I would like to turn the call back over to Natalia for her closing remarks before we move on to take your questions. Natalia Shuman: Thank you, Ed. I'll conclude by summarizing the market opportunity we see and preview why we believe MISTRAS is well positioned to create and capture more value. Demand for our services is continuously driven by mission-critical projects, aging assets and aging infrastructure across a diverse set of demanding and dynamic industries. That said, the MISTRAS of today is not operating at the full potential of our capabilities. We have historically operated as a company in silos and on a project-by-project basis. Historically, it was more common to be commissioned by a customer to provide a single nondestructive testing at a specific plant versus an entire program on a more strategic enterprise-wide basis. In fact it is the exception and not the rule that the customers of MISTRAS utilized our services in a holistic way. This represents significant opportunities for future growth. Our overall strategic priority in the near term is to change this paradigm and drive more strategic value to our customers through the synergy and scale of our capabilities. The time is right because the challenges that our customers face today require an enterprise level approach to risk mitigation and optimal return on their CapEx investment. We believe MISTRAS has the technical know-how, proven expertise, data analytics and advanced solutions portfolio to best serve as the new standard for 21st century testing and inspection industry. Our Vision 2030 strategic plan is built on the foundation that MISTRAS is significantly more valuable to our customers when we deliver the complete suite of services of our platform as an integrated solution. In the months and quarters ahead, we will be sharing more detail on the execution of our plan and how we are connecting with our customers. In the meanwhile, let me close with recapping the 3 priorities of our strategic plan. First, to continue to develop and deliver comprehensive and integrated solutions to our existing customers in our core markets. Our goal is to be more integrated with each client by providing holistic solutions instead of singular fixes. At an enterprise level, we drive value for customers and in doing so, we expect to broaden the addressable revenue and profit opportunity. Secondly, diversify into new industries while protecting our core business. We expect our revenue mix and end markets to become increasingly diverse as we do more for new customers. Historically, our company has been subject to oil & gas secular cycles and our objective is to diversify in order to mitigate the impact of cycles tied to commodity prices. Thirdly, to build upon operational efficiencies, do what we do today, but better to improve our margins primarily in the field services business. We have an opportunity to drive increased profitability as we deliver solutions for clients on a holistic enterprise basis. We have had recent success in margin progression through operational efficiency and we believe it will be a catalyst of our Vision 2030 strategy that will drive sustainable operating leverage, industry leading performance and scale. I'll close by thanking all of our customers and partners who have contributed to our superior results this quarter. In particular I would like to sincerely thank all of our MISTRAS employees from the front lines to back office for their tireless efforts in executing on their day-to-day tasks while embracing transformative change and evolving strategy of our company. These efforts are creating value for our customers and in turn, our shareholders. We look forward to updating you on our performance as we progress further. With that, let me turn the call back to the operator for questions. Operator: [Operator Instructions] Your first question will come from Mitch Pinheiro with Sturdivant. Mitchell Pinheiro: So a couple of things. First, I didn't see a breakdown of the oil & gas revenue by subcategory and I didn't know if that was an omission or if you planned not to have that in your releases going forward. Natalia Shuman: Yes, Mitch. I will explain. We did in fact remove that subcategory reporting. As I reported before, I have done a lot of analysis of how our customers buy and how we operate and basically what we've learned that many clients of ours straddle between those 2 or 3 subcategories. So reporting on those subcategories is not very accurate. But I can tell you right now because of the strong quarter especially attributed to the turnarounds, downstream was up about 14% where we also saw the LNG sector is very strong and midstream and upstream was low single-digit growth. So that kind of gives you an idea of where we are. But again, several of our customers are in between those subcategories so reporting doesn't make sense. Mitchell Pinheiro: Okay. Maybe you should figure out a way to recategorize it because it's obviously the lion's share 2/3 of your business and it does have a fairly large impact when you have strong upstream, downstream to at least have some visibility there and so enough of that. Then the other question I have, and this is sort of less to do with the quarter and more to do with reporting, is as I look at your business it's hard to understand what field services, shop lab, I understand data analytics. It's hard to really understand and how to model that. So to look at your -- and then on top of that with all your subsegments; oil & gas, aerospace, industrials, power gen; it's a confusing way to present your story financially. And I was wondering if you're going to look at changing the way you present your financials to better reflect how you're looking at the business. Natalia Shuman: Yes. Good comments, Mitch. We can certainly follow up with you on that and see what would make sense, how you would like us to give a view better picture. So Ed, do you have any comments? Edward Prajzner: Yes. I mean, Mitch, it's a good question. We struggle with this as well the best ways to look at the business, but we try to give you as transparent a view as we can. We give you, meaning all investors, geography; we give the end markets being served. We're talking about our service types now between the field, the in-lab and the data. So we are trying to pull it apart so you can better understand it and we're trying to give you multiple views of it. But we will continue to call out the high, the low and give you a feel for what's growth rates, relative mix. It is all very important. Run and maintain versus called out is something we also talk about. That's another important way of looking at the business to get to the run rates. But all of that's important and we'd like to give you different ways to view the business to understand the drivers of the activity. Natalia Shuman: We report separately the in-lab services as well as the field services. Some of our labs still are doing both. So we are certainly now separating that so to give more transparency into the operations and the performance so that you will see some improvements there for sure as we're going forward in '26. And again our strategic plan is built around the specific industries and market verticals that we serve. So you will see more there for sure as we're progressing with our strat plan. Mitchell Pinheiro: Okay. I mean like for instance so just taking a look at -- so you had oil & gas good performance there and I would have thought field services would have been up then. I see field services down 1%. So why would field services be down 1% when you had such a nice quarter in the oil & gas segment? Natalia Shuman: But if you see the other category in the same table, that's the labs that do both. Those offices that do the field inspection and the in-lab testing and that's where you see the increase, right? So substantial increase. And again to that point, as we go forward in '26, we will separate those and you will not see others any longer. So that will give you a much better idea of field services and in-lab and then data analytics as well. Edward Prajzner: And PCMS, Mitch, is another piece of that answer. PCMS is oil & gas focused. They're in half the refineries in North America, but they're not field services. They're clearly data. So that's another example there where that industry is up because of PCMS, but they're not field services. They're in a different category, i.e., the data solutions category. Mitchell Pinheiro: Okay. And then staying on this, your aerospace & defense, very nice growth sort of accelerating out of like a slower first half and I see that shop laboratories was up 12%. I'm assuming the shop laboratories is mostly your aerospace & defense business. Natalia Shuman: That is correct. Yes, aerospace, defense and industrials. As you know, third largest end market is industrial. So most of our in-lab is testing for the industrials and aerospace & defense. Mitchell Pinheiro: So what kind of capacity do you have? I mean so you've consolidated some of that, but do you have the capacity to grow at this type of rate for a couple of years or is there a bottleneck there that you have to solve or can you talk a little bit about how you can grow the aerospace & defense business within the labs? Natalia Shuman: Absolutely. Couple of things there. Yes, very proud of the team in lab. They've done a very good job. There was a volume increase as well as the price calibration. So we can see that certainly that customers are now much more willing to pay for the services and the value we provide to them. But to answer to your specific question on capacity, that is our strategic plan, right? So to expand further on the capacity, we are continuing to build out hub-and-spoke model where we have several large hubs in different parts of the country as well as Canada where we have the most capabilities and then we have smaller labs where we can take the orders and be closer to the customers. So we're expanding 2 things. We expanding capacity by building out those hubs as well as we are expanding capabilities where we're adding new services. We reported earlier in Q2 that we added welding accreditation. So we continue to add machining, repairs, rework, cleaning. So basically optimizing the supply chain for our customers. So you've seen our CapEx is a little bit up, that all goes into growth investments. So that's CapEx and we're advancing our UT capabilities, ultrasonic capabilities, in our labs. So that again will give us much better and bigger capacity to serve our clients because market is growing, right? Market is -- our customers are disclosing publicly they have backlog. We're continuously talking to our customers and they are expecting growth. They are cautiously optimistic especially in the commercial aerospace sector, subsector. They're cautiously optimistic because there is some tightness in their own supply chain. Nevertheless, it's a growing business for us and it's growing not only in the U.S., but also in Europe. And another thing, don't forget is defense. Defense growth is obviously expected whether it's in Europe or military spend or U.S. So it goes also well for us. Edward Prajzner: Some of these same projects, Mitch, are being funded jointly with the customer. They need us to grow. They need this capacity. They want us to expand. So they're actually jointly funding some of this CapEx to help expand the footprint to service them going forward to help them catch up on their backlogs that they have and we're very happy to support them and we will expand capacity to do that. Mitchell Pinheiro: Okay. Just 1 more question and I'll get back in the queue. On the last call, you were talking about new construction projects related to data centers, AI, electrical infrastructure. Can you talk a little bit more about anything that's developed over the last 3 months? Natalia Shuman: Yes. So we announced that new project with Batchelor & Kimball. So that's a good win for us. Again, as I mentioned last time, it's right now in an intersection where technology can no longer advance without the energy and we've been very prominent in the energy sector. So we're basically taking the same our testing methods and inspection methods and apply it to new use cases. So in data centers, it's the same. We're doing exactly the same what we've been doing all these years. It's ultrasonic testing, it's thermal infrared imaging to detect the heat issues. So there's radiography, there's visual inspection and testing. So all of those services we provide for the data center. So it's more to come on that. It's a big sector for us. We're certainly already creating capabilities or having the separate teams that are working on data centers. I reported earlier that we have hired some sales executives that are continuously looking into this sector and developing the relationship with prospective customers, with new customers. So more to come on that. It's a good opportunity for us. We feel confident that it's a good market for us. Again, it's a part of our diversification strategy in our Vision 2030. It's part of our strategic plan. Operator: Your next question will come from John Franzreb with Sidoti & Company. We'll move on to Joichi Sakai with Singular Company. Joichi Sakai: On the margin side, can you help me quantify how much of that margin improvement is coming from deliberate lab or business exit versus pure operational execution? And how much of that runway remains for further portfolio pruning? Natalia Shuman: Certainly, absolutely. Certainly, the larger part of the margin improvement is attributed to the favorable business mix so that led to the improved gross profit. And then obviously operational efficiencies and the closure of unprofitable labs contributed to the improved EBITDA margin overall. But majority of the improvement comes from that the revenue improvement, gross profit improvement mostly in oil & gas attributed to our turnaround, very good traditional seasonality impact there and then growth in all the other sectors or industries. But in terms of operational efficiencies, obviously, it played a role there and closing of unprofitable labs as well. Joichi Sakai: Okay. And I know you commented a little bit about the aerospace industry and the data analytics industry. Which end markets are you really showing the most forward visibility into 2026 and then the kind of acceleration in spend from your key customers? Natalia Shuman: So what we are really seeing where we see -- first of all, kind of all markets right now and that's contributed to our Q3 results as well are quite stable. And we see growth is in aerospace & defense, in particular defense where we see the increased opportunities there as well as in infrastructure. Data centers are in our infrastructure segment. So that's where we see that there will be potential opportunities and growth as well as in power generation as well because again it's now infrastructure and energy and energy demand is coming from again technology expansion and advancement and so on. So I would say those 3 sectors; aerospace & defense, infrastructure and power generation; we believe that we will see growth in 2026. Having said that, obviously a large percentage of our business mix is in oil & gas and so we're continuously working with our clients in that sector, in that market vertical to offer integrated solutions. So that first pillar or first priority of our strategic plan is to increase the wallet share with existing customers. And we believe with integrated solutions, we certainly can achieve that where we envision growth coming from our oil & gas customers using more than just field services inspections. But we're adding additional services such as PCMS, such as other robotics, rope access and so on. So we're quite confident about the about the market as we're looking for next year. But of course what I can tell you right now, we will start making growth investments in those sectors to get this ability to grow and capitalize on opportunities. Joichi Sakai: Got you. And that CapEx that you were mentioning that you'll have to make, that's dependent on the cash conversion that you will be able to accomplish by the end of this year. Is that correct or would that -- are we trying to model increase in debt levels? Natalia Shuman: That's right. So obviously cash generation is one of our priorities internally. This is something that we can control and that is something that absolutely will take priority as we're stepping in into the new year. Joichi Sakai: Okay. And just 1 more question. You mentioned that the pricing environment is quite stable. As you transform into a more integrated solutions provider, what's the competitive environment like and what is kind of your early win rates as you maybe -- I don't know how early that is as you present yourself as a more integrated solution? What's the competitive environment like and how are you gaining traction? Natalia Shuman: Thanks for this question. Yes, we're tracking obviously the competitors. It's a slightly different set of competitors as we're reaching out to the other markets or they're looking at the other services and adding services, right? But this is not new to MISTRAS. This is not new to the company. So although we had the bulk of the services, so to speak, in our portfolio as our foundation so we know that environment. We're just integrating the solutions and we believe that we will produce more value with integrated solutions. In terms of the early wins, yes, I can tell you it's one of our KPIs for our strategic plan is to measure the cross-selling and how we're tracking on cross-selling. About $3 million to $3.5 million this quarter already attributed to the cross-selling results or cross-selling efforts. So that, I can tell you, we will report as we're going forward. So how we're doing specifically on integrated solutions and what progress we're making in that regard. Operator: For our next question, we'll return to John Franzreb with Sidoti & Company. John Franzreb: Congratulations on a good quarter. I'm actually curious about the quarter itself. Was there any revenue that was pulled forward from the fourth quarter into the third quarter? Natalia Shuman: No. That was all third quarter generated revenue. John Franzreb: Okay. And I'm also curious about the guide. It kind of suggests at least at the midpoint that there's more gross margin sensitivity than I was cognizant of or potentially SG&A goes up sequentially. Am I thinking about that properly or am I missing one of the puts and takes here? Natalia Shuman: You're talking about Q4. Is it correct, John? John Franzreb: Correct. Yes. Natalia Shuman: Yes. So the way we're modeling Q4 is that we certainly -- so we believe that we will be in line with our own expectations. We've already seen again good traditional seasonality for October. So our turnaround season was quite strong in October. We also know that again traditionally, Q4 is not as strong as Q3. So we're implying in our guidance some revenue growth versus prior year. We believe there will be a moderate growth in EBITDA. But we believe there's no surprises at this time that we can tell you about for Q4. John Franzreb: I'm sorry, do you want to say something? Edward Prajzner: No, nothing else to add there, John. John Franzreb: Okay. And I'm curious if you're starting to get orders for the upcoming spring season yet and if that's the case, can you give us some kind of qualitative thoughts on it? Natalia Shuman: Yes. So as we plan for '26 and now we're in the middle of the budgeting season as you can imagine. So we believe it will be a strong spring turnaround season. You might recall last year was quite different or this year rather was quite different. So spring was not as strong as the fall. So right now we see that we have won some of the turnaround awards and bids. So we anticipate a stronger turnaround season that was in 2025. John Franzreb: That's good to hear. Just an odd question I think. Do you have any impact in any of your business from the government shutdowns or is that a nonissue for you? Natalia Shuman: No, there is not an issue for us. Operator: At this time, I see no callers in the queue. So I will hand back to Ms. Shuman for her closing remarks. Natalia Shuman: All right. Thank you, Laila, and thank you, everyone, for joining this call today and for your continued interest in MISTRAS. I look forward to providing you with an update on our business, Vision 2030 strategic plan and progress achieved towards our ongoing initiatives on our next call. Thank you. Operator: This ends today's conference call. You may disconnect at this time.
Operator: Good day, and thank you for standing by. Welcome to the Vishay Intertechnology Quarter 3 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to now hand the conference over to our first speaker, Mr. Peter. Please go ahead. Peter Henrici: Thank you, [ Raven ]. Good morning, and welcome to Vishay Intertechnology's Third Quarter 2025 Earnings Conference Call. I am joined today by Joel Smejkal, our President and Chief Executive Officer; and by David McConnell, our Chief Financial Officer. This morning, we reported results for our third quarter. A copy of our earnings release is available in the Investor Relations section of our website at ir.vishay.com. This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website. During the call, we will be referring to a slide presentation, which we also posted at ir.vishay.com. You should be aware that in today's conference call, we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see today's press release and Vishay's Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have included a full GAAP to non-GAAP reconciliation in our press release as well as in the presentation posted on ir.vishay.com, which we believe you will find useful when comparing our GAAP and non-GAAP results. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures. Now I turn the call over to President and Chief Executive Officer, Joel Smejkal. Joel Smejkal: Thank you, Peter. Good morning, everyone. Thank you for joining our third quarter 2025 conference call. I'll start my remarks with a review of the third quarter performance and business conditions and then turn the call over to Dave, who will take you through a review of the third quarter financial results and our guidance for the fourth quarter of 2025. After that, I'll update you on the strategic levers we are pulling under Vishay 3.0 as we continue to execute on our 5-year strategic plan, and then we'll be happy to answer any of your questions. For the third quarter, revenue grew sequentially 4% to $791 million, 2% above the midpoint of our guidance. Many market segments were up over Q2. Automotive, industrial, computer and medical were positive. Asia achieved the greatest growth, notably from automotive customers and sales to distributors supporting computing and industrial. Our sales to Asia distribution was positive in Q3 because of a large number of orders placed in Q2 to get ahead of the tariffs. Vishay book-to-bill in the quarter was slightly below parity. Orders from OEMs were up in all regions. Orders from EMS were positive over Q2. Distribution orders in the Americas and Europe were positive above Q2, while Asia distribution orders were lower following the higher order amount in Q2, which was mentioned previously. Both semi and passive book-to-bill was slightly below 1. Book-to-bill for October is at a run rate of 1.15. Our backlog continues to build at a gradual pace as it has since the beginning of the year. Orders were up 19% year-over-year, indicating that conditions are improving in automotive, smart grid infrastructure, aerospace defense and AI-related power requirements. However, a very large portion of these orders are still placed with short-term delivery requests. Turns business, expedites, pull-ins, they all continue in nearly all markets as customers for the most part, are still not planning ahead. In Asia, the percentage of short-term delivery orders continues over 50%. This seems to be the new normal for our business at the moment. Our decision 3 years ago to invest heavily in incremental capacity has positioned Vishay to satisfy nearly all of these quick turn delivery requests without having to choose one customer over another. Today, Vishay is demonstrating to customers that we can reliably satisfy quick turn demand while still maintaining competitive lead times. At the same time, we remain well positioned to capture the early stages of upturns in market demand and supplying customers as they scale. We are now serving the channels of distribution, OEM and EMS more reliably. Let's turn to a review of the revenue, which is by end market on Slide 3. Automotive revenue increased 7% versus the second quarter on higher volume in the Americas and Europe. We mentioned in the Q2 call that we saw automotive positive in the second half of 2025. Tier 1 customers increased their pull rates, and we've increased our engagements with more automotive OEMs and Tier 1s now that we have capacity. Automotive customers have audited our U.K. and Mexico sites, where we have now gained more site approvals. We work closely now with the OEMs and Tier 1s to further approve our product PCM. Our design activities continue in all automotive powertrains, ICE, hybrid and battery electric vehicles. Increasing our revenue in all automotive applications is our focus as electronic content increases, particularly in traction inverters, ADAS features, safety and smart cockpit applications and electronic braking and power steering. Revenue from the Industrial segment increased 2% for the second quarter, driven heavily by our shipment of capacitors to smart grid infrastructure projects for programs led by Europe and China OEMs. Q3 seasonality slowed bookings a bit in the Americas and Europe. The industrial market is showing some improvement. There continues to be a pickup in replenishment orders in the channel now that inventories are mostly consumed. As reported each quarter, we see the orders for our high-voltage DC power capacitor as an early indicator of the improving industrial business. We continue to win large orders for customers in Europe, Asia and India for high-voltage DC power transmission to be delivered in 2025. Demand for industrial power management customers will be next to increase as the smart grid transmission lines are put in place. Growing opportunities for Vishay are industrial power for electricity to AI data centers, automotive hybrid EV for power management requirements as well for the AI chip production sites. Our design activity is focused largely on AI power structures and grid improvements as the build of data centers is driving demand for control systems, which monitor backup power and cooling. Along with power supplies and power distribution management, we also work on designs for industrial automation, robotic platforms, energy storage and smart meters. In aerospace defense, Revenue decreased 2% quarter-over-quarter as the U.S. Department of Defense was slow to release funding for major programs. Now in this quarter, orders are beginning to pick up with the release of funding to large military contractors and the replenishment of the distribution channel inventory to support defense business. The majority of designs in the U.S. and Europe remain focused on new and legacy weapon systems, communication systems, drones, commercial aerospace and satellite programs. In the medical market segment, revenue grew 2% on increased activity by some of our larger long-standing customers and in support of new programs and increased activity for existing programs in cardiovascular, pacemakers and defibrillators, medical surgical, surgical tools, patient monitoring and respiratory care, neuroscience for chronic pain and movement disorders and cochlear hearing applications. Ongoing demand for these applications also drove order growth. Our design activities remain focused on all medical products and applications. Our strategy to cross-sell all Vishay technologies to existing medical customers continues to progress positively. As an example, we have designed in and qualified to supply additional passives for a new project at a long-standing medical customer. This will start in 2026. We're continuing to develop opportunities to sell across our portfolio with this customer and others. Revenue from the other market segment, including computing, consumer and telecom end markets was up 4% quarter-over-quarter, reflecting ongoing demand for AI servers and server power. Asia is where these transactions take place. We see increased order flow as new AI server power projects move into production. We continued in the third quarter to increase our customer count and are now supplying more AI customers. At the same time, in addition to MOSFETs and ICs, we design in and supply customers with diodes, capacitors, inductors, resistors to expand our overall part counts. We continue to win qualifications with polymer tantalum, also for magnetics and current sense resistors. Design activity remains focused on power conversion and power management, including multiphase DC to DC converters, ultra-low DC resistant inductors, polymer tantalum capacitors for the GPU chipset power and also AI optical modules. Next-generation data centers are requiring higher input voltages in order to deliver more power to each rack with less power loss. These are further opportunities for Vishay's products. Let's move to Slide 4 for revenue by channel. OEM revenue grew 6% quarter-over-quarter, driven primarily by increased volume with automotive and industrial accounts, plus shipments for smart grid infrastructure projects in Europe and Asia. Order intake increased in all regions during the quarter and is back to levels last seen in 2022. Sales to the EMS channel fell 7% with reductions in all regions reflecting mix. Order intake for EMS increased from the second quarter, also reaching the level -- the highest level we've seen in 3 years. As a result, our new investment in incremental capacity, we are in a much improved position to participate in the EMS channel business. We can reliably satisfy increasing demand from EMS customers that are operating in a short-term visibility. We are supplying aerospace, defense projects, automotive, industrial and AI-related programs. Distribution revenue increased 4% with nearly all of the Q3 growth coming from Asia, while Europe and the Americas were more seasonal. AI servers, industrial and smart grid infrastructure projects supported the Asia increase. Our intake grew in all regions to prepare backlogs as end customers' inventory further normalized. In the Americas, order intake increased significantly, driven primarily by demand from aerospace defense customers. Distribution inventory was flat compared to Q2, while inventory overall is holding steady at 23 weeks. Both POS and POA remained stable in each region. Based on data from our customers, we can see that our initiative to gain share with distributors is working. We continue to add part number SKUs throughout the channels, recently including many new released inductor products, placing more part numbers on the distributor shelves as we deepen engagement with them and position Vishay for further share gains. Turning to Slide 5 in terms of geographical mix. Revenue growth for this quarter came predominantly from Asia with a 7% increase in sales. Americas revenue was up slightly and Europe was essentially flat due to the seasonal impacts mostly in August. Before turning the call over to Dave, I'd like to thank the Vishay employees for their hard work and for their continued commitment to Vishay's strategic and financial goals. They put the customer first every day. They embrace a business-minded approach to help the customers when looking for support. In the current climate, they may be asked by a customer to expedite a Vishay delivery or to help prevent a line down due to shortages from another supplier. We work hard to step in and help the customer. Our sales, business development, marketing, operations and corporate colleagues do everything they can to show Vishay customers that Vishay 3.0 is a transforming company, creating opportunities to satisfy new customers while reengaging previously underserved customers. Thank you to all the Vishay employees and our reps to show Vishay is a reliable supplier. I'll now turn the call over to Dave for a review of the third quarter financial results. David McConnell: Thank you, Joel. Good morning, everyone. Let's start our review of the third quarter results with the highlights on Slide 6. Third quarter revenues were $791 million, up 4% compared to the second quarter, reflecting a 3% increase in volume and a 1% positive foreign currency impact related mostly to the Euro. Average selling prices, including tariff adders were flat versus the second quarter. Nearly all reportable business segments had higher revenues than the second quarter, driven mostly by volume. Compared to the third quarter of 2024, revenues increased 8%, reflecting an 8% increase in volume and a 2% positive foreign currency impact related mostly to the Euro. This was partially offset by a 2% reduction in ASPs, including tariff adders. Book-to-bill for the quarter was 0.97, broken down into 0.96 for semis and 0.98 for passives. Backlog in dollars was flat at $1.2 billion and is now at 4.4 months. Moving on to the next slide, presenting the income statement highlights. Gross profit was $154 million, resulting in a gross margin of 19.5%, slightly below the midpoint of our guidance and flat versus quarter 2. The margin performance was driven mostly by elevated metals prices as well as modest currency headwinds. The negative impact from our Newport fab was approximately 150 basis points, slightly better than our guidance. Depreciation expense was $54 million, in line with our guidance and up $1 million over quarter 2. SG&A expenses were $135 million, slightly below our guidance and down $2 million from quarter 2 on an adjusted basis. GAAP operating margin was 2.4% compared to 2.9% in the second quarter and a minus 2.5% in the third quarter of 2024. Adjusted operating margin was 1.4% in the second quarter and 3.0% in the third quarter of '24, excluding -- non-GAAP adjustments. There were no pretax non-GAAP adjustments in quarter 3. EBITDA for the quarter was $76 million for an EBITDA margin of 9.6%. Adjusted EBITDA margin was also 9.6%, up from 8.3% in the second quarter. Our GAAP effective tax rate remains meaningful at these low levels of pretax income or loss as relatively small items such as foreign currency and repatriation taxes have a disproportionate impact on our effective tax rate. As profitability returns, we would expect a more normalized effective tax rate closer to our historical guidance. In the quarter, we recognized $13.7 million of tax expense due to changes in tax laws and regulations in the U.S. and Germany, which is excluded from our adjusted net earnings. GAAP loss per share was minus $0.06 compared to earnings of $0.01 per share in the second quarter and a loss per share of $0.14 in the third quarter of '24. Adjusted earnings per share was $0.04 for the third quarter of 2025 compared to a net loss per share of $0.07 for the second quarter of '25 and adjusted net earnings per share of $0.08 for the third quarter of '24. Moving on, Slide 8 provides a summary table detailing revenue, gross margin and book-to-bill ratios across our reportable segments for quick reference. In the third quarter, Newport's results continue to be reported under the MOSFET business segment, reducing that segment's gross margin by approximately 720 basis points, an improvement from the 840 basis points impact seen in Q2. Turning to Slide 9. In the third quarter, our cash conversion cycle remained steady at 130 days, reflecting our disciplined working capital management. Inventory increased to $760 million, primarily driven by production ramp-ups and higher metals prices. However, inventory days outstanding improved to 108. Our DSO was stable at 53 days, while the DPO decreased 1 day from Q2 to 31. Continuing to Slide 10. You can see we generated $28 million in operating cash for the third quarter. Total CapEx for the quarter was $52 million, including $43 million designated for capacity expansion projects. On a trailing 12-month basis, capital intensity was 10.8%, relatively flat versus the same period last year. We continue to deploy cash for capacity expansion projects. Due to these investments, free cash flow for the quarter was a negative $24 million compared to a negative $73 million in the second quarter, which included significant transition and repatriation taxes. Stockholder returns for the third quarter consisted of our $13.6 million quarterly dividend. We did not repurchase any shares in the quarter. At the end of the quarter, our global cash and short-term investment balance stands at $444 million, and we remain in a net borrowing position in the U.S. with $189 million outstanding on our revolver. As we've noted in the past, we're required to fund cash dividends, any share repurchases as well as principal and interest payments using our U.S. cash on hand and we are using U.S.-based liquidity to fund our Newport expansion and other strategic investments. We have $280 million accessible on our revolving credit facilities at the current EBITDA level. We expect to continue to draw on our revolver to fund our U.S. cash needs. Moving on to our guidance on Slide 11. For the fourth quarter of 2025, revenues are expected to be $790 million, plus or minus $20 million. Gross margin is expected to be in the range of 19.5%, plus or minus 50 basis points, inclusive of tariff impacts and expected continuing higher input costs. Newport is planned to have an approximate 150 to 175 basis point drag on gross margin in the fourth quarter. As we discussed last quarter, we're passing through additional tariff costs to customers, those tariff adders increase our revenues without impacting our gross profit. The impacts of tariffs are generally limited and incorporated into our guidance for the fourth quarter. Depreciation expense is expected to be approximately $55 million for the fourth quarter and $212 million for the full year '25. SG&A expenses are expected to be $138 million, plus or minus $2 million for the quarter. Our GAAP effective tax rate remains not meaningful at low levels of pretax income and loss. As our profitability returns, we expect a normalized tax -- effective tax rate closer to our historical guidance of 30% to 32%. In quarter 4, we expect tax expense to be between $4 million and $8 million, assuming a similar profit mix amongst our tax jurisdictions. Finally, our stockholder return policy calls for us to return 70% of our free cash flow to stockholders in the form of dividends and stock repurchases. For 2025, we once again expect negative free cash flow due to our capacity expansion plans. However, we expect to maintain our dividend and opportunistically repurchase shares based on U.S. available liquidity in line with this policy. I'll turn the call back over to Joel. Joel Smejkal: All right. Thank you, Dave. Let's go to Slide 12. Slide 12 will give us an update on the strategic levers we are pulling to drive faster revenue growth, higher margins and enhanced returns on capital as we execute our 5-year plan. Starting with capacity investments. Year-to-date, we have invested $179 million, and we expect to spend between $300 million to $350 million this year. At least 70% of this CapEx is for expansion projects. At our Newport facility, we are on schedule, increasing our wafer starts each month. During the quarter, we completed the installation of all tools for silicon and silicon carbide wafers, and we released and started production ramp-up for 2 additional technologies. Automotive customer audits are continuing. In our passive business at La Laguna, Mexico, we released commercial part numbers for production while continuing to qualify additional part numbers. We've scheduled site audits with many automotive customers. We've completed the IATF certification of our automotive-grade inductors, which opens the door to move for more site audits and supplying more automotive OEMs from this facility. We've had more than 20 audits completed at La Laguna. At our facility in Juarez, Mexico, we've passed the audits conducted by 2 of our automotive customers and continue to increase production of commercial products. Through our subcontractor initiative, we now have qualified more than 9,000 part numbers, further expanding our portfolio of diodes, resistors, capacitors and inductors. As a reminder, this initiative has a couple of objectives. The first one is to create incremental capacity internally for our high-growth products by outsourcing commodity products. The second is to broaden our product portfolio and to increase our share of customers' bill of materials. Turning to innovation in our silicon carbide strategy during the quarter. For MOSFETs, we released 3 additional products, 2 industrial and 1 automotive for the Gen 2 1,200-volt planar. We plan to release 8 devices in Q4 for industrial and 8 devices for automotive in Q1. We remain on track to release the 1,700-volt and the 650-volt industrial platforms in Q1 and the automotive platforms in Q2. Samples for the Gen 3 1,200-volt trench were available in Q3 and on track to release the industrial platform in Q4 and the automotive products in Q1. For silicon carbide diodes, we fully released the industrial and automotive, Gen 4 1,200 volt and the 650 volt. In closing, market signals remain directionally positive with increasing demand from automotive, AI server, and server power, smart grid infrastructure and industrial power, aerospace, defense and medical. Our accelerated investments to expand capacity over the last 3 years positions us to capitalize more on the market up cycles in these high-growth segments, meeting quick turn delivery requirements while maintaining competitive lead time. We like the feedback we get from customers about Vishay 3.0. We keep our feet on the ground because we have a journey to complete in this transformation of Vishay. Every day, we are demonstrating to the customers that we have the capacity to assure them of reliable volume as they scale production and to supply more part numbers to them. Over the past 3 weeks, we contacted many global automotive and some industrial and computer customers to offer our support to address their manufacturing line down concerns. Customers appreciated very much that we call them. We now have daily conversations with automotive OEMs and Tier 1s to cross part numbers and help them manage their risk. Looking ahead, we are intently focused on creating more opportunities to expand our participation in the full market recovery to better leverage our entire portfolio and to deepen our engagement with new and existing customers. We are building on our success to gain share with our channel partners in cross-selling products in our portfolio, designing in and supplying a greater share of the customer's bill of materials. We also focus on creating more value for our customers through innovation with our silicon carbide strategy by expanding our portfolio of technologies to better serve their demand and by supporting their technology road maps. We remain committed to pulling the 8 strategic levers as we execute our strategic plan to accelerate revenue growth, improve margins and enhance returns on capital. Raven, let's open the call to questions. Operator: [Operator Instructions] Our first question comes from Ruplu from Bank of America. Ruplu Bhattacharya: The first one, Joel, in the Automotive segment, did Vishay see any benefit or impact from the export restrictions that were put on Nexperia? Joel Smejkal: Ruplu, nice to hear from you. This is a dynamic conversation. I mentioned in the closing that we are in discussion with many OEMs daily and many Tier 1s. They've asked for support in line down situations, and we have been able to support in some cases, depending on how the part numbers cross. So we -- at the moment, we're seeing a lot of opportunity developing. We didn't guide or didn't place much of that in our Q4 revenue guide because at this moment, it's been shortage quantities just to keep factories moving. So we are in the conversations. Ruplu Bhattacharya: Okay. Okay. Can I switch to margins? I mean, it looks like Newport was not as big a negative impact as you had expected on fiscal 3Q margins. But just looking at the gross margin, it was maybe 20 bps below the midpoint of guidance. I think you mentioned the metal prices as one factor. Were there anything else? How was pricing? And when it comes to the metal pricing or prices and cost, are you using the strength of the balance sheet to prebuy any metals? So just any thoughts on that impact going forward? Joel Smejkal: Okay. I'll take the first part of that, and Dave can comment on the second part. The items that impact gross margin, metals was one, whether it's gold, whether it's palladium, platinum, silver, they're all at a very high rate plus copper tariff. Copper tariff is another one. So we're managing the metals, and we're preparing to pass costs on to customers. That's a negotiation season now. So we're passing metal costs on as much as possible. Exchange rate, Dave can elaborate on a little bit. There's also operational items. It's not a perfect operation. There's always things that we need to improve on with manufacturing efficiencies. So metals, exchange rate plus some operational issues is what had the gross margin flat Q3 versus Q2. Dave, do you want to talk at all about any of those items or the forward buying of metals? David McConnell: Yes. No. So Ruplu, it's a good question. When you -- combining the metals and the FX impact, we're looking probably north of 50 basis points on the total, okay? So it's no small impact. So I mean everybody knows what's going on in the metals markets right now. I mean gold year-to-date, 48% increase; silver, 59%. And in October, we're seeing them go up again, okay? In terms of the FX impact, we're well balanced with the Euro, but we do make -- we do build parts in some countries where we don't have revenue, okay? And 2 countries specifically, currency, the Shekel and the new Taiwan dollar strengthened and hurts our P&L. In terms of the hedging, one thing you have to keep in mind is we don't buy just pure copper and pure gold, right? We buy premanufactured parts a lot of time or semi-finished parts or WIP, whatever you want to call it. So our vendors are incurring extra cost and passing on to us. So [indiscernible] the pricing, but we're going to approach -- we're going to put steps in place to address the metal increases where possible and passing it on to our customers. This is in motion now. Ruplu Bhattacharya: Okay. Got that. But are you doing any prebuys? Like are you seeing the strength of the balance sheet to buy and store any metals? Is that something you would look into? David McConnell: We have -- we do that to some extent. We have a fairly long pipeline on some of our manufacturing times, and we will place purchase orders out into the future. But as a general purpose, we're not stockpiling metals now. It's expensive to do that. Ruplu Bhattacharya: Okay. Let me ask you another question. So it looks like book-to-bill fell about to below 1 this quarter, and this was the first time this year. When we look at the revenue guide for fiscal 4Q, I mean, that would imply total fiscal '25 revenue growth of about 4% year-on-year. Then when I look at consensus for next year, looks like consensus is modeling an acceleration to 7% year-on-year for revenues and gross margins to expand to something like 23.6% from 19.5% that you're running at today. So Joel, just when you look at the environment, when you look at the book-to-bill, and you look at consensus estimates for fiscal '26, do you see these as reasonable growth and margin expectations? And any color you can give on what can drive revenue growth and margin expansion and how you see that trending over the next year? Joel Smejkal: Okay. The October run rated book-to-bill, I mentioned is 1.15. So even though Q3 was slightly below 1, October orders across the products has moved up quickly. When we look at the market drivers, we've got 5 market drivers in what we see as an improving economy. We've got 2 of them which are supported by government spending. One is aerospace defense and the other is smart grid infrastructure. Those are 2 of the 5. We've got AI that we're all watching the AI server build and the power requirements. We've got automotive and industrial overall, auto, industrial, aerospace, defense, AI, medical as well. So we're seeing these market segments lining up. The customer engagements that we have, people are talking about mid-single-digit growth next year across these segments to high single-digit growth. We've done a good job of getting in the customer meetings. I think the October bill is a nice signal for us. We've got some product lines that the customers are placing further out orders like the high-power capacitor that we've got programs that we have to deliver in 2026, and that will continue to develop the industrial business behind that. So I see a growth next year [ receiving ], like you said, consensus of plus 7%. I think that's in line as we do our budgeting right now. We are developing our budget for 2026, and we're expecting to grow because of these 5 end market segments, which are showing positive signs. This is kind of a different year we're moving into. In the past, when you looked at how many market segments we were aligning to drive an economy, we had the telecom boom in the 2000. We had auto booms in the late 2000s and the pre-COVID years. But now we've got 5 market segments that Vishay supports that we see are lining up to be positive in 2026. So I think the revenue growth, what the consensus has put together is in line with what we're hearing from customers. The margin growth you talked about, we've got a plan to get Newport to margin neutral by the end of Q1. So that will raise our gross margin by 1.5%, 150 basis points. So we move to 21% plus the manufacturing efficiency and cost reduction projects we have internally division by division, passing on the metals cost that we talked about, plus then the volume growth, which we expect to see volume efficiencies on. So I think what you listed there is similar to what we're viewing for 2026. Ruplu Bhattacharya: Okay. Okay. That's helpful. And maybe I'll just throw one more in if we have time. Dave, can you elaborate on the capital return strategy? I mean, how would you prioritize any debt reduction versus buybacks versus any acquisitions [ that you pipeline? ] David McConnell: Sure, absolutely. So our cash balance has been decreasing. I think everybody can see that. And in the U.S., we're certainly in a net borrowing position. We're at $189 million, I think, on the revolver. The Newport CapEx is slowing, but Newport is not up and running completely yet. So we still need to fund U.S. money to fund Newport. So we don't see right now, given our current liquidity in the U.S. that we would want to be doing any share buybacks. We are continuing the dividend. Dividend is important to us. But we're not looking right now to purchasing shares. Operator: [Operator Instructions] Our next question comes from Peter Peng with JPMorgan. Peter Peng: You mentioned about some volume growth in the first quarter. Is it right to read into that, that you're expecting more seasonal trends? I think typically, your first quarter is up somewhere in the low single digits. Is that kind of the way you're thinking about seasonal trends into the first quarter? Joel Smejkal: Seasonal is an interesting word now. It's hard to say what's seasonal right now. You're right, in the past, Q1 did see some increase because of the Q4. Q4 is just a comment about Q4, it's not a 13-week quarter. It's a 12-week quarter. Customers tell us that they're going to be closing between Christmas and New Year. So we're really running a shorter quarter to have flat revenue. So we see that we are making a good push. Q1, Chinese New Year is in February. We're watching order activity now based on lead times to see is the customer going to be bringing in product before Chinese New Year or setting the stage for after. So I would say that's the seasonal effect that's there that is common Q1 after Q1 is Chinese New Year. However, industrial programs, aerospace, defense spending, the push to replenish the weaponry I don't think we're in anything that could be considered seasonal. Automotive, with what's happening with shortages and preventing line downs, we're doing our best to support OEMs that are coming to us in Tier 1. So I don't think I could put seasonality on that one. The industrial grid designs and those projects continue to move positively, plus then medical. Medical is always dependent on FDA approval of programs. So if I said seasonal for compute or because of the China New Year holiday, I think that's the only part of seasonal I would consider. We see the better bookings again in October, 1.15 right now, that run rate. If that continues, that sets us up for a better Q1. Peter Peng: Perfect. And then just going back to the gross margin dynamics, you mentioned that the Newport headwind is going to roll off in the first quarter and then you're going to be potentially passing some of the middle cost. And so what's the kind of the right base level to think about the margins as we kind of look into Q1? Joel Smejkal: We don't normally guide that far ahead, right? We're guiding for Q4. We are diligent in our cost improvement projects internally. The negotiation season is now with the large customers that have annual contracts. So too early to say we have a result of what the ASP change might be. I think we need a little more time yet to really dial in what the impact of, in particular, those negotiations -- the results of those negotiations is going to be. Peter Peng: Got it. Okay. And then last quarter, I think you mentioned about a change in [ work ] configuration at that large compute customer and that you guys are working to qualify. Maybe you can provide some update on that progress. Joel Smejkal: Okay. We are always connected to the AI design centers. We -- I mentioned we have branched out to a number of AI companies and building the hardware. Continuing to talk with the main players, continuing to offer more Vishay products, whether it's MOSFETs and ICs, that's what gets all the attention in the conversation. So we're in design activity there, plus the passive components. The capacitors, the resistors, the inductors. So we take a large -- a wide umbrella, a big toolbox and we go into the AI leaders, and we promote the broad portfolio. So we're gaining good traction. We're getting good design and print position. Peter Peng: Okay. One more, if I may. Just a follow-up on the Nexperia situation. I know you guys are not baking any revenue, but what's the potential -- how material of an impact could this be to your business as you kind of talk to your customers? Maybe a sense of what the magnitude is? Joel Smejkal: We're crossing part numbers. We're helping automotives with avoiding line downs. And it's not just Vishay. There's other suppliers, our competitors who are also helping this because we need to make sure the automotives are running and they don't have to do production stops because that impacts more than just Nexperia's volume, it impacts everybody. So I think what I'm hearing on the street is everybody is taking the opportunity to help. Vishay with the lineup of products, we crossed the best of our ability, but the automotives have to make a decision on how does the program perform with a Vishay product in it or another competitor's product in it. So it takes some time. We like the conversations we're in. We're being given a great opportunity to tell the automotive OEM and Tier 1 more about Vishay. They like what they hear. They like to hear about our footprint. They may not have known much about us in the past, the OEM -- so it's hard to put a number on it at this point. It's so dynamic. Because it's geopolitical, things could change in a moment. We saw what happened with April 2 and the announcement of tariffs and how that changed the business in a moment. We saw what happened here now with the geopolitical announcements of China and the Dutch about Nexperia. So I think it's too early for us to really put any type of number on it. There's too many moving parts. Operator: This -- I'm showing no further questions at this time. I would like to turn it back over to management for closing remarks. Joel Smejkal: All right. Thank you, Raven. Thank you, everyone. Thank you for joining us on our third quarter earnings call. The combination of directionally positive signals and Vishay's capacity readiness is encouraging. We look forward to reporting our fourth quarter results to you in February. Thank you very much. Have a good day. Operator: Thank you.
Operator: " Stacie Selinger: " Michael Sacks: " Jonathan Levin: " Pamela Bentley: " Kenneth Worthington: " JPMorgan Chase & Co, Research Division William Katz: " TD Cowen, Research Division Tyler Mulier: " William Blair & Company L.L.C., Research Division Operator: Good day, and welcome to the GCM Grosvenor Third Quarter 2025 Results. [Operator Instructions]. As a reminder, this call will be recorded. I would now like to hand the call over to Stacie Selinger, Head of Investor Relations. You may begin. Stacie Selinger: Thank you. Good morning, and welcome to GCM Grosvenor's Third Quarter 2025 Earnings Call. Today, I'm joined by GCM Grosvenor's Chairman and Chief Executive Officer, Michael Sacks; President, Jonathan Levin; and Chief Financial Officer, Pamela Bentley. Before we discuss this quarter's results, a reminder that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements. This includes statements regarding our current expectations for the business, our financial performance and projections. These statements are neither promises nor guarantees. They involve known and unknown risks, uncertainties and other important factors that may cause our actual results to differ materially from those indicated by the forward-looking statements on this call. Please refer to the factors in the Risk Factors section of our 10-K, our other filings with the Securities and Exchange Commission and our earnings release, all of which can be found on the Public Shareholders section of our website. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of non-GAAP measures to the nearest GAAP metric can be found in our earnings presentation and earnings supplement, both of which are on our website. Thank you again for joining us. And with that, I'll turn the call over to Michael to discuss our results. Michael Sacks: Thank you, Stacie. We are pleased to report another strong quarter for GCM Grosvenor, led by strong investment performance, strong fundraising and financial results that exceeded expectations. For the quarter, our fee-related earnings, adjusted EBITDA and adjusted net income were up 18%, 16% and 18%, respectively, as compared to the third quarter of 2024, and the results are similarly favorable on a year-to-date comparison. We're also seeing strong momentum sequentially with third quarter fee-related earnings and adjusted net income growth of 13% and 16% over the second quarter of 2025. Our fee-related earnings margin for the quarter was 45%, which is approximately 350 basis points higher than it was in the third quarter of last year. We ended the quarter with a record $87 billion of Assets Under Management, a 9% increase compared to the end of the third quarter of 2024. Investment performance remains solid across each of our business verticals. Our Absolute Return Strategies (ARS) has delivered particularly strong performance to clients with our multi-strategy composite generating a 14.2% gross rate of return over the last 12 months. In addition to the strong ARS performance, we also enjoyed year-over-year portfolio appreciation across each of our private market strategies. Looking ahead, our teams remain focused on investing client capital and deploying our $12 billion of dry powder. On the capital formation side, our positive fundraising momentum continues. Year-to-date, we raised $7.2 billion, higher than our total fundraising for the full year of 2024. Over the last 12 months, we've raised $9.5 billion, the highest trailing 12-month fundraising period on record for Grosvenor. Infrastructure and Credit led our growth during that period. Jon will cover fundraising drivers and pipeline shortly, but I do want to note that in the quarter, we closed on a $490 million collateralized fund obligations that will be invested in private Credit secondaries. Beyond the management fees that we will receive from this vehicle going forward, we generated $2 million of transaction fees that were recognized in the third quarter. Importantly, in general, activity levels are high and our pipeline remains quite full. Our gross unrealized carried interest balance stands at an all-time high of $941 million, up $32 million or 4% from the end of the second quarter with approximately 50% of that belonging to the firm. During the quarter, we realized more than $24 million in carried interest, which is the highest level of quarterly realized carried interest we've seen over the last 2 years. While carry realizations are clearly trending in the right direction, and we're optimistic about 2026, it's worth noting that typically, the third quarter carry realizations are seasonably the highest of any given calendar quarter. A few weeks ago, we hosted our 2025 Investor Day, and we were thrilled to welcome investors and analysts to hear directly from the leaders who drive our business every day. The goal of the day was to provide a comprehensive look at GCM Grosvenor, who we are, how we've evolved, where we're going. Our team led by Stacy Selinger and August Klatt did a great job putting that day together. The deck and video are available on our website, and I think they're helpful in understanding the company. That said, I do want to highlight a few of the key themes we covered. First, we made clear that GCM Grosvenor is central to the alternatives ecosystem, bringing more than 5 decades of innovation, execution, growth and relationships to bear across Private Equity, Infrastructure, Credit, Real Estate and Absolute Return Strategies. Second, we showed that our investment platform is broad, built for performance and importantly, highly scalable. Across the firm, we have the capacity to deploy multiples of our current capital base using our existing investment engine. That scalability, combined with a rigorous and repeatable investment process has produced attractive risk-adjusted returns for clients in each of our verticals. Third, our growth outlook is compelling across each of our investment strategies. Each of our verticals from Credit to Infrastructure to Real Estate to Private Equity and Absolute Return, has a path to substantial AUM growth over the next 5 years. We highlighted the fact that our team's execution over the last 5 years has translated into earnings growth with fee-related earnings having grown more than 90% since 2020. Importantly, we spoke about our path to double 2023 fee-related earnings to more than $280 million by 2028 and to drive 2028 adjusted net income per share to more than $1.20 per share. We also announced an increase in our quarterly dividend to $0.12 per share, reflecting continued confidence in our growth trajectory and our strong free cash flow generation. Finally, the day underscored what truly differentiates GCM Grosvenor, our client-first culture that is rooted in teamwork and alignment and is a key competitive advantage, delivering high re-up rates and significant growth. We hope that for anyone who participated or subsequently dove into the materials, it is clear that we are well positioned strategically, financially, culturally with multiple growth engines, a scalable operating model and a clear line of sight to meaningfully higher earnings and cash flow in the years ahead. We have a high degree of confidence that we can compound value for shareholders over the long term. And with that, I'll turn the call over to Jon. Jonathan Levin: Thank you. As Michael noted, I will focus my remarks this quarter on our strong fundraising results and healthy pipeline. We covered this during the Investor Day, but the beauty of our business is in many ways we have to win with all types of clients. Our business diversification in terms of geography, asset type, client type and implementation style is reflected in the diversification of our fundraising results. Looking at the record fundraising over the last 12 months, there's a few things I'd call out. First, Infrastructure and Credit together accounted for nearly 2/3 of our capital raised. These strategies are where we're seeing the highest demand in the market. In Infrastructure, we benefit from the market tailwinds generally and our broad platform that offers various strategies and numerous vehicles to meet the unique needs of investors. In Credit, our success is rooted in helping investors access the markets that they don't necessarily have the ability to access on their own, which means strategies outside of traditional direct lending and investment implementation styles outside of regular way fund investments. Our direct-oriented strategies in both Infrastructure and Credit are driving a significant percentage of our growth. Second, Absolute Return Strategies generated $1.5 billion of fundraising over the last 12 months. As Michael shared, the pipeline here is the best it's been, in years on the heels of very strong investment performance. While we aren't changing our flat net flows budgeting assumption, the backdrop for ARS is increasingly encouraging, and we believe we can compound AUM growth through strong performance. Finally, Insurance clients accounted for approximately 14% of capital raised over the last 12 months and 40% of Q3 capital raised, driven by the almost $500 million collateralized fund obligation that will be invested in private Credit secondaries. Looking ahead to our pipeline, I want to emphasize the strength and predictability of our Separate Account business. We are perpetually in the market raising Separate Accounts from existing investors through re-ups and from new investors. If we do our job well taking care of our existing clients, re-ups and cross-selling into new strategies are our best sources of new capital. As is usually the case, we're also in the market with several specialized funds. We held our first close of our Private Equity Secondary fund, GSF IV. We also held the first close of our inaugural Real Estate fund, REV, which now allows us to offer our real estate investment strategy and specialized fund form, expanding our addressable market for that strategy. One particular interesting note on REV is that one of the primary anchor investors in the first close is an RIA. We're also preparing to launch the fourth vintage of our diversified Infrastructure fund, Critical Infrastructure Strategies IV, CIS IV, which will hold its first close in the coming months. We're also successfully executing on our growth plans for the individual investor channel. Our distribution joint venture, Grove Lane, is rapidly ramping up with new hires and has already sourced dozens of new relationships for the firm year-to-date, around 40 of which have already contributed to an investment product. Flows for the Infrastructure interval fund are increasing week-over-week and the traction is very encouraging for what we believe is a highly differentiated product in the market and a significant opportunity for us over the long term. We're also preparing to launch a fund for Private Equity assets in the coming months, which will follow a similar model to CGIF, and we believe also has differentiated positioning given its expected high diversification and middle market focus on co-investments. So the punchline here is that we have a clear strategic plan, and now it's a matter of executing well. Something we talk about a lot as a team is the importance of relentlessly focusing on execution for our clients as investors and as business owners. And with that, I'll turn it over to Pam. Pamela Bentley: Thanks, Jon. We are pleased with our third quarter results, which Michael highlighted, and I will cover in more detail. Given our strong fundraising and investment performance this quarter, Assets Under Management grew to $87 billion and fee-paying AUM grew to $70 billion, a 9% and 10% increase year-over-year, respectively. Our contracted not yet fee-paying AUM grew 17% year-over-year to $9.2 billion, providing a foundation for continued organic growth as that capital converts to fee-paying AUM over the next few years. Private Markets management fees year-to-date and for the quarter grew 10% and 7% year-over-year, respectively, from a combination of solid fundraising and conversion of contracted not yet fee-paying AUM. Absolute Return Strategies continued its strong investment and business performance. ARS management fees for the quarter grew 6% year-over-year. Our multi-strategy composite returns were a strong 3% in the third quarter, putting year-to-date growth performance above 9%. Total management fees for the quarter were $101.4 million, an increase of 7% year-over-year. We expect total management fees for the fourth quarter to be approximately $1 million higher than the third quarter. Our year-over-year fee-related revenue in the third quarter grew 9%, driven by strong business performance. As Michael noted, this quarter's FRR included $2 million of transaction fees related to the Credit collateralized fund obligation. This will not be recurring next quarter. That said, we do expect to launch additional structured solutions in the future. Turning to expenses. Our compensation philosophy is centered on attracting and retaining top talent by aligning their interest with those of our clients and shareholders. We do this through a combination of annual and long-term incentives, including FRE compensation, incentive fee-related compensation and equity awards. We remain disciplined in managing expenses and third quarter FRE compensation and benefits remained stable at just over $37 million. We expect slightly lower levels of FRE compensation in the fourth quarter. Non-GAAP general, administrative and other expenses declined from last quarter to $20 million. We expect non-GAAP general administrative and other expenses in the fourth quarter to return to the levels we saw in the first and second quarter this year. Pulling together these factors, our fee-related earnings for the quarter grew 18% year-over-year, and our third quarter FRE margin expanded to 45%. Turning to incentive fees. Our gross unrealized carried interest balance increased to an all-time high of over $940 million. And this quarter, we realized $25 million of total incentive fees, including $1 million of performance fees and more than $24 million in carried interest. Given our strong ARS investment performance year-to-date, we have approximately $33 million in unrealized performance fees as of quarter end in addition to the $7 million we've already realized this year. Third quarter carry realizations are generally seasonably higher and the improving realization levels are encouraging as we head into 2026. Our financial position is strong and our decision to raise our already healthy quarterly dividend to $0.12 per share reflects our consistent and growing cash flow generation. In addition, as of quarter end, we had $86 million remaining in our share buyback authorization. That said, our primary focus remains on strategically investing for long-term growth, and we remain confident in our goals to double our '23 FRE by 2028 and more than double our adjusted net income per share over the same time period. Thank you again for joining us, and we're now happy to take your questions. Operator: [Operator Instructions] And our first question will come from Ken Worthington with JPMorgan. Kenneth Worthington: I guess I'll try 2. First, on the CFO raise, you mentioned the $2 million of fees upfront. Are there ongoing fees for that product as well? Or is it the way it's structured, the fees just come in that upfront chunk? And then are these CFOs something you might regularly come back to market with more regularly? Or is what we saw really a one-off this quarter? Michael Sacks: So thanks for the question, Ken. It's Michael. The CFO is absolutely a regular recurring management fee recurring management fee with some carry building over time, pool of capital. So, it's a $490 million raise, and we'll earn an annual management fee on that. And hopefully, we'll earn some carry on that as well. In addition to the normal fees that would accompany a $500 million raise, there was an upfront fee, and we specifically mentioned it so that when you saw it on the financials, you knew what it was and you knew that, that was not recurring. But we will start next quarter to enjoy management fees from that pool of capital. They will be recurring. Kenneth Worthington: Okay. Great. Michael Sacks: And the second question was, yes, we do hope to, and if I didn't say that, I meant to, we do hope from time to time to launch other fund obligations. This is our second as market conditions, investor demand line up and make sense to do it. Kenneth Worthington: Great. And then just on ARS, you mentioned that we see a better turnaround the business, good returns. We saw better flows to start the year. It's been sort of quiet since, and we're going into what I think is typically the seasonally weak 4Q when we see bigger redemptions. So, I guess the question is, if things are going well and things feel good, why isn't this yet being seen in the net flows picture? And I guess, how is 4Q shaping up given it's seasonally a weaker quarter, but the environment feels better and you're doing better? Like how do we sort of add up Michael Sacks: Jon, maybe you can talk a bit more about pipeline. But what I would say, Ken, and we talked about this at Investor Day, there is no question that the interest level is higher and the opportunities for us to drive flows are higher. And that's just, that is a fact. So I don't know, Jon, how much; we're not going to make news, but go ahead. Jonathan Levin: Yes. I would just step back, Ken, and say we've obviously held to the convention from a budgeting, forecasting and guidance standpoint, we've had, frankly, since we went public 5 years ago, and we've been wrong about that in both directions, but kind of not really wrong about that in the aggregate. So if you look at the earnings presentation, for example, where we go through the flows picture and the supplemental information, you can look at 9 months in 2024. You can look at the 9 months year-to-date today, you can see how that's been an improving picture. If you look at year-to-date Absolute Return Strategies through the first 9 months, when you look at contributions versus withdrawals, distributions are a little bit of an anomaly because those are sometimes self-liquidating vehicles. It's slightly net positive. I think that the, so the trend and the attitude and the environment because of performance, because of investor interest, all of that is better. I don't know that I would, as Michael said, I don't know that we're changing our Q4 picture. I don't think that there's much, it might be an accident in history. I don't think there's much seasonally that you should actually look into a ton around the ARS business for the vehicles that have liquidity quarterly, that could be any quarter's activity. But I would say that you heard it, as Michael said, live at the Investor Day. David Richter, who runs that business, is feeling very good about things. And Michael, Pam and I are also feeling good about things, but also waiting to see that picture change before we change how we talk about the forecasting and the guidance around the business. Operator: And our next question will come from Bill Katz with TD Cowen William Katz: Just maybe, Michael, just unpack a couple of things on the realization outlook. Forgive me for not knowing this already, but why is the third quarter seasonally so strong? And then as you look into next year, where do you see the greatest opportunity for those realizations? If I look at your disclosure, which is terrific, so thank you for that. A lot of it sits in funds 2017 forward. So, one of the themes we're hearing from some of your peers is like there's still some vintaging and aging and seasoning that need to go on along the way. So, I'm just trying to triangulate between the very strong realization commentary and what might actually flow through the P&L as we look out to next year or so. Michael Sacks: Yes. So, I think the fact that the carry or the average distribution of the carry, if you will, has aged and it's in these 2017-plus buckets is somewhat overwhelmingly a good thing for us. And let me just start with that. So, I think it's a good thing for us. It's a good thing for us because when you have more recent vintages, these are you can, you have some carry that's got some value at a mark from 2008, but it hasn't exited yet, you're sort of skeptical about when it's going to exit, et cetera. You have carry in that 17-plus bucket that's kind of normal, that's supposed to be there, that's healthy and that's good. You're confident that your marks are appropriate and conservative. And so that's very much kind of live carry. The other reason that's a good thing is we own more of that. And so, we own a higher percentage of that 17 bucket than we do the earlier buckets. And I think those are both good things for us. I don't think we have any ability to generalize about when that carry might be realized or when it might accelerate aggressively. I think our carry revenue experience is pretty much consistent with what you're seeing and what we're observing from a macro perspective across the industry. And we are so well diversified in our carry on so many different lines that just when that, those realizations pick up, and they have picked up. So, as they continue to pick up and they continue to accelerate, we will participate. But there's nothing like we can't look at one big deal that's going to generate carry and determine the outcome for a year. It's too diversified, which we think is a benefit for the stability and the strength of that carry, but it makes it like harder for us to point to timing. The last thing is the seasonality of the third quarter is related to when tax carry is paid in the industry in general. So a lot of the carry that you see in the third quarter for most of the sponsors you follow will include tax carry distributions that they're receiving that tend to take place in that quarter to a greater degree than they do the rest of the year. The carry from actual exits is much, I think, more random and spread throughout the year and doesn't necessarily have any predictable seasonality. William Katz: Okay. That's helpful. And maybe one for Pam. Just as I think through next year, can you give us a sense of how we should think about both stock-based compensation issuance as well as maybe the direction for share count despite the buyback, it did go up pretty substantially quarter-on-quarter. Pamela Bentley: Sure. Thanks, Bill, for the question. In terms of our stock-based compensation, we expect it to be at similar levels or slightly higher depending on the stock price at the time we grant any awards generally as part of our year-end compensation cycle. But don't expect any unusual anomalies. What I would say on both share count and how we manage dilution there, we've, from stock-based compensation and from stock-based awards, we've enjoyed less than 3% dilution over the last 5 years cumulatively. So we're very actively managing dilution, through both buybacks and settlement options to make sure that we're very diligent and careful around the share count. The other item, as you may recall earlier this year in the summer, we had issued about 2% dilution. We raised $50 million in proceeds from a strategic partner that invested in the business from a primary offering. So that was the other, just less than 2% of dilution that you see in our numbers. So we're going to continue to, again, actively, we have $86 million remaining in our buyback. We're going to continue to actively manage dilution through the buyback programs and really don't see any significant changes in the near term. Operator: [Operator Instructions] And we'll go back to Bill Katz with TD Cowen. William Katz: So just, Jon, maybe one for you. You ticked off a fair amount of data on or just details on the retail business, and I was trying to keep up with you. Could you maybe unpack a little bit of your disclosure? You mentioned that you're getting on to a number of additional distribution partnerships, I think, and that you're seeing really nice growth week-on-week. Can you provide maybe just level set of where you are in terms of AUM and what products specifically you're in the market for? Just trying to make sure we have a full accounting of the opportunity set in front of us. Jonathan Levin: Sure. So I think let me just kind of start with level setting on some data. And some of the data, Bill has not obviously changed materially from a couple of weeks ago when we had our Investor Day and had a few slides on this, just in case you want to go back to it after the call. But it's about $4 billion of AUM today, just in general from the individual investor channel. A pretty significant percentage of that has been capital that's been raised over the past several years. That capital that's been raised over the past several years, most of the past several years has been for separately managed account for institutional 3C7 kind of private closed-end funds, largely across the wire houses. I think what we've highlighted at the Investor Day and what I tried to highlight on the call is if you look and while it's not material yet to our economic profile, and as Michael has kind of gone to pains to mention on many calls in the past, like this is the type of thing that we're super excited about is growing, but it will take time for it to really move our needle. But if you look over the more recent period of time, what's been exciting for us is the partnership with Grove Lane, which is meant to focus on RIAs, and that partnership is less than a year old, and we have picked up another probably 3, 4 dozen RIA relationships over the past several, couple of quarters, which in a long sales cycle business is tremendous momentum to us even if it's not huge dollars yet. We are still marketing separately managed accounts, which we think will be a competitive edge for us in the Individual Investor Channel. We're still marketing kind of traditional closed-end private funds in that channel. And as you know, we also launched our Infrastructure interval fund, which goes alongside interval fund product or I should say, registered product that we have in the Absolute Return Strategies space. That's very early days, but it's raising money every day and raising money through the RIA channels, both from our partnership with our distribution partner as well as through Grove Lane. And then the other point that I think we mentioned at Investor Day or certainly mentioned on the call or mentioned right now is that we expect to also follow on our Infrastructure product with something similar in the private equity space. And so I just think it's all good. It's all investing more of our time and resources and all just building towards kind of momentum and platform such that we can take advantage of what we see as our role in that ecosystem and the opportunity set in that ecosystem, which is to help individual investors build diversified portfolios across different market cap size, across different implementation styles to complement what they're already doing in kind of the mega cap space. Operator: And the next question will come from Tyler Mulier with William Blair. Tyler Mulier: The collateralized fund obligation raise from the private Credit raise. It seems like the noninsurance raise would have been a little lighter and there have been notable bankruptcies in the Credit space. Just curious if you've seen any concerns from clients or changes in the landscape there on private Credit. Did you hear that, Michael? Michael Sacks: Yes. I think that the first couple of words, Tyler, that you said didn't come through, but I think you were saying, were you saying excluding the Tyler Mulier: Yes. Michael Sacks: So I guess a couple of things. One is we're not seeing Private Credit slowing down. And we're not seeing that slowing down. There's all this talk about Credit quality. There have been a couple of high-profile Credit issues. I think those were all, or the biggest ones were Credit issues where it wasn't strictly direct origination private. There were plenty of traditional lenders in there, I think, as well. And that, we're just not seeing those issues. So there's a lot of conversation there, but that the asset class is growing, the allocations are growing. They're going to continue to grow. It's going to continue to be a fast-growing strategy for us. And I would just say that pretty much every strategy goes through cycles where people are questioning its future and questioning what's happening. And these are just very good solid ways to invest, have been over very long periods of time through different cycles, and that's not changing and you're in a kind of a major, I think, uptrend, upswing in the allocations to Private Credit. There was a significant amount of capital that came from insurers inside that structured product. And so, we are still seeing a productive insurance sector, and we believe that the insurance sector will also will continue to be productive as we go forward. Is that helpful? Operator: And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional remarks. Thank you. Pamela Bentley: Thank you for joining us again today. We appreciate all of the time and the interest. If you have follow-up questions, please feel free to reach out to our team. If not, we look forward to speaking with you again next quarter. Thank you. Have a good day. Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's Quarterly Earnings Call. Today's call is being recorded. [Operator Instructions] I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Stuart McElhinney: Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings which can be found in the Investor Relations section of our website. [Operator Instructions] I will now turn the call over to Jordan. Jordan Kaplan: Good morning, and thank you for joining us. Office leasing during the third quarter was obviously not what we had hoped. While July was strong with over 300,000 square feet leased, our typical August slowdown in new leasing was deeper than usual and lasted into September. Fortunately, renewals did better with tenant retention above our 70% long-term average. . Fourth quarter office leasing is off to a good start, but we're now hesitant to be encouraging until we complete the quarter. We've seen that multifamily growth rates have slowed in other parts of the country and other markets in L.A. County, but we're not seeing that in our portfolio. Our multifamily same-store cash NOI increased almost 7% compared to the prior year. Same-property cash NOI for the whole portfolio was up 3.5%, with office benefiting from higher property tax refunds. We expect property tax refunds to be impactful for the foreseeable future, though the timing remains unpredictable. Our 2 multifamily development projects in Brentwood and Westwood will add over 1,000 premium units to our portfolio. In addition, recent changes to state municipal law allow us to build more multifamily units at a number of our existing locations. For example, we can now build a new 500-unit residential tower at the corner of Wilshire and Barrington in Brentwood. During the third quarter, we refinanced almost $1.2 billion of debt at very competitive rates. We are also actively working on a number of off-market office opportunities with full engagement from our joint venture partners. I will now turn the call over to Kevin. Kevin Crummy: Thanks, Jordan, and good morning. At 10900 Wilshire and Westwood, we are finalizing plans for converting the existing office tower to apartments and building a new ground-up apartment building. Construction should begin in 2026. At The Landmark Residences in Brentwood, construction is in full swing. When we finish the project, it will meaningfully add to our in-service residential portfolio. Finally, we continue to make good progress leasing at Studio Plaza in Burbank. During the quarter, we completed 3 financing transactions that extend our debt maturities at very competitive fixed interest rates. As we mentioned in our last call, in July, we refinanced a $200 million office term loan that was scheduled to mature in September 2026. The new nonrecourse interest-only term loan matures in July 2032, with interest effectively fixed at 5.6% through July 2030. In August, we closed a package of new residential term loans. The new secured nonrecourse interest-only loans total approximately $941.5 million, bear interest at a fixed rate of 4.8% and mature in September 2030. They replaced loans aggregating $930 million that were scheduled to mature in 2027 and 2029. We also repaid the debt that encumbered The Landmark Residences and added that property to our pool of unencumbered assets. We continue to work on refinancing our next loan maturities, now scheduled for late 2026, and to look for attractive acquisitions. With that, I will turn the call over to Stuart. Stuart McElhinney: Thanks, Kevin. Good morning, everyone. During the third quarter, we signed 215 office leases, covering 840,000 square feet in our in-service portfolio. This included roughly 200,000 square feet of new leases, which reflects the slowdown in the latter half of the quarter that Jordan mentioned. Office rental rates and concessions are steady. Looking ahead, our remaining office expirations in 2026 and 2027 are below our historical averages. The overall straight-line value of new leases we signed in the quarter increased by 1.8%, with cash spreads down 11.4%. At an average of only $5.63 per square foot per year, our office leasing costs during the third quarter remained well below the average for other office REITs in our benchmark group. Our residential portfolio continues to enjoy strong demand and remained essentially fully leased. With that, I'll turn the call over to Peter to discuss our results. Peter Seymour: Thanks, Stuart. Good morning, everyone. Compared to the third quarter of 2024, revenue was flat at $251 million. FFO decreased to $0.34 per share, and AFFO decreased to $52 million with increased interest expense outpacing higher contribution from operations. Same-property cash NOI increased 3.5%, reflecting a strong 6.8% increase from multifamily and a healthy 2.6% increase from office. As Jordan mentioned, we continue to receive significant property tax refunds whose timing varies unpredictably from quarter-to-quarter. Excluding property tax refunds, our office same-property cash NOI growth would have been essentially flat. At approximately 4.3% of revenue, our G&A remains low. Turning to guidance. We still expect our 2025 net income per common share diluted to be between $0.07 and $0.11, and our FFO per fully diluted share to be between $1.43 and $1.47. For information on assumptions underlying our guidance, please refer to the schedule in the earnings package. As usual, our guidance does not assume the impact of future property acquisitions or dispositions, common stock sales or repurchases, financings, property damage insurance recoveries, impairment charges or other possible capital markets activities. I will now turn the call over to the operator so we can take your questions. Operator: [Operator Instructions] The first question comes from Nick Yulico with Scotiabank. Nicholas Yulico: I guess starting off with leasing. If we go back to last quarter in the call, you guys had some optimism on the leasing pipeline, you still had your occupancy guidance intact and then this quarter didn't play out as expected. I'm just hoping to get a little bit more detail on sort of what exactly did not materialize in the new leasing plan? There were certain markets, buildings, anything you could just sort of quantify a little bit more on that? Jordan Kaplan: I would -- I don't -- do not have a great answer. I can't point to an industry, I can't point to a market, I can't point to a building. There was a slowdown. We actually still did a number of deals over 10,000 feet. All of that worked, it just slowed down. And if you ask the question, where are we now? Think -- it seems like the slowdown is temporary, and it looks like we're off on this quarter to a good start, but I don't want to make any predictions because we were so surprised by July. From July to August, we were like, "Oh, this is going to be a great quarter." Then you had August and September, just kind of fell off or actually like later part of August. And maybe it will be timing, I'm not sure. Nicholas Yulico: Okay. And I guess second question, Jordan, is you're a larger shareholder in the stock, I'm sure you're not happy with how the stock is done and some of that has to do with leasing and performance there. But are you starting to think about other alternatives? You mentioned some acquisitions, but I guess I'm wondering do you think about trying to prune the portfolio? Do you think about stock buybacks? Are there other opportunities to do something sort of pivot here a little bit in terms of a strategy to sort of improve the stock performance outside of just the leasing focus that needs to be addressed? Jordan Kaplan: I would say that -- well, first of all, I still feel very good about both our office and residential portfolios. We're growing our residential portfolio, and we're working on growing our office portfolio. I think the markets will be good. I actually think both of them will come back at a good clip. And when I look at kind of more macro things. So there's obviously some stuff that's been in the way. I'd say locally, the only real thing that's been in the way has been politics. I think politics are kind of starting to move back into the right direction. And then there's been some national stuff, but I know some other markets are recovering. I'll still say: We have very good tenants, we have high renewal rates. I like our prospects in office. I'm working on buying more office, as Kevin said. And we gave you a sense of how much more aggressive we're becoming on developing residential and our residential is performing extremely well. So more on the development side, we are moving on a number of things. There's a ton that we can do here in L.A. as a result of these changes in laws. And I'm going to tell you, I still feel good about our office portfolio. I get it, the last quarter was more upsetting to me than anybody, but we're trying to continue -- we're continuing to do our best. Operator: The next question comes from Steve Sakwa with Evercore ISI. Steve Sakwa: Stuart, you provided a little bit of comment on kind of the tax refunds and Peter did as well. But I'm just trying to make sure when we look at kind of the third quarter office expenses, is that $74 million kind of a good run rate? Or are there some kind of onetime true-up payments that sort of hit in the quarter that benefited Q3, but won't carry forward into Q4 and beyond? Peter Seymour: Steve, it's Peter. Yes, I mean, whenever we have tax refunds, it's going to -- you're going to see it in the expense line. And as we said, it's -- we expect to continue to get property tax refunds, and we expect those to be impactful. It's just hard for us to predict quarter-to-quarter, year-to-year what the numbers are going to be. Steve Sakwa: No, I understand that, but is the $74 million kind of like the new base with which you grow from? Or were there like past refunds that were kind of onetime in nature that the run rate is higher than that? Peter Seymour: It's kind of hard to pull it all apart, but there's a little bit of both. There's some of it that's onetime and there's some of it that you reset for a period of time. Jordan Kaplan: I mean I don't think we have guidance for you on expenses for the next few years, but I can tell you this, Steve: We have been receiving rolling tax refunds for quite a while, and I think they are going to keep rolling forward because we -- they're just very slow, the money comes in very slow. We don't recognize the money until we receive it. I mean, but it's been coming in, and I think it's going to keep coming in, when I look at the amount we have in front of them. Steve Sakwa: Okay. And then maybe, Jordan, just going back to kind of leasing broadly, I mean, I did see that UCLA downsized kind of their footprint with you in the third quarter. But just any comments kind of around the industries that did lease in kind of the third quarter, maybe were you positively surprised that activity? And were there any industries that just are still kind of stuck and maybe underperforming your expectations? Jordan Kaplan: I would say -- and I'm glad you reminded me of that. I was going to say the one area where I'm seeing weak -- it's not a lot of it in our portfolio with the exception of UCLA, but where we see weakness is government. Government is definitely having everything. They're having trouble bringing people back in, they're having budgetary problems, they're shrink -- they got it all going on. Most of our other sectors seem to be okay. And every time we like get bonked, I'm always like, "Oh, great, UCLA got you." But I will also tell you, I think UCLA is going to bring people back. So it's hard to know where they're going to end up. They could end up being our growth engine going forward in terms of new leasing because they have been shrinking for a while and they really need to bring people back in, in a more robust way. So I don't want to beat on them too much. They really are only -- they rely on the government, both the federal government and the state government. They're obviously part of the state government. I know the government has beaten the daylights out of downtown. So -- anyways, that's the only industry I can give you some feel for. Operator: Next question comes from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Thank you for keeping your conference call old school, not going the high-tech route, so I appreciate that. Jordan, your stock is trading at a 9 implied. I understand the enthusiasm for apartment development. It's been something long in the making over the past few decades, and it's great to see you guys be able to take advantage. You also mentioned potential more acquisitions. But from a funding perspective, you can't really issue equity, that makes no sense. You're always hesitant to sell assets to gin up additional cash. So with everything that's on your plate and where the stock is, how would you think about funding new acquisitions if you have demands on your capital for the development projects? Jordan Kaplan: Well, as I mentioned, we have extremely good engagement from our joint venture platform. You're right, we're not issuing stock. But historically, we have not issued stock to make acquisitions regardless of where the stock price was. We do have positive cash flow coming out of the company. We -- so we're generating cash flow, we're using it to do a number of things. We have a lot of ability to do financing. I mean, I know we don't mention it that often, but huge -- we're all nonrecourse first-trustee debt. And a huge portion of our portfolio doesn't have any loans on it. And so we can actually use that to use financing. We can use our free cash flow to invest alongside our joint venture partners. To date, most of what we've done is use some of our free cash flow and invested alongside our joint venture partners. And we've used some of our free cash flow to power the 2 development or at least -- yes, the 2 development projects we have, although one of them has a lot of joint venture partners in it, so it's not taking much. Alexander Goldfarb: Okay. But your point is that between the demands from -- to fund the current development pipeline, there's still excess cash that you're generating to fund JV acquisitions? Jordan Kaplan: That's a 100% true. Alexander Goldfarb: Okay. Second question is just playing off of that. Again, given where the stock is trading and you guys haven't been huge issuers over time, why would the joint venture partners not be interested with you guys in just maybe taking the company private? I mean the public markets haven't rewarded what you guys have achieved, you certainly have a lot of growth ahead of you, but it would seem like an opportune moment to arbitrage the difference. Jordan Kaplan: Well, we -- I mean, yes, they ask that a lot. I don't think it's a very good time to go private vis-à-vis my shareholders, of which I'm one, and a lot of us are because I think the stock is super undervalued, and I want to do a good job for the shareholders. But yes, I mean, you're right, they all lead with that. Alexander Goldfarb: No, I'm just saying you guys -- I mean there's a lot of good stuff that you guys are doing, but it's not reflected in the stock. Jordan Kaplan: Yes, I know it's not. And that's a point in time. The stock kind of moves around vis-a-vis what's going on. And most of the time I'm wrong. It should be up, it's down. It's just like things slow down and it's up. But I think over the long haul, we're going to have a great opportunity to do a good job for our shareholders. I don't want to like crawl out with my tail between my legs. I want to do a good job for them. Operator: The next question comes from Blaine Heck with Wells Fargo. Blaine Heck: Great. Jordan, I appreciate the commentary. Can you just talk a little bit more about the size of the opportunity set within your portfolio to potentially do more office to residential conversions or ground-up residential development? And maybe where in the time line of getting the required permitting or zoning you are? Is the opportunity you mentioned in prepared remarks something that you think could be shovel-ready in 2026? And are there any others that you think could be started in the next couple of years? Jordan Kaplan: There are a number of extremely great locations that we now feel we can build meaningful additional resi. And Ken and I have been talking a lot about it. I mean his -- and I've said to you guys historically, really, the gating issue for us is like kind of growing our ability to do more projects, and we're talking about that. The early stages of that, we are already doing. So we are working on like planning and looking at some of these sites, talking to architects about what can we do here, working on a lot of that. I mean if you ask me, do we have a lot of sites that could be ready to go at the end of '26? We probably do, but we ourselves have to finish building the stuff we're building to do a good job. And so we're kind of, I would say, we're tightening up that line of projects and getting them more than theoretically ready, but how fast will we roll them out, that's a little harder to answer. Blaine Heck: Okay. Great. And just a follow-up. Similarly on the acquisition side, do you think you're close to closing on any other interesting opportunities? And maybe how have your return requirements evolved along with the changes in your cost of capital? Jordan Kaplan: I believe we'll make some meaningful acquisitions in a reasonable time line. I'm extremely confident of that. What was the second part of your question? You want to know how my return metrics... Blaine Heck: Just how your targeted yields return requirements... Jordan Kaplan: I mean our return metrics are kind of best-in-class, but consistent with the world of returns that we live in right now. But we don't want to lose best-in-class deals and that's the stuff that seems to work the best for us and in terms of where we like to operate, which, I've said before, is in the top quartile of our portfolio. I think that's more achievable now than ever. I'm telling you right now, I'm really confident that, that will happen. I think that as a result of that, we're not going to miss any of those. It's going to be -- the return metrics are better than they were in 2019, but I don't know if there'll be all the way to where you guys want them for us, I think we'll feel very good about them. Operator: The next question comes from Seth Bergey with Citi. Nicholas Joseph: It's Nick Joseph here with Seth. Maybe just following up on the transaction market. Are you feeling that there's more competition as you're bidding for assets? How are you seeing kind of the competition landscape changing? Jordan Kaplan: I think that we're a little bit like [indiscernible] going to sound, there are so many markers that remind me of when Ken and I got into this business. So when we -- in the early '90s, we did a lot of buying -- all through the '90s, we did a lot of buying. And I remember looking at that time, at where -- like how much was broker transactions, how much was off market, getting people to come to us. And I'm seeing that shift again, a lot more off-market, I mean like an amazingly higher percentage of off-market. We know you'll do it and close, which is great. It's great -- it's kind of a payback for decades of building that reputation. So that has given me confidence. We're seeing like real deals, and we are running at them and stuff that I've wanted for a long time. Nicholas Joseph: And then just on -- a couple of questions have been on kind of the discount and ways to close it. And I understand where -- obviously, you're not happy where the stock price is and see a path to closing that discount. But is that -- you had mentioned kind of the LPs maybe having some interest. Is -- has that been a broader Board discussion or is that more just kind of your opinion on where the opportunity is to close that gap right now? Jordan Kaplan: I didn't give that as an opportunity to close the gap. I said I wouldn't want to do that now. The stock price is too low. That's not doing a good job. I'm saying -- all I was saying is, of course, they ask me about it all the time. But why would I go with an incredibly low point in the stock and say, "Oh, now I'm going to go --" I mean you guys are looking at me like I'm an idiot. I believe the office and resi has huge upside, why wouldn't we deliver to our existing shareholders. Operator: The next question comes from John Kim with BMO Capital Markets. John Kim: I wanted to ask a 2-part question on leasing. Jordan, you mentioned October, it seems like it picked up. I'm wondering what you attribute that to? And secondly, is there anything that you can do to stimulate demand? We're seeing here in New York a lot of landlords really stepping up on amenities. And I know your portfolio doesn't really have the same footprint to do that, but I was wondering if any amenities would resonate in your market? Jordan Kaplan: Where some amenities make a difference, we have done that kind of thing. We've been pretty successful in projects where we have a lot of leasing and making a deal with a gym or something like that, a commercial gym to be their high-end gyms and that becomes an amenity of the project, and obviously, we make money on those deals. But our portfolio is in very amenity-rich areas. And I'm not just talking about like access to high-end housing, I'm talking about restaurants, the whole 9 yards. So we don't have like a ton of additional demand like that on that front. In terms of stepping up demand, we are -- nobody is better than us, like getting out there and getting access to every deal that's out there and pushing and trying to get them done. I mean if you looked at the various tiers of our portfolio and the outreach and the aggression of showings and trying to turn those into -- every step of the way you go, we have an incredibly aggressive platform. Yes, so I would -- that -- I have a lot of confidence in that. That's why you hear me saying I have a lot -- I got it that the pace of real estate and the recovery of the office portfolio is not consistent with the quarter-to-quarter analysis, and certainly, we had a quarter that didn't look great. But when I look at what's happening in general and our platform and its outreach and what's out there and what we're going after, I go, "No, I still feel good about this." I'm confident we'll get there. I have to -- we just have to stay focused and keep playing hard, and we will. And I think we're going to do a great job for everybody. John Kim: Okay. And then my second question was on Barrington Landmark. Any update on the litigation progress? If you think we'll get some news on that in the next year-or-so? And you added a new development site there this quarter. Do you expect that to get off the ground before Landmark Residences? Jordan Kaplan: We wouldn't build that before we have Landmark Residences built -- leased because they'll just compete directly with it. We already have 700 units there. So we would do all the work to get it ready, which is a good thing to do, and we're already doing that to marry it to the project. . But as I said, we have to like play through what we're building right now, but it's probably also smart for us to do all the kind of -- some of the other work on many other sites, that's one site, but on a number of the other sites to go like this is kind of getting more and more ready to go with all that we need to know that when we do want to get to it, we can get right to it. And that's the early stuff that Ken and I have talked about doing and are doing, and we are doing it. John Kim: And then litigation? Jordan Kaplan: The litigation, they're like training mountains of documents. I mean, obviously, we feel very good about it. But nothing like that is ever very fast, and it's certainly not going -- I mean the metabolism of the courts is extremely slow, like it's slow as a sloth. So just assume that's what we're dealing with. Operator: Next question comes from Jana Galan with Bank of America. Jana Galan: When you talk about the slowdown experienced in August and September, was that more that touring and top of funnel activity slowed or the activity was there and then the decision-making just kind of got paused? And when you think about the improvement in October, is it more just a normal month or is it seeing that kind of delayed activity from the summer coming now into the fourth quarter? Jordan Kaplan: I think it was probably a slowdown in like decision-making to close. And in terms of this quarter, I'm so nervous to make projections. I would like to have the proof in the pudding. Let us just deliver the answers. And I told you, things -- I mean, if you're looking at it, what's the problem? I mean, so let's just see closing and all the rest of it. Let's see how we do this quarter. Jana Galan: Great. And then just curious if you could kind of talk about the decision or the strategy to refinance the multifamily properties early and to unencumber The Landmark Residences? Jordan Kaplan: Well, I would say Fannie Mae was a great partner there. They allowed us -- they left their loan intact and allowed us to really like basically empty the buildings, there's not a ton -- they're pro-housing, they want -- when they knew that we were going to build back and do the housing, they're pro-housing bunch, so they're like, "We don't want to get in the way of housing." I said it would be hard on me. We could probably handle it, but it'd be hard on me if you told me I had to repay your loan at this exact moment, right? Once we had made it into the construction, they were saying, "Okay, well, we'll let you roll forward on that." That's great. I can't tell you how much I appreciate that because that makes a huge difference to adding this housing. And -- but I also said, "When I see a good opportunity to get you back out of that because I know it's like -- it's whatever, it's an item on your list, we'll take it." And as those other resi deals have just matured and the cash flow just keeps increasing, we saw an opportunity to extend everything out at very good pricing, very good spread. And we certainly had the room to, at that point, delever Barrington, take all the leverage off. So it didn't have to be on their watchlist. It's a great point with your lender when you can do something for them, and we did it. Operator: Next question comes from Rich Anderson with Cantor Fitzgerald. Richard Anderson: Perhaps a tough question to answer, but is there anything about the coming Olympics economic activity, you as a landlord of office and multifamily in the area that you see as an opportunity short term, long term, given what typically happens in front of and after an Olympic event. Anything you're thinking about at all or is it just nonevent for -- from the standpoint of Douglas Emmett. Jordan Kaplan: There is one big primary thing, which is that the council member for that for [indiscernible] has a strong interest in making a lot of really positive changes. So UCLA is the Olympic athletic village, so all of the athletes stay in the dorms at UCLA and then their area is going to be that Westwood Village area. And she's really leaning into like every type of funding, everything they can put together to get that area like really nice and showing well to the world, and she's come to a couple of large owners, of which obviously we're one of them, and said, "I want you to kind of lean into all this with us." And we said we would, and we've joined her. In a very similar way that Santa Monica came to us, and they're doing something similar, not necessarily for the Olympics, but here in this downtown area, and we've joined them, too. And so I think if you're asking specifically about the Olympics, I think it's going to leave that area much better off. And we see that the city and county and even state and all the rest want to show well there in that village. And those improvements to the village where we're a large owner in terms of like making more of like walking areas of streets, making the retail work, pushing the transportation to the outside. She focused on all those things. And I think they're going to get a bunch of them done. She wants to get it done. Richard Anderson: Okay. Great. Not so bad question after all. And then the second question, you mentioned progress at Studio Plaza. Can you put a finer point on that in terms of anything around leasing activity, where you're at? I know you're hesitant typically do not get too specific, but I'm wondering if you could share anything about progress there. Jordan Kaplan: Well, I think the big comments around Studio Plaza is, number one, I had a lot of fear there of reading the entertainment industry and what's going on. But we're doing tons of entertainment deals there, and it's leasing. And we're getting all sizes of tenants and some little larger multi-floor, we're getting single floor, we're getting all of it. We got to close them, of course. A number of closed already, some -- I think we're already -- some are already paying. Well, we finished a project, the project shows incredibly well. And so like I would just say my blood pressure went down on it now that I'm seeing it perform. So that's the main thing. And I have a lot of confidence there will be -- will finally -- well, it was great. It was great to own it. It was leased for 30 years to a mix of tenants. But ever since Warner Brothers took it over, it was just always a subject. And now it's going to be like a good robustly multi-office project that will take kind of the risk profile of those large single tenants off our plate, and it's just not something we enjoy, and it's getting done. So I'm pretty happy about it, actually. And the redo of the building is a stunner. That's one also that has like a lot of amenities that an earlier question asked me about, got it set up with like great outdoor amenities, indoor amenities, the whole thing. Richard Anderson: Yes. So when do you think you're kind of sort of done getting that back leased, do you have a time line in mind? Jordan Kaplan: Yes. But if I give a time line, I'll blow it. So I don't want to do that. Operator: The next question comes from Upal Rana with KeyBanc Capital Markets. Upal Rana: Great. Jordan, you mentioned doing more acquisitions. And I wanted to get your thoughts on the Beverly Hills office market. Some assets have traded there recently, including one of your peers buying Maple Plaza. So I just want to get your thoughts there. And maybe if you tell us if you were part of the bidding there as well? Jordan Kaplan: Well, I saw the stuff they sold, and I saw what they bought and what I have for them is applause. I mean that was a great trade to move out of that other stuff and into that, I'm like well done. And I love the Beverly Hills market. I think it's a great market. Upal Rana: Okay. Great. And then could you talk about any of the larger tenants coming back to the market? You mentioned in the past that you're seeing an increase there, but just curious what your thoughts are today? Jordan Kaplan: Stuart, go ahead. Do you want to answer? Stuart McElhinney: Yes. I mean we have -- we saw, again, very typical good, healthy leasing over 10,000 feet in Q3. So that was good to see. It was a year, I think, more than a year ago now that we were really seeing that category underperform, and it's been pretty healthy last couple of quarters. Operator: [Operator Instructions] The next question comes from Dylan Burzinski with Green Street. Dylan Burzinski: Just a quick one for me. You mentioned the amount of acquisition opportunities that you guys are looking at on the office side. I guess presumably these are mostly sort of value-add type deals where Douglas Emmett can bring them into their operating platform and execute lease-up. But I guess how do you guys weigh that with the existing portfolio level of vacancy that you guys have in the office portfolio today? Jordan Kaplan: So you saw us do a value-add deal, and maybe that's why you're saying that because we took that when we bought that 220,000 foot building with the development site and we're converting it. My main guiding principle is buy the best stuff that's in the market and keep control over the best stuff in the market because I still believe in the markets. So the best stuff could have some vacancy, it could not have vacancy. But if you go, what's my -- the #1 criteria, it's not value-add, not value-add, whatever. It's -- we want to buy the best buildings in the markets that we think are long term great investments that have great supply constraints and a great kind of natural tenant base and amenities and good access to like high-end housing, all the stuff that seems like pablum that we put in the front of our original like S-11, but really has what's guided us. Operator: This concludes our question-and-answer session. I would like to turn the conference back to Jordan Kaplan for any closing remarks. Jordan Kaplan: Well, thank you for joining us, and we look forward to meeting with a number of you individually soon. Bye-bye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to Ocugen's Third Quarter 2025 Financial Results and Business Update. Please note that this call is being recorded at this time. [Operator Instructions] I will now turn the call over to Tiffany Hamilton, Ocugen's Head of Corporate Communications. You may begin. Tiffany Hamilton: Thank you, operator. And good morning, everyone. Joining me on today's call and webcast is Dr. Shankar Musunuri, Ocugen's Chairman, CEO and Co-Founder, who will provide a business update and an overview of our clinical and operational progress. Ramesh Ramachandran, our Chief Accounting Officer, is also on the call to provide a financial update for the quarter ended September 30, 2025. Dr. Huma Qamar, Chief Medical Officer, will be available to answer questions following the presentation. This morning, we issued a press release detailing associated business and operational highlights for the third quarter of 2025. We encourage listeners to review the press release, which is available on our website at ocugen.com. This call is being recorded and a replay with the accompanying slide presentation will be available on the Investors section of the Ocugen website for approximately 45 days. This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. We may, in some cases, use terms such as predicts, believes, potential, proposed, continue, estimates, anticipates, expects, plans, intends, may, could, might, will, should or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Such statements include, but are not limited to, statements regarding our clinical development activities and related anticipated timelines. Such statements are subject to numerous important factors, risks and uncertainties that may cause actual events or results to differ materially from our current expectations. These and other risks and uncertainties are more fully described in our periodic filings with the Securities and Exchange Commission, the SEC, including the risk factors described in the section entitled Risk Factors in the quarterly and annual reports that we file with the SEC. Any forward-looking statements that we make in this presentation speaks only as of the date of this presentation. Except as required by law, we assume no obligation to update forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise after the date of this presentation. Finally, Ocugen's quarterly report on Form 10-Q covering the third quarter of 2025 will be filed today. I will now turn the call over to Dr. Musunuri. Shankar Musunuri: Thank you, Tiffany. Thank you all for joining us today. I'm pleased to share an update on our modifier gene therapy platform and would like to recognize that in just over 3 years, we brought our lead candidate, OCU400, from initial Phase 1/2 dosing to nearing Phase 3 enrollment completion. The OCU410ST Phase 2/3 pivotal confirmatory trial is following close behind, and we are on track to complete enrollment in the first quarter of 2026, lining up for our planned biological licensing application, BLA submission, in the first half of 2027 for OCU410ST. This rapid progress is somewhat unheard of in the industry and not only reinforces our commitment to file 3 BLAs in the next 3 years, but it also brings us closer to addressing the incredible unmet medical needs that exist for patients facing vision loss. While all 3 programs are moving along on schedule, we received additional, positive news in the third quarter that the Committee for Medicinal Products for Human Use, CHMP, of the European Medicines Agency confirmed the acceptability of a single U.S.-based trial for submission of MAA in Europe for OCU410ST. This alignment allows us to maintain the same timeline and budget efficiencies in Europe as we have with the OCU400 pivotal trials. To fund clinical trial progress, we continue to pursue opportunities to increase our working capital and in August, closed the registered direct offering with Janus Henderson. The gross proceeds were approximately $20 million, which we anticipate will extend our runway through the second quarter of 2026, and we will receive $30 million of additional gross proceeds if the warrants are exercised in full, extending our runway into '27. The OCU400 Phase 3 liMeLiGhT clinical trial remains on track for BLA and MAA submissions in 2026. It is the only broad retinitis pigmentosa RP gene-agnostic trial to address multiple genetic mutations with a single therapeutic approach. And it's important to note that this is the largest known Phase 3 orphan, gene therapy trial. There are approximately 300,000 people in the U.S. and Europe combined living with RP, which affects more than 100 genes. Ocugen's gene-agnostic approach has the potential to treat multiple gene mutations associated with RP with a single, one-time, subretinal injection. Currently, the only approved gene therapy for RP targets a single gene RPE65, which accounts for 1% to 2% of RP patient population. This product achieved peak sales of $52 million in 2023 with a patient population of approximately 2,000. We believe OCU400 has far greater commercial potential as it is intended to provide a therapeutic option for the remaining 98% to 99% of RP patients. We anticipate commercialization in 2027. Process validation and manufacturing activities are progressing well in support of the BLA. Brand planning and marketing initiatives led by Abhi Gupta, our EVP of Commercial and Business Development, are scaling up as well. We will begin rolling submission of the OCU400 BLA in the first half of 2026 and release Phase 3 top line data in the fourth quarter of 2026, in line with our commitments. As we prepare for what will ultimately be a global rollout for OCU400, we're pursuing regional partnerships that preserve Ocugen's rights to larger geographies to maximize total patient reach while also generating return for our shareholders. In September, we announced an exclusive licensing agreement with Kwangdong Pharmaceutical Company Limited for the rights to OCU400 in South Korea. Under the agreement, the company will receive up to $7.5 million in upfront and development milestone payments plus sales milestones of $1.5 million for every $15 million of sales in South Korea, projected to reach $180 million or more in the first 10 years of commercialization. We will also earn a 25% royalty on net sales generated by Kwangdong and will be responsible for manufacturing and supplying OCU400. There are an estimated 7,000 individuals in the Republic of Korea with RP, which represents approximately 7% of the U.S. market. OCU400 provides the opportunity for our partner to help thousands of patients facing vision loss. Upon regulatory approval of OCU400 in Korea, we believe Kwangdong will become a leader in the field of ophthalmic gene therapy in South Korea. Now let's move on to OCU410ST. OCU410ST has the potential to target over 1,200 pathogen mutations in the ABCA4 gene associated with Stargardt disease and other ABCA4-related retinopathies with a single, onetime, subretinal injection. As I mentioned earlier, enrollment in the Phase 2/3 GARDian3 clinical trial is ahead of schedule. The strong response underscores the significant, unmet medical need among Stargardt patients who currently have no approved treatment options available. Stargardt disease affects approximately 100,000 people in the U.S. and Europe combined and approximately one million people globally. With CHMP acceptance of U.S. trial data for the MAA submission, we'll maximize resources and streamline development efforts with the goal of bringing OCU410ST to patients in Europe sooner than originally anticipated. The 12-month data from all available Phase 1 subjects showed highly encouraging results with a 48.2% reduction in lesion growth and a meaningful online 6-letter gain in visual acuity in evaluable treated eyes compared with untreated eyes. All treated eyes also demonstrated stabilization or improvement in visual function, highlighting a consistent and tangible therapeutic benefit. Interim data from ongoing Phase 2/3 study is expected mid-2026, further advancing our goal of bringing OCU410ST to patients in need. Finally, OCU410 is specifically designed to address multiple pathways implicated in the pathogenesis of dry age-related macular degeneration and offers a promising advantage for current treatment options that target only one pathway, the complement system, which does not fully address the disease progression and underlying causes of vision loss. Currently approved treatment options require frequent intravitreal injections about 6 to 12 doses per year and are accompanied by various safety risks. For example, roughly 12% of patients develop wet AMD following treatment. With approximately 2 million to 3 million geographic atrophy patients in the U.S. and Europe combined, OCU410 represents a significant market opportunity. Current therapies have notable limitations, and there are no treatments approved for GA in Europe, as existing FDA-approved options failed to demonstrate meaningful functional outcomes. OCU410 is therefore well positioned to address this critical, unmet, medical need. At 12 months, available subjects in the Phase 1 study showed a 23% reduction in lesion growth, along with a 2-line or 10-letter stabilization or gain with visual equity in treated eyes. Preliminary results from 6-month interim analysis demonstrated a 27% reduction in lesion growth and preservation of retinal tissue in the treated eyes when compared to untreated control eyes. This reduction is over twice that observed with currently approved, intravitreal therapies at 6 months, monthly and every other month PEG citicoline injections, which showed only 13% and 12% reductions, respectively, highlighting OCU410's potential to provide a significant and meaningful therapeutic benefit to patients with a onetime treatment. In addition to the greater lesion reduction, a single subretinal injection of OCU410 demonstrates greater efficacy in preserving retinal tissue surrounding GA lesions compared with monthly and every other month PEG citicoline treatments. We plan to provide full 12-month data from the Phase 2 study, including both structural and functional outcomes, in the first quarter of 2026 and anticipate initiating the Phase 3 study next year. I will now turn the call over to Ramesh Ramachandran to provide an update on our financial results for the quarter ended September 30, 2025. Ramesh Ramachandran: Thank you, Shankar. The company's cash, cash equivalents and restricted cash totaled $32.9 million as of September 30, 2025, compared to $58.8 million as of December 31, 2024. With the recent $20 million financing in the third quarter, we believe our current cash position provides sufficient runway to operate through the second quarter of 2026. Total operating expenses for the 3 months ended September 30, 2025, were $19.4 million and included research and development expenses of $11.2 million; and general and administrative expenses of $8.2 million. This compares to total operating expenses for the 3 months ended September 30, 2024, of $14.4 million that included research and development expenses of $8.1 million; and general and administrative expenses of $6.3 million. That concludes my update for the quarter, Tiffany, back to you. Tiffany Hamilton: Thank you, Ramesh. We will now open the call for questions. Operator? Operator: Your first question comes from the line of Michael Okunewitch with Maxim Group. Michael Okunewitch: Congratulations on all the progress. So, I guess to just start out, I'd like to ask a little bit about OCU400 and in particular the timing of the BLA completion. You mentioned that you are going to be starting that in the first half of 2026, enrolling BLA. But then how quickly do you believe that you can turn around the pivotal data over to the FDA and complete that filing? Shankar Musunuri: As soon as it in, we're nearing completion as we stated. And we'll have resources ready to turn around in weeks. Michael Okunewitch: All right. That's great to hear. And then in terms of your manufacturing, are there any other items that you need to do to get ready for commercial manufacturing before you can start submitting that and start the rolling BLA process? Shankar Musunuri: Yes, good question. Our PPQ, our process validations runs, are going very well. They're on target. In fact, all the material we're making in support of the registration, they can be commercialized. So, we will have lots made ready to go. Michael Okunewitch: And then just one more for me, and I'll hop back into the queue. For OCU410ST, with the upcoming interim readout, what endpoints are you expecting to release? Or is that going to be an internal DSMB review? Shankar Musunuri: I mean for endpoint for the Phase 2, yes, it's already in the clinical protocol. We are looking at lesion growth compared to untreated control group. We do have untreated control group. And the secondary, we're looking at visual equity. Michael Okunewitch: But I'm specifically referring to the interim release that you're expecting midyear 2026. Will that be publicly released or is that going to be internal? Shankar Musunuri: That's a good point. Yes, there will be limited information publicly. The DMC looks at it, and then we'll be informing the agency. However, we will give some indications about the clinical trial. Michael Okunewitch: I appreciate the update. It looks like there's a lot to look forward to Ocugen. Operator: Your next question comes from the line of Boris Peaker with Titan Partners. Boris Peaker: A couple of questions for me. Maybe let's start with the OCU400. Can you just remind us exactly what the statistical kind of design of the liMeLiGhT study is, what the assumptions were? And I'm just curious if you've had kind of recent discussion with the FDA to make sure that it's still acceptable. And I think this question comes in the context of what we've seen just recently with uniQure, where it sounds like the FDA may have moved the goalpost a little bit in their gene therapy. So, I think I just want to get a sense to make sure that similar dynamic doesn't happen here. Shankar Musunuri: Yes. Good question. I'll start, then Huma will chime in. So first and foremost, I want to distinguish all our clinical trials, including our Phase 2 GA trials, we have a control arm within the study. Typically, FDA -- that has been a tradition. Most of the clinical trials, FDA really looks for control within the study, not using some external controls or very rarely natural history. So I think I really want to differentiate that from what you mentioned about uniQure. So, we do have our OCU400, OCU410ST total trials, including even OCU410 GA clinical trial, we have untreated control subjects in the clinical trial. So that's what we're using to compare. And Huma, go ahead on the clinical trial design. Huma Qamar: Yes. Thank you, Shankar. So, the clinical trial design is we have 150 subjects that we are planning to enroll for the study, 100 in the treatment and 50 in the control, 75 in the rhodopsin and 75 in the gene-agnostic arm with 50 being active and 25 in the control. We have 97% power for this study. We have assumed 50% and 10% treatment effect in the treated and the untreated eyes. And there is a 2:1 randomization, which means there is -- we are treating both the eyes as they meet the inclusion/exclusion criteria with the worst eye being dosed first. This is the only trial that is globally available with clinical and/or genetic diagnosis of RP with syndromic and covering non-syndromic forms. Boris Peaker: And maybe a question on OCU200. You mentioned the milestone that we'll see completion of enrollment by the end of the year in Phase 1. Can you comment when we'll see the data? And what would that initial data include? Huma Qamar: So we are on track for our OCU200 enrollment for our Phase 1. Our periodic safety updates are there. There are no serious adverse events related to the product listed as of right now. Yes, in the beginning of next year, we will be providing some more updates on the safety and efficacy of OCU200 as soon as it becomes available. But as this is a Phase 1 first-in-human, there are no serious adverse events related to the investigational product reported as of right now. Boris Peaker: And how many patients will you have in that initial update? Huma Qamar: So, we have a dose-ranging, dose escalation portion of the study. So, that would be almost 9 to 12 subjects. Operator: Your next question comes from the line of Swayampakula Ramakanth with H.C. Wainwright. Swayampakula Ramakanth: So, a couple of quick questions. The first one on OCU400, as you're nearing to the point where you're putting not only your application together, but also thinking about commercialization, what sort of investments are you making within the commercial infrastructure so that you're allocating appropriately within your budget for pre-commercial activities? Yes, let me start with that. Shankar Musunuri: Yes. I think, I mean, based on 2027 launch next year, we will be ramping up slowly for U.S. commercialization. Obviously, our goal is to continue to look for partnerships just like we announced one in South Korea and other regional partnerships in Europe, Japan and elsewhere. But U.S., we are looking still into because it's a good market. We have a good handle. We created a lot of the centers for excellence, which will be part of the commercialization for subretinal delivery. Therefore, we will have more information provided next year, but we'll slowly ramp up. We'll be allocating a carefully limited budget starting with. But we're looking into other revenues to beef that up next year. Swayampakula Ramakanth: Okay. And then on the ST, with the comment that it's reaching 50% enrollment on the GARDian3 trial, what's the cadence of enrollment there? Just trying to understand how the enrollment is going. Are there any geographies where you're seeing less of an enrollment? How many patients you're screening so that you get the enrollment moving? Shankar Musunuri: Yes. I'll let Huma take that. Huma Qamar: So, this trial includes 51 subjects, 34 in the treatment, 17 in the control. We are almost 50% and above in our enrollment. We have completed that, and we are on track. So, there are no geographical restrictions here. Actually, I would say, this is basically the disease of the pediatric population, and we are covering early to late stages of Stargardt, also 3 years of age and above. That's why we are pretty confident we are going to meet the enrollment goal. In fact, we do have almost half of what we have enrolled more than that in the screening queue. So, we are on track for completion of our enrollment. But there is no geographic restrictions. There are almost 15 centers that we have equally covered across in the U.S. and all of them have the screening metrics for those patients as well. So, we are on track. Swayampakula Ramakanth: Shankar, if I may, can I ask one quick one on OCU400 itself? Having looked at the data from the earlier studies and the patient characteristics, have you folks identified any of the patients? Obviously, there are some who are high responders and some who are non-responders. In general, how are you thinking about what the real potential is for OCU400? And what could your commercial strategy be so that you try to get the highest adoption that you could get? Shankar Musunuri: So RK, I mean, our design clearly outlines based on the strong scientific basis, we are targeting entire RP from early-stage to advanced pediatric to adult, and that's the coverage. And I mean, we are including in our Phase 3 clinical trial all major components of RP. That means some of the mutations with high prevalence rhodopsin or XLRP, [ RUSHERS ] and PDE6B, all those mutations are included with good representation. So our goal is to look at the data holistic and get the broad RP indication, so that we provide a treatment potentially for all RP patients, not restricted to specific genotype. Operator: Your next question comes from the line of Robert LeBoyer with NOBLE Capital. Robert LeBoyer: Just as a follow-up from some of the previous questions, my understanding of OCU400 is that it's a regulatory gene that affects the entire gene network downstream, restoring homeostasis. So, early-stage, late-stage, child, adult, specific mutations really wouldn't matter because it's affecting the whole downstream pathway that leads to blindness. So please let me know if that is the correct way to think about it. Shankar Musunuri: Yes, absolutely, Robert. You stated it. Robert LeBoyer: Okay. And secondly, the OCU410 in GA is also ongoing. And could you just go over some of the endpoints and what to expect in that trial? Shankar Musunuri: Yes. Huma? Huma Qamar: So, we have completed our ArMaDa enrollment Phase 1/2. The Phase 1 was a typical dose-ranging, dose escalation, 3 plus 3 design, 9 subjects there. And also we had a Phase 2, where we had a high dose, medium dose and a controlled, which means that we enrolled 17 subjects in high dose, 17 in the medium dose and 17 in the controlled. Also in terms of the endpoints in Phase 2/3, which is important, it's Stargardt atrophy lesion growth reduction from baseline and also looking at low luminance visual equity over the period of time as well, which is functional we have been consistently releasing the data on that, and we are on track for following up those patients until early part of next year. Shankar Musunuri: So there is a 1-year time point, Robert, to clarify. Our GA trial is a 1-year trial. Operator: Your next question comes from the line of Elemer Piros with Lucid Capital Markets. Elemer Piros: So, Shankar, you talked about OCU410ST and your agreement -- OCU410ST, your agreement with the European agency that the U.S. trial would be sufficient. Do you have a similar agreement related to the RP program as well? Shankar Musunuri: Yes. We have a similar agreement with [indiscernible], with EMA, on RP program. Elemer Piros: Okay. And what would be the regulatory path in South Korea for OCU400? Shankar Musunuri: Yes. Currently, it looks like South Korea and the rest of the world, typically for orphan gene therapies, they are following FDA closely. And once we get FDA approval, based on the FDA approval, we get approvals in those countries. So most of these countries don't need any additional clinical trials. Elemer Piros: I understand. And one housekeeping question, how much of the $7.5 million or up to $7.5 million that you received from Kwangdong is included in the cash balance that you reported? Ramesh Ramachandran: The $7.5 million is not included in the cash burn at this point of time. It is going to be in future. So that's not part of our cash burn at this point of time. Elemer Piros: And could we project some into the fourth quarter in terms of the initial payment? Ramesh Ramachandran: The $1 million, which we received from Kwangdong, that is already in the cash projection, but nothing more than that. Elemer Piros: Okay, $1 million. Okay. And lastly, could you talk about your manufacturing capacity, Shankar, especially when we think about much larger indications such as OCU410 for geographic atrophy? Shankar Musunuri: Yes. The manufacturing capacity, we have ex-U.S. partner with plenty of capacity. I mean, we have our own facility in our backyard in Malvern, Pennsylvania, and that facility will be ready. Our plan is to get that ready by 2027. And when we get the first approval, it's called a prior approval supplement with the U.S. FDA at the site. And our goal in future is to produce all U.S. supply from our U.S. manufacturing site. Elemer Piros: But you mentioned also that you have an ex-U.S. partner as well, manufacturing partner. Shankar Musunuri: Yes. That's right. Yes, currently. And we have plenty of capacity, global capacity. Operator: Final question comes from the line of Daniil Gataulin with Chardan. Please go ahead. Daniil Gataulin: First on OCU400, the trial, as we know, you have 2 arms, one with RHO mutations, one with RP gene-agnostic mutations. For the gene-agnostic arm, are you disclosing how many different mutations are included there? And in terms of the enrollment, did one arm see a more robust enrollment than the other? Shankar Musunuri: Go ahead. Huma Qamar: So actually, it's an assessor-blinded study. So, at this point, we cannot disclose. Gene agnostic means that all the major mutations will be covered, which is more than 95% geographically look at it in U.S. and globally. So we are going to cover that in the gene agnostic and all forms of rhodopsin are going to be in the rhodopsin arm. So that is the first one. And yes, there is a robust enrollment randomization that we are proceeding with. As we stated, clinical and/or genetic diagnosis, syndromic, as well as non-syndromic forms. Daniil Gataulin: In terms of prep for BLA filing for OCU400, what are the outstanding CMC -- or what is the outstanding CMC work that needs to be completed before you file? Shankar Musunuri: Yes. With the RMAT designation, Daniil, we have opportunity to initiate rolling submission, as we stated, in the first half of next year. And so you can submit nonclinical and CMC sections. So, as far as CMC is concerned, we have to complete our process validation runs for drug substance and drug product, and it's progressing really well, and we're on target. So, those sections will be submitted before we submit the clinical section. That will be the last one late next year. So somewhere in the middle of next year, somewhere we'll be submitting the manufacturing section. We'll start with nonclinical, followed by CMC, followed by clinical. Daniil Gataulin: And one last question for LCA. Is that on hold for now or is that completely off or out of your pipeline? Or what are your plans for LCA? Shankar Musunuri: From a market perspective, Daniil, it's very small. What we'll do is -- right now, it's not in our plan. And obviously, once the RP gets into the market, we can always look into that for Phase 4. Operator: This concludes the Q&A portion. I will now turn the call back over to Chairman, CEO and Co-Founder, Dr. Shankar Musunuri. Please go ahead. Shankar Musunuri: Thank you, operator. The third quarter was marked with important clinical progress, strategic business development and essential financing accomplishments. We are poised to close 2025 on a strong note and look forward to early 2026 catalysts that will further advance Ocugen's position as a biotechnology leader in gene therapy for blindness disease. Have a great day. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Unknown Executive: Thank you very much for attending the briefing session by Eisai Company Limited. We will now begin financial results and business update session by Eisai Company Limited for Q2 fiscal 2025. Today, this is held in hybrid format combining in-person attendance and virtual attendance. For those attending in person, we have distributed flash report financial results and deck of slide presentation. Those of you who are participating virtually, please download these materials from the website. The presenter today is Mr. Haruo Naito, Representative Corporate Officer and Chief Executive Officer. Mr. Naito, CEO, please. Haruo Naito: Let me begin our presentation for the first half of FY 2025. So let me look at the results for the first half. As you see at the very first bullet point, inorganic business of us. Pharmaceutical business has shown steady growth in profits as well. Most of the profits are from the frontline business, which is Pharmaceutical business and we could achieve increase in both revenue and profits. I believe that that is the most important point that I wanted to share with you today. And regarding our forecast for the full year results, I believe that there are various opinions. So when we see the stock price trend after announcement, I was disappointed. However, I believe that there are some requirements for the second half that is written in the second bullet point. Anti-Tau antibody and narcolepsy treatment, these are the 2 next generation neurology area promising projects of Eisai into which we are making investment of resources into this because clinical trials and studies are now reaching the peak. And on top of that, there are structural reforms in Europe and in line with such structural reforms, there will be various expenses to be incurred. Therefore, we do not intend to revise the full year forecast. So we did not make any revisions to the full year forecast. In the red box, revenue was JPY 400 billion. Compared to the previous year given the stronger yen trend, we could achieve about 4% increase in revenue year-on-year. And as I said earlier, in the next line Pharmaceutical business revenue JPY 393.3 billion is shown here. And most of the JPY 400 billion in revenue was generated from our organic business. Cost of sales, given the impacts of domestic drug price revision and changes in the product mix, were offset and the cost of sales was managed within the planned range. Gross profit was increased by about 3.0 percentage points from a year earlier. R&D expenses accounted for 18.9% of the revenue. Therefore, R&D expenses were managed under 20% of the revenue. We were able to manage these expenses as such. One of the reasons for this was the clinical study expenses for LEQEMBI have peaked out, which have started to show decline and in the previous year, there were some restructuring including the headcount reduction. Therefore, R&D expenses ratio to the revenue was controlled within 20%. Now for SG&A expenses increased by 3.6%. As you see below this line, Lenvima grew very steadily. Therefore, expenses regarding shared profit of Lenvima paid to Merck increased and SG&A related to R&D. We are still in the phase of increasing the resource investment into the LEQEMBI. Therefore, operating profit was JPY 34.4 billion, which has shown the significant increase of 23.6% from the previous year. And operating profit estimated for the full year is reported to be JPY 54.5 billion and most of which is going to be generated from Pharmaceutical business. So in other words, the profit structure of Eisai has shifted to be more dependent on the organic business in order to increase and record profits and we have started such a transformation of our profit structure during this first half in this fiscal year. The Pharmaceutical business is grown by 3 global brand products. LEQEMBI, which has grown 153% year-on-year. We believe that this was a significant growth. It's about 2.5x the size recorded last year and details of this will be explained later. And for Lenvima, in main markets for us in the United States, there was a negative impact of Inflation Reduction Act. There were some suppression caused by this act, but this negative impact was offset and for all the cancer types we were able to grow Lenvima business. Therefore, Lenvima has been able to maintain its growth so far. And Dayvigo as well, the impact of drug price reduction in Japan was offset and 15% growth was shown. Now looking at the breakdown of changes in operating profit, JPY 27.8 billion last year. Gross profit increased JPY 9.1 billion. R&D expenses, because of the reasons I mentioned earlier, was controlled better by JPY 6.2 billion. SG&A expenses increased JPY 7.1 billion thus reducing the operating profit. And other income and expenses include some changes from the previous year, therefore, recorded minus JPY 1.7 billion. And we recorded JPY 34.4 billion operating profit, which was 8.6% operating profit margin. Today, I would like to focus on LEQEMBI, but I prepared just 1 sheet of the slide for Lenvima. Since its launch, 10 years have passed and it has been approved in 81 countries and marketed in those countries and already we have been able to contribute to 580,000 patients in the world and it has been indicated for 7 indications in 5 cancer types. And due to the favorable court decision and settlement agreements to resolve litigation of the high-purity patients in the U.S., generic versions of Lenvima will not be launched until July 1, 2030. As you see, JPY 166.5 billion was the total revenue. But you can see in this pie chart, sales by cancer type is shown here and the largest revenue is generated from the indication of RCC, which has been the driver of growth. For RCC, there are 2 studies which have been conducted together with Merck, LITESPARK-011 study and LITESPARK-012. With these 2 studies, the top one is for second line of RCC, Lenvima with belzutifan, Merck's anticancer treatment combined with Lenvima and the primary endpoint was the extension of a progression-free survival. This primary endpoint was already met. And together with regulatory authorities, including FDA, discussions for preparation of the potential submission have begun. And the bottom one is the first-line trial for RCC and this is based upon the assessment variation of the treatment pembrolizumab, KEYTRUDA was added to the above mentioned combination and with the same regimen conducted in the first-line study for RCC. And compared to that, favorable results were obtained and ESMO was the place where the results were published. And these studies are ongoing steadily in this expansion of the label based upon this base RCC indication. So we believe that this is going to be very positive factors for further driving the revenue. LEQEMBI has been recently approved in Canada. Therefore, LEQEMBI has been approved in 51 countries and territories. So the requirements to be the truly global product have been met through building such a foundation. For us, we understand that Alzheimer's Disease is a progressive disease and may be potentially fatal disease. Therefore, removal of Abeta plaque is confirmed through amyloid beta PET, but it is not the end of a treatment and the neurodegeneration process will continue and the cognitive decline will continue. That has been shown by data. Therefore, for this kind of disease, the early initiation of treatment and maintenance of treatment should be continued and that is the key to treat such disease. That is the key point that we have been continuing to have in our mind and I believe that this has expanded the basis for this treatment. As you see, the administration methods are shown at the bottom. During the first 18 months after initiation treatment was started, the IV once every 2 weeks are provided and after that, maintenance treatment period will be started. In the past, there was only 1 option to dose through IV once a month. But this time, LEQEMBI IQLIK self-administration method is approved and launched with a great option of once a week dosing. Therefore, it has made maintenance treatment much easier through the launch of LEQEMBI IQLIK. Now value proposition by LEQEMBI is being enhanced. Regarding administration period and dosing, as I said earlier, in the genre of maintenance treatment that has been cultivated by LEQEMBI. And when it comes to safety, particularly incidence of ARIA, based upon the real-world data in the United States and also Japan's all case surveillance, including over 10,000 patients. Based upon such a large scale data, the incidence of ARIA and the severity or seriousness of ARIA are all within expectation described in label. So we did not belittle the importance of ARIA. However, based upon this safety data, we believe that ARIA can be manageable. That has been confirmed. And now if you turn to efficacy aspect. Above all, Clarity AD has been conducted during the open-label extension study for 4 years and CDRSB difference against placebo over 48 months and this is the difference from the reference of ADNI and CDR difference has been expanded to 3x or 4x. So toxic substance is shown to being removed through disease-modifying effect of this drug in your brain. That has been shown by this data and AIC was the place the U.S. real data, 2-year real-world data was shown and 8.8 out of 10 was shown in terms of satisfaction score and 87% of the patients were continuing LEQEMBI treatment and 84% of patients had not progressed to the next stage of the disease. Such very quite robust data results were obtained from this real-world evidence. And in the daily lives, how cognitive function has been maintained or improved. Humanized message was utilized in order to show that in an easy-to-understand manner in explanation to patients. Now you can see here the first half results in revenue of LEQEMBI. Please look at the very bottom line. JPY 41.1 billion was recorded as the global revenue, which was 153% of the result recorded in the previous year. As we have been reporting to you, in China due to the geopolitical risk, the stockpiling for the period until the end of this calendar year. By the end of December, distributors have purchased to secure the inventory up until the end of calendar year. Therefore, JPY 7.7 billion was recorded in Q1. And in parenthesis, you can see the actual demand excluding such stockpiling by distributors in China are recorded and JPY 2.7 billion was recorded in the Q2 and the JPY 5.1 billion in the total first half. So considering all this, JPY 38.3 billion was recorded based upon the China's actual demand basis. Even with this 135%, very high growth ratio was recorded from a year earlier. In all regions, high growth were recorded exceeding plans for all regions. And JPY 76.5 billion has been shown here as the forecast for full year and our progress to date against this forecast exceeded 50%. Therefore, we are deepening our confidence in achieving this full year forecast. Now turning to LEQEMBI IQLIK. I have brought this with me here. This was the first ever commercial unit produced. This is the real thing, real product, very valuable products. I would like to decorate this in frame or box in my office. So this is the memorable and commemorative first-ever products and this was launched on October 6 this year. And what are the benefits for patients? First, the patients or care partners are able to administer at their home within approximately 15 seconds or so on the average and they don't have to drive or visit the infusion centers in person. We believe that this will be a great benefit for them. For medical institutions, on the other hand, they don't have to do a lot of monitoring or preparation for IV infusion, securing [ chairs ] or monitoring by nurses or health care providers involved in the administration. These medical resources can be reduced. This will be a significant saving and they will be able to expand the capacity to accept new patients. At the time of launch, we started the LEQEMBI Companion program. LEQEMBI IQLIK is to be covered under Medicare Part D. The reimbursement shall be conducted by private insurer. Although they are still under the supervision of CMS, but private insurers will be in charge of reimbursement and private insurers have set the cycle of formulary introduction at 15 months. Therefore, in January 2027, the formal formulary will be putting this LEQEMBI IQLIK on their list and there is a program called the Medical Exception Process in the meantime until the IQLIK will be put on the formulary. So under this Medical Exception Process, the reimbursement can be allowed and this has been used widely in the United States and this process will be applied to LEQEMBI IQLIK as well. Information and support related to this process are provided by our area reimbursement managers and nurse educators are providing in-person or online support to patients for dosing and providing demo kits for dosing training. This is the demo kits. And 4 weeks have passed since launch and IQLIK initial delivery has been conducted at 34 facilities in the U.S. and demo kits for administration training were provided to 341 facilities and they have started preparations for use. And Medical Exception Process, under which I believe that most of the patients have applied for this and we anticipate a smooth reimbursement process to be conducted under this process. So as regards to the reimbursement for LEQEMBI IQLIK, we do not have any concerns and we believe that the reimbursement process will be smoothly conducted. Regarding initiation treatment for IQLIK: during the first 18 months and submission for this initiation treatment has been started in the United States and a rolling submission process has been utilized. And the last such submission will be conducted in December this year. And we were expecting to receive priority review status if that is approved and then in 6 months approval may be provided in first quarter of FY 2026 for both for initiation treatment and maintenance treatment. For both periods of treatment, LEQEMBI IQLIK may be utilized before dosing. So that is approaching. And in Japan, we are prioritizing the submission for the initiation treatment for SC-AI. This will be conducted by the end of this December. On the right hand side, you can see that this IQLIK has been selected by TIME Magazine as one of the best inventions of 2025. Now another topic I would like to talk about is the confirmatory tests using BBM in the United States. There has been a significant advancement during the past 6 months. In July, AIC was held in Toronto, Canada. Alzheimer's Association of the U.S. put forth BBM Clinical Practice Guideline. And BBM tests with 90% or higher sensitivity and specificity can be recommended for confirmatory amyloid beta diagnosis. That has been proposed and published through this guideline. And Fujirebio's BBM was approved before this. Based upon the composite score, this BBM was granted the IVD clearance and this achieved the above criteria of 90% or higher sensitivity and specificity. Under this practice guideline, Fujirebio's BBM is now allowed to be used as confirmatory diagnosis. LabCorp and Quest Diagnostics or other leading clinical laboratory companies in the U.S. have introduced this as a test item. Therefore, confirmatory testing has been started utilizing this BBM. C2N as well, based upon different methodology, submitted FDA regulatory filing for BBM. And CMS for Medicare, a new national payment rate of $128 per test for BBM has been decided and it will be applied as effective from January 2026. That has been already announced. We believe that this will drive the use of BBM further as a tailwind. Currently, already for amyloid beta confirmatory tests, about 10% of such tests are estimated to be conducted utilizing BBM. Outside of the box, triage test. Roche BBM using pTau-181 was granted IVD clearance. This is particularly for PCP, primary care physicians, who may use this for triage. Now I am showing rather complicated diagram I'm afraid, but I would like to use this for explanation. What I would like to say is by introduction of BBM test, amyloid beta test particularly confirmatory test, and how the number of such tests and the number of positive cases will change up until FY 2027. Rather based upon the robust data, we would like to present our estimates. First of all, please look at the bottom blue line, solid line. This shows the number of amyloid beta confirmatory tests based on BBM. This shows the trend of increase in the number of such tests. If you look at FY 2025, as I said earlier, about 10% of the confirmatory tests is being conducted using BBM. And then over '26 and particularly after 2026 with higher likelihood, the BBM-based confirmatory tests are expected to increase. And next, please look at the orange solid line. This shows the number of amyloid beta confirmatory tests using PET and CSF only. So during FY 2024, PET and CSF were the only approaches for the amyloid beta confirmatory test. So this shows the trend of number of such tests based upon the conventional methods. And once the BBM confirmatory tests are launched and then orange line, the curve will be less steep. And the purple solid line shows the number of amyloid beta confirmatory tests of all 3 methods: PET, CSF and BBM. The total number of confirmatory tests are shown. And above that, if you look at the red solid line, preclinical triage utilizing the ones like Roche's BBM. And the total number of BBM tests is shown here for both triage and confirmatory tests and this has shown an exponential increase. Based upon this, if you look at the pink bar first, the pale pink bar shows the amyloid beta the confirmatory test. The total number shows for 2024 only PET and CSF were used and in 2025, the BBM is added and going forward, the number will increase. And the pink arrow shows the number of amyloid beta positive cases, which is expected to be increasing. And the number of confirmatory test as well as the positivity rate are also considered to be increasing. And the positivity rate was 50% in 2024. But in 2027, it's expected to be reaching 80% as positivity rate. Why? In triage or prescreening, BBM will be used and the PET CSF positivity rate will be between 50% to 70%. And then that is the 1 step to increase the positivity rate. And BBM confirmatory test becomes available and then for example PCPs will be able to utilize this for diagnosing and ordering the test and the results of the test will return it to them and their proficiency will be enhanced. Before ordering the confirmatory test for BBM, the confirmatory test precision for the cognitive function test will be increased. So their proficiency level will be enhanced based upon this and the positivity rate is expected to reach 80% or so. So amyloid beta cases will increase significantly and actually, there has been quite a high correlationship between this numbers and growth rate of LEQEMBI. I believe that this is another evidence to show that LEQEMBI is expected to grow further towards FY '27. The other day we've presented that there are 3 options for modified AD continuum that only Eisai can deliver. I would just like to share with you once again the gist of this. First, with the current LEQEMBI, suppression of cognitive decline after AD onset. The biggest characteristic here is long-term administration. We have 48-month long-term data. Efficacy was demonstrated and expansion of efficacy was demonstrated. Why is that possible? It is shown in the third bullet point. There is low immunogenicity neutralizing antibody incidence of lecanemab. This allows for long-term administration. Because of this advantage due to property, it is possible to suppress cognitive decline after AD onset. And before MCI, the earliest stage, preclinical AD or stage is tested in the trial. As shown in the middle, the biggest characteristic of our trial is shown in the second bullet point. Pure preclinical AD patients are selected. Global CDR is 0 not 0.5, but 0. Abeta accumulation is measured with Abeta PET, it is greater than 40 centiloid. This is preclinical AD as determined under the guidelines. These patients are selected in this trial. That is showing the precision and accuracy of a preclinical AD trial. This duration of a preclinical AD stage is very long. So low immunogenicity and neutralizing antibody incidence can be utilized for long-term administration. And the final bullet point, data endpoint is PACC5. Preclinical AD clinical conditions or symptoms are most precisely reflected in PACC5. Such endpoint is used. And this is also based on the guidelines determined by FDA and EMA. And therefore, this is very legitimate. For regulatory purposes, we have conducted a Phase III study. That is the characteristic of AHEAD 3-45 Study. And finally, combination with etalanetug. This goes without saying that there are 2 major pathologies of Abeta and Tau. We are able to approach both. This is a treatment that is epoch making in that sense. We are aiming to maintain cognitive function after AD onset. This cannot be done by anyone in the world. No one can come near us. This is the unique option that is available from Eisai. Etalanetug has obtained clinical proof of mechanism with DIAD population. 202 Study with sporadic AD is enrolling patients steadily. Biomarker is used mainly for optimal dose and target population, biomarker evaluation is used mainly. This is a study design, which is quite epoch making in that sense and first data readout is expected in fiscal 2027. As for preclinical, data readout from Phase III is scheduled for fiscal 2028. Preclinical AD, what is preclinical AD? This shows the summary concept. Early AD is shown on the left, prevalence is 240 million people. That is the estimated prevalence. A large number of people are estimated to have early AD. Preclinical AD and in order to calculate people who are eligible for AD-DMT, we use a Phase III study criteria and number of patients eligible for AD-DMT is estimated to be 2.3 million people. What I'm trying to say is that we also have a very large potential market in preclinical AD. It is quite near us. In addition to early AD, there is a huge market potential of preclinical AD, which is right in front of us. Now nationwide in the United States, National Education Program is being held, 1,000 people participated. Shown on this photograph, the left 2 are patient and family, they are smiling; and 3 people on the right side are U.S. leading AD experts. We have a very large volume of data and they were confirmed once again. We also have IQLIK, a breakthrough administration method. These were discussed in this program with many people responding actively. On the right side, this is a medical program. This is on the concept of smoldering Alzheimer's disease. AD continues to smolder. Plaque removal is not the end of the story. Toxic species continue to increase. Continuous treatment, therefore, is necessary and such campaign is continued. Another major initiative is targeting PCPs, primary care physicians. Primary care physicians are very important. Many MCI patients first visit PCPs and there should be correct diagnosis and speedy referral to the specialists in order for treatment to start. So in the second half, PCP specializing representatives are assigned. 3,500 targeted PCPs are the primary targets. The key message is shown as an example on the right side. This is the cover of the brochure. Early referral can mean early intervention with LEQEMBI. Early referral to specialists and that would mean early intervention with LEQEMBI. That is the message. And therefore, PCPs will have to be able to quite accurately diagnose MCIs and refer patients to nearby IDNs, which is a group of clinics with a number of specialists. There should be quick referral to such institutions. We would like to help PCPs by establishing a standard procedure for referral and IQLIK and BBM developments will also be a strong tailwind. For similar purpose to promote treatment, we have a targeted DTC TV campaign. This is not a normal TV campaign, but it's targeted. Who are the targets? Early AD diagnosed patients. These patients are not taking the next steps such as the tests or informed consent. That is understood to be the case. So targeted DTC TV campaigns were conducted. We were able to see good results in the first half. We will double the effort so that there will be next steps taken by the patients to move on to informed consent and actual infusion. This campaign has already started. In other markets, we are also seeing good progress. In Japan initial introduction, there are 800 initial treatment facilities and there are 1,600 follow-up facilities. 800 initial treatment facilities will be treating for the initial 6 months. And as shown in the middle of this, we have done TV campaigns to increase awareness of the disease. About 1 in 3 of Japanese population is aware of MCI now, what MCI is as a disease. Such disease awareness initiative campaigns effects are shown. This is wonderful. And 330,000 have visited specialists and close to 30,000 have received Abeta tests. The speed of referral from PCPs to specialists has also increased by about fourfold. On the right side, LEQEMBI in China. Yin Fa Tong through collaboration with JD Health is a digital platform for promoting visits to clinicians and diagnosis and follow-up. Yin Fa Tong is now used by 620,000 people and cumulative consultation number is 26,000. Digital means it is used to build the pathway and much progress is seen. And next bullet point is extremely important. In China, currently we are focusing on self-pay market. Towards the market with self-pay patients, we are promoting. But for true expansion, it is important to be listed on the NRDL. The Chinese government recently decided to leverage private commercial insurance for innovative drugs. Such a new scheme is being introduced or proposed by Chinese government. We would like to respond to this and in China, we would like to improve our access to very huge market in China. As for Europe: LEQEMBI in Europe. In Germany and in Austria, we were able to launch very smoothly. In Germany, the drug is reimbursed at discretionary price. In Europe, commercial and medical activities. The first bullet point it mentions CAP, controlled access program, is obligated in all European countries by the authority. And what needs to be done here is that prescribing doctors and prescribing facilities have to satisfy certain conditions as prescribed under CAP. So satisfying doctors and facilities need to be registered and LEQEMBI can be prescribed in these registered facilities. That is the scheme. 350 facilities, 420 doctors are registered in case of Germany. Number of facilities registered and number of doctors registered, there is no limit for LEQEMBI. There has to be prior registration for certain products. In that sense, large clinics and specialists are starting to prescribe smoothly. And I have 3 more slides before I end. Eisai's mission in AD is to make AD diagnosis and treatment familiar for patients and encouraging them their standardization and widespread adoption. IQLIK and BBM are the potential 2 innovations to achieve this. This example was seen in rheumatoid arthritis. BBMs appeared, major disease-modifying drugs instead of IVs were made available, SC-AI formulation emerged leading to a major transformation. So this could be repeated. We see great potential in both early AD and preclinical AD. With that, I would like to conclude and thank you very much for your kind attention. Unknown Executive: We will now move on to Q&A session. We will be entertaining questions from analysts and investors before entertaining questions from the members of the media. If you have question, please give us your name and affiliation before your question. If you have a question, please raise your hand. Hidemaru Yamaguchi: My name is Yamaguchi. I'm Citi. I have a question about the performance and the actual results as you explained at the outset, but there are still others. And if you include that number in the revenue generated from other businesses than Pharmaceutical business and I believe that if you add that number, then there will be further upside to the second half. But inclusive of that considering the restructuring in Europe and also R&D so the upside will be used for those expenditures. But inclusive of that potential upside, there are still uncertainties. That's why you have kept your full year forecast unchanged. Haruo Naito: The first one, the onetime is going to be offset by onetime factors. So actual revenue from organic business or profits, JPY 54.5 billion. That is the number that we believe that we are going to approach. Hidemaru Yamaguchi: So JPY 54.5 billion is the number that you are going to keep as it is. Haruo Naito: But under this number, the most will be brought about by the organic business. I see. Then the shortage not depending on the onetime factors. Hidemaru Yamaguchi: Understood. On Page 11, I was interested in this diagram. I have 1 question. The total number of tests increased and hitting rate or positivity rate. So these are the 2 functions and how these 2 are going to play out? Could you please give us the dynamics? Haruo Naito: For your question, Mr. Toyosaki is going to respond. Hideki Toyosaki: I am in charge of medical affairs in the United States. My name is Toyosaki. In FY 2024, we have taken this data from the claims data. And for FY 2025 this year, similarly based upon the claims data, amyloid beta tests and number of BBM tests and the positivity rates that has been already confirmed to be increasing. This trend of increase is one thing and on top of that, as has been explained in presentation with the spread of BBM, there are several positive events. First of all, clinical practice guideline was published and based upon certain criteria, there has been a recommendation to use BBM as the confirmatory test. Fujirebio's BBM has been granted the clearance. Therefore, there are requirements that have been met by the BBM. And LabCorp and Quest and leading laboratory companies have added this in their menu of the testing. And in January next year, the CMS national payment rate will be applied and about $130 per test will be applied throughout the country and BBM reimbursement will be consistently applied. These events are being conducted and happening in the United States one after another. So considering this, first of all, the use of BBM as confirmatory test will significantly increase. And for PCP, the triage BBM tests have been granted from Roche. Therefore, not only for neurologists, but also for PCP, the test of BBM as a triage will be increasing. And in 2027, we believe that there will be such an increase in the number of BBM-based tests. Seiji Wakao: I'm Wakao from JPMorgan. First question is about returning to ROE of 8% for next year. That is the target and could you elaborate on this? Up to second quarter, the actual business is performing very well. So ROE of 8% level to be achieved, I believe you are making positive progress. So how do you see the situation currently? Having said so, in the next fiscal year, would you require sales from other businesses? Pharmaceutical business is performing very strongly. So with major products, do you expect to be able to achieve 8% return on equity? Haruo Naito: That question will be addressed by Mr. Iike. Terushige Iike: Thank you very much for your question. This is Iike speaking. Last fiscal year and the fiscal year before that in the so-called other businesses, operating profit was about JPY 40 billion. And we wanted to wean ourselves from relying on that and so that is what we are seeing in this fiscal year. In this fiscal year, as CEO mentioned, especially in the second half we are planning to make expenditure in structural reform mainly in Europe. There were more reliance on onetime factors in the past 2 fiscal years. But without relying on these onetime factors, we want to achieve the figure as we informed in guidance. LEQEMBI in the past and up to this fiscal year is still incurring loss as a single product, but the margin of loss has been reduced substantially since last fiscal year and there will be a continuation of positive trend. And therefore, in terms of operating margin, we expect a significant increase and we would like to be able to meet the expectations of shareholders for ROE. And beyond that, we would like to return to double-digit figure and we are on the way to achieving. We are in the process of achieving this as we see the situation. Another point, this was not discussed much, but China. In China, we have LEQEMBI and Dayvigo and Urece, this is the gout treatment drug. We have these 3 products in China, NRDL listing or stage before that, coverage by commercial insurance. If this can be achieved, there is a potential for rapid expansion. In the past in China, Lenvima was the driving force pushing up the company-wide performance. So we would also like to continue to make much efforts in China market so that it can be a factor for growth. Seiji Wakao: I have 1 more question. On Page 9, SC coverage is shown quite extensively. Based on the presentation today, LEQEMBI IQLIK; in terms of sales increase, it may be after January 2027 that sales increase will be observed from LEQEMBI IQLIK. Is that correct? And initial dosing indication may be approved in the first quarter next year? And from January 2027, do you expect to book sales for that indication as well? Haruo Naito: Medical Exception Process we believe will be applied to about 80% to 90% of the patients. In January 2027, listing of official formulary is expected. But before waiting until then, high probability we believe that patients will be able to be reimbursed for the insurance. Between Eisai and insurer, we will have to agree on this or negotiate. So Medical Exception Process, it says exception, but it's not exceptional. Regularly this scheme is utilized. I believe your concern is that we may have to wait until then to see large sales, but that is not the case. Please follow up, Mr. Haruna. Katsuya Haruna: Thank you very much for your question. I'm Haruna responsible for U.S. business. I would like to add to what CEO said. Commercial insurers, patients and HCPs are giving us very positive feedback. As for insurance reimbursements, earlier CEO Naito mentioned, in January 2027 it may be listed in formulary. But before waiting until then, through this process we believe that it can be made more widely available. Easy example to understand is IV reimbursement rate and the current SC level is similar. Therefore, we do not see this as a bottleneck at all. The initial treatment in next year, if that is achieved, I believe that will be a major game changer. With the launch of IQLIK, long-term treatment will become easier and that is also a major benefit. For patients, it is a huge benefit. Kazuaki Hashiguchi: My name is Hashiguchi from Daiwa Securities. Regarding your forecast for the results. At the beginning of the fiscal year, onetime expenses were not included, but onetime revenue was included. But regarding the progress for first half, the cost of sales ratio was lower than planned. In my reading and R&D expenses compared to full year forecast, the progress seems to be slower. These trends are expected to continue into the second half. And even without onetime revenue, you will be able to get closer to JPY 54.5 billion in operating profit excluding onetime factors. Haruo Naito: R&D expenses, whether these expenses will be contained with this level, we are not sure yet. But as I said earlier, we are going to put resources into the forecast projects and we are sure that we needed to continue to invest resources into these main themes. The more efficient expenditure of R&D expenses should be secured. As Mr. Hashiguchi mentioned, that is almost the same scenario we have in our mind. Kazuaki Hashiguchi: Another question is about etalanetug Study 202. Data readout is expected in fiscal year 2027 and clinicaltrial.gov shows the primary completion date is December 2026. And so this shows that the progress has been slower than expectation. But do you think this is different from what you say here from the primary completion date and what kind of events do you foresee for fiscal year '26 and '27? Haruo Naito: Mr. [ Horea ] is going to respond to your question. Unknown Executive: I am in charge of translational science. My name is Horea. Let me respond to your question. Regarding Study 202, the completion of the study as described in clinical.gov is scheduled to be at the end of December 2026. But after that, the samples will be analyzed and the results of the biomarkers will be summarized and inclusive of the statistical analysis and readout from the trial is expected in the first half of fiscal year 2027. Thank you for your question. Unknown Executive: Are there any other questions? Yes. Fumiyoshi Sakai: I am Sakai from UBS. About Medical Exception Process. In the past, SC formulation when it was near launch, Medicare Part D to Medical Part B switch was mentioned. By cutting our process, sales can be booked earlier. More clinics will be using SC, more institutions will be using SC. Is that what you are saying? And as for Medical Exception Process, is this introduced in practice? Can you cite some actual example? Haruo Naito: IQLIK was to be applied to Medicare Part D. It will be applied to Medicare Part D. Did I mention switch from Medical Part B to Part D? From Part D to Part B, did I really mention that? I trust Mr. Sakai so I may have mentioned that. But Medicare Part D will be applied. That is the category of the product. So please understand that Part D will be applied. And as for Medical Exception Process, details will be given. Katsuya Haruna: This is Haruna speaking. First, about maintenance treatment of IQLIK, IV LEQEMBI will be Part B and from Part B IV, they will be switched to IQLIK which is applied Part D and that switch is actually occurring. When you are switching to Part D, Medical Exception Process is used for insurance reimbursement. And to add a little more, LEQEMBI IQLIK is already being prescribed and patients are receiving IQLIK treatment already. Is this common practice? MAP is very common for MS or diabetes Medicare Part D drugs, anticancer drug is not included. But in most drugs when new drugs are launched, this process takes place and many use this process. Neurologists, we conducted a market research of neurologists before the launch of IQLIK and more than 80% of neurologists have used MAP process before. We are also providing information, but physicians are already familiar with this process. And by providing ample information, reimbursement is taking place very smoothly. Fumiyoshi Sakai: I also have a question on reimbursement in China listing on NRDL. What is the timing that you expect to be listed and how will you apply? I understand that there is stockpiling of inventory, but what is the timing for NRDL listing? Haruo Naito: Ms. Sasaki will respond. Sayoko Sasaki: Thank you, Mr. Sakai, for that question. I am Sasaki responsible for China business listing on NRDL. And as I introduced on the slide for innovative drug, Chinese government is introducing a way to increase access by leveraging commercial insurance usage. We are considering the market environment, including competitive landscape and expansion of the use of BBM. And when we decide that we are able to use this, we would like to make use. In self-pay market, we will achieve growth and by utilizing such program, we believe we can accelerate the growth. NRDL and related initiatives, these are announced by the authorities in China. We cannot say the timing on our part. So I hope Mr. Sakai will also pay close attention to announcements by Chinese authorities. Fumiyoshi Sakai: Understood. But price will be lowered so how should we understand the offsetting impact? Haruo Naito: This is preaching to the converted, but sales equal price multiplied by number of units sold. So naturally that will have to be taken into consideration. Otherwise, we will be scolded by investors. Unknown Executive: We would like to receive questions from participants online. Operator: Mr. Tony Ren from Macquarie Securities. Tony Ren: Tony from Macquarie. Can you guys hear me clearly? Unknown Executive: Yes, we can hear you. Tony Ren: Perfect. So first one, a simple one. So it appears that your gross profit margin declined a little bit. On Slide #1, that is attributed to product mix and the drug price revision. Just wanted to see if you could provide a little bit more color on the extent of the price revision and the degree of product mix change. Haruo Naito: For your question, Mr. Iike is going to respond. Terushige Iike: Thank you very much for your question. This is Iike speaking. I would like to respond to your question. As you commented, there was a drug price revision in Japan and due to this in terms of ratio, that was the biggest factor in terms of percentage of contribution to the decline in the gross profit. And the biggest product for us, Lenvima, there was a Medicare Part D redesign in the United States. The gross to net has been lower to what it was in the past. And it is also related to the growth of LEQEMBI. But in terms of ratio, these 2 had the larger portions in the contribution to the lowering of the gross profit. So that's why I mentioned the product mix. Tony Ren: Okay. How should we think about gross profit margin going forward in the second half of this year and possibly into next fiscal year? Haruo Naito: Mr. Iike is going to respond to your question. Terushige Iike: For this fiscal year, as we have already reported to you, we believe that the gross profit margin is going to be controlled within the guidance. Towards next fiscal year, it will depend on the product mix, but we do not believe that there will be significant change and we will be able to control as we do. Tony Ren: Okay. And if I may, also just want to go back to ask about the Medicare Part D Medical Exception Process here because if we have to wait until January 2027, that does appear to be quite far away. So out of the -- we understand the current approval rate is pretty high. Just want to quantify that. So out of 100 patients or doctors applying for the Medical Exception Process, what percentage of them will be successful today? Would that be something like 50% or more like 70% or even higher? Haruo Naito: For your question, Mr. Haruna is going to respond. Katsuya Haruna: Thank you very much for your question. First, generally speaking about -- well, it may depend on what data you refer to, but 70% or 80% is the current success rate. But it's only 4 weeks since it was launched. Therefore, there will be some fluctuations in data, but we have observed already over 90% success rate. So we have seen steady progress. And going forward, we expect to see increased number of patients over longer term and then the data may be fluctuating. But as an early signal now, we believe that we are very confident in providing this products or drug to patients. Tony Ren: Okay. 90% is a very good number. Thank you very much. Operator: Ms. Sogi, Sanford Bernstein, please. Miki Sogi: First question, I believe you have heard from the people in the field. The other day we were able to speak with early adopter doctors. And clearly amongst the patients, early stage patients when they are given LEQEMBI or Kisunla, stronger efficacy, higher efficacy is observed. And the doctor said that the doctor is treating more MCI patients. So clearly efficacious or clear responding patient segment is becoming clear. I think this is very important for the adoption of the drug. Real-world evidence indicating such data, is Eisai collecting such data? Regarding early treatments, do you plan to run campaigns? Haruo Naito: Mr. Toyosaki will respond. And regarding Japan, Mr. Yusa will respond. Hideki Toyosaki: Thank you very much for your question. I would like to mention 2 things. The first is, as you rightly mentioned, early treatment. Early start of the treatment and early diagnosis and early treatment and maintaining through maintenance treatment. Such treatment will offer the optimal outcome to our patients. That is our belief. As for clinical studies in CLARITY AD trial, irrespective of Tau level, pathologically very early stage patients, low Tau patients or Tau level negative patients are included in the study. In this population when we look at Tau substudy results over 4 years, more than half of the patients were able to maintain their stage or have shown improvement. I believe that is one of the uniqueness of lecanemab. And therefore, early treatment and patients who received early treatment can expect to maintain the disease condition over long term. So long-term continuation of the treatment is the focus. Currently, in the United States in 9 institutions and we will increase the number of institutions, but we are in the process of collecting real-world evidence. Interim analysis will be presented in summer this year at AAIC and we will continue to collect the data and we plan to present the final analysis data next year. So I hope you will look forward to that data. That is the situation in the United States. Toshihiko Yusa: Thank you for your question regarding Japan. I'm Yusa responsible for Japan business responding. As for data creation in Japan, as you know, all patient study and registry survey are underway. And as you pointed out MMS score, what level of patients are responding in what way. Such data is collected and Phase IV is also planned in Japan. Earlier stage patients in campaign, whether campaign was planned was also a question. We are conducting TV commercials focusing on MCI in DTC. This was explained by CEO Naito earlier in November last year and May this year. And in August this year, we have run these 3 campaigns. So this has led to increased awareness of MCI. Haruo Naito: Ms. Sogi, you've also mentioned that when LEQEMBI is started early and MMSE, the higher the score of MMSE, the greater the efficacy is and ability to maintain MMSE and CDR scores. That is what we are also told from the physicians. And as for LEQEMBI, 29 to 30 score of MMSE, only LEQEMBI is indicated for this segment of patients. So in particular, we are looking at this very early stage MCI patients and we would like to lead to early diagnosis and early treatment of this segment of patients. Miki Sogi: Another question. On the other hand, in the United States, Kisunla and LEQEMBI are included in formulary in some of the clinics. Both are available. Patients are increasing. There is an infusion capacity issue. With the same capacity, double the number of patients can be treated with Kisunla. I hear that oftentimes institutions are using Kisunla for that purpose. The number of accounts, there can be only accounts – Kisunla only accounts and accounts with both LEQEMBI and Kisunla and it may be due to the balance of these numbers. But until spreading dose starts in the accounts with both LEQEMBI and Kisunla, one may be preferred over the other. But as far as the trajectory is concerned, before IQLIK is used more widely, is there a potential for slowdown for LEQEMBI? But of course market overall may be growing so I hope that there will be no slowdown. What is your expectation? Haruo Naito: That question will be addressed by Mr. Haruna. Katsuya Haruna: Thank you for your question. This is Haruna responding. First, about the U.S. market overall. Regarding market share, LEQEMBI has the majority of the market share in particular amongst IDNs where there are neurology specialists, we have received very high marks. LEQEMBI's value and positioning are not affected we believe. And as you rightly pointed out, on the other hand, the competitor, Kisunla is once monthly treatment. Treatment may be discontinued after 12 months to 18 months and some medical institutions may prefer this. We are fully aware of that. What is important is that LEQEMBI has a solid position in the market and it's growing and Kisunla is used by those who prefer once-monthly dosing and that is also growing as a new market. So overall, AD market is growing. AD market on a quarter-by-quarter basis continues to grow at double-digit pace. So we have seen this substantial growth. If I may focus more on LEQEMBI. LEQEMBI growth has not stopped and we do not believe it will stop. It will accelerate. Looking more closely, LEQEMBI prescribing physicians, more than 50% of AD treating doctors are prescribing only LEQEMBI. Majority of prescribers are prescribing LEQEMBI only according to the data. So we believe LEQEMBI has established a very solid position. When I visit health care providers, certainly there are some who say that they prefer once monthly dosing and some patients and health care professionals prefer discontinuation after 12 to 18 months, but treatment effect was observed through the course of LEQEMBI treatment. And there are patients who are given Kisunla who are struggling to decide whether it is truly good to discontinue treatment and we have seen increased number of inquiries into Eisai because of that. IQLIK launch: without IQLIK launch, it's not that the position of LEQEMBI will change. We have a very strong potential and we expect continuous growth. We are confident that growth will continue, and we hope to be able to demonstrate that with actual fact going forward. Haruo Naito: If I may add to that. As Mr. Haruna mentioned, donanemab is it eroding rock solid market of LEQEMBI? We do not think so. Very solidly established, LEQEMBI market is not affected. There are patients who may wish to discontinue treatment after 12 to 18 months and there may be such health care providers as well. And initial treatment can be given with a monthly dosing, that may be preferred by some patients and health care providers. That is a market that is newly created as donanemab market. So donanemab is achieving growth by creating that donanemab market. But we have a very solidly established market. This market includes IDNs who are the core health care providers in the United States. I will not mention the names, but universities with well-established medical schools have their group and they apply the same standard and provide the same treatment. Such integrated IDN network provider treatment and AD treatment is conducted in these core IDNs. We believe that our share is about 80 versus 20. We have a very solid share with LEQEMBI in IDNs. As for AIC, ambulatory infusion centers and group practices, these are also important health care providers in the market in the United States. Here Kisunla advantage may be seen relatively more so in comparison to IDN. But it is not at all the case that we have less than 50% share versus the competitor. That is not occurring looking at the data. What I am trying to say is that with Kisunla, will our core market be eroded? That is not at all the case. And Kisunla is creating its own market. That is occurring naturally. As we have presented today, initial treatment indication for IQLIK may be approved as early as in the first quarter of 2026. So once monthly IV infusion or weekly auto-injection at home will be the options. And when that becomes a reality, which will be chosen by patients and health care providers. And looking at that, we have to make utmost efforts. As for the possibility to end treatment after 12 to 18 months and we are taking the opposite approach. Our antibody has property that allows for long-term administration because immunogenicity is low and neutralizing antibody incidence is low and because of that, long-term administration is possible. As for the 48-month data that I've mentioned before, toxic Abeta oligomer continues to be removed with long-term administration and CDRSB effect size becomes larger as a result. That is demonstrated and the reference is Adoni data. These are predefined patients. Before the start of Phase III, Adoni patients are selected in baseline. So the study is not biased. It is quite transparent and we have selected a reference, which allows for high quality comparison. This disease is a progressive disease. It continues to progress. Under Abeta PET after confirmation of plaque removal, can treatment be ended? Is that the right concept? Our position is that for AD, the right option is continuous treatment, which is the right option. I believe sooner or later patients and health care providers will make a decision. Unknown Executive: We would like to receive questions from the media. If you have any question, please raise your hand. Hinako Banno: My name is Banno. I am from Nikkei Newspaper. Regarding the situation in United States, I have a question about tariffs. I don't think there have been any recent movements for tariffs. But based upon the currently available conditions, what impact do you foresee for your business? And I believe that in China, you are stockpiling or increasing the inventory level. But to what extent or by when do you think you have secured the inventory level? Haruo Naito: For your question, Mr. Iike is going to respond. Terushige Iike: Thank you very much for your question. In terms of systems, we have not seen any secure or certain things. Given this situation, as we have indicated, the inventory -- I'm sorry, Mr. Yasuno, please. Could you please respond to the question? Because you are here traveling all the way from the U.S. Tatsuyuki Yasuno: I am in charge of the United States. My name is Yasuno. As you know, the tariffs for the pharmaceutical products are out of the scope of reciprocal tariffs according to the Section 232 of the U.S. Trade Expansion Act. And there has been an investigation being conducted in order to make decision whether there are any impacts on the national security. Based upon this, the Executive Order from President Trump has not been issued yet. And using the SNS, President Trump mentioned that he intends to impose 100% tariff rate on to the pharmaceutical products. Other than that, there has been no announcement. So there are lots of uncertainties. Therefore, for us, we have not been able to calculate what impact we foresee because of this on our business yet. But on the other hand, as Mr. Ike mentioned, going forward the pharmaceutical products to be imported into the United States to prepare for the potential tariff, we are conducting various measures such as inventory management and supply chain measures. Regarding the pharmaceutical products, which are necessary for the U.S. market, up until far into the next fiscal year, we have secured inventory. Therefore, for the time being, we do not think that we will be impacted by tariffs. Hinako Banno: I have another question. This is a question I'd like to ask CEO. Regarding MFN Pfizer and AstraZeneca, other leading companies have reached agreement with the U.S. government. How this rule is going to be implemented is not known yet. For you, how big this can be a threat for you? How serious threat do you think this can be for your business? Haruo Naito: I think in countries of OECD whose GDP per capita is at 60% or higher than that of the U.S. is going to be the criteria. I mean the minimum price should be in those countries to be applied to the U.S. market. But it will depend on whether this is going to be the listed price. And this will be based upon -- reimbursement will be based upon the cost effectiveness and this will be forced by the government agencies. Therefore, there is no room for discretion by companies. Unless you accept that price reimbursement, you are not allowed to deliver your products to patients in need. The mission for pharmaceutical companies is to deliver stably their pharmaceutical products to patients who need them. That is the fundamental mission for us. We have to deliver that mission. If it's going to be listed price and then the price level set by ourselves will be -- has been deployed throughout the EU and LEQEMBI is priced as that in the U.S. price. In Asia as well, the price of LEQEMBI is at the same level or even higher than that in the United States. So which price level will be referred to, it's going to be very important. For that, very severe decision-making may be necessary. That caused our concern. Mr. Yasuno, do you have anything to add? Tatsuyuki Yasuno: Yes, I am in charge of U.S. business. My name is Yasuno. As our CEO mentioned, that is the stance of the company. What is happening in the U.S. now? I believe you know the situation there. President Trump have sent the direct letters to 17 companies, out of which 3 companies have reached some kind of agreement that has been announced. According to the speculation, by the end of this week, 2 other companies may be announcing their agreements with the government. That is the information we received from our DC team in Washington, D.C. So those 17 companies which received the letters from the President Trump or U.S. government have started discussion with the U.S. government. But on the other hand, U.S. Association of Pharma Companies, PhRMA, before adopting this middleman or PDN or 340B reform. These are considered to be challenges. That is what PhRMA is explaining in its advocacy activities. We of course are closely watching what is happening day by day. Through such monitoring, we would like to prepare ourselves. Unknown Executive: It is now time. We would like to end the earnings call by Eisai. Thank you very much for your time. Thank you for your kind attendance. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Hudson Pacific Properties Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Laura, please go ahead. Laura Campbell: Good morning, everyone. Thanks for joining us. With me on the call today are Victor Coleman, CEO and Chairman; Mark Lammas, President; Harout Diramerian, CFO; and Art Suazo, EVP of Leasing. This morning, we filed our earnings release and supplemental on an 8-K with the SEC, and both are now available on our website, along with an audio webcast of this call for replay. Some of the information we'll share on the call today is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information as well as the reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss industry and market trends, Mark will provide an update on our office and studio operations and development, and Harout will review our financial results and 2025 outlook. Thereafter, we'll be happy to take your questions. Victor? Victor Coleman: Thanks, Laura. Good morning, everyone, and thank you for joining us today. I'm pleased to report another solid quarter of execution for Hudson Pacific in regards to our strategic priorities. We're on track for our strongest office leasing year since 2019, having locked in another quarter of signed leases north of 500,000 square feet, bringing year-to-date leasing to 1.7 million square feet. With significantly lower expirations in 2026, our office occupancy is squarely at an inflection point as we achieved positive absorption in the third quarter. We're seeing clear evidence of a recovery taking hold in the West Coast office, particularly as we benefit from the continued expansion of AI and technology companies in our markets. And on the studio side, even as the broader production environments remain challenging, demand for well-located best-in-class assets, such as our Hollywood Studios, enabled us to drive sequential occupancy improvement in the third quarter. From a capital structure perspective, we've significantly strengthened our financial foundation. On the heels of our office portfolio CMBS financing and significant equity raise in the first half of the year, we successfully refinanced our 1918 8th Street Seattle office asset and amended and extended our credit facility, bringing total capital markets activity year-to-date to well in excess of $2 billion. With $1 billion of liquidity, 100% of debt fixed or capped and no maturities until the third quarter next year, we are now in a position of strength to capitalize on ample embedded growth opportunities, or say it otherwise, leasing, leasing and then more leasing. Looking at broader market dynamics, ongoing transformation across our West Coast markets reinforces our strategic positioning, U.S. venture capital investment remained strong in the third quarter, with year-to-date deal value already tracking about 15% above full year 2024 levels. This marks one of the strongest funding environments since the 2021 peak, with AI accounting for nearly 2/3 of the U.S. deal value year-to-date and the San Francisco Bay Area capturing more than half, reaffirming the region's leadership in innovation and capital formation. These trends underscore growing optimism, which in turn sets a constructive backdrop for the industry's driving markets as well as the need for West Coast office space heading into 2026. In San Francisco and the Peninsula, leasing accelerated sharply in the third quarter, led by tech and AI tenants such as Roblox, while Silicon Valley recorded its fourth consecutive quarter of declining vacancy as demand from AI, software and hardware firms expanded. In Seattle, AI investments surpassed $1.5 billion to date, contributing to the first decline in availability in nearly 4 years. These are encouraging indicators that venture-backed tenants are once again growing, hiring and leasing space in the very markets where Hudson Pacific is most deeply embedded. Over 80% of the third quarter leasing activity occurred at our Bay Area assets, including 100,000-plus square foot AI tenant at Page Mill Center in Palo Alto, exactly the type of growth-oriented tenant that validates our market thesis. Our portfolio stands poised to capture the resurgence in demand as AI companies scale operations and require more substantial teams. Turning to our studios. While Los Angeles shoot days declined 30% in the third quarter relative to last year, we remain confident in our long-term prospects with California's recently expanded and extended film and television tax credit already creating strong momentum. Since July, the program is allocated to 74 new productions compared to only 18 the same period last year. These include 18 television series and 10 feature films expected to shoot in Los Angeles, with tax credits recipients required to begin filming within 180 days of allocation. While it's difficult to predict future show counts, this represents a sizable pipeline, especially when compared to the 80 to 85 production filming in Los Angeles on average over the last several quarters. We feel our Los Angeles studios and services are well positioned to capture our share of future demand. Regarding acquisitions. In the third quarter, we acquired our partner's 45% interest in our Hill7 office property in Seattle, in consideration for which we assume the partner's $45.5 million share of the joint venture's debt and receive $1.4 million of cash on hand. This acquisition gives us multiple paths to unlock value at a Class A, well-located property like Hill7 by proactively restructuring the existing loan and ultimately growing occupancy and cash flow as the Seattle market recovers. We have seen a notable increase in inquiries, tours and proposals for available space at Hill7, and we remain committed to operating a best-in-class portfolio in Seattle over the long term. Our approach to asset sales remains disciplined and strategic. We're under no pressure to transact and will move only when it clearly enhances shareholder value. When we see compelling pricing, particularly for non-core properties or those requiring significant reinvestment, we'll look to recycle that capital into our highest conviction assets and markets. It's a selective purposeful approach that positions Hudson Pacific to capitalize on the recovery gaining momentum across our West Coast footprint. And with that, I'm going to turn the call over to Mark to discuss our office and studio operations and updates for our development pipeline. Mark Lammas: Thank you, Victor. I'll walk through our third quarter office leasing performance, which demonstrates the strong execution and market momentum Victor highlighted. We executed 75 office leases totaling 515,000 square feet during the quarter, 67% of which were new deals, underscoring our continued success in attracting new tenants to our high-quality assets. Our in-service office portfolio ended the quarter at 75.9% occupied, up 80 basis points sequentially and 76.5% leased, up 30 basis points sequentially, representing steady progress in our leasing efforts. GAAP rents were 6.3% lower compared to prior levels, while cash rents were 10% lower. This primarily reflects 40,000 square feet across 6 smaller leases in Palo Alto, rolling from peak market pre-pandemic rents to still healthy close to $80 per square foot triple net rents. Importantly, we're seeing clear signs of rental rate stabilization across the Peninsula and Silicon Valley with improving tenant demand and space absorption, positioning us well for future rent growth. While our 2026 expirations are about 3% below market, quarterly rent spreads always reflect a snapshot of backfill leases expired over the last 12 months. As we saw this quarter, geography, tenant size and other factors influence these results. Our various leading indicators of future strong quarterly leasing activity continued to show positive momentum. Touring at our assets accelerated significantly in the third quarter, comprising 2.1 million square feet of unique requirements, up nearly 20% sequentially and 60% year-over-year. This reflects growing demand across our markets, 2/3 of which is technology related and 1/3 is specifically AI. Our leasing pipeline of deals and leases proposals or LOIs stands at 2.2 million square feet with nearly 600,000 square feet in advanced stages. We're now seeing on average 20,000 square foot requirements for tours, while within our pipeline, average requirements are approaching 25,000 square feet, underscoring that companies are becoming more confident about their growth trajectories and space needs. Hudson Pacific's lease expiration profile is now very favorable, allowing our team to focus more on occupancy growth opportunities rather than simply defensive renewals. We only have 140,000 square feet of remaining 2025 expirations, all less than 20,000 square feet, and we're in leases or negotiations to address close to half of that footage. Looking forward to 2026, we have 1 million square feet expiring, representing approximately 8% of our in-service portfolio. That's about 40% less square footage expiring than our average annual expirations over the last 4 years. Given our strong leasing momentum, we're already in leases or active negotiations on approximately 50% of 2026 expirations, which is ahead of our historical pace. Notably, we have 75% coverage on our 4 expirations exceeding 50,000 square feet. With only 30% of our in-service portfolio subject to pre-pandemic leases and 75% of our availabilities in quality assets and Bay Area markets leading the West Coast recovery, we are poised to grow occupancy and cash flow. Turning to our studio operations. We continue to make strides in positioning our business optimally for the current environment while preserving upside potential as a production recovery takes hold. On a trailing 12-month basis, our in-service studio stages were 65.8% leased, representing a 220 basis point sequential increase, driven primarily by additional occupancy at Sunset Las Palmas and, to a lesser extent, Sunset Glenoaks. Our Quixote Studios were 48.3% leased on a trailing 12-month basis, representing a sequential increase of 90 basis points. We are now seeing the benefits of our cost-savings initiatives. And in the third quarter, despite sequentially lower revenue, studio NOI adjusted for onetime expenses increased by $4 million sequentially, finishing in positive territory for the first time in more than a year. This represents yet another step forward in alignment with our overarching goal of positioning our studio business and Quixote in particular, to operate profitably in any market environment. On the development front, Sunset Pier 94 Studios, Manhattan's first purpose built studio is on time and budget for a year-end delivery and first quarter grand opening. As we approach completion, we have strong interest from multiple high-quality productions looking to lease significant portions of the facility for 6 months to a year with a potential to renew for additional term thereafter. The quality and location of Sunset Pier 94 is unmatched, and we expect demand to further accelerate as we approach completion. In the third quarter, we received entitlements to redevelop our 10900-10950 Washington office property in Culver City into a mixed-use project with approximately 500 residential units and ground floor retail. With housing and short supply, 10900-10950 offers a premier multifamily location where the demand in rents achievable make for an extremely compelling development site. We are evaluating our options to maximize value, which could include bringing in a partner to develop the site with Hudson Pacific contributing the land or selling outright. We look forward to providing additional updates on this unique value-creation opportunity in the coming quarters. And with that, I'll turn the call over to Harout for our financial results, capital structure and outlook. Harout Diramerian: Thanks, Mark. I'll take everyone through our third quarter financial results, which reflect solid operational execution amid our ongoing focus on leasing. Total revenues for the quarter were $186.6 million compared to $200.4 million in the prior year, primarily resulting from asset sales and lower occupancy as we continue working through our lease-up process. G&A expenses improved substantially to $13.7 million compared to $90.5 million in the prior year, representing a 30% reduction. This savings reflects the successful implementation of various organizational efficiency measures and underscores our commitment to rightsizing our cost structure while maintaining operational excellence. We generated FFO, excluding specified items in the third quarter, of $16.7 million or $0.04 per diluted share compared to $14.3 million or $0.10 per diluted share in the prior year. The year-over-year 17% increase resulted from improved G&A, interest expense and studio NOI, partially offset by lower office NOI. Note that third quarter FFO per diluted share reflects the share count increase following our second quarter common equity offering. Specified items in the third quarter totaled $2 million or $0.00 per diluted share and primarily consisted of onetime expenses associated with cost-saving initiatives and financing activities. In the prior year period, specified items were $7.5 million or $0.02 per diluted share. Our third quarter same-store cash NOI was $89.3 million compared to $100 million in the prior year, mostly due to lower office occupancy. As Victor highlighted, we significantly strengthened our balance sheet and capital structure. In the third quarter, our activities included the $285 million refinancing of 1918 Eighth, which underscores our ability to access the debt markets on favorable terms for assets with our high-quality portfolio. We also amended and extended our credit facility, which provides us with $795.3 million of capacity through the end of next year and $462 million through the end of 2029, with continued strong participation from our core banking group. Our liquidity position is strong at $1 billion, comprised of $190.4 million of unrestricted cash and cash equivalents and $795.3 million of undrawn credit facility capacity. We have another $15.9 million at HPPs share of undrawn capacity under the Sunset Pier 94 construction loan. 100% of our debt is fixed or capped, providing for predictable debt service costs that support our financial planning and cash flow management. Looking ahead, our next debt maturity isn't until the loan secured by our Hollywood Media Portfolio owned jointly with Blackstone matures in the third quarter of 2026. In anticipation, we continue to focus on operational enhancements at those assets and have a plan in place with Blackstone to approach the refinancing in the first quarter of next year with the goal of maximizing our financial flexibility. Turning to outlook. For the fourth quarter, we anticipate FFO of $0.01 to $0.05 per diluted share. To bridge from our third quarter FFO of $0.04 per diluted share, we expect lower studio NOI due to typical seasonality, we do not expect fourth quarter average show counts to reflect the benefit of tax incentives as productions receiving allocations have up to 6 months to begin filming. We also anticipate slightly elevated G&A in line with our full year G&A expense assumptions, which remains unchanged from last quarter. Lower stage occupancy and potential ongoing challenges required the Sunset Glenoaks joint venture to reconsider the risks associated with the underlying project financing and treatment of the venture as consolidated for accounting purposes. Based on these considerations, Sunset Glenoaks has been deconsolidated, leading to the following adjustments to our full year outlook assumptions, lower interest expense, lower FFO from unconsolidated joint ventures and higher FFO attributable to noncontrolling interests. Our full year same-store cash NOI growth assumption also remains unchanged from last quarter. As always, our outlook excludes the impact of potential dispositions, acquisitions, financings and/or capital markets activity during the remainder of the year. And now I'll turn the call back over to Victor for closing remarks. Victor Coleman: Thanks, Harout. As we wrap up today's call, I want to emphasize that Hudson Pacific is uniquely positioned at the intersection of the AI-driven technology expansion, the West Coast office market recovery and the return of a more robust studio demand. Our strategic focus and high-quality assets in innovation hubs is already paying dividends with our strongest leasing year since 2019 and positive absorption inflection point. While our strengthened balance sheet, $1 billion of liquidity, 100% fixed debt and no maturities until Q3 '26, provides the financial flexibility to capitalize on embedded growth opportunities. The momentum we're seeing from record AI investment to expanding venture capital activity reinforces our conviction that were in the early stages of a meaningful recovery and Hudson Pacific is ready to capture this opportunity. Now we'll be happy to take questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Alexander Goldfarb with Piper Sandler & Co. Victor Coleman: Alex, you there? Operator, let's go to the next question, please? Operator: Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Can you hear me? Victor Coleman: Yes, we can, Ron. Ronald Kamdem: Okay. Great. Just a couple of quick ones from me. Just starting I would love -- I see the leasing coming through. I love sort of an update on just high level where you think occupancy trends over the next sort of 12, 24, 36 months? And if you could tie in sort of any high-level commentary on the implication for same-store NOI, that would be great as well. Mark Lammas: Yes. Thanks, Ronald. We indicated in our prepared remarks where our expirations are, right, with 140,000 the fourth quarter, about 1 million next year on 67% of the activity just this quarter is all new leasing, and we've got 50% coverage on next year's expirations ahead of where we would typically be at this point. So all indications are, we are heading into positive net absorption territory and hopefully picking up steam, right, because at [ 500-plus thousand ] per quarter for quite some sequential quarters now, we're going to be outpacing those expirations by quite a bit. So trending in the right direction, not going to get too specific here about exact percentages on where we're going to land either year-end or heading into next year, but I think reasonable to expect that you're going to see -- and you saw it this quarter, you're going to see more positive net absorption. On the NOI -- same-store NOI, I think those are obviously correlated. You're seeing a little bit of a lag. We -- third quarter average same-store office occupancy dipped a little bit, right? We sequentially went down from like 73.3% to 72.8%. The -- and in comparison to last year, you're really -- you're comparing yourself to higher occupancy in that previous year, right, in the higher 70s with some pretty high rent paying tenants, not the least of which were Uber at 1455. We had Amazon and Met Park North. We had Picture Shop at 6040. Those were the main contributors to the prior year NOI that are no longer flowing through the number. In the same way that office occupancy is trending up. So we finished actually higher sequentially at 75.9%, so higher even than the average occupancy. The average occupancy flowing through the same store is also going to go up. While we need to get somewhere, I think, north of 76% because in fourth quarter, we were 76.3% average occupancy in the same store. So somewhere higher than that, plus the studios need to come -- either be stable or improve a bit, and then you're going to start to see that -- you're going to see same-store NOI start to move in a positive direction. Ronald Kamdem: Really helpful. And if I could just ask a follow-up on the studio. I think we've been talking about sort of the recovery path and trying to understand the shape. It sounds like you are seeing more activity, but just in terms of like what are the key sort of milestones and data points that we should be looking for to get a sense that this is -- the recovery is really getting going in a way that's favorable? Victor Coleman: So a couple of points on that. I mean, listen, the content spend is still constant and going up. I think you will see some pretty impressive numbers with the [ Skydance Paramount ] purchase. At the end of the day now, their new content spend is sort of rivaling the numbers that Netflix is, which is in excess of $20 billion a year. So those numbers are going to obviously, permeate in. And specific to California, as we sort of mentioned in our prepared remarks, with the new tax credits in place and the number of productions that have to commence within the first 6 months of approval, you're going to see that number just organically grow. And I think we're going to be able to capitalize on that in the production side, not just from the OpCo side, but the PropCo side as well, which we're already seeing in our Hollywood assets, which we've seen that we've picked up occupancy there to almost 100%. We only have 2 stages vacant now. And that is also a leading indicator in the production that we're seeing in the activity right now. Early on, it's very attractive, as Mark mentioned in his remarks over Pier 94. So it's trending that way. I think that the effectiveness of the credits are doing what they should be doing. We still have some work to go, though. Operator: Your next question comes from the line of Dylan Burzinski with Green Street. Dylan Burzinski: I think I don't know if it was Victor or Mark that mentioned how rents are sort of stabilizing across Silicon Valley and the Peninsula. Just sort of curious how rents are sort of trending across the rest of the portfolio. If you can provide comments as it relates to San Francisco, given the strong depth of AI demand there as well versus what you're seeing in Los Angeles and Seattle, that would be helpful. Victor Coleman: Yes, I'll let Art jump in. Arthur Suazo: Yes, I'll jump in right now. Yes, so they've been holding steady pretty much across the portfolio. We're even seeing improvement in some of the submarkets, specifically in San Francisco, with the tech demand so high and AI growth so apparent. We're seeing the growth really in the North and South Financial District, more than the other submarkets at this point, but we're really starting to see the growth in other submarkets as well. Seattle is holding pretty firm. And again, we can talk about the growth of tech and AI there that's going to cause the rates to increase over the next several quarters. But I think for now, it's really standing path. And in L.A., this building that we're in 11601, which is our headquarters building, we're seeing a tremendous increase in rental rate growth. We don't have any leasing on the west side of L.A. And so that's really our only look into the rental rates. Dylan Burzinski: And then, Victor, you mentioned obviously not having the need to sell anything, given where the balance sheet is at and the capital raise you guys did last quarter. But I'm just sort of curious, I think in the past, you guys have talked about just bringing non-core assets to market and just doing a normal process of capital recycling. So just given what seems to be an improving backdrop, obviously, on the fundamentals front, potentially leading to an improvement in the capital market side of things. Just do you guys still have continued desire to bring assets to market that you guys sort of no longer deem a fit within the context of your guys' go-forward portfolio? Victor Coleman: Yes. Dylan, listen, as the market continues to stabilize, we're going to make further progress on our occupancy, as you're seeing it right as we speak. And of course, I think we're all very pleasantly surprised with the activity specifically in the Valley and how strong it has been. And as you saw by the prepared remarks that Mark said, I mean, our average tenant size is going up, and that's leading us to having the ability to evaluate some of the assets that we can now look to sell in the marketplace at numbers that could be much higher than they were, let's say, 12 or 18 months ago. So that's always going to be some place that we're going to reflect into and see what the opportunity is to capitalize on some form of external growth and disposing of assets. So we've got a list of a few assets that are there. As I said in my remarks, we're not planning on selling some assets, but there will be assets that will be sold. We're just not going to identify them until at the end of the day, it's going to be a number that we're going to probably look at that's going to be a combination of assets that we could have sold in the past and now we're going to try to sell them going forward. And I think those opportunities are going to come fast and furious, specifically in the Valley because everybody is focused on the city right now. And I think now the Valley is also opportunistic. Operator: Your next question comes from the line of Blaine Heck with Wells Fargo Securities. Blaine Heck: Victor, we've been talking about the influx of demand in San Francisco from AI for several quarters now. And clearly, you guys have benefited as evidenced by the ex AI lease. But we've also more recently seen some layoffs coming through that could be attributed to AI displacement. So I guess my question is, do you see any of your submarkets or tenant industry as more susceptible to that potential negative trend as we look ahead? Victor Coleman: So Blaine, listen, of course, everybody is focused on AI. But if you look at the leases that we're signing, they are tech and tech-related leases, but we've signed a lot of fire-related tenants. And the expansion of those tenants, I think, is evident currently today. There is obviously a backdrop of what's the initial impact on labor for AI going forward. But what we're seeing right now, it's not impacting the core businesses that are signing, which is legal firms, insurance firms, which you would think would be impacted. They still are signing leases and taking space that is on a positive basis. A lot of education is coming to the marketplace at the same time, don't underestimate that. I think the financial institutions have yet to really show up on -- specifically in San Francisco, the way they had in the past. So they're less active, and that would be more of an impact. And clearly, you're hearing and seeing a lot of the financial institutions shipping employees to secondary tier markets where they can have lower cost of rents and the likes of that. And so I think we're finding that the impact is not as great immediately. One true sign, though, and Art can get into some statistics which is, I think, very, very unique to this past quarter's data that we've seen is now we're seeing a drop in sublease dramatically impacted in some instances in throughout all of our markets, but really in the Peninsula and in the city. The sublease space is coming back to the tenants because they realize they want that space now for future growth. Arthur Suazo: Yes. Victor, I was going to say to your point, it's AI and tech really grabbing the headlines everywhere because it's a sexy thing to say. But it's not a 90-10 situation, Blaine. It's really 55% of our pipeline is tech and half of that is AI. This 45% of our pipeline is fire sector, professional service firms, education that we're availing ourselves up as well. Blaine Heck: Great. That's really helpful color. Just switching gears with respect to Quixote. You guys have done a good job of improving efficiencies in that business. Can you just give us an update on how much more you can cut on the cost side or whether that effort has kind of run its course at this point? And any color on your ultimate plans for that business would be helpful. Victor Coleman: Yes. Listen, I think we're making some headway, as you said, we've got more to go. We've got some things in plan. Obviously, I'm not going to disclose the exact numbers and the time line, but it's in the works right now. We're on the precipice of breaking even. That's been the objective for first quarter of '26, and we're getting there along the way and comfortable that I think that we'll achieve that. From that point on, we'll have to look at where the market is, where the show counts are, what's the absorption from our market share from the OpCo side and then see what's the next phase in that business. We've always said we're going to be reacting to where the future of this business is going to go. We've come through what we would call is the 100-year storm. And hopefully, we're coming out of it and may be better off than we think. We're not optimistic yet, but we're at least seeing the positive signs. Mark, do you want to comment? Mark Lammas: No. Yes, I think you summed it up. I would just say, Blaine, in our prior call, we mentioned a cost saving of approximately $23 million per annum -- pro forma $23 million to $24 million. And if you look at our most recent results, it bears that out perfectly. Last year, in the third quarter, we had $25 million -- nearly $25 million of expenses for Quixote. In this quarter, adjusted for those onetime items, we're at $19 million. And so if you run the run rate on that, you'll see it supports the annual savings target that we had mentioned, which I think is, for us, a nice confirmation that our cost savings is coming through. Operator: Your next question comes from the line of Richard Anderson with Cantor Fitzgerald. Victor Coleman: Rich, you there? Richard Anderson: Excuse me, sorry. Okay, I'm on, I'm now I think. Victor Coleman: I thought you were with Alex. Richard Anderson: Yes, I know. I did say I buy rating on the Zoom execution here. I like it a lot, except for the fact that I don't know how to unmute myself. So I was looking at the leasing stats sequentially, and I was trying to do this quickly while you were talking, but when was the last time in the office space that leasing sequentially went up both from an occupancy perspective and a lease percentage perspective because it wasn't in 2024, and it wasn't at least in a lot of 2023. That's as far as I got before I asked the question. I'm just curious how substantial you see that sequential move, albeit small, is that something that's sort of signaling to you part of this bottoming that you're hoping to see? Victor Coleman: Well, as Mark sort of checking the stats because I don't think it was -- I think the last time it was probably in '22, but he's going to look, but he probably doesn't have it. But I can tell you, we did say on our last call, I think somebody had asked the question, where is the bottom? And I think I commented that we were at it. And so that sequential move, yes, it's -- listen, it's positive. We're nowhere near satisfied to where it's going to be. As you know, the indications as we said, between what we have in our pipeline and deals that are out to be negotiated, both on the 50% of the deals that we have for next year that we're already in negotiations on and new leasing, we're moving on that track. But I don't really know what that number is, Mark? Mark Lammas: I mean there may have been a blip in there somewhere, but it's got to be 2, if not more than 2 years since we've had a sequential positive quarter, both on leasing and occupancy. We bottomed out, as Victor said, essentially 2 quarters ago, we were at 75.1, and then we sequentially did another 75.1 in occupancy and of course, we're 80 basis points higher than that this quarter. So you can easily discern that bottoming and then sequential improvement, but that's been a long time in the making. It's -- we can get it to you, Rich, but it's got to be over 2 years since we've had that. Richard Anderson: Okay. Great. Second question for me. Understanding you got a lot going on besides AI, but I'm curious about the kind of the shared knitting of an AI-oriented lease. Are companies maybe taking less lease term or maybe different types of assets, maybe not high rise, but more low-rise, suburban, just not making an overcommitment yet to AI in terms of the space -- the type of space and the commitment they're making time-wise. I'm wondering if it's different with AI than it is for your other more conventional office tenants. Victor Coleman: I think the only thing that -- and Art is going to jump in and tell you about the stats around it. But the only thing that's different is they're looking for growth, right? They're much more growth-oriented. If they want 100,000 feet today, they want a line of sight for another 50,000 or 100,000 tomorrow. And that is obviously going to be correlated to high-quality buildings with some potential role that they can absorb when tenants move out or vacancy in place. And that's been consistent throughout. But I think that theme has also been always with tech. They want the ability to grow, but also they want the ability to have their own security and safety amongst their employees. They're spending a ton of money on personnel. They want to make sure that the environment is conducive to their people and not other companies. And there's been a big negotiation now, which we hadn't seen until early on in the tech years where the competitive landscape of other tenants going in the same building, they refuse to have similar tenants in similar working class or proprietary information being in their buildings. Arthur Suazo: Yes. Victor hit the nail on the head. It's really about path to growth, being able to control their growth, being able to control their security. There's talk about high-rise versus low-rise. I don't -- they're looking for quality Class A or trophy assets with growth top of mind. No question about that. They also are looking more for kind of richly amenitized space. That's a big driver for the AI users. And which is another reason they're looking at second-generation really high-quality second-generation space, a, to cut cost, and b, to move in quicker. So those are really the key items. Richard Anderson: Okay. And then if I sneak on one quick one. On the tax credits for studios, obviously, an improvement. But do you think it's enough versus other areas of the world in terms of trying to move production elsewhere outside of LA? Do you think that enough has been done or do you think it needs to be something even more substantial to keep production in California? Victor Coleman: Listen, I never think it's enough. This is a captured business that I think the leaders, both on the statewide in city and county-wide took for granted for a very long time and realized now that they have to be competitive. I do believe that there is going to be more changes that are just more than beyond just tax credits, both above the line and below the line. And the below line is really important for the unions right now and they're focusing on that. There is other things that we have talked about, and we're seeing implemented like fees, license fees, filming fees, ease of production. Right now, it is beating the markets that really took a lot of infrastructure away from us, like the Georgias and the New Mexicos and the New Orleans of the world. But at the end of the day, you can always do more, and we've been pushing very hard with the -- all the entities, both on the federal and the state side, film commissions and the city and the mayor and the governor to help enhance this. And it's clearly evident that they recognize they need to do more. We just hope it's going to be enough and quickly. Operator: Your next question comes from the line of Alexander Goldfarb with Piper Sandler & Co. Alexander Goldfarb: Victor, I'm unmuting, new challenge with this new technology. Victor Coleman: Are you talking, Alex? Can I hear you? Sorry, Alex, you there? Alexander Goldfarb: Yes. I feel like a dinosaur. My kids would have fun, call me a fud. So 2 questions here, Art, just going to Northern California specifically, we hear a lot of talk that more of the AI and more of the growth is in San Francisco, but your overall comments suggest that the Peninsula is picking up with activity. So can you just give a sense of the dynamic between what the leasing is like in San Francisco itself and then how the leasing is going in the Peninsula? And if it's big tech in the Peninsula or if you're starting to see a lot of the smaller start-ups and other smaller tenants active in the Peninsula? Arthur Suazo: Sure. A couple of quarters ago, I mean, the talk was it was chiefly -- 2, 3 quarters ago, chiefly it was the big AI users in the city. And then I would say over the last 1.5 quarters, we've really started to see the migration of some of these larger users who are taking 200,000, 300,000 feet in the city, now taking 50,000, 100,000, 150,000 square feet down across the Valley and the Peninsula. So it's really -- I think it's really evened out in terms of growth. And obviously, in the Valley we see more of kind of the early-stage tenants -- incubator stage tenants that are growing into 5,000, 10,000, 15,000 feet, which will become the next 25,000, 50,000 square foot tenant. So we're really seeing brisk activity across all of Northern California at this point. Alexander Goldfarb: Okay. And then Victor, just going back to the entertainment and the tax credits. By your comments on the 180-day sort of shot clock, if you will, it sounds like we really shouldn't expect a material pickup until the back half of next year. I realized Harout's not giving guidance yet, but just from sort of getting our expectations in line for how the studio ramp would go, it sounds like it's really a back half next year based on that 180-day shot clock. Is that fair? Or you think it could be sooner? Victor Coleman: Listen, I never want to go earlier on comments, especially if you're giving me a lifeline to go longer. But I think the 180 sort of takes us to the second quarter of next year. And you're not going to see it right now. Obviously, we're in November and December is obviously the quietest month of the year for production. So by the time they start filming, it should be really effective for the second quarter. And then clearly, going forward, there will be another launch of shows that are approved. I believe it's November 19, so you're going to see that. And then you take that 180 from that time line is really gets you almost till May. So at the end of the day, yes, you're going to see the second half of the year for sure, but I do think you'll have an impact after the first quarter. Operator: Your next question comes from the line of Vikram Malhotra with Mizuho. Vikram Malhotra: It was pretty simple. I just got an unmute request, so I think I clicked it, but this is great. I think this format is pretty cool. So I like that you did it. Just -- maybe just going back to the core office side, you talked a lot about fire AI. I'm just wondering, bigger picture, like as your strategy evolves to grow from the bottom with so much vacancy in other peer buildings and just the markets, like how do you gain share consistently? Are there pockets where you're saying we're giving up on price incentives? Are there like specific buildings that you're looking at and saying like, "Hey, we need different strategies." Like I'm just trying to figure out, like in this environment as you bottom, but to grow from the bottom, just how competitive is it? What are your peers doing? Is it just a price war? Victor Coleman: Yes, Vikram, I think that's a great sort of astute point, is it really just pricing to the bottom. And we don't see that for 75% of our portfolio. Because that part of the portfolio is Class A. There's a demand there. We've seen us compete with maybe 1 or 2 other projects. It's not a list of 10 that we're competing with, and we're getting more than our fair share. And it looks like going forward, we're going to continue to get much more than our fair share given what we've seen on the pipeline going forward. But I would say we've talked about this in the past. There is 20% or so of our portfolio, we have assets that are going to fight the fight with other assets in the marketplace. And hopefully, we'll get more than our fair share, but we're willing to take our fair share at the end of the day. And whatever it takes to go out and lease those assets, we're not going to turn anything down. No, we're not giving it away by no means because the market is going to dictate that across the board. But at the end of the day, I think it's safe to say that we will be much more further ahead given where, as you can see with all the statistics that have come to market, the lack of development that is coming to the marketplace, there is 0 in all 3 of our major markets, which is the Bay Area, the Pacific Northwest and here in Los Angeles. So those marketplaces have 0 new development. So organically, as you see the demands continue to drive in fire and other related businesses that are outside of tech and AI, those buildings will lease. Arthur Suazo: And Vikram, if I can add to what Victor said, regarding the assets that you're referring to, the type of asset you're referring to, if I could add kind of a tactical piece to this thing that gives us a competitive edge is we have -- in those assets, we have over 300,000 feet, closer to 350,000 square feet of ready-built spaces for these tenants that are in great condition and move-in ready condition that really have carried the day for us. And it allows -- especially now allows tenants to move in a lot quicker. And so that's been the difference maker in those assets that you're referring to. Vikram Malhotra: Okay. And then just on the studio side. So like if I take the 3 big segments, your long lease, long duration lease stages, ones that are shorter in the Quixote business. Just assuming Quixote doesn't come back for a while, for whatever reason, it's more variable. Can you remind us of the stickiness of the other 2 businesses, what's the variability there? Like how should we think about sort of from here on a downside scenario? Victor Coleman: Well, if you look at the Sunset portfolio, virtually with the exception of Glenoaks right now, it's almost 100% leased. And the stickiness is those longer-term leases take us until almost '31 for the most part. I mean there are a couple of shows that go through 2026 and '27, but the lion's share goes through '31 with our Netflix leases, which is almost uniformly that way. Clearly, the show by show, the ones we have currently have right now have all gotten picked up for the next seasons. So we're feeling good about that stickiness for those shows. And that's the directional force of what we're seeing. We're looking right now at 40%. Tenant it's taking 40% of our Pier 94 asset, which is a show that will go at least a couple of seasons. And so that, I think, is sort of the future of where this industry is going and the competitive landscape at the end of the day, it's going to be a show by show versus a long-term lease. On the Quixote side, we have the same thing. We have some sticky shows right now, and we have some vacancies. Operator: Your next question comes from the line of Tom Catherwood with BTIG. William Catherwood: Great. You guys hear me? Victor Coleman: Yes, we can. William Catherwood: Perfect. Perfect. So I wanted to go back to Alex's question on demand in the Peninsula. And Art, I think last quarter, you mentioned discussions with 4 tenants looking for something like 100,000-plus square feet each in San Jose. Can you provide an update on those and your kind of overall leasing expectations in that market? Arthur Suazo: Yes. Sure, Tom. Those -- we did talk about there were 4 tenants across the Valley and the Peninsula, one of which we executed on and the other 3 are still in process. We're starting to see more demand in the kind of 50,000 square foot range at the airport, which I think was going to carry the day. And our team there has got demand drivers kind of in hand relative to those deals. William Catherwood: So is your expectation that we could see an acceleration in leases executed in that airport market in the near term? Arthur Suazo: Yes, we're definitely going to start to see an acceleration of that, and we've already started to see that in the Peninsula as well. Victor Coleman: I think we've been pleasantly surprised with the size increase of tenants in the Peninsula in the last 6 months. And the line of sight for future tenants, including the 3 that we're referring to, there's many behind them in that sort of 40,000 to 80,000 foot range that are in the marketplace. William Catherwood: Great. Perfect. And then second one for me, going up to Seattle on Hill7 specifically, what's the leasing outlook for that building? And how much did the need for incremental leasing CapEx play into the buyout of your partner's position? Arthur Suazo: I'll talk about the activity at Hill7. And currently, we're in negotiation with 3 multi-floor tenants, totaling about 139,000 square feet, and there are various stages, but it would address nearly all of the existing vacancy. Victor Coleman: Yes. And in terms of the economics around that, listen, it's -- we look at it as an opportunity. We have an allowance that is already in place for TIs to a certain amount of the leasing that Art's referring to. So it won't be coming out of pocket. It's already allocated to the building. And we just think that the asset with the quality space that's in place right now, it's going to need very little TIs. The build-out is very, very impressive, and that's why the demand is there. This would be an asset that we would have to reposition, but fortunately, we don't. And so I think the opportunities with the tenants that we're looking at is really like a plug and play. And we're optimistic that we're going to get some of those deals done relatively quickly. William Catherwood: And so again, that sounds very positive, Victor. Great to hear that. But that being the case, then what drove the buyout of the tenant? Was it concerned -- it can't be refinancing concerns that debt doesn't come up until '28. What was the kind of catalyst that brought that to a head at this point in time? Harout Diramerian: No, it's a good question. It is putting in capital in the future, and we're better positioned for that and we see a bigger upside than our partner did. And so that's -- you're exactly right, it's exactly that. Victor Coleman: And this is not new for the partner to exit. They've done this with other -- specifically other REIT partners, they've just walked away from assets. Operator: Your next question comes from the line of Jana Galan with Bank of America. Jana Galan: Just a quick one on the office leasing this quarter. It looks like the average lease term came down for both new and renewal leases. Were there any large one-offs influencing this? Or are AI firms just prone to shorter lease term? And as this segment increases in your portfolio, how should we think about kind of the TIs, leasing commissions and maybe faster lease commencements? Mark Lammas: Yes. The tenant -- the large tenant we signed a deal on in Palo Alto was really what underlied the sequential downtick, if you will, in term. I mean just in terms of overall economics leasing is holding up well. I mean you may have noticed that net effectives came down a bit sequentially, but they stayed in the same range of where they landed now for quite some time. Where if you look at net effectives on a trailing 12-month basis relative to pre-pandemic, we're approximately 10% off, which has kind of been -- that towards the upper end of the range of where we've been for quite some time now. I still think things are trending back towards closer to pre-pandemic net effectives. It's just we had this quarter a little bit of a dip. On other economic fronts, rates are holding fine. TIs, you'll notice ticked up a little bit. Again, same lease associated with that. I think where we'll see the benefit in terms of that TI spend is that, that was first-generation space. We completely repositioned that asset, taking it offline. So the spend sort of correlates with the condition of that space to get that tenant move in. And I think we'll see a benefit from that when we renew that tenant, we'll get a sort of more bang for our buck, if you will. But in terms of overall TIs, if you look at TIs per annum for the -- on a trailing 12-month basis, they're actually 14% lower than pre-pandemic trailing TIs per annum. So again, a good sign that lease economics are holding. Operator: Your next question comes from the line of Lauren McNichol with Citigroup Global Markets. Victor Coleman: Lauren, are you there? Operator: [Operator Instructions] Victor Coleman: All right. We'll come back to Lauren. Let's move on to John. Operator: Your next question comes from the line of John Kim with BMO Capital Markets. John Kim: I wanted your thoughts on Mayor Mamdani. No, I'm just joking. There was a Mayor race with a socialist front runner similar to what we had in New York. But I was wondering if you believe that has impacted leasing decisions or any economic decisions in Seattle over the last couple of months? Victor Coleman: Listen, I'm getting live updates, John, right now as we speak. And as of the last -- there's going to be a poll drop, I think, at 11 a.m. this morning. But I think if it was a 54-46 in favor of Bruce. And so -- and it looks like it's -- the City Council is going to be [ 6 3 ] still as a firm hold. I think we're going to see -- it was an amazingly low turnout. I think historically low turn out in Seattle. So we're going to see what the impact is at the end of the day. Clearly, you know where our position is on that. At the end of the day, Seattle, the shift on this potentially could be impactful only because not based on the politics, just based on the background of the potential new mayor, if she gets elected, I mean she has no background in terms of running any governmental agency or any history of that. And so I think the process in Seattle could be slowed, but let's hope that Bruce gets in, and we'll know that in the next couple of days. John Kim: Fingers crossed. Okay. Second question is on your economic and leased occupancy, they both trended in the right direction this quarter. But it seems like you've walked back from the target that you mentioned last quarter of high 70s, low 80s by year-end. I was wondering if that was still on the table. And as part of that, if there's any update on 1455 Market since that seems to be a pretty big needle mover? Victor Coleman: So I'll start on that because it was -- I think if you recall, I said, leased -- I specifically said leased, and I said some time by year-end or first quarter, and I know you like to hold us to specific correlated numbers. The trajectory is there. Whether it gets there by December 31 or it gets there by March 1, it's there. And so I wouldn't worry about is this immediate and impactful on a moment in time. And so specific to 1455, negotiations are moving along at the pace that we are very happy with. But it is a city entity, and the process will take time. But I believe our team is extremely confident that, that deal will get done in a matter of time. That being said, as you heard by our prepared remarks and by what you've seen with our pipeline, we're very comfortable with our renewability for the remainder of '25 and all of '26 and the percentages around that, and the new tenant absorption and the activity around that, we're very comfortable with that as well. Mark, do you want to jump in? Mark Lammas: No, I think you summed it up. John Kim: 1455? Mark Lammas: Yes, that's what I said, I was talking about the city. That's what I was referring. Operator: Your final question comes from the line of Lauren McNichol with Citigroup Global Markets. Seth Bergey: This is Seth Bergey. Is the line unmuted? Victor Coleman: Yes, you are. You kicked Laura out... Seth Bergey: No, she's here with me. I guess my first question is on the 4Q guide, $0.01 to $0.05. At this point in November, kind of what gets you to the low and high end of the range? Harout Diramerian: Seth, it's Harout. It's -- I think we -- in my prepared remarks, I mentioned that the driver at this point is really around the studio business. It is slower activity in the fourth quarter. So if that were to tick up, I think that puts us in the higher end of the range. And if that were to tick down, it would put us in the lower end of the range. That's really the biggest driver at this point of the year. Seth Bergey: Okay. And then I guess just on that, how should we think about the recovery, the shape of the recovery? I think you mentioned some seasonality in the fourth quarter. And then they have 6 months. So is that kind of a 6 months kind of where you would expect to kind of see the pickup? Or would you kind of expect to see like a steady increase until that time period? Mark Lammas: Yes. That's about -- that's the right time frame. The new -- the enhanced credit went into effect in July. There was a round of awards right out of the gate, roughly, I don't know, 20-something awards. More recently, there were another, I don't know, 40-plus awards for a total of 74. They -- we think, and our numbers are pretty good on this, that roughly 15% of that is currently in production. So there is squarely a lag between the amount of shows that have been awarded and those that are under production. So we -- that should hit within that 180-day time frame from the 2 different awards starting in July. Seth Bergey: Okay. Great. And if I could ask just one more. I believe on the last call, you kind of mentioned there are some pickup in tour activity Washington 1000 and some space requirements that you were kind of engaged with there. Could you just kind of give us an update on that activity? Arthur Suazo: Sure, Seth. You're absolutely right. But this tour activity we talked about last quarter has increased even more based on the demand drivers -- the positive demand drivers we're seeing in Seattle. Tour activity increased 171,000 square feet quarter-over-quarter, which is to say it went from 200,000 feet to 371,000 square feet. We're currently in some form of negotiation with 4 tenants with requirements of 50,000 square feet or more. And 2 of them are in later stages. So we feel really good about that. And as the competitive landscape continues to improve in Seattle, we feel that we're even better positioned now than we ever have been. Operator: There are no further questions at this time. I will now turn the call back to Victor Coleman, Chief Executive Officer and Chairman, for closing remarks. Victor Coleman: Thank you again for participating in our third quarter call. We look forward to giving you updates as we go. We'll speak to you after the New Year, hopefully. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Fortrea Q3 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tracy Krumme, Fortrea's SVP of Investor Relations. Please go ahead. Tracy Krumme: Thank you. Good morning, everyone, and welcome to Fortrea's Third Quarter 2025 Earnings Conference Call. With me today on the call is Anshul Thakral, Chief Executive Officer; and Jill McConnell, Chief Financial Officer. Before we begin, please note that this call is being webcast. There is an accompanying slide presentation, which can be found on the Investor Relations section of our website, fortrea.com. During this call, we'll make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties that could cause actual results to differ materially from our current expectations. We strongly encourage you to review the reports filed with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our press release and presentation that are posted on our website. Please note that any forward-looking statements represent our views as of today, November 5, 2025, and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures provide investors with a more complete understanding of results. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and the earnings call presentation, which is provided in connection with today's call. Lastly, I would like to add that Anshul, Jill and I will be attending the Citi and Evercore Healthcare Conferences on December 2 and 3, respectively. If anyone would like to meet with us on these dates, please contact me or a sales representative from the firm. And with that, I'd like to turn the call over to Anshul Thakral, Chief Executive Officer. Anshul, please go ahead. Anshul Thakral: Thank you, Tracy. Good morning, everyone, and thank you for joining us today. As I mark my first 100 days in this role, I want to begin by expressing my gratitude for the warm welcome and support I have received from colleagues at Fortrea, our Board, our clients and our broader community of stakeholders. I'm pleased to share that Fortrea delivered solid results in the third quarter, in line with our expectations. Revenue for the third quarter was $701.3 million, adjusted EBITDA was $50.7 million and backlog is over $7.6 billion. Our book-to-bill ratio improved to 1.13x, up sequentially from the second quarter, and our trailing 12-month book-to-bill ratio of 1.07x remains in line with the CRO sector. These results, combined with the continued strength of our pipeline position us for continued backlog growth. Overall, we saw demand for our services grow. Our win rates improved significantly, reaching the highest level in 6 quarters. Specifically with biotech clients, our win rates doubled compared to the prior quarter. Decision-making time lines for biotech clients have continued to improve from a low in the first quarter of 2025. We saw continued strong RFP flow across clinical pharmacology and full-service clinical development and have a robust pipeline that is balanced across biopharma and biotech clients. While we saw a slight increase in our cancellation rate, it remains within our historical range. The overall demand environment is showing signs of improvement with growth in clinical trial starts so far this year and increased biotech funding in Q3. Biopharma remains resilient and continues to advance its development portfolios, reflecting the underlying strength of the science. Our cash position is robust, bolstered by the receipt of the second and final milestone payment of $25 million from the divestiture of our enabling services business. We continue to focus on debt paydown, including a recent tender offer to repurchase up to $75.7 million of the company's outstanding senior secured notes, funded in part by our improved cash position. These actions underscore our commitment to maintaining a healthy balance sheet and financial flexibility. We also welcomed Bill Sharbaugh to our Board of Directors this quarter. Bill brings a wealth of experience from his long tenure as an executive in clinical development at Bristol-Myers Squibb and PPD. I have had the privilege of working with him previously. His insights will be valuable for our Board as we execute our strategic plans. Let me provide some details on our new business wins in Q3. We secured several significant awards with new and repeat clients that underscore our differentiated capabilities and strong client relationships. Our clinical pharmacology business continues to grow with robust wins from leading pharma partners as well as biotechs. Average contract size continues to increase, consistent with our expertise in managing complex early phase clinical trials. Our portfolio continues to see growth in metabolic disease, neurodegenerative disease, immunologic and rheumatologic diseases. We also see growth in studies, including patient cohorts, which we are increasingly able to execute internally within our own clinical research units or what we call our CRUs. This is true for later-phase studies as well, where we are able to leverage our CRUs as multipurpose research sites. Our global clinical development business saw diverse awards across multiple therapeutic areas -- our new to Fortrea Biotech awards in the quarter included a Phase II study in a rare neuromuscular disease. We won repeat business from several clients in the quarter. These wins included two Phase III ophthalmology studies from a biotech client, a Phase III complex respiratory disease study from a midsized pharma and a Phase II oncology study from a large pharma client. In addition, we were delighted to secure 2 new strategic partnerships with midsized clients. Turning to client and operational highlights. We are pleased to report another sequential improvement in Net Promoter Scores in Q3, reflecting our ongoing focus on client satisfaction and operational excellence. Our NPS improved further year-over-year, supported by measurable delivery achievements, including reducing the time to site selection by 33%, accelerating recruitment in a high-priority complex respiratory study by 3 months and finishing enrollment 5 months early in a Phase II Alzheimer's study. This is the execution excellence that drives client trust. With our culture of innovation, we continue to make strides in technology and AI adoption, delivering productivity gains that are expected to improve efficiency, quality and client delivery. I'll highlight some of the innovations that are part of our Fortrea technology strategy focused on digital modernization of our workflow. Earlier this year, we launched Accelerate Risk Radar, including an AI-powered agent designed to enhance risk-based quality management in clinical trials. It uses AI and ML to automate risk identification and suggest mitigation strategies, reducing manual effort and improving efficiency and patient safety. Start My Day is a new digital experience that brings actionable insights and prioritize tasks into a single intuitive persona-based interface for CRAs and study teams. This tool is designed to improve daily productivity and decision-making. It's in pilot stage now with broader deployment planned in 2026. As part of our strategy to modernize CRA workflows, we are broadening the rollout of our ICRA mobile app and digital assistant following successful pilots. We are integrating the app with our Accelerate platform to provide smart reminders, digital site check-ins and risk metrics. Early users report 5% to 10% efficiency gains, which should increase as we add further functionality, tangible proof that our strategy is delivering. These initiatives streamline processes, reduce manual effort and foster a culture of continuous improvement, positioning Fortrea for operational excellence and scalable innovation. Now I'd like to share more color about our progress on our strategic plans. As I mentioned on our last earnings call, my first 100 days at Fortrea were focused on 2 priorities: deepening client-facing activities and employee engagement. To that end, I traveled extensively across the United States with members of our executive team as well as to India, China, Japan, the U.K. and Bulgaria, meeting with clients and colleagues. These visits included discussions with many of our top clients to strengthen partnerships as well as joining our sales efforts by attending bid defenses and numerous meetings with biotech executives as part of our new client acquisition actions. Client feedback on Fortrea has been overwhelmingly positive. Both large pharma and biotech clients value our global delivery, quality, executive attention and operational improvements. Biotech clients, in particular, appreciate our balance of scale, agility and the focus on client intimacy. With that said, we, of course, like all CROs, can continue to get better in project management and overall client relationship management. We held in-person employee town halls across various geographies and offices, engaging with about 1/3 of our workforce. We saw firsthand a hackathon in India, showcasing grassroots innovation from our study team. We are instilling a culture amongst our colleagues to continue to focus on efficiency across all aspects of our workflow. I am proud of our employees' deep experience and their commitment to our mission of bringing life-changing treatments to patients faster. The team moved quickly through our leadership transition without missing a beat, and there is a strong emphasis on employee engagement. They have worked with tireless dedication to serve our clients and position the company for future success. My first 100 days also reaffirmed that our strategy should center around 3 critical pillars for the business: commercial excellence, operational excellence and financial excellence. Commercial excellence is how we return to growth, built on the 3 Rs: reach, relevance and repeat. We must continue to expand our reach by growing our pipeline of new opportunities and acquiring new clients. We must also leverage our recognized therapeutic and scientific expertise in ways that are relevant and resonate with clients, doubling down on areas where we are already strong. Lastly, we're growing our roster of repeat clients through sticky relationships and enhancing our account and portfolio management capabilities. Operational excellence is how we deliver quality and productivity consistently for our clients. We are optimizing project management, streamlining our structure and bringing therapeutic experts closer to delivery. We're also enhancing our biotech operating model and empowering our operational teams to accelerate studies with better technology, tools, training and infrastructure. Financial excellence means continuing to rightsize our organization while driving margin expansion. While cost actions have begun to reduce our expense base, we are implementing further targeted initiatives to ensure that these translate into margin improvement in 2026. The ability to tightly match resources to demand must remain in Fortrea's DNA. We continue to optimize our capital structure. We remain focused on positive cash flow and stay committed to keeping our DSOs in the low to mid-40s. We're closely monitoring the pricing environment to balance winning new business and achieving attractive margins amid competitive pressures. I will now turn the call over to Jill for a deeper dive into our financial results. Jill McConnell: Thank you, Anshul, and thank you to everyone for joining us today. In my prepared remarks, I'll cover the primary factors that influenced our third quarter performance and share an update on our 2025 guidance. I'll highlight our progress against our previously shared cost optimization initiatives. Additionally, I'll spend a few minutes highlighting improvements in our cash flow this quarter and our expectations regarding liquidity and our sound capital structure that position us well as we move forward. These results demonstrate that our actions are beginning to deliver results. I wanted to be clear that we are continuing to take appropriate actions to improve our financial performance and capital profile. As Anshul stated, we delivered a solid third quarter. For the quarter, we delivered revenue and adjusted EBITDA that continues our momentum towards our margin optimization initiatives, including delivering nearly 2/3 of our $150 million in gross savings targets in the first 3 quarters of the year. We generated strong positive operating and free cash flow, and we delivered a 13-day improvement in DSO versus the second quarter as we have now fully unwound the impact of the invoicing costs related to the launch of our new ERP system during the first quarter. Now I'll cover the financial results in more detail. Third quarter revenue was $701.3 million, 3.9% higher than the prior year quarter, driven by increases in both our clinical pharmacology and clinical development businesses with a small benefit from foreign exchange. The increase in our Clinical Pharmacology business was primarily driven by higher demand as well as study mix that is resulting in increased levels of pass-through costs. The clinical development increase was driven by recent net new business awards, including higher pass-through costs, partially offset by lower FSP revenue. On a GAAP basis, direct costs in the quarter increased 9.9% year-over-year, primarily due to an increase in pass-through and stock compensation costs as well as the negative impact of lower research and development tax credits. This increase was partially offset by lower headcount and personnel costs, which declined despite the reintroduction of variable compensation as we carefully balance investing in our employees while delivering on our transformation efforts. SG&A in the quarter was lower year-over-year by 21.6%, primarily due to lower TSA and IT-related costs. If you look at underlying controllable SG&A sequentially, SG&A in the third quarter is 7% lower than in the second quarter of 2025 and 20% lower than our fourth quarter 2024 run rate. This also includes the absorption of reintroducing variable compensation. I'll discuss progress on our ongoing transformation efforts across the organization later in my remarks. Net interest expense for the quarter was $22.6 million, broadly in line with the prior year quarter. Turning to our tax rate. We recognized income tax benefits of $12.8 million, which resulted in an effective tax rate of 44.6%. The effective tax rate for the 3 months ended September 30, 2025, was higher than the company's statutory tax rate, primarily due to an increase in the company's U.S. operating losses, partially offset by nondeductible compensation expenses, valuation allowance and withholding taxes on our non-U.S. earnings. Our book-to-bill for the quarter was 1.13x, significantly improved from the second quarter as we navigated the brief period of leadership transition. Book-to-bill for the trailing 12 months was 1.07x. Our backlog is over $7.6 billion. Although cancellations were slightly higher in Q3 than in the last few quarters, they have continued to be in line with our historical trends. Adjusted EBITDA for the quarter was $50.7 million compared to adjusted EBITDA of $64.2 million in the prior year period. The reduction versus the prior year quarter is driven primarily by lower margin related to project mix, including a higher proportion of pass-through costs, the reintroduction of variable compensation and a reduction in R&D tax credit. Moving to net loss and adjusted net income. In the third quarter of 2025, net loss was $15.9 million compared to a net loss of $18.5 million in the prior year period. In the third quarter of 2025, adjusted net income was $11.7 million compared to adjusted net income of $20.7 million in the prior year period. For the current quarter, adjusted basic and diluted earnings per share were $0.13 and $0.12, respectively. Turning to customer concentration. Our top 10 customers represented 60% of third quarter 2025 revenues. Our largest customer accounted for 19.8% of revenues during the quarter ended September 30, 2025. As I comment on cash flows, note that all references to prior year cash flows are for the entirety of Fortrea as we had not segregated cash flows from discontinued operations for the businesses sold in June 2024. To more clearly see year-to-date and third quarter cash flow metrics, please refer to the investor presentation we posted to our website this morning. For the 9 months ended September 30, 2025, we reported negative operating cash flow of $15.6 million compared to positive operating cash flow of $245.7 million in the prior year period. The positive cash flow in the corresponding prior year 9-month period was attributed primarily to the initial sale of receivables under the securitization program initiated in June 2024. For the third quarter of 2025, we generated positive operating cash flow of $87 million and free cash flow of $80 million, which exceeded our expectations. Days sales outstanding from continuing operations was 33 days as of September 30, 2025, 13 days lower than June 30, 2025, and 17 days lower than the same period last year. The significant reduction versus the second quarter primarily demonstrates our continued progress to improve the timeliness of our order to cash processes, although we did benefit from the timing of certain payments in the quarter. Net accounts receivable and unbilled services for continuing operations were $663.2 million as of September 30, 2025, broadly in line with the $659.5 million balance as of December 31, 2024. We ended the quarter with no borrowing on the revolver compared to $50 million outstanding as of June 30, 2025. Our positive operating cash flow in the quarter, combined with our undrawn revolver, resulted in available liquidity in excess of $0.5 billion. We currently target full year 2025 operating cash flow to be slightly negative with the first quarter negative cash flow being mostly offset by positive cash flow generation for the remainder of the year. With our targeted EBITDA and the significant add-backs available under the credit agreement, we expect that we will continue to have ample liquidity for the foreseeable future. As an important reminder, our credit agreement includes add-backs well beyond what we include in our definition of adjusted EBITDA, such as the pro forma benefits from in-flight cost savings initiatives, our public company costs and costs necessitated by the spin. The maximum net leverage ratio under the amended credit agreement ranges from 5.5x to 6x over the years 2025 and 2026 and reverts to 5.3x as of the first quarter of 2027. While we do not disclose our covenant calculation, we have considerable headroom and our covenant leverage ratio under our credit agreement is significantly better than our reported leverage ratio, generally at least 1 turn better than our reported leverage. We are currently and anticipate that we will remain fully compliant with the financial maintenance ratios of the credit agreement for the foreseeable future. Our capital allocation priorities continue to be driving organic growth and improving productivity, along with debt repayment, including the closing of our note repurchase that is required under the indenture in connection with the divestiture of our enabling services businesses in 2024, which is expected to take place in the fourth quarter of 2025. Backlog burn in the third quarter was in line with the second quarter of this year and in line with the prior year period. This was supported by growth in our faster burning clinical pharmacology business, along with our progress in moving clinical development projects into more intensive phases of their life cycle. We anticipate this trend to continue throughout the remainder of 2025. Now I'll give an update on how we're executing against our transformation plan. As previously shared, we continue to execute against our target of gross cost reduction of $150 million in 2025 with the expected net benefit of around $90 million this year as some of the cost reductions are being offset by the reintroduction of variable compensation. Year-to-date, we have captured more than $95 million in gross savings with roughly $53 million in net savings contributing to improvements in EBITDA. Year-to-date, these savings have benefited largely gross margin more than SG&A, but we are seeing an increase in SG&A savings as the year progresses, consistent with our planned timing for executing on the SG&A-specific savings program. Building on our ongoing progress to improve our cost base, through the third quarter, we have further leveraged our third-party relationships to optimize the cost of delivering services out of our SG&A functions. We expect our SG&A optimization programs to extend into 2026 as we continue our efforts to bring this spend more in line with peers. For full year 2025, we are raising our revenue guidance and narrowing our adjusted EBITDA outlook. Based on exchange rates as of December 31, 2024, we are increasing our revenue target to a range of $2.7 billion to $2.75 billion. At the same time, we are narrowing our adjusted EBITDA target in the range of $175 million to $195 million, reflecting continued operational discipline and confidence in our execution. In terms of cash flow for full year 2025, we are targeting operating cash flow to be marginally negative with positive operating cash flow expected in the fourth quarter of 2025. The team at Fortrea continues to demonstrate commitment and resilience, and we are pleased to see improving customer satisfaction scores and continued strong employee engagement amidst our efforts to optimize our profitability. We believe we have laid the groundwork to enable stable financial performance that will improve over time. We are energized by what lies ahead and our ability to be laser-focused on delighting our customers. As we advance through our transformation phase and target execution against the 3 pillars Anshul shared with you in his remarks, we look forward to demonstrating our continued progress towards delivering value for all of our stakeholders. Now we'll open the call for Q&A. Operator, please open the line. Operator: [Operator Instructions] Our first question comes from the line of Eric Coldwell of Baird. Eric Coldwell: Nice job and glad to have you here, Anshul. I got a couple. First off, in the past, the company talked about its mix of pre-spin awards burning through revenue as opposed to post-spin or next-generation style contracting. And that was -- the majority of that was pre-spin awards that's been navigating towards more post-spin awards. But I'm curious if you can give us an update on where you are and how you see that unfolding through 2026. Anshul Thakral: Eric, it's nice to talk to you. Thanks for the kind words. It's been a great first 100 days here at Fortrea. Excited for the entire team stepping up this quarter. So I'm very proud of our team here at Fortrea. I think we talked about this a little bit last time to pre-spin versus post-spin, trying to get folks less focused on that vocabulary. I think there are contracts that have been signed with Fortrea long before the company became Fortrea when it was still a business unit at Labcorp. And there's limited things that we can do in terms of rightsizing those contracts and limited work we can do. But the team is focused on everything that is possible in terms of rightsizing those contracts, and we continue to do that. And as far as -- as you call it post bid, I just look at it as independent contracts signed within the Fortrea landscape. We've been very focused, especially these last 2 quarters on ensuring that we're focused on things like out-of-scope work, things like overburns, things like ensuring that the teams are staffed appropriately, and we're starting to see some really good results from those efforts. You said you had a couple of questions Eric? Eric Coldwell: Yes. Thank you. I appreciate that. The -- it sounded like you made some progress with new to Fortrea clients this quarter. Obviously, that was a bit hampered last quarter with the original uncertainties around the CEO transition and some counter detailing by your competitors as well as just the market environment. But I'm hoping you can give a little more detail in terms of maybe, if possible, sizing or giving a count of new to Fortrea customers or any kind of quantitative metrics, if possible. But more importantly, I think talk to us about how you're approaching that marketplace. Is it new sales strategies? Is it higher level executive engagement? What is going to drive a previously inexperienced customer, someone who hasn't worked with you? What is going to drive them to come to Fortrea moving forward? Anshul Thakral: Sure, Eric. Happy to touch on that. Last time we spoke on an earnings call, I think I was on day 2 or day 3 of the job. And now having really, for the company completed the CEO transition and frankly, to a solid financial performance, though not in bookings in the second quarter, that -- all of those factors in general just helped create a level of stability around Fortrea in the eyes of our customers. That renewed confidence got reflected in the numbers we saw here in Q3. And I'll share some numbers with you, and I want to answer your real question is what are we doing differently. The thing I look at is RFP volumes from these new to Fortrea customers. RFP volume in Q3 for us was up almost 40% quarter-over-quarter with these new customers. Our win rates were where we were really having impact. Our win rates for these new Fortrea biotechs doubled quarter-over-quarter. And they've been -- our win rates in general with our biotech customers have been at the highest level we've seen in the last 5 to 6 quarters. Now your question is, what do we do? It's focus. For all of these customers, whether it's our big pharma customers or biotech customers, it's a renewed focus on account management. It's a renewed focus on how we're showing up in the sales force. I mean I'll tell you, I've spent most of my time now either visiting sites and being with some of our colleagues where I've been on bid defenses myself, so is the executive team, and I've been out at customers almost every single week that I've been here. So it's a renewed focus on our sales strategy. It's bringing a lot more medical expertise and operational expertise into the bidding process earlier. Frankly, Eric, it's a lot of just getting back to the basics. Eric Coldwell: Fantastic -- Yes, that's it. I just want to also say congrats on getting Bill Sharbaugh into the organization. It will be fun to catch up with him. He was fantastic at PPD. So congrats at that. Anshul Thakral: I'll pass on that message. Thanks, Eric. Operator: Our next question comes from the line of Patrick Donnelly of Citi. Unknown Analyst: This is Brendan on for Patrick. I want to touch on a little bit on like the bookings backdrop. I wonder if you'd be able to parse out kind of like what you're seeing there between large pharma and kind of small biotech. And kind of more recently, as we've seen more headlines on the [ MSN ] news and pharma tariffs, have you seen any increased activity or interest in moving forward previously pending projects? Anshul Thakral: Yes. Brandon, happy to answer that question. Look, we don't break down specifics around our bookings numbers between biotech and biopharma. What I'll tell you is from a trend perspective, we're seeing neutral to favorable trends in both segments, in both markets. Let's take a look at our biotech customers. Historically, let's go back to Q1 of 2025, we saw some pretty depressed decision-making time lines, things taking forever. So we're starting to see that pick up. That trend is pretty important in the biotech segment, and that's led to not just increased RFPs, but a slightly faster sales cycle for us over the course of the third quarter. As far as our biopharma customers are concerned, what I would tell you about our biopharma customers is they continue to be resilient and persevere through the ever-changing landscape, be it tariffs, be it pharma pricing, et cetera. And what we're finding with all of our biopharma customers is their prioritized pipelines that are backed by science and innovation continue to move forward. And our conversations with our biopharma customers continue to move at a healthy pace that we've seen all year. Unknown Analyst: Appreciate that. And then on the pricing environment, this has definitely been kind of a big focus of kind of the CRO industry. And I was wondering if you've seen any changes in the competitive intensity over the last several months? And how do we kind of see that moving forward? Anshul Thakral: Well, look, I think the pricing environment continues to be competitive but disciplined. Our bid margins, these are margins of the levels at which we submit our proposals and bids have largely stayed consistent this year. In our full-service CRO work, price isn't really a lever we see that wins business at the end of the day. It's leading with science. It's leading with executive engagement. It's leading with staffing the right operational teams and putting the right delivery solutions in front of the client within the desired time frame. With that said, in the FSP business, we certainly see more aggressive pricing strategies coming specifically from some of our larger CRO competitors. We tend to shy away from areas where pricing makes the business unattractive for us. Operator: Our next question comes from the line of David Windley of Jefferies. David Windley: Anshul, congrats on the first quarter. Good to hear your voice. I wanted to ask a question that meanders through a few different topics, but basically around kind of pricing strategy and margin leverage. So I heard $53 million of delivered savings to the P&L, more of that benefiting gross margin than SG&A. I think you had also talked about in meetings in September kind of a focus on maybe long term, growing revenue to drive operating leverage and improve margin. And then we're talking about new to Fortrea client wins among other wins. And so I guess what I'm interested in is, are you, one, trying to at least hold price, if not walk up price a little bit as a method to drive more operating leverage in the long term, thinking that maybe Fortrea in the past has been a little bit low on price at the outset. And then secondly, given that revenue was strong in the quarter, I'd love for you to disentangle, maybe Jill can disentangle the direct fee versus the pass-through to help us understand why that didn't benefit gross margin instead of seeing this gross margin detriment compared to the prior periods. Sorry, long question. Anshul Thakral: First of all, David, it's nice to hear your voice, too. It's nice to talk to you again. Let me start by giving some of the overarching answers. I noted down about 3 questions and 7 parts here, but I'll do my best to walk through to give you the narrative there. I think -- look, I think that's the question of the day, right? So -- and then I'll have Jill add some commentary here on the specifics. You asked several questions. It's -- the root of your question is pricing strategy and therefore, margin leverage. So let's hit a pricing strategy and let's talk about margin leverage in the quarter and what happened. My goal is to hold on price when and wherever possible. That said, it's a very competitive pricing environment. If there's some strategic reasons for a particular customer, a particular therapeutic area for us to be competitive in the marketplace, we will be competitive in the marketplace. But holding price is extremely important. I can tell you there's examples of multiple studies in Q3 where I specifically asked the team to frankly walk away at the last days of the proposal because terms and pricing aren't in congruence with what I'd like to do here is to return Fortrea back to closer to industry level margins. So being very vigilant there. And almost every deal from a pricing perspective makes it up to myself or Jill or Mark, and we discuss these things. So there's a lot of holding and being vigilant there. That said, it's -- this concept that I talked to you about growing revenue to get the operating leverage we need, that's key. But it's not just growing revenue, it's growing direct service fee revenue. I'm going to have Jill comment a little bit about this quarter so you can understand where our revenue beat is coming from, so you can start articulating that revenue beat in comparison to margin. But Jill is going to hand that over to you. Jill McConnell: Sure. Yes, David, I appreciate the question. So I think if you're thinking holistically about revenue and where it's landed this year, a couple of points. In terms of the makeup and the mix, we have seen more upside in pass-throughs than we expected. And when you think about the guidance and how the guidance has been adjusted through the course of the year, that's predominantly been because we've seen an increased mix of pass-throughs relative to service fees. We have a good handle on our service fee revenue now and have been very successful in being able to forecast that for ourselves. So that's very positive. I think like many of our peers, we're continuing to see increased pass-throughs. So that's driven a lot of the revenue change over the year, and that's why you're not necessarily seeing it either in the adjusted EBITDA dollar or the margin. Does that help answer your question? David Windley: Yes. I mean is it possible to put some numbers on that? Anshul Thakral: David, I'd love for you to lead the charge at getting the entire industry to start doing that because I spent time in prep sessions yesterday with the team saying, maybe we should just start doing that. But if you can get the rest of the industry to do it, I'll do it the same, okay? David Windley: Got it. I'll ask one much shorter follow-up. Eric asked you the question on new to Fortrea clients. I'll maybe if there's anything specific about -- you mentioned in your prepared remarks, biotech operating model. That is -- you obviously have a history there, a successful history there at your prior shop. Is there anything specific that you might add to your answer to Eric about biotech client go-to-market strategy, in particular, given your reference to the biotech operating model? Anshul Thakral: Yes, sure. I would -- I mean, I've spent a career focused on this topic. I think I started creating biotech-specific strategies and units before it was a thing or even popular in the CRO industry. What I'll tell you what I've been trying to do here at Fortrea is we just need to be bespoke. Every deal needs a bespoke approach when it comes to biotech, whether it's trying to understand the makeup of what they're trying to solve for with the particular trial so that we've got our medical and scientific experts leading the deal versus our sales reps leading the deal or we understand that they're trying to solve for a resource gap in how they've been able to build their own clinical operations resources, then it's our clinical team that's leading the deal or we're really trying to solve for something that is much more of a -- right now, we just need some estimates because we're trying to raise funding. Then we've got our sales team leading the deal. So in each one of these cases, what I'm trying to do at Fortrea and what I've done in my past is to upskill our customer-facing resources. Our customer-facing resources don't just sit in sales, upskill our customer-facing resources to get to the root cause, just like I do as an engineer, problem solve, what is our customer trying to solve for and then figure out which resource and how does Fortrea need to show up in that specific problem. I think we did that better than we have in the past in Q3. But do I think we did it at a complete level of satisfaction for me personally? No. But that's the opportunity over the next coming quarters for us to continue to approach the biotech customers in a much more bespoke way than Fortrea ever has. Does that answer your question, David? David Windley: Yes. Yes, very helpful additional color. Operator: [Operator Instructions] Our next question comes from the line of Luke Sergott of Barclays. Luke Sergott: I appreciate the talk about like rightsizing the cost structure and stuff. But as we kind of look further out, one of the questions we get asked is like the disconnect that you guys have from a margin perspective versus peers, on your normalized basis, is there any reason why you wouldn't be able to close that gap once you kind of engage all these other productivity programs, et cetera? Just kind of thinking about where these margins could go in a more normalized growth and bookings environment for you or operating environment. Jill McConnell: Yes, Luke, I think Anshul can speak here because we've actually talked about this, and I think he'll reiterate that over time, we don't see that he still doesn't see, but he can comment on that. I think part of the margin challenge, as I mentioned in the response that I had previously, some of the revenue this year has come from higher pass-throughs, which obviously bring challenges. We've been open about the fact that we've reintroduced variable compensation back this year as we try to make sure we retain our key talent and engage. So we're trying to be thoughtful about how we balance those headwinds. I think we've done it in the right way because we have managed to keep employee engagement really high, and we know that, that's very important to our customers as we -- they want to have the solidity of those teams. Over time, you're going to continue to see us focus on bringing down SG&A expense as a percent of revenue. We've made progress this year, but there's still more work to be done. And then what Anshul has been saying, and I'll let him weigh in here, we need to continue to rightsize the whole organization relative to where we are as a company. And that is something that we have spent on the journey on, but there's still more work to be done. Anshul, do you want to add... Anshul Thakral: Yes. No, that's great. Luke, I think it's as Jill said, and I said this before, now 100 days into the company into the weeds, I don't see any structural reason. I don't see any structural reason why we can't return back to more industry standard margins. But it's going to take a few things. It's not just going to take rightsizing, but it's going to take a consistent growth in our backlog. So if I look at Fortrea, where we are right now, 2.5 years into this journey, the next 2.5 years look very different than the past 2.5 years. In the last 2.5 years, we had headwinds that were market-related headwinds in terms of softening demand, our own issues and coming out of the gate, if you think about the inconsistency in commercial delivery and inconsistency in how we were building the backlog, the serious headwinds related to a spin that was probably messier than anyone could have forecasted and took longer than anyone could have forecasted. And on top of that, we had tons of counter detailing, leadership transition happening from a CEO standpoint that took some time. If I think about it, the market is starting to get neutral to positive, as you've heard from all of my peers, as you all have stated in your reports, we're starting to see green shoots of decision-making time lines and biotech getting better. You saw the funding reports came out this morning, biotech funding, while not at historical levels, is starting to return. So you're starting to see the market go from neutral to positive. You were completely out of the spin. We're a fully independent company, not encumbered by the kind of expenses and frankly, distractions. People think about the spin in terms of cost and forget how much effort it takes to complete that spin. Those distractions, CEO transition being complete. So many of the structural headwinds that have been holding us back from that type of progress are starting to subside. That said, we have a lot of work to do. I don't see any structural reasons in this company why we can't get back to more industry standard margins, but it's going to take work. It's going to take work in 2 pillars. One is a continuous rightsizing DNA that is all about being a midsized nimble CRO. And the second is a consistent delivery of book-to-bill that gets us to a consistent and diverse building of our backlog. Luke, that's probably more than what you wanted, but hopefully, that answers your question. Luke Sergott: Yes, it does. It was just more about like the structural if it was something that you guys had from either business mix or something like that. But I think that kind of gets to the crux of the issue. And then for... Anshul Thakral: I could have just said no instead of long-winded answer. I could have just said no. There's no -- I'm not giving you a long-winded answer. That's the feedback I'm receiving live on this call. I get it. Luke Sergott: That's all right. That's a good CEO right there. As we look at '26, I understand it's pretty early here. But if we kind of just assume this kind of stabilized burn rate and then continued bookings and backlog trend here, that kind of gets us to something around like low singles to mid-singles. Do you think that's a decent starting point to think about top line growth next year? Anshul Thakral: I think we're not giving any '26 guidance right now. It wouldn't be prudent for us to do that. But it's a good way to try to ask that question and sneak that in there. But we're not giving 2026 guidance right now. Let me get another 100 days under my belt. Yes. No, I appreciate it. Kudos on the try. You almost had me there, but give me another 100 days in seat, and we'll talk about guidance. Operator: Our next question comes from the line of Justin Bowers of Deutsche Bank. Justin Bowers: So Anshul, I just wanted to sort of extend on Luke's question in some ways about the industry environment. So for you, I mean, you guys, I think, did a little better than what people were thinking and peers are talking about improved industry environment as well. But are there any anecdotes you can provide for us to sort of like to qualify that in terms of maybe terms and decision-making times, et cetera? And then as a follow-up to a lot of the conversation has been focused on biotech, but I'd love to hear what you're seeing in large pharma and some of the conversations you're having there as well. Anshul Thakral: Sure. Why don't I give you 2 small anecdotes, one at each. I just got feedback from Luke of giving long-winded answers. So I'm trying to be careful here. But look, on the biotech, I'll give you one anecdote. We have a great customer of ours who awarded us 2 large Phase III programs in Q3. And this is a customer that for the longest time has been sitting on high-quality Q2 data -- high-quality Phase II data. But with some of the uncertainty happening at the FDA and some of the uncertainty happening on who's staying in their particular department and who's not and what the narrative looks like around what's going to be an acceptable approach to this particular Phase III in the back and forth. A lot of that started subsiding over the course of the last 4, 5 months. I wouldn't say just a quarter, which changed their time line, which changed their ability to make decision and it went from a, okay, we can make a decision by the end of the year to, hey, Fortrea, how can you get us first patient enrolled by January? We turned that proposal on a dime within 2 weeks and went to contract within 6 weeks. That wasn't -- that's just an anecdote. And of course, I picked a really good anecdote, right? But that's to give you a flavor of the types of conversations that are happening. And sometimes we'll be working for 9 months on a proposal with a client. And in this particular case, we had 2 weeks to turn around an entire study team and a proposal on a Phase III program where we need to get first patient in, in the first quarter of next year. So that's an anecdote in the biotech sphere. Let me give you an anecdote in our pharma sphere. In our large pharma sphere, we've had -- as -- I won't obviously mention the name of the clients, but as many of these pharma companies start negotiating their deals with the current administration in the U.S., that takes away a certain level of uncertainty. That doesn't mean it takes away risk or to their financials, but it takes away uncertainty and that taking away of uncertainty allows them to move internal processes like, okay, we can now finalize our R&D pipeline for 2026. We had one of our pharma customers go through that experience. And whether it was them negotiating it or not, the fact that somebody was negotiating with the administration allowed them to get comfortable that, okay, now it's time to lock in our R&D plans for 2026. And once they lock in their R&D plans for 2026, I'd like to say their first call is a CRO. It's really not, but it's probably their third or fourth call is a CRO to start working through, okay, these are the studies I need launched in the first quarter. Let's start putting teams together, let's start putting proposals together. Justin, I hope that gives you the sort of anecdotal evidence that you're looking for. All of that to be said, and I think all of my peers have said the same thing, neutral to positive. We still have a lot of headwinds and uncertainty in the market. We're not looking at markets that look like 2018, but certainly, there's reasons to think neutral to positive. Justin Bowers: And then just one quick follow-up on Phase I. We haven't really talked about that on the call yet. How is capacity utilization there? And any progress on bringing more of that in-house? Anshul Thakral: Yes. So I think, look, that's a great question. Thank you for asking about our clinical pharmacology business. It's a business I'm actually very proud of. I think the Phase I business, we had higher-than-expected growth over the last 2 quarters. We mentioned in the last quarter, we're mentioning it this time as well, which is great because we're seeing utilization rates. If I look at this quarter, as I look at next quarter, utilization rates are where we'd like them to be. They're healthy in our Phase I clinic. But I want to talk a little bit about this bringing the work in-house versus not bringing the work in-house. See the thing is it's really more about the mix of the work that's coming in. We have certain studies coming in, for example, large bioequivalent studies in obesity, for example. These type of studies require significant cohorts to be run simultaneously. And often, you need 4, 5, 6 sites to run because of the design of that study. And when you run those studies simultaneously in multiple sites due to the request of the customer and design of the program, we end up having to use external sites. That's not a structural thing we can't do that work in-house. It's just that x number of cohorts need to be run within the same 4-week time frame simultaneously. And in that business, we've seen, as Jill talked about, we've seen some higher-than-normal pass-through costs. Now these are -- from a strategic standpoint, this is good because we're continuing to service our customer, continuing to move their pipelines forward. And frankly, we're getting a lot of repeat business from some of these big customers. But when those kinds of large obesity bioequivalent studies come in, that's just one example of several others in the mix, you end up with some higher pass-through costs. So the mix has been really the narrative that we should be talking about in clinical pharmacology. We're doing good on our capacity front. Operator: Our next question comes from the line of Jailendra Singh of Truist Securities. Jenny Cao: This is Jenny on for Jailendra. I wanted to ask about the FSP sales team that you recently launched. Just curious on the momentum there in the past quarter. What's the traction for the dedicated FSP sales team? And are you seeing shifts in sponsor preferences between FSP and FSO? And then just a quick follow-up to that. I know you're maintaining pricing conversations in FSO, but how are you balancing pricing discipline with the competitive environment in the FSP segment? Anshul Thakral: I think you've asked several questions around FSP, Jenny, and I'm happy to try to answer them to the best I can. We're seeing some sequential increase in FSP RFPs right now. We've launched the FSP sort of relaunched our focused effort here in FSP earlier in the year. It's a bit early to see the kind of progress I'd like to see there. We're seeing an uptick in RFPs. But FSP RFPs, when you're talking about anywhere from 10 to several hundred resources, the sales cycle on these things are longer than FSO. So that's going to take a little bit more time. Though we are proceeding with a relative amount of caution because what we have to do is we have to balance the reach that we want with these customers and the business that we want in FSP with work that makes sense for us to take on. Some of the FSP work comes in levels of margins that are, frankly, not great for us. And even in this quarter, we walked away from some of that. And much of the FSP work that we are able to take on, we take on when we've got healthy margins. So it's -- let's take more time to see how that strategy plays out on FSP. Jenny Cao: That's fair. And then just a follow-up on the momentum that you're seeing in large pharma locking in or deciding on 2026 R&D plans and maybe going forward with that in Q1. In the past, I think Fortrea has talked about large pharma for the company being more back-end loaded as large pharma decide on what -- decide for the next year. So just curious on -- are you seeing decision-making being pushed out a little from back half to maybe early 2026 this year? Anshul Thakral: I think that's a great question. There isn't any consistent trend right now in decision-making being pushed out by either biotech or biopharma clients. I think we're starting to normalize a little bit on decision-making time lines and time frames. But remember, you're talking about a pretty significant -- even for us, we're the smaller of the public company CROs that you cover. Even for us, it's a pretty significant customer segment. So you've got ups and downs and puts and takes depending on the particular customer, but there's no consistent trend that I'm seeing in terms of decision-making being pushed, if that's the question. Operator: Our next question comes from the line of Elizabeth Anderson of Evercore ISI. Alan Chen: This is Alan Chen on for Elizabeth. I guess a question for Anshul. Given that you're a few months into the role, I was wondering, could you talk about what have been the biggest surprise for you in your time at Fortrea so far? Anshul Thakral: I'm sorry, I'm having a very -- my apologies, I'm having a very hard time hearing your question. It's extremely vague. Would it be okay if you could speak up and repeat that question? Alan Chen: Yes. So given that you're a few months into the role, could you talk about what have been the biggest surprises for you in your time at Fortrea so far? Anshul Thakral: Sure. I appreciate the question, and I'll do my best to answer biggest surprises. I think I'm kind of consistent in things. I wouldn't call them surprises necessarily, but pleasant surprises, if anything. As I toured many of our sites, I had a chance with my -- we have members of the executive team with me on every trip, but we had a chance to engage with close to 1/3 of our colleagues at a personal level over the course of the last 100 days, several thousand people. The -- at our workforce, the morale, the sort of commitment to Fortrea, the work ethic and commitment to their clients and the focus remains resilient and strong. And that was one of my hypothesis coming into this job. And now I've had a chance to get to multiple continents, multiple geographies and multiple countries across roles and see that at a consistent level. People are engaged, people are focused. Despite the industry level macro trends over the last 1.5 years, 2 years being difficult and of course, Fortrea spin itself being very difficult, at the ground, folks that are working on executing on our clients' programs are highly engaged, highly committed and have incredibly strong work ethics. And I got to see that from the ground across multiple continents and multiple countries. And that has been, I wouldn't say a surprise because I anticipated that. That was my hypothesis coming into it, but it's been reassuring to have been -- have confirmed that hypothesis. Operator: I'm showing no further questions at this time. I would now like to turn it back to Anshul Thakral, CEO, for closing remarks. Anshul Thakral: As we come to a close of our time today, I would like to thank all of you for your thoughtful questions and for welcoming me to Fortrea. Fortrea is well positioned as a pure-play midsized global CRO that specializes in the execution of clinical trials from first in human to post approval. We're focused and we're disciplined. That's the message. In addition to our financial progress, it would be remiss of me not to thank our team for making the short list for Best CRO at the Industry SCRIP Award. I also want to note that we earned a bronze EcoVadis rating for our sustainability program, which we have built from the ground up. Our commitment to sustainability is not just important to our colleagues around the world, but it is a requirement of our global client base. What matters to our clients matters to us. I want to thank you for joining us today, and I look forward to speaking with you soon. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. I am Katie, your Global Meet call operator. Welcome, and thank you for joining QIAGEN's Third Quarter 2025 Earnings Conference Call Webcast. [Operator Instructions] Please be advised that this call is being recorded at QIAGEN's request and will be made available on their Internet site. [Operator Instructions] At this time, I'd like to introduce your host, John Gilardi, Vice President, Head of Corporate Communications at QIAGEN. Please go ahead. John Gilardi: Thank you, operator, and welcome to all of you who are joining us for this call for the third quarter of 2025. We appreciate your time and your interest in QIAGEN. So joining the call today are Thierry Bernard, our Chief Executive Officer; and Roland Sackers, our Chief Financial Officer. Also joining us today is Daniel Wendorff, our new Head of IR; and Dr. Domenica Martorana, from our Investor Relations team. Before we begin, I'd like to share that our next deep dive on Sample technologies is planned for Friday, November 21. The invitation was just sent out to you. So please register for the event. Domenica has done an outstanding job leading the creation of the series, and we look forward to another engaging session. As always, -- today's call is being webcast live and will be archived in the IR section of our website at www.qiagen.com. Here, you can find the press release and presentation accompanying this call. Please also note that this call will include forward-looking statements. Actual results may differ materially from those projected due to a number of factors outlined in our most recent Form 20-F and other filings with the U.S. Securities and Exchange Commission. We will also refer to certain financial measures not prepared in accordance with U.S. generally accepted accounting principles, or GAAP, that provide additional insights into our performance. Reconciliations to the most directly comparable GAAP figures are in the release and presentation and all references to earnings per share refer to diluted EPS. With that, let me hand the call over to Thierry. Thierry Bernard: Thank you, John, and hello, everyone. Good morning, good afternoon or good evening to all of you joining us from around the world. I'd like to start by thanking the QIAGEN teams across our company and across the world for their ongoing dedication and strong execution in this challenging macro environment. Their focus and collaboration enabled us to deliver another solid quarter. In fact, the 24th consecutive quarter in which we met or exceeded our targets. We continue to see the clear merits of our strategy to prioritize high-growth areas of molecular research and testing while maximizing the reach of our portfolio to customers across both the life sciences and diagnostics. This approach continues to provide balance and stability even in those very volatile and uncertain conditions. This performance in 2025 also enables us to advance key capital allocation initiatives that are strengthening our business and creating value. Two important developments were announced yesterday. First, the acquisition of Parse Biosciences that expands our Sample technologies portfolio into the very fast growing AI-driven single-cell market. Second, a $500 million synthetic share repurchases to be completed in January 2026 that will bring total shareholder return since 2024 to above our 2028 goal for at least $1 billion return to shareholders. We remain strongly committed to our 2028 ambitions even again, in this challenging environment. We have significantly strengthened key pillars in our portfolio and continue to position QIAGEN towards our 7% sales CAGR target from '24 to '28. We are also on track to move well above our 31% adjusted operating income target by the end of 2028 despite currency and integration headwinds. So we are combining top execution with decisive actions to deliver solid profitable growth. So let me walk you through our key messages for today. First, we once again exceeded our targets for the third quarter and delivered one of the fastest growth rates in our industry. Net sales rose 6% to $533 million, where -- while results are constant exchange rates were up 5% and ahead of our 4% CER target. More importantly, core sales, excluding recently discontinued products increased 6% CER over the prior year period. Adjusted diluted EPS was $0.61 at both actual and constant exchange rates and therefore, above our outlook for at least $0.58. Those results, again, underscore the strength of our differentiated portfolio. and the success of our efficiency initiatives in delivering a consistent performance quarter after quarter over the past 6 years. Second key message our growth pillars continue to perform strongly in 2025. QIAstat diagnostics grew 11%, driven by strong instrument placements and double-digit consumable growth on demand across our clinical syndromic testing panels. QuantiFERON also grew 11% CER supported by continued latent TB conversion from the skin test and broader adoption worldwide. Sample technologies returned to growth with sales rising 3% CER on demand for automated consumables despite cautious capital spending. QIAcuity, our digital PCR platform maintained double-digit CER growth with robust consumable demand more than offsetting slower instrument sales among life science customers. And QIAGEN Digital Insight, our bioinformatic portfolio delivered solid double-digit growth, driven by growing demand for clinical bioinformatics and also the integration of Genoox, which has further enhanced our growing edge of AI-driven solution for interpretation of clinical next-generation sequencing data. Third key message. Our strong performance so far in 2025 is allowing us to again raise our earnings target while confirming our sales outlook. This reflects the success of our efficiency initiatives and disciplined execution. Despite currency headwinds and the adverse impact of tariffs and the current U.S. government shutdown, we continue to improve profitability and maintain solid growth. This is fully aligned with our 2028 ambitions for solid profitable growth. Therefore, we now expect adjusted EPS of about $2.38 CER, an increase of $0.10 from our initial guidance for 2025. At the same time, we continue to expect net sales growth of about 4% to 5% at constant exchange rates. And more importantly, 5% to 6% CER growth for our core portfolio. This is definitely another solid and strong quarter demonstrating consistent execution, operational discipline and clear strategic direction. And lastly, let me briefly address the announcement about our leadership transition. After more than 10 years with this remarkable company, including 6 years as CEO, I and our Supervisory Board have agreed that this is the time to prepare for QIAGEN next phase of growth. This decision comes after deep reflection and with full confidence in the strength of our company, the strength of our strategy and above all, the quality of our people. I will obviously continue to lead QIAGEN until a successor is appointed to ensure a smooth and orderly handover. Our focus -- my focus remains unchanged. Executing on our strategy, delivering on our 2025 goals and advancing on our 2028 ambitions for solid and profitable growth. It is a real privilege to serve QIAGEN and to work alongside such talented and dedicated colleagues. And I'm really confident that our company is well positioned for its next phase of growth. With that, I'll hand it over to Roland for more on the financials. Roland Sackers: Thank you, Thierry, and hello, everyone. Let me start with a few key financial highlights. First, QIAGEN remains one of the fastest-growing companies in our industry as core sales rose 6% at constant exchange rates. Second, profitability remains strong. Our adjusted operating income margin for the third quarter of '25 was steady at 29.6% of sales, 30% at constant exchange rates absorbing more than 150 basis points of headwinds from currency movements and the impact of U.S. tariff. And earnings per share at CER were $0.61 and well ahead of the outlook for at least $0.58. Third, cash generation was also strong with underlying operating cash flow of $466 million for the 9 months of '25, including about $45 million cash restructuring payments. And fourth, our balance sheet remains strong, giving us the flexibility to invest in innovation, pursue targeted bolt-on acquisitions like Parse and to increase returns to shareholders as we are doing with our $500 million synthetic repurchase set for completion in January '26. We have a long-standing capital allocation strategy that has created value by directing resources to the highest return opportunities. Based on this new repurchase program, we are well ahead of our target to return at least $1 billion to our shareholders by end of '28. We also anticipate that our leverage rate, our net debt to adjusted EBITDA ratio will move towards the industry average of approximately 2x during '26 as we consider additional capital allocation in the new year. Now let me take you through the details. In terms of sales results, among the 4 product groups, Sample technologies rose 3% CER and driven by consumables growth, especially automated kits that showed double-digit expansion compared to the year ago period. Instrument sales were slightly lower, but included good placements of the QIAsymphony, QIAcube Connect and EZ2 Connect systems. In Diagnostic Solutions, sales rose 4% at CER, but at a faster 8% excluding the discontinued [ NeuMoDx ] system. The top performers were QIAstat and QuantiFERON, both growing 11% CER and supported by further expansion of our companion diagnostic pharma partnerships. In PCR and nuclear acid amplification, sales were stable compared to the third quarter of '24 at constant exchange rates. Our digital PCR platform QIAcuity continue to grow as strong demand for consumers more than offset lower instrument sales amid cautious life science spending. In the genomics and NGS product group sales was 9% CER and led by the QIAGEN Digital Insights bioinformatics business. QDI sales grew at a double-digit rate through a combination of sales growth from the current business and first-time contributions from the Genoox acquisition. Consumables for universal NGS panels also grew over the year ago quarter. Turning to the regions. Sales in the Americas rose 7% CER supported by strong growth in the U.S. against lower sales in Brazil and Mexico. In the EMEA region, sales grew 4% CER, led by Germany, France and Italy along with the Nordic region. The Asia Pacific region declined 2% CER and reflecting a mid-teen CER decline in China over the same period in '24 against higher sales in India, South Korea and Australia. Moving down the income statement. Adjusted operating income grew in line with sales and reached $158 million as the adjusted operating income margin remained at 29.6% of sales compared to the third quarter of '24. R&D investments were 9.2% in the third quarter, 25% compared to 8.9% in the year ago period. The vast majority of our R&D spending continues to focus on our pillars. This includes the upcoming launches of 3 new sample prep instruments, new panels for QIAstat-Dx, the expansion of QIAcuity applications in research and the clinic and also the development of the fifth generation for QuantiFERON. Sales and marketing expenses showed the benefit of efficiency gains declining about 1 percentage point to 21.2% of sales from 22.2% in the third quarter '24, while our teams maintained an ongoing high level of customer engagement. General and administrative expenses declined slightly to 5.7% in the third quarter, 25% compared to 5.9% showing continued cost discipline while investing in IT upgrades, such as the SAP system migration. Adjusted diluted EPS was $0.61 at constant exchange rates exceeding the outlook for at least $0.58 CER. The adjusted tax rate was 18%, and this was consistent with our target. Moving to the cash flow. We saw an ongoing high level of cash generation for the first 9 months of the year over the same period in '24. Operating cash flow was $466 million for the '25 period, compared to $482 million in the same period of '24, but the '25 results included about $45 million of cash restructuring payments related to the efficiency and portfolio initiatives. Free cash flow was USD 336 million, which was slightly below the same period of 24% due to the higher levels of planned capitalized IT investments. Accounts receivables declined to about 53 days compared to about 56 days at the end of '24 as our teams continue to improve in this area. At the same time, days of inventories were 151 days at the end of the third quarter of '25 compared to 193 days at the end of '24 and again reflected benefits from our efficiency initiatives. The improving level of profitability and strong cash flows is further strengthening our healthy balance sheet. This gives us opportunity to make disciplined decisions to invest in innovation, pursue targeted bolt-on acquisitions and increased returns to shareholders, as you saw with the development. This is complemented by our decisions to increase returns to shareholders with a new repurchase set for completion on or about January 7, 2026. This $500 million return program comes after we completed a $300 million synthetic share repurchase in January and also paid our first annual dividend of $54 million in July. So based on this capital allocation decisions announced and also our considerations for further deployment in '26 through attractive return opportunities, we expect QIAGEN's leverage ratio to move towards the industry average of about 2x net debt to adjusted EBITDA. In closing, our strong financial position supports our commitment to solid profitable growth. We are deploying resources in areas offering the highest returns, all designated to improve our position to deliver on our '28 ambitions and create long-term value. With that, let me hand the call back to Thierry. Thierry Bernard: Thank you, Roland. And as usual, let's have a look at the progresses across our product portfolio and particularly focusing on our pillars of growth. You probably remember that we are targeting around $1.490 billion in combined sales from our 5 pillars for 2025, representing a growth of around 8% CER. So based on the results to date in '25, we remain well on track to achieve the goal for this group. Let's start with Sample technologies. We continue to advance our next wave of automation and have taken an important step with the acquisition of Parse to extend this leadership by moving into new technologies. Regarding the upcoming instrument launches, those are perfectly on track. QIAsymphony Connect has now been installed at the first customers, and the initial feedback has been very positive about the performance and enhanced connectivity. QIAmini and QIAsprint Connect also both remain on schedule for launch in 2026 and early field test for QIAsprint Connect are confirming very strong demand for an advanced high-throughput solution. It is indeed extremely interesting to note that we have already received purchase orders for QIAsprint Connect. We have also recently marked the 4,000 placement of QIAcube Connect, reaffirming our leadership in automated sample processing. Beyond automation, we are expanding the reach of our Sample technologies portfolio with the acquisition of Parse, a pioneering scalable instrument-free single-cell analysis. Parse has developed a breakthrough instrument-free combinatorial barcoding technology that removes the need from -- for droplet-based system and enables analysis of millions or even billions of sales instead of thousands. This enables delivering more insight at a fraction of the cost. Parse solutions are already used by more than 3,000 laboratories worldwide, including every top pharmaceutical companies and leading research institutions. So this acquisition is really opening up new dimensions for QIAGEN in this fast-growing single-cell market, and fits perfectly with our Sample to Insight strategy. Parse also creates synergies with our QDI bioinformatics business connecting large-scale single-cell data generation with powerful AI-driven interpretation. Together, we can accelerate discovery, built virtual cell models and help researchers unlock new frontiers in AI-based drug discovery and next-generation biology. So tuning for our Sample technologies deep dive session on November 21, and you will learn more about the exciting area of our portfolio. Turning now to QIAstat. We continue to expand our syndromic testing portfolio worldwide with the launch of a new instrument version in the U.S. and we are preparing for more panel submissions in 2025. In September, we received the U.S. FDA clearance for QIAstat Diagnostic Rise, the higher throughput version of our syndromic testing platform. QIAstat Diagnostic Rise automates up to 18 test simultaneously processing as many as 160 samples per day with very minimal hands-on time. So this high-volume version is particularly attractive to our largest customers. Also, in the third quarter, we were well above 150 QIAstat placement, which is once again a testament to the continued growth and stronger customer adoption of QIAstat system. When it comes to menu expansion, we remain perfectly on track to submit the blood culture panel in the U.S. and in Europe by the end of 2025. On QIAcuity, our digital PCR platform, we continue to expand the assay menu and where we are on track to sell at least 1,000 new assay in 2025. So now back to Roland with the details on our outlook for the year. Roland Sackers: Thank you, Thierry. Let me now turn to the outlook for the rest of '25. We continue to expect another year of solid profitable growth as our teams drive operational efficiency and disciplined execution across the portfolio. For the full year, we are reaffirming our outlook for total net sales growth of about 4% to 5% at CER. The expansion remains broad-based across the business. More important, our core portfolio is expected to grow about 5% to 6% CER since this excludes sales from discontinued products. You saw that impact on our results for Q3 '25 with gross sales rising 1 percentage point faster than total sales. Additionally, we raised our target for adjusted earnings per share to about $2.38 CER, reflecting our ability to improve profitability faster than sales while absorbing the headwinds of currency movements and U.S. tariffs. This marks an increase of $0.10 in our adjusted EPS target from the start of 2025. For full year '25, we continue to anticipate tariffs to create a relative headwind of about 90 basis points on the adjusted gross margin as we work on implementing various mitigation actions. Now on to the fourth quarter where we have decided to take a view that the impact of the U.S. government shutdown continues until the end of the year. In light of that factor and also the current macro trends, we are targeting for total net sales to be steady at constant exchange rates compared to the fourth quarter of '24. And for our core sales and the core sales drives about 2% CER. Adjusted EPS is expected to be about $0.60 at constant exchange rates. As we look at the currency impact market trends, for the full year, we continue to expect a positive impact of about 1 percentage point of net sales but an adverse impact of about $0.02 on adjusted EPS. For the first quarter, currency movements are expected to have a positive impact on net sales of about 1 percentage point, but an adverse impact of about $0.01 on adjusted diluted EPS. On a separate note, I'm pleased to introduce Daniel Wendorff, who joined QIAGEN as of November 1 as our new Vice President and Head of Investor Relations, reporting direct to me. Some of you may know Daniel from his prior role at the Investor Relations team at Merck in Germany and earlier as a research analyst covering QIAGEN and the life science sector. He joins a strong IR team. John Gilardi will continue in his role as Vice President, Corporate Communications. With that, I would like to now hand the call back to Thierry. Thierry Bernard: Thank you, Roland. So we are coming to the end of our call. So to give you a quick summary, QIAGEN definitely delivered another strong and solid quarter, once again exceeding our outlook. And just as important, we took decisive action to strengthen our portfolio and increase returns to shareholders all aligned with our 2028 ambitions. Our differentiated pillars, mainly serving the continuum from basic research to clinical diagnostics continue to perform very well. New product launches and additions to our portfolio are on the way to create new relays of growth. We definitely remain focused on creating value through profitable growth, operational excellence and disciplined capital deployment, while maintaining flexibility to pursue attractive acquisition opportunities like Parse. With the increase to our adjusted EPS target for 2025 and the new $500 million share repurchase, we are definitely delivering on our commitments to value creation by positioning QIAGEN for continued momentum as a top performer in 2026 and way beyond. With that, I would now like to hand back to John and the operator for the Q&A session. Thanks a lot for your time. Operator: [Operator Instructions] We'll take our first question from Jack Meehan with Nephron Research. Jack Meehan: And congrats, Thierry, John, enjoyed working together, but I doubt this will be the end. For my question, I wanted to focus on the Parse acquisition. Just had a few questions on that. Just first, if you could talk about how the deal came together and what brought them to the top of the list of targets as you consider tuck-in M&A? And then if you look at the competitive landscape for single-cell is very competitive kind of have an entrenched leader with 10x. And then Illumina talks about instrument-free approach with Fluent. So if you could just talk about the differentiation of the technology and kind of why it's better in QIAGEN's hands and what you can do with it, that would be great. Thierry Bernard: Thank you, Jack, and thanks for your nice comments. So First of all, for me and for the company, the acquisition of Parse is the typical, very good examples of a very good use of our cash for a strategic bolt-on acquisition. First, it is strategic; second, it is extremely synergistic with our existing portfolio; third, it is accretive to our top line growth; and fourth, it will be accretive to our financials in a very reasonable time frame, in less than 3 years. But -- because there are different knowledges around Parse, let me come back first on what does Parse offer and what could be the everyday application. This is a company that we are following since 2017. We have always believed at QIAGEN that single-cell was a natural extension to our sample prep technology. And since we know them, what has amazed at QIAGEN is that this constantly executed on what they told us they would deliver, either growth or product development. Let us remember first that single-cell analysis is literally turning biology from a blurry group photo into a real sharp portrait of every individual cell. As a result, scientists all over the world, they can now study millions to billions of cells at once, for example, to try to see which ones are driving cancers. Other technologies, groups, all the cells together, so researchers cannot really see which specific cells are actually causing the disease. Parse makes the level -- this level of insights completely possible. And we will combine this with AI-driven tools from our QDI portfolio. So why did we select Parse? There was no way for QIAGEN, obviously, to invest into a me-too product or portfolio of solutions. First of all, Parse is the fastest-growing company in single-cell analysis and is a very natural extension of our sample prep portfolio. Examples, Parse is already present in more than 3,000 labs in the world. Second, Parse offers an instrument-free kit, allowing any lab to use it without costly hardware. Third and perhaps more importantly, Parse differentiates because it can process millions to billions of sales far more than any other system and far more than the competitor that you mentioned. As a result, we consider that it is a very natural fit for Sample tech, but also with synergies with our QDI and also next-generation sequencing chemistry. Does this answer your question? Jack, does it answer your questions? Jack Meehan: It does. Operator: We will take our next question from Hugo Solvet with BNP Paribas. Hugo Solvet: I'd like to focus on QIAstat, please. Can you talk to the traction for the new panels, gastro and meningitis? And how do you see them driving an acceleration going forward? And as some of the instruments placed during COVID will likely arrive at the end of their life cycle soon, can you maybe talk to the opportunity for potential market share gains here? Thierry Bernard: Thank you, Hugo. So QIAstat continues to deliver. I mean, it's very interesting to see again a double-digit growth in Q3. And we all know that Q3 is always normally a kind of softer quarter for QIAstat. Why? Because the syndromic testing market is still driven by respiratory panels, and we all know that in most of the western world, Q3 is rather a low time for respiratory infections. So 11% growth in Q3, 150 more placements of system is a good performance. Respiratory panels are 70% of the syndromic market. But it's very interesting to see at QIAGEN, the growth of our GI panels and meningitis and especially where we can grow, like, for example, in the North of Europe or in North America or in Middle East. For GI and for meningitis, Hugo, we are growing at more than double digits. This is very encouraging and especially in the U.S. I remind you all that the U.S. is still the main market for syndromic testing. So yes, as you said, obviously, some of the customers that we installed during COVID will come from renewal and basically renewing with once again QIAstat is the perfect choice. Why? Because since COVID, they have much more panels opportunities, and they will get more in 2026 with the launch of the blood culture panel. And the complicated UTI by the end of '26 for Europe and '27 for the rest of the world. So we are well on track to execute on our guidance for 2025. And for syndromic testing, Hugo, we will definitely beat our mid-term guidance that we gave in our Capital Market Day in New York, which was, as you remember, $200 million revenues by 2028. I continue to say with the rest of the company that in syndromic testing, QIAGEN will be a very solid and competitive #2 on the market. Operator: We'll take our next question from Doug Schenkel with Wolfe Research. Douglas Schenkel: A couple of quick questions on the diagnostic side. First, on QIAstat-Dx. You now have the 3 key panels, respiratory, GI and meningitis approved in the U.S. I'm just curious how you have seen these contribute to platform growth since then. I know it's relatively early, but I just want to see if placements and utilization are tracking in line with expectations? And then on QuantiFERON, you guys have done a very good job this year with the investment community. Basically talking about the importance of some of the automation capabilities enabled via your partnership with DiaSorin. I'm just curious if -- as we sit here today, given I feel like we've heard less about any competitive disruption to the franchise, but if there's anything new to talk about there, whether it's via the partnership or more broadly, given performance looks quite good there. Thierry Bernard: So I think the main example that I can give for the impact of those 3 panels on our U.S. performance for QIAstat is, as we already disclosed at the end of Q2, Doug, we placed more instruments in 6 months in the U.S. in 2025 that we did in the full year of '24. I think this is the best estimate that those 3 panels now are really helping. In addition to that, we have reshuffled the team. We have dedicated sales rep for QIAstat in every territory in the U.S. So that helps. So in '25, we are going to exceed our target for instruments for the U.S., and the growth is very solid. So I'm very confident. On QuantiFERON, I keep the same approach together with the team. We always believe that competition would come one day to this market. And this is why for the last 10 years, Doug, we have prepared for that. Even when there was no names or no precise dates, we are prepared. This is why we built that automation partner with DiaSorin, but not only with DiaSorin with also Tecan and Hamilton. This is why we consistently improve the technology itself. We are now at the fourth generation of QuantiFERON. And this is why also we continue to focus on what is still today the main competition, which is skin test. I remind everybody once again that we still have to convert more than 50 million skin tests in the world. And if you just take the U.S., it's around probably 15 -- a bit more than 15 millions of skin tests that we need to cover. And then we are prepared -- we are prepared. And last thing I would say that makes me very optimistic for QuantiFERON, Doug, is that despite those good results, despite the fact that we continue to grow at double digits, we continue to prepare the future. I started to speak about this in our Q2 earnings. Expect in the coming weeks and months to see announcements improving the workflow of QuantiFERON, the ease of use, and we are also working on further enhancements of the test. So there is no complacency in our approach. We are #1, but we know that we need to defend this disposition, and we are ready. We are ready commercially, we are ready also from a product standpoint. Douglas Schenkel: Thierry, I don't know if you could still hear me, but if you can, I just want to thank you for those answers and more importantly, for all the great work you've done over the years, you've really done a great job through a tough period in the industry, bringing a new level of discipline to the company. So I really appreciate that. And thanks for everything. We look forward to seeing you in a few weeks. Thierry Bernard: This is very humbling. Thank you. Operator: We'll take our next question from Casey Woodring with JPMorgan. Casey Woodring: Great. Maybe just to start on academic and government. Maybe just walk through if you can quantify what the shutdown impact is on the quarter. I know that you're assuming those shutdowns for the entirety of the quarter in 4Q. And then some of your peers have talked about European academic and government spend improving in 3Q and taking a bit more optimistic stance there on the forward outlook. So just elaborate on what you're seeing in academic and government maybe between regions? Thierry Bernard: Yes. Thanks for the question, Casey. I mean, obviously, the new events since we had a quarterly release is that we are in a shutdown in the U.S. And it's fair to acknowledge as well that nobody, and believe me I ask many other CEOs, you probably know that I'm still chairing our industry association in the U.S., and nobody knows when he's going to stop. So we took a conservative assumption, which is, okay, we are going to be in the shutdown probably until the end of the year. If it stops before, we might see an improvement of our target so far, but let's take cautious and realistic approach. So obviously, the shutdown has an impact on our sales because it impacts, obviously, an already constrained environment in academia and research, where we know that people were very cautious to spend on capital expenses, but some time on consumables. I believe that QIAGEN is able to mitigate that impact for some reason. First of all, because while we are not immune, obviously, to it, but I believe that we sell product of very high value for this academia and research labs. So it's very difficult to basically not use our product. Second, we do not sell huge price tag instruments, for example. So our solutions are, first, very important. Second, it's not a big, big budget, but we see an impact. This is an impact on sales of consumables on a daily basis, and this is an impact also on sales of instruments. But overall, I think it's under control. It's fully factored in our current guidance. And I remind you, Casey, in that environment, unlike many competitors or peers, we have maintained our guidance for the year, top line. And we have also improved our guidance from a profitability standpoint. I think this is a testament to the strength of the company. Casey Woodring: Understood. And would just reiterate what Doug said, Thierry. Thierry Bernard: This is very nice of you. I appreciate that. Thank you. Operator: We will take our next question from Aisyah Noor with Morgan Stanley. Aisyah Noor: My one is on tariffs. So thank you for the guide of 90 bps impact on the margin. Are you able to be a bit more explicit about the dollar value of these tariffs, whether these are gross or net of mitigation efforts and whether we can annualize this impact for 2026? Thierry Bernard: Thank you, Roland, would you like to take this one? Roland Sackers: Yes, sure. No, again, I think we were -- the 90 bps this year is, of course, the net impact. And I think what we said going forward is we have ongoing mitigation. So we do not necessarily expect an increase for next year's mitigations more or less kicking in particular also early next year. So we do not -- with the knowledge as of today, and unfortunately, that is an area where one tweet can change a lot. And -- but with all the information we're having right now, we do not expect that it becomes a larger impact for us. Aisyah Noor: Okay. If I could follow up on that, on the pricing dynamics. These tariff surcharges that you're placing on your products, we're hearing from some of your peers that there could some resistance to the surcharges that are being passed through and potentially resulting in some delay or push out of demand into the next quarter. Just curious is this something you're seeing? Or are you comfortable that these surcharges are passing through? Thierry Bernard: Well, I think we can take this question both of us. I can tell you I've been for something like more than 20 years now, unfortunately, on the field. It is always a negotiation when you want to price -- to pass the price increase, Aisyah, always a negotiation. Customers, when you are selling value, are understanding this because let's not forget that QIAGEN invest 10% of our sales in R&D, they see that. So the surcharge of -- coming from tariffs, it's not a price increase, it's a surcharge that we communicated to customers. It's not an easy discussion, but we explained, we explained the reason and we explained that we need to share the burden as well. And it has generated results in our quarter as well. So never easy. We do not see customers postponing decision for this. It is a discussion. We are always pragmatic, obviously, because we respect customers, but we are also insisting that we need to pass them. I think, Roland, you wanted to add something also to that. Roland Sackers: No, I think, you covered it very well, Thierry. Yes, at the end of the day, again, it depends. It is nothing what we do. Again, we clearly look on where we have pricing power, in which region, which product, what are the contracts? For us, more important is that, I would say, again, if you look at the financial results of this year, that we balance it out quite well. We were able to increase EPS 1 more time. Now we are $0.10 up. If you look on the overall margin expansion for QIAGEN, again, I just want to remind everybody, I know I'll show that you know it quite well. '23, we ended the fiscal year with an adjusted EBIT margin of 26.9. '24, we ended the year with an adjusted EBIT margin of 28.7. For this year, again, if you do the forecast, CER, we end with an EBIT margin of 30%. So we have now in less than 24 months, an EBIT margin improvement of 310 basis points. I think that speaks for itself how we're able to manage it, including clearly headwinds like U.S. tariffs. Operator: We'll take our next question from Patrick Donnelly with Citi. Patrick Donnelly: Thierry, my congrats as well on a great run. Can you just talk about your high level, the moving pieces we should be thinking about for '26. Obviously, the 4Q exit rate has a little bit of the shutdown in it. So just trying to think about high level the approach into '26, both on revenue maybe for you, Thierry. And then Roland, I know you touched on the margin there. Anything high level we should be thinking about as we head into next year. Thierry Bernard: Yes. We'll ask Roland to start with the overall picture, and I will come back on the revenue as well. Roland? Roland Sackers: Yes. I think, again, talking about the margins, let me kick it up also on Q4. As I just said, we are probably ending the year with a margin CER-wise of 30% for the fourth quarter also, while it's clearly a more challenging quarter in terms of the U.S. shutdown, we still expect also a constant exchange-wise, an EBIT margin of 29.5%, so still quite high. Yes, we have a bit more currency impact, negative impact in that quarter. But nevertheless, I would say, still quite strong. And I think that also makes us confident for next year. So for me, it's very clear that we also expect an underlying margin improvement, not only for '26. And I know that you're all expecting us that we will update the margin for '28, and we're going to do so and you will see a significant increase there. But of course, I don't do that today. The one thing, of course, I want you to have in mind is why we will have an underlying margin improvement next year. It's quite obvious that as we just talked about, tariffs is, to a certain extent, still some headwind. And of course, the [ Argos ] acquisition is also to a certain extent, a headwind. Nevertheless, we will more or less go into the year similar to what we did this year. And I do think we had a good one this year so far. Thierry Bernard: And to complete that, Patrick, thanks for the comments. And the way we see it with the team is quite simple. Two years ago, Patrick, we took a commitment to the market, which was very simple. 7% sales growth CAGR, 31% EBIT margin, as Roland highlighted, of $2 billion of revenues coming from our pillars of growth. The obsession of management, the priority and the focus is regardless of the market environment, we deliver on this. And what I mean by this is that it is clear that since our last Capital Market Day, sales are becoming more difficult. You see this with our competitors. You have seen most of our competitors or peers downgrading their outlook or expanding the range of potential growth. So what we believe is that if the situation doesn't improve in 2006 -- and '26, we are positioned to go probably around 5%, slightly above everything, including with the acquisition of Parse. If the situation doesn't improve -- if the situation improve, because also of our organic portfolio, but also the input from Parse, we could be between 5% and 7% of growth. This is not a guidance call. Let's make it clear. I'm giving you -- we are giving you with Roland some flavors. Obviously, we monitor the situation. But what is important is that if you look at what this management is going to do, and it's not just Thierry, it's all the team, is that regardless of the environment and complexity, we do smart move with our cash generation and balance sheet to improve our portfolio of products, Genoox, Parse and we take actions also to continue to improve our profitability. In other words, I would also say that we will position QIAGEN again, regardless of the environment to deliver on the expectation on the market from an EPS standpoint in 2026. Operator: We will take our next question from Luke Sergott with Barclays. Luke Sergott: Can you talk about just from the Parse acquisition plans that you guys or investments that you guys are -- that you would need to take either on the automation side or anything that you can leverage on your existing portfolio here to add scale or make it more user-friendly across a broader customer base? Thierry Bernard: Thanks. I mean it's already extremely user-friendly. And this is why -- imagine this is still a young company, more than 3,000 customers worldwide. It's a significant and humbling performance, I think. Second, you know that one of the differentiation is that it's completely instrument-free. So it makes the ease of use extremely customer-friendly. Third, there is something that we didn't go into details today that Parse has built, which I find also interesting is giga lab capacity to address, especially higher throughput, higher volume customer demand. So I see a lot of interesting synergies, immediate portfolio synergies. Someone selling Sample tech at QIAGEN can sell also Parse tomorrow. And I would say a lot of people from Parse can immediately sell also and leverage our Sample tech portfolio, our QDI solution as well. Second, there is another natural. By definition, we are much more a global company than Parse. So we can immediately obviously expand the geographic footprint. And so it's in our business case to continue to support this portfolio with R&D investment and the 2 teams are now going to work together as well to see what more synergy from a development standpoint, can we put to make sure that we ensure the continuum of solutions from Sample tech, but also QDI and also our sequencing chemistry. And all this linked with AI. Let's not forget that a good driver also from that acquisition is that we take another dimension with AI in our portfolio. Luke Sergott: Okay. That's helpful. And then I guess from a QIAcuity perspective, you talked about the consumables up double digits. Can you just break out what you're seeing there for across the biopharma side? Like how much of your QIAcuity piece is actually being sold into that market versus the A&G market? And then a follow-up on just what you're seeing from a competitive dynamic versus especially the new offerings from the droplet technologies? Thierry Bernard: So once again, I mean, as usual, we deeply, I'm sorry, respect our competition. What we see is that our direct competition is basically presenting numbers that are not really comparing to our performance. We are still double digit that we continue to invest. I said during the call that it's a significant number of new application in academia and research every year that we are making available for our customers. You know that the solution is also now available for clinical customer is what we call QIAcuity Diagnostic. And we see a very good also -- performance from our companion diagnostic. So from direct customers, usage such as biopharma, QC controlled by pharma is boosting way over double digit and pharma customers are becoming a significant now a segment of customers, and they are very interesting. Why? Because, first of all, their throughput -- their volume of consumable is higher than any other segment and they are very demanding customers. Second, the portfolio of companion diagnostic, digital PCR based is even surprising to us in full transparency. It's growing very fast. And I remind you this positions QIAGEN very well because we are the only company at this moment able to offer to biotech and pharma companies companion diagnostic solutions that are PCR-based, NGS-based or digital PCR based. So we are confident. Double digit, its a good performance. We are a bit impacted by this low capital expense environment. So we feel it in our number of placements. But once again, what are we talking about? We are still placing above 100 systems per quarter, and this is good for the future of digital PCR because those placements are going to generate, obviously, consumables. Operator: We will take our final question from Jan Koch with Deutsche Bank. Jan Koch: My first question is on the announced acquisition of Parse. Could you elaborate on the gross and margin -- EBIT margin profile of the business? If I have done the math correctly, it looks like you don't assume any kind of EBIT contribution from this asset in 2026. And could you also share the specific milestones that are required to trigger the additional $55 million payment? And then my second question is on the Sample tech business. Obviously, very encouraging to see that business returning to growth in Q3. But did you benefit from any one-offs in the quarter? And what kind of growth do you expect in Q4 in view of the government shutdown? Thierry Bernard: Very good. Thanks for the question. I will ask Roland to take the financial on Parse from a contribution to our financials, and then I will address the Sample tech question. Roland? Roland Sackers: Yes. I do think, again, what we announced is as you've seen that we expect a dilution of about $0.04 for '26, while we expect revenues of about $40 million. So if you do the math, you really can see it has an EBIT dilution, of course, also for that year. And -- but nevertheless, we do expect it becomes accretive in '28. It is a significant growth opportunity again, the revenue growth rate is quite exciting. So yes, it is dilutive EBIT margin wise for next year, and it's something what we have to eat, and we were clearly trying this underlying to compensate and maybe even to overcompensate for that. But I would expect on the mid-term, there is a nice equation coming up as this business has healthy gross margins for QIAGEN and therefore, the revenue growth rate is going to help. Thierry Bernard: Thank you, Roland. And for Sample tech, there is no one-off in Q3. And I think -- I hope that you will be able to attend our deep dive on the 21st because there, we will go into details showing you, I hope, and demonstrating that we are perfectly executing on our strategy. And what is the strategy? For the last 4 years, we have really, really invested into further automation. QIAcube became QIAcube Connect. EZ1 became EZ2. QIAsymphony Connect is currently being installed. And in the first semester of '26, you will have 2 new instruments with QIAmini and QIAsprint Connect. So automation is the way to go. Second is investing into very high added value application. The first that comes to my mind, obviously, is liquid biopsy. This is not a number that we publish a lot. But do you know that Sample tech liquid biopsy by QIAGEN is growing way over double digit. And when I say double digit, I'm not talking the 10 marks, way over that. And this is where we need to invest. And third is investing into technologies of the future, the demonstration is Parse. So there is no time off. I expect that for the full year 2025 and especially because of the shutdown, we will be basically overall flattish for the year, but I continue to confirm our ambition to grow in the '28 objective because those instruments are going to help. And they are perfectly factored in the ambitions that we gave you back in New York 2 years ago, which is roughly 3% growth rate and reaching $750 million revenues. John Gilardi: Okay. Thierry and Roland, thank you very much. And with that, I'd like to close this conference call. And again, thank you for your participation. If you have any questions or comments, please don't hesitate to reach out to us. Thank you. Operator: Ladies and gentlemen, this concludes the conference call. Thank you for joining, and have a pleasant day. Goodbye.
Operator: Hello, and welcome to Equitable Holdings, Inc. Third Quarter Earnings Call. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the call over to Erik Bass, Head of Investor Relations. You may now go ahead, please. Erik Bass: Thank you. Good morning, and welcome to Equitable Holdings Third Quarter 2025 Earnings Call. Materials for today's call can be found on our website at ir.equitableholdings.com. Before we begin, I would like to note that some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. Our results may differ materially from those expressed in or indicated by such forward-looking statements. Please refer to the safe harbor language on Slide 2 of our presentation for additional information. Joining me on today's call are Mark Pearson, President and Chief Executive Officer of Equitable Holdings; Robin Raju, our Chief Financial Officer; Nick Lane, President of Equitable Financial; Seth Bernstein, AllianceBernstein's President and Chief Executive Officer; and Tom Simone, AllianceBernstein's Chief Financial Officer. During this call, we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and related definitions may be found in the Investor Relations portion of our website and in our earnings release, slide presentation and financial supplement. I will now turn the call over to Mark. Mark Pearson: Good morning, and thank you for joining today's call. Equitable Holdings delivered solid third quarter results marked by continued organic growth momentum and increased earnings power across our businesses. We also allocated $1.5 billion of capital to drive shareholder value and future growth, successfully redeploy a large portion of the proceeds from our individual life reinsurance transaction with RGA. This includes approximately $200 million of investments to help accelerate growth in Asset and Wealth Management. Looking forward, our integrated business model positions us well to be a long-term winner in retirement, asset management and wealth management, and we remain confident in achieving each of our 2027 financial targets. On Slide 3, I'll provide a few highlights from the third quarter. Non-GAAP operating earnings were $455 million or $1.48 per share, down 6% year-over-year on a per share basis. Adjusting for notable items, non-GAAP operating EPS was $1.67, which is up 2% compared to the prior year. As expected, earnings rebounded from the first half of the year, helped by growth in each of our core businesses and the completion of the life reinsurance transaction. I'm also pleased that we saw only small impacts from our annual assumption review, validating our conservative approach to assumption setting. We ended the quarter with record assets under management of $1.1 trillion, up 4% sequentially, which bodes well for future growth in earnings. We will also see additional benefits from management actions to enhance yields in our investment portfolio and drive productivity savings. Organic growth momentum remains strong, supported by our flywheel business model. Our retirement businesses generated $1.1 billion of net flows during the quarter, driven by continued growth in RILA sales. As a reminder, flows tend to be lower in the third quarter due to seasonality in the K-12 teachers business, and we did not have any material institutional flows in the period. Wealth Management had another strong quarter with $2.2 billion of advisory net inflows, a 12% annualized growth rate. Adviser productivity increased 8% year-over-year. Turning to Asset Management. AB reported total net outflows of $2.3 billion, which includes $4 billion of low-fee assets transferred to RGA as part of the life reinsurance transaction. Excluding this, AB had net inflows of $1.7 billion, driven by the private wealth and institutional channels. Private markets assets increased 17% year-over-year to $80 billion and are on track to achieve AB's $90 billion to $100 billion target by 2027. Moving to capital deployment. We used $1.5 billion to drive shareholder value and make investments for future growth. During the quarter, we returned $757 million to shareholders, including $676 million of share repurchases. We completed most of our planned $500 million of incremental buybacks and expect our full year payout ratio to be at the upper end of our 60% to 70% target range. We also reduced outstanding debt by $500 million to manage our leverage ratio and give us more capital flexibility moving forward. Finally, we announced 2 strategic transactions that help scale our Wealth Management and AB Private Markets businesses. We are acquiring Stifel Independent Advisors, which has over 110 advisors and $9 billion of advisory assets. In addition, we are allocating $100 million to support AB's investment in FCA Re, an Asia-focused sidecar established by Fortitude Re and Carlyle. AB will become a key investment partner for Fortitude and initially manage $1.5 billion of private credit assets for FCA Re. I will discuss these transactions in more details in a minute, but they both offer attractive IRRs and are consistent with our strategy to scale adjacent businesses. Turning to Slide 4. We highlight our strategy to drive growth and create shareholder value. We are focused on 3 core growth businesses: Retirement, Asset Management and Wealth Management that have synergies and provide flywheel benefits. Participating in all 3 of these businesses allows us to capture the full retirement value chain. There are 4 key pillars to our strategy: number one, defend and grow our retirement and asset management businesses; secondly, scale our high-growth and high multiple wealth management and private markets businesses. Third, seed future growth by investing in high potential opportunities like annuities and 401(k) plans and emerging asset management markets. And finally, be a force for good and deliver on our mission to help our clients secure their financial well-being so they can live long and fulfilling lives. On the next 2 slides, I will provide a deeper dive into our strategy for scaling adjacent businesses. First, I will focus on our Wealth Management business, which is a key growth driver for the company. Having affiliated distribution also provides a significant competitive advantage for Equitable's retirement businesses. Wealth Management has strong growth momentum with $6.2 billion of year-to-date advisory net inflows. Adviser productivity is up 8% year-over-year and 24% since 2022. Earnings are on track to reach $200 million in 2025, 2 years ahead of plan. We are also allocating capital to enhance the strong organic growth momentum. We have increased our investment in experienced adviser recruiting, bringing in over $1.1 billion of recruited assets over the past 12 months. Earlier this year, we hired a new Head of Business Development to build out our platform, and we have a strong pipeline and expect to ramp up recruited AUA over time. As I mentioned earlier, we also recently announced the acquisition of Stifel Independent Advisors, which has over 110 advisors and $9 billion of AUM. Stifel's advisors have similar characteristics to Equitable's advisors, creating a nice cultural fit. There are also meaningful operational synergies. We expect the transaction to close in the first half of 2026 and forecast it to add about $10 million to Wealth Management earnings in 2027. This is a good example of the type of bolt-on acquisition we will look at to help scale our Wealth Management business at a reasonable cost. Looking forward, assuming normal markets, we forecast Wealth Management earnings to continue growing at a double-digit rate, driven by asset growth and further advisory productivity improvement. In addition, margins should expand over time as the business scales. I would also note that our business does not have significant exposure to lower short-term interest rates. Cash sweep income has accounted for only 15% of the segment's year-to-date earnings and 100 basis points of Fed rate cuts would reduce annual earnings by only about circa $15 million. Turning to Slide 6. I want to highlight some examples of how Equitable is deploying capital to support growth at AB. Having access to Equitable's balance sheet is a competitive advantage for AB relative to most traditional asset managers and the investments we make yield flywheel benefits across EQH. Our investments come in 3 primary forms: number one, allocations from Equitable's general account portfolio, which can be used to seed capital to launch new strategies or permanent capital to scale existing offerings. To date, we have deployed over $17 billion of our $20 billion commitment to AB's private markets platform. Number two, in addition, we support team lift-outs that bring new capabilities to AB. For example, in the past year, AB added private ABS and residential mortgage teams to expand its private markets offering, and Equitable was able to provide them with immediate capital to invest. Number three, finally, we help finance M&A or strategic investments, either by providing cash or issuing AB units. We did this with the acquisition of CarVal in 2022 and more recently with the investments in the Ruby Re and FCA Re sidecars. These sidecar investments highlight some of the unique synergies between AB and Equitable. AB leveraged Equitable's insurance expertise in the due diligence process, and both firms benefit from developing a strategic partnership with the sponsor. These investments also provide Equitable with exposure to new insurance markets such as pension risk transfer and Asia. AB has been able to leverage these investments to help deliver strong growth in private markets and third-party insurance, 2 key strategic focus areas for the company. Private markets AUM has grown at a 12% CAGR since 2022 and is on track to meet or exceed the $90 billion to $100 billion target by 2027. Third-party insurance general account AUM is up 36% since 2021, and AB has added 6 new mandates year-to-date. Stepping back, the recent actions we've taken to support the growth of AB and Wealth Management are good examples of us executing on our strategy and leveraging our unique flywheel benefits. I will now turn the call over to Robin to go through our financial results in more detail. Robin Raju: Thanks, Mark. Turning to Slide 7. I will provide some more detail on our third quarter results. On a consolidated basis, non-GAAP operating earnings were $455 million or $1.48 per share. We reported a GAAP net loss of $1.3 billion, primarily driven by a onetime impact from asset transfers at the closing of our individual life reinsurance transaction. There is an offsetting adjustment to AOCI. We had a few notable items in the quarter. First was a $36 million adjustment for July mortality experience, most of which was covered under our reinsurance agreement with RGA. The transaction had an effective date of April 1, so it covers claims in July. However, the reinsurance benefit is not reflected under U.S. GAAP as we did not close the transaction until July 31. Accordingly, there is a difference between our GAAP results and our cash results. Going forward, we expect to see significantly less volatility in our Life results, which are now reported in Corporate and Other. We also had $24 million of onetime expenses in Corporate and other. Finally, we had a $4 million benefit in Wealth Management from a reserve release, which reflects better emerging experience on the loans we've made to recruit experienced advisors. Our annual assumption review had a $1 million positive net impact on operating earnings. As Mark mentioned earlier, this validates our conservative approach to assumption setting. Adjusting for these items, non-GAAP operating earnings per share was $1.67, up 2% year-over-year. Total assets under management and administration rose 7% year-over-year to $1.1 trillion, which bodes well for future earnings growth. In addition, we'll see further benefits from expense initiatives that will contribute to the bottom line over time. Adjusted book value per share ex AOCI and with AB at market value was $33.59. In our view, this is more meaningful than reported book value per share, which reflects our AB holding at book value. On this basis, our adjusted debt-to-capital ratio was 24.5%. On Slide 8, I'll provide some more details on our segment level earnings drivers. Starting with Retirement. Earnings declined from the third quarter 2024, but increased 9% sequentially after adjusting for notable items in both periods. Net interest margin, or NIM, was down year-over-year due to a lower level of market value adjustment gains and some spread compression as our pre-2020 RILA block runs off, but it did increase 4% sequentially. As discussed last quarter, we do not assume any benefit from MBAs going forward, and we expect spread pressure from the older RILA block to be de minimis by mid-2026. NIM should continue to increase from the third quarter level, driven by growth in general account assets. We also saw fee-based revenues increase 4% from the second quarter due to strong equity markets. Separate account balances ended the quarter 4% higher, which bodes well for further growth in fee revenues in the fourth quarter. Growth in revenues was partially offset by higher DAC amortization, which reflects growth in the block and increased surrenders. This quarter is a good baseline for amortization moving forward, and we expect it to increase by approximately $4 million per quarter. Moving to Asset Management. AB delivered a strong quarter with earnings up 39% year-over-year. This includes the benefit of increasing our ownership from 62% to 69%. Fee revenue increased 6% sequentially, driven by favorable markets and a higher base fee rate. The adjusted margin improved 290 basis points year-over-year to 34.2% and is expected to come in above the 33% target for the full year. AUM ended the third quarter at a record $860 billion, which should support future growth in base fees, and we now project full year performance fees of $130 million to $155 million, up from our prior forecast of $110 million to $130 million. Turning to Wealth Management. We delivered strong earnings and net flows. Earnings increased 12% year-over-year, excluding the reserve release and 12% annualized organic growth compares very favorably with peers. We expect segment earnings to continue growing at a double-digit rate moving forward. Finally, results in Corporate and Other were negatively affected by the notable items I mentioned earlier and adverse mortality throughout the quarter. We expect to see much more muted impact from mortality in future periods as we get the full benefit of the life reinsurance transaction. We will also see incremental benefits from our expense efficiency initiatives. Our alternatives portfolio generated an 8% annualized return in the quarter, consistent with our 8% to 12% long-term expectation. This exceeded our guidance of a 6% return due to a gain on a strategic investment. We expect returns at the low end of our 8% to 12% target range again in the fourth quarter. Lastly, the consolidated tax rate for the quarter was 17%, below our normal expectation of 20% due to some favorable items. We now expect the full year consolidated tax rate to be in the high teens. Looking to 2026, we still expect the full year overall company tax rate to go back to 20%. Putting it all together, we see good momentum heading into the fourth quarter and remain focused on controlling what we can control to drive higher earnings in the future. Turning to Slide 9. I'll highlight Equitable's capital management program. During the quarter, we returned $757 million to shareholders, including $676 million of share repurchases. We completed most of the planned $500 million of incremental buybacks in the third quarter. For the full year, we expect our payout ratio, excluding the onetime buyback to be at the higher end of our 60% to 70% guidance range. Over the past 4 quarters, we have reduced our share count by approximately 8%, helping to drive growth in earnings per share. We ended the quarter with $800 million of cash at the holding company, above our $500 million minimum target. During the quarter, Holdings received $1.6 billion in subsidiary dividends, including $1.3 billion from our Arizona insurance entity. We used this to fund the capital return to shareholders, tender for $500 million of debt and redeem the remaining $165 million of our Series B preferreds. In the fourth quarter, we expect to take an additional dividend from our Arizona subsidiary and we'll also receive distributions from our Asset and Wealth Management businesses. For the full year, we expect total cash upstream to the holding company to be $2.6 billion to $2.7 billion. This includes $1.6 billion to $1.7 billion of organic cash generation in 2025, in line with our guidance. In addition, we will upstream $1 billion of proceeds from the life reinsurance transaction. Importantly, over 50% of our organic cash generation is coming from Asset and Wealth Management businesses, highlighting our diversified business model. We will provide additional guidance on our 2026 cash flow outlook early next year and remain on track to achieve the $2 billion of annual cash generation by 2027. I will now turn the call back over to Mark. Mark Pearson: Thanks, Robin. Equitable has healthy organic growth momentum and higher assets under management are driving increased earnings power across our retirement, Asset Management and Wealth Management businesses. I'm also pleased with the progress we've made in redeploying the $2 billion of proceeds from the life reinsurance transaction to drive shareholder value and make strategic growth investments to scale our Wealth Management and AB private markets businesses. Looking forward, we expect EPS growth to accelerate and remain confident in achieving our 2027 financial targets. We will now open the line for your questions. Operator: [Operator Instructions] Your first question comes from the line of Suneet Kamath of Jefferies. Suneet Kamath: I wanted to start with private credit. And if we take a step back, we have some people outside the insurance industry pointing fingers at the insurance industry, some folks within the industry saying we're fine. So I wanted to get your perspectives on 2 things. One, what your view of the environment is? And I guess the bigger question is, as you start to add private credit assets, can you talk about the process that you go through with CarVal, just to understand what the requirements and criteria are, whether you want to talk about ratings or who rates the securities? Just want to get some color on the background there. Robin Raju: Sure. Suneet, thanks for the question. I think on the broader environment and CarVal sets on the line, so I'll let him touch that. But let me talk quickly about how we think about it at Equitable Holdings. We do think private credit and broader credit is a good asset class for clients and investors at Equitable and AllianceBernstein and we want to make sure we're compensated for the risk we take. For Equitable's general account specifically, this is a business in insurance that we have sticky liabilities and where you want to take some liquidity risk. And as a result, private credit is an attractive asset class that matches well with our liabilities. We invest in investment-grade assets, and we pick up in a liquidity premium as a result. Specifically on the ratings, as I know this has come up in some of the calls, about 90% of our fixed maturity portfolio is rated by at least 1 of the big 3 rating agencies. We have 8% at DBRS or Kroll and 2% is NAIC only. We only have $200 million that's rated by Egan-Jones, and that's really within our middle market lending portfolio. So that's about less than 20 basis points of our total portfolio. Just importantly, Ratings is an output, but we don't rely on ratings. What we rely on at Equitable Holdings is the underwriting capability within our general account team and at AllianceBernstein. And that's really the benefit of our flywheel here is we have direct access of underwriting. And so we need to get comfortable first with the underwriting of the portfolio that we're being compensated for any risk that there is and then you would get the rating. So the overall portfolio, the general account, it's about 98% investment grade and A2 rating, but it's -- that's the output of this good underwriting that takes place between Equitable and AllianceBernstein. And we continue to view even in this environment, private credit as an attractive asset class. But both private and public credit for the general account does come with risk. That's our role. We want to take good risk and make sure that our shareholders are being compensated for it, and we feel comfortable where we are today for the general account at Equitable. Maybe I'll pass to Seth, so he could talk about AB, broader credit and CarVal as well. Seth Bernstein: Okay. Thank you. And Suneet, let me just make the broader statement, which is as we look at our private credit businesses, of which CarVal is one of several, our overall investment performance, including recent results, has been as expected or better. We've seen pretty strong results across the board, certainly recovering, particularly in commercial real estate. But I would say generally that given the amount of money that's moved into private credit, we've certainly seen some reduction in strength of the covenant structures, and it's clear that people are reaching for risks in what has been a very strong demand market. That being said, we stay very close to home in the risks we underwrite, whether at CarVal or our middle market lending business. And those processes are bottoms-up due diligence intensive and highly negotiated structures. which to date have protected us pretty well. We've been pretty prudent at stepping aside where we think the terms and the structure or the management team are not giving us the visibility that we would think is essential for us to take a favorable decision in that regard. So yes, there are signs of exuberance. And obviously, there have been indications of fraud, at least in 2 cases that are out there. But we think we're well protected and we're comfortable with the positions we have, both in the general account of Equitable, but also more broadly for our third-party clients. Suneet Kamath: Okay. My second question is on the RILA market. And I know about half of your sales are somewhat protected given Equitable Advisors and some of the P&C companies that you sell through. But I wanted to focus on the other half and where I think there's probably more competition. And I just wanted you to talk to maybe 2 things. One, how are you differentiated in that other half? And then second, are you seeing anything in terms of terms and conditions that start to make you a little bit worried about aggressive features, things that we saw in the kind of the mid-2000s. Just want to make sure that doesn't kind of creep up on us. Nicholas Lane: Great. Thanks, Suneet. This is Nick. As you highlighted, first, we do see continued strong demand for RILAs across the space, driven by the demographics and this macro uncertainty, and that resonates across all channels. As Mark highlighted, overall RILA sales were up 7%, another record high for us. in the quarter. We think our flywheel gives us a sustainable durable edge in 3 ways across the different markets. One, we generate attractive yields through AB. The second, as you highlighted, which is we have our privileged distribution through Equitable Advisors, but we have a track record as a pioneer, having been the first to launch this product over a decade ago and continue to deliver on the value proposition, consistent stories and the relationships with over 15,000 advisors in the third-party space. And then finally, we have the scale given our wholesaler footprint, our #1 position. When we look at how we are continuing to evolve in the market, we have a successful track record of innovation that's really anchored both from the insights we get from Equitable Advisors that we translate on consumer need to other markets as well as anchoring our products in our economic that ensures we deliver attractive returns. So our focus has been on prudent innovation relative to both within the segments in RILA's, we were the first to launch dual direction. These are new segments that tap into different needs as well as new versions that open up new markets. For example, in August, we launched our SCS Premier product, which allows consumers to pay a fee for a higher cap, which is fitting a new need that others aren't looking at. So I would say, going forward, we believe we're in a privileged position to capture a disproportionate share of the value being created in this fast-growing market. Operator: Your next question comes from the line of Tom Gallagher of Evercore ISI. Thomas Gallagher: First question, Robin, beyond the $35 million onetime adjustment for mortality, you mentioned underlying mortality experience was also unfavorable. Can you comment on how much below your expectation kind of underlying mortality experience was in the quarter and why you're confident that should normalize going forward? I think you said you expect less volatility. Was it -- maybe a little more color on what drove it this quarter and why you're comfortable that should normalize? Robin Raju: Sure. Thanks, Tom. So we did call out about $36 million or $0.12 per share as a notable item for July mortality experience. And this is to reflect economic benefit from the reinsurance transaction that was not reflected in the GAAP results. Mortality was a bit elevated in August and September and broader across the whole quarter, we saw higher severity in the quarter as it relates to mortality. But our retained experience, which is net after the benefit of the RGA transaction was only about $10 million worse than expected for the months of August and September. So while it did weigh on earnings for Corporate and Other, the impact was relatively modest, underscoring the benefit of the reinsurance transaction. So we don't expect it to be highly volatile like it was previously going forward that we have RGA in place. Thomas Gallagher: Okay. That seems fairly modest. Seth, follow-up question is just about capital. And I heard your comment about you have a $500 million HoldCo target. You have $800 million currently. I guess, historically, you ran with this like giant buffer at the holding company, $2 billion plus. And now -- but now things have changed. I think you've significantly improved cash flow outside of the insurance entities. Is $800 million a good kind of level? I know you have a $500 million target, but should we be thinking about in normal course, you're going to run with some buffer on top of that? Is $800 million reasonable to think about as a base case? And then also, how much is left from the RGA deal? Is it around $300 million that you would have in addition to normal cash flow? Robin Raju: Sure, Tom. So on cash flows, look, our cash flow position is very robust. If you recall back, going back when we IPO-ed, only 17% of the cash flows were coming from asset and wealth businesses, and now it's over 50%. And that's reflective of our distinct strategy in growing our asset and wealth businesses as we capture bigger share in the overall flywheel that we have at Equitable Holdings. For the HoldCo, we want to target $500 million. Yes, that time to always have a little bit more, but not substantially just to manage volatility within results. So I wouldn't think that we -- I wouldn't take away that we have a higher target than the $500 million. But yes, sure, we're always going to have a little bit more as we want to manage any cash flows that are needs, whether it's for interest expense or timing of upstreams from the holding company as well. As it relates from -- for the RGA transaction, we're happy that we completed and closed the transaction effective July 31. Reminder, $2 billion in total value. We use that value and that shift to really move our business away from long-dated, highly volatile life business to faster-growing businesses in Asset and wealth. You saw that in this quarter as well. So we invested about $800 million to increase our stake in AllianceBernstein from 62% to 69%. We had $500 million of incremental share buybacks on top of our 60% to 70%. That's going to be helpful for go-forward EPS growth. We also reduced our debt position by $500 million. And in this quarter, we invested approximately $200 million to scale our wealth management business a bit more with the Stifel acquisition. That's about 110 advisors, $9 billion of AUM, AUA. So that's good for our growth in our Wealth Management business going forward and continue to invest in sidecars to grow AB's private credit business. So that's the $2 billion of proceeds right there. There's about $300 million of left that we said we will deploy, and that will be deployed in due time, either in growth investments or additional share buybacks depending on where we are in the market. Operator: Your next question comes from the line of Ryan Krueger of KBW. Ryan Krueger: I think you called out $10 million of unfavorable mortality in August and September that impacted the Corporate segment. Was there anything else that would you consider somewhat unusual this quarter when you -- I think you called -- you showed kind of a $98 million loss. It sounds like there was a $10 million mortality impact. Anything else you would point out that maybe caused that to be worse than you'd normally expect? Robin Raju: Nothing else I would call out. But look, at Corporate and Other, there's always a little bit of a noise. And we will provide earnings guidance for Corporate and Other next quarter as we discuss our 2026 outlook. But you should expect the quarterly loss to be smaller than the $100 million per quarter that we had guided to prior to the resegmentation. Ryan Krueger: Okay. Got it. And then can you go into the sidecar strategy a little bit more in terms of investing in terms of AD investing in third-party sidecars? You've done a few things now. Do you see this as something you'll continue to do beyond what you've already done? Or is that most of what you think you'll do? Seth Bernstein: Well, why don't I start? This is Seth Bernstein. We have done 2 that we've announced. We are talking with others, and there's ultimately a limit on what we would be willing to do here depending on the opportunities. But we're quite mindful of the overall risk we're prepared to take on the balance sheet with respect to insurance risk. And again, we do this in partnership with Equitable, utilizing their extensive underwriting capabilities, which we don't have here in-house as well as outside consultants that we use to evaluate the opportunities. So this is going to be, I think, a continuing attribute of private credit markets, given insurers, particularly life insurers' desire to access capital to continue to expand their businesses and do so in the most cost-effective way. It has proven to be a pretty attractive way for us to deploy and develop -- deploy new assets and develop new client relationships. But ultimately, there is a limit on the amount we're prepared to do. And perhaps, Robin, I don't know if you have a perspective from the Equitable perspective level. Robin Raju: Well, from an EQH perspective, sidecars fit quite well into the flywheel. We can underwrite insurance liabilities and AB can invest in private credit. Just to double-click a little bit, where we've invested so far, if you look at the RGA sidecar Ruby Re, we're getting into an asset-intensive sidecar, PRT liabilities. Those are liabilities that Equitable is not directly in, but can help underwrite the AB team and AB can invest and leverage their private credit capabilities. And then if you look at the FCA sidecar, well, that's now an international market, Asia-based liabilities. we can help underwrite and again, leveraging AB's private credit capabilities. So as we look at these opportunities, we want to make sure the equity stands by itself that it delivers good risk-adjusted IRRs. And then also it builds on the capabilities that we have at AllianceBernstein to grow our private markets business, which is now $80 billion and well on track to the $90 billion to $100 billion that we laid out at Investor Day. So we like the sidecar strategy. It leverages the flywheel, and we'll do more of them if we see that they fit the needs between Equitable and AB. Operator: Your next question comes from the line of Joel Hurwitz of Dowling. Joel Hurwitz: In retirement, the DAC amortization jumped $10 million quarter-over-quarter. Robin, you mentioned, I think, in your prepared remarks that surrenders was a driver. But I guess are surrenders getting worse than expectations? Because I thought that was the driver of the jump a year ago. Robin Raju: Yes, that's right. Some -- well, 2 things driving higher DAC amortization that I mentioned, higher growth in sales, which obviously we capitalize and have to amortize and then some higher surrenders that we have in place, and that's what I mentioned on the call as well. Nick, you could provide some color on it as well. Nicholas Lane: Yes. So just on overall flows, as a reminder, our Retirement segment now encompasses both our Individual Retirement as well as our Group Retirement business lines. So breaking that down, first, within Individual Retirement, we achieved $1.4 billion of net flows, driven by $3.9 billion of RILA sales. In the last 9 out of the last 10 quarters, we've had record sales, so we continue to see momentum. Next, as was sort of highlighted in the previous remarks, this was partially offset by our expected seasonal outflows in group retirement, which is comprised of our tax-exempt institutional and our corporate business. In tax exempt, this is our teachers business. We experienced modest outflows consistent with seasonal expectations given that teachers paused contributions during the summer months. As a reminder, this is where we have our 1,200 advisors that work with close to 900,000 educators and school districts on supplemental retirement plans. We would expect this line to continue to achieve single-digit growth with strong ROAs and be positive for the year. Institutional, we didn't have any material flows in the third quarter. However, we've gathered over $800 million in assets year-to-date. And then finally, in our corporate business, this is our legacy 401(k) lower margin that's sort of been in structural runoff. We would remind you that 20% of the outflows are for retirement distributions and the remainder, we're capturing 50% given our flywheel model through Equitable advisors. So looking forward in the retirement business, we expect to continue to generate strong flows supporting the future growth of our earnings and cash flow. Robin Raju: And where we did -- where we did see surrenders, the actual rate -- surrender rate didn't increase. It was more the benefit of higher markets, so higher account values overall. So the surrender rate itself was okay. Joel Hurwitz: Got it. That's helpful. And then, Nick, just following up on I guess, institutional, any expectations for Q4? And maybe can you comment on expectations for the sales of the fixed annuity product that you launched? Nicholas Lane: Sure. We continue to be bullish on the untapped potential for long-term growth in the institutional market. Just to frame, it's an $8 trillion defined contribution market with a potential addressable market for in-plan annuities probably between $400 billion and $600 billion longer term. Still in the early innings. We have the policy support, that's the regulatory tailwinds through the SECURE Act. We have the products. We have the partnerships now with the target date funds and the record keepers. So we're really now on that fourth step of engaging plan sponsors. We're encouraged by the momentum, having gathered over $800 million since we launched the BlackRock partnership last year and believe that going forward, we're in a strong position with a first-mover advantage. This is both our expertise in the product design as well as our partnership network with AB. AB has been in this space for over a decade. And BlackRock -- this is allowing us to build a track record that we think the fast followers are going to look at when they start to adopt these solutions. Specifically, for the next quarter, we don't expect material sales. We get visibility about 30 to 60 days prior to transfer, but there is a strong pipeline for 2026. Operator: Your next question comes from the line of Alex Scott of Barclays. Taylor Scott: I just wanted to make sure I had it clear on sort of the movement in HoldCo liquidity. It sounded like there's still some cash being taken up. So just wanted to see if you could walk us through like what does that look like on more of a pro forma basis for what you're expecting in 4Q? And if the higher sort of incremental share repurchases are more complete at this point? And how would you stack up like the set of priorities for potentially deploying more? Robin Raju: Sure. So we ended the quarter at $800 million at the HoldCo. We put a chart on Page -- Slide 9 of the deck that highlights the walk from last quarter to this quarter. It included the subsidiary dividends, the capital return, the debt tender, the preferreds and some interest expense. In the fourth quarter, you should expect that we'll continue to get upstreams from both the Arizona insurance entity and also AB, our wealth management business and the asset management contracts that we have. that should total around $700 million. And then we'll have capital return as well in the quarter and interest expense on top of that as well. So we should end the quarter probably above $1 billion in HoldCo cash as well. And then going forward, as we think of next year, we'll give guidance on our cash flows next year. But obviously, we're committed to the 60% to 70% payout ratio, and we want to continue to find attractive bolt-on opportunities to fuel growth in the business as well, similar to like what you saw this quarter. Taylor Scott: Got it. That's helpful. And in Wealth Management, as I think about some of the other peer companies out there that have built up their wealth management groups, I think Team LIFT has been a big part of it. Can you talk about that as part of your strategy? Is that something that you're deploying capital towards and using to build it up over time? I guess it would be a little more organically. Nicholas Lane: Sure. First, as we hire, we're excited by the Stifel transaction. These are high-quality advisors that are a strong cultural fit. And we see the opportunity for them to continue to accelerate the growth of their practices on our platform. As Mark highlighted, with 110 advisors, $9 billion of AUA, this is a good example of the bolt-on acquisitions where we're deploying capital to augment our strong organic growth as we continue to build scale. Looking forward, we see continued momentum in our underlying organic growth drivers. We're one of the few in the industry that continues to bring in new advisors or new talents into the industry, which allows us to be disciplined in our experienced hire efforts. So we think we're well positioned to meet this growing demand for advice and are very encouraged with the momentum that we have. Operator: Your next question comes from the line of Jimmy Bhullar of JPMorgan. Jamminder Bhullar: First, I just had a quick follow-up question for Nick around your comments on competition in the RILA market. I'm not sure I missed what you said, but I realize you guys have a unique distribution and obviously scale in the product line as well. But the market is a lot more crowded than it was a few years ago, and some of your competitors have alluded to an increase in competition. So what is it that you're seeing competitors do in the market? And are you seeing any that are offering maybe overly generous terms and conditions? Or is it just that there are more companies and it gets harder to sell as a result? Nicholas Lane: Yes. So obviously, as you mentioned, the competitive landscape has changed since we pioneered the product a decade ago with the majority of carriers now having launched the product. We're very mindful of competitive trends on pricing. Usually, new entrants offer a teaser rate and they revert back because it's not sustainable. We remain focused on profitable growth. As the market leader with a durable edge, we're continuing to benefit from that growing pie as more advisors and consumers become familiar with the value of buffered annuities as an asset class in their portfolio. I'd highlight over the last 3 years, our RILA sales have almost doubled, and we've produced record sales in 9 of the last 10 quarters. So we continue to focus on, I would say, innovation anchored in our economic model, and you'll see us delivering, I would say, sustainable growth within that market. Jamminder Bhullar: And then just maybe on Individual Life. Obviously, your exposure going forward to the block is going to decline given the reinsurance contract. But if you think about the underlying policies, margins have deteriorated over time, and they've been especially weak the last few years. And do you view that as more of an aberration and just normal volatility in the business? Or is there something about the type of policies or terms in the block that are -- that have been pressuring results in recent years that might be more sustainable? Robin Raju: Sure. So when we think about the Individual Life business, let's just take a high level where we're focused is on Equitable Advisors. And the reason being is we don't find the third-party businesses being attractive. And a lot of the volatility we see from the results was a function of third-party sales pre-global financial crisis that had very high face amounts and had a low ROE on it. And that's why we did the RGA transaction. It take a 5% ROE business and reinvest it in higher growth businesses for Equitable to drive our strategy going forward. We are perfectly economically reserved. We manage the business on an economic basis. So the reserves are all good. It's there is some noise in the GAAP accounting with volatility. And part of the reason we did the RGA transaction was to reduce that volatility going forward. But we don't see anything else other than volatility at this time. They are older age policies, high face amounts. So if someone dies, if they don't die this year, it's likely they're going to die soon, and then you're going to see that volatility come in. So as a result, we feel good of where we set our reserves economically, and we feel very good about the RGA transaction because this helps accelerate our strategy into these faster-growing businesses. Operator: Your next question comes from the line of Elyse Greenspan of Wells Fargo. Elyse Greenspan: My first question is on the $300 million, I guess, the capital left from the RGA deal, right, that you just haven't fully earmarked. How do we think about you guys balancing using that right for M&A versus buyback? And will you just, I guess, make the decision if it goes to incremental buyback once you kind of get through what you've already outlined as the extra buyback? Robin Raju: Sure. So I just think of the $300 million, I mean, we're not going to be tracking it going forward. It's going to be returned in normal course of business as part of our 60% to 70% payout ratio. So if you see us at the high end of the payout ratio, it may be because of some of the $300 million, but I wouldn't anchor on the $300 million so much as we have excess capital in the system, so we can do both. We can return capital to shareholders and do bolt-on acquisitions, invest in sidecars to fuel growth for our business going forward. We want to drive earnings growth in the business, and we want to drive EPS accretion. So we have the ability to do both because of our unique business model. Operator: And then you guys had last said you were in the middle of that 12% to 15% EPS CAGR. That's where you thought you would be, right, with the financial plan. Is that still where we sit today post Q3? Robin Raju: Yes, we still feel comfortable with the 12% to 15% in the middle of the range as part of our 2027 target. We feel comfortable with all of our 2027 targets, to be frank, the $2 billion of cash flows, we can see the visibility on that. We're in the $1.6 billion to $1.7 billion this year. That will go up next year, and we're on track for the $2 billion. You can see since our Investor Day, we're well on track to the high end of the payout ratio of 60% to 70%, where we were below on the EPS growth. If you normalize as of last quarter, we showed we're at 11%. We'll continue to hold ourselves accountable, and we see the benefit of record AUM at $1.1 trillion, organic growth coming in through all of our businesses, expense initiatives, investment initiatives, all will come through to support the 12% to 15% growth going forward in addition to the additional buybacks, which help reduce our share count. So we feel quite comfortable with the 12% to 15% target. Operator: Your next question comes from the line of Jack Matten of BMO Capital Markets. Francis Matten: Just one on your -- the spread lending business. Just wondering if you can talk a little bit more about the growth opportunities there. How big do you think that business can be for Equitable? And any thoughts on current market conditions? Robin Raju: Sure. So we launched this FABN business specifically in 2020. We issued about $4.5 billion so far year-to-date, and it's about $10 billion in total. We have a lot of capacity to continue to grow that business. This business directly benefits again from the flywheel as we can benefit the strength of Equitable and having a strong rating, borrow at a low cost of funds and take that and invest it at attractive risk-adjusted yields at AllianceBernstein. So it's really a function of the flywheel. And the FABN business is just a secondary benefit of the growth in our RILA business, as Nick spoke about earlier. As our general account continues to grow, our RILA sales continue to grow, attract more customers, it gives us more capacity to do FABN as long as the returns are there. So we'll continue to be a benchmark issuer in the market, but it's a function of our overall growth strategy that helps drive our ability to have FABN. Francis Matten: Got it. And then just a follow-up on your Bermuda entity. I know you executed a large transaction earlier this year, but just wondering if there's any thoughts or any update on your thoughts around further transactions, whether it's in-force flow reinsurance or down the line maybe third-party deals? And kind of over what time frame do you expect to do more with that entity? Robin Raju: Yes. We're really excited to have our Bermuda entity set up and also very thankful for the people in our Bermuda company that are help operating that as we have people on island at this time as well. And we'll continue to grow our presence there over the next few years. The Bermuda business, we did our inaugural in-force transaction this year on our group side. We -- it's a lever in our toolkit for capital management. We can use it for flow reinsurance, which is something we'll look at for 2026. And then post 2027, we'll look at to see if we can leverage it for further growth, whether it be third-party or broader markets to help our growth profile overall. So I think it's a good framework. It's an economic framework. We like the regulatory regime in Bermuda. It's very close to our economic framework that we manage internally. So it's going to help us sustain cash flows on a go-forward basis as well. So we're happy to have Bermuda, and we're going to leverage it as part of our toolkit. Operator: Your next question comes from the line of Tracy Benguigui of Wolfe Research. Tracy Benguigui: Very basic question. So when AB partnered with RGA to create the Ruby Re, I was thinking that makes sense since RGA doesn't have real asset management capabilities. But turning to FCA Re, Fortitude Re has asset management capabilities with Carlyle. And on the Fortitude Re press release, they said the vehicle should add $10 billion of fee earnings AUM to Carlyle. So could you add some color on how AB won that mandate for private alternative management and where essentially that is outsourced? And what is the related AUM? Seth Bernstein: Let me try and answer that. This is Seth Bernstein. We want it because we have an existing relationship with Fortitude and know one another pretty well. And they approached us as they were looking for raising capital for this particular vehicle. And we were prepared to, just given the quality of the insurance risk they were taking, the market, particularly attractive market for us given our broader reach within Asia and our desire to grow our insurance activities in that region. And the result is that we believe for the amount of money we put in, we will raise, I think, about $1.5 billion of incremental private alternatives to manage for them in areas that are complementary, I believe, to what Carlyle already does for them. Tracy Benguigui: Okay. Awesome. And then when you did the Ruby Re deal and the enhanced relationship with RGA, do you see this relationship with Fortitude Re maybe enhancing future risk transfer deal with that partner? Seth Bernstein: I'm sorry, can you ask the question again? Tracy Benguigui: Okay. So when you created the Ruby Re deal with RGA, that enhanced your relationship with RGA. And I'm just curious, given this deal with Fortitude Re as you're looking to optimize your blocks, right now, you still have New York legacy VA. And I'm wondering if perhaps this could enhance your relationship with Fortitude Re. Seth Bernstein: I'll hand it over to Robin to answer that. Robin Raju: Yes. Sure, Tracy. We look at these on a stand-alone basis. We don't have any other -- we've done the big block deals at Equitable. We did the legacy VA transaction. We did the largest life reinsurance transaction in the industry. At this point in time, we're looking to grow the different business lines, and we look at sidecars as a way to grow AB's private credit business while getting good returns on the equity that we invest. So I wouldn't read into our sidecar investments leading to future reinsurance deals with any partner. If we're going to do reinsurance, we'd obviously look at all the partners in the different industry and get the best returns for shareholders. Operator: Thank you. We have reached the end of our Q&A session and the end of our session for today. Thank you so much for attending today's call. You may now disconnect. Goodbye.
Operator: Good morning, and welcome to the Horace Mann Educators Third Quarter 2025 Investor Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rachael Luber, Vice President of Investor Relations. Please go ahead. Rachael Luber: Thank you. Welcome to Horace Mann's discussion of our third quarter 2025 results. Yesterday, we issued our earnings release, investor supplement and investor presentation. Copies are available on the Investors page of our website. Our speakers today are Marita Zuraitis, President and Chief Executive Officer; and Ryan Greenier, Executive Vice President and Chief Financial Officer. Before turning it over to Marita, I want to note that our presentation today includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements include risks and uncertainties and are not guarantees of future performance. These forward-looking statements are based on management's current expectations, and we assume no obligation to update them. Actual results may differ materially due to a variety of factors, which are described in our news release and SEC filings. In our prepared remarks, we use some non-GAAP measures. Reconciliations of these measures to the most comparable GAAP measures are available in our investor supplement. I'll now turn the call over to Marita. Marita Zuraitis: Thanks, Rachael, and good morning, everyone. Yesterday, Horace Mann reported record third quarter core EPS of $1.36, a 64% increase over the prior year. Trailing 12-month core return on equity has increased to 13.8%. These results clearly demonstrate the earnings power of our diversified business. On a year-to-date basis, we are now well ahead of our 2025 financial goals and on track for record core earnings, which generates strong shareholder return. Both top and bottom line results were strong. Total revenues for the quarter were up 6% over prior year with net premiums and contract charges earned up over 7%. We delivered oversized growth in the Supplemental and Group Benefits segment with individual supplemental sales up 40% and record sales in Group Benefits. In fact, sales are outpacing the prior year across all business lines. Given strong year-to-date outperformance, reflecting both underlying business performance, as well as continued lower catastrophe losses, we are raising our full year core EPS guidance to a range of $4.50 to $4.70. Ryan will provide more details on the full assumptions later in the call. Today, I want to focus on the significant progress we are making towards our enterprise strategic priorities that position Horace Mann for sustained profitable growth over the long term. Most importantly, business profitability across all segments is in line with or above target levels, giving us the opportunity to accelerate investments in future growth. In Property and Casualty, the total combined ratio year-to-date is 91.4%, with an auto combined ratio of 96.4%, in line with our mid-90s target. And in Property, we continue to deliver exceptional results with a combined ratio of 83.1%, well below our target of 90% or below. Property profitability is strong, reflecting both rate and non-rate actions we've taken to reduce earnings volatility, and to a larger degree, much lighter severe weather activity this year. For comparison, pretax catastrophe losses year-to-date are $56 million. Last year at this point, pretax catastrophe losses were $91 million. In the Life and Retirement segment, we continue to see steady earnings growth, driven by strong net investment income and effective spread management. Our core fixed income portfolio continues to benefit from strong new money yields. Year-to-date, the core new money yield is exceeding book yield by more than 100 basis points. In Supplemental and Group Benefits, policyholder utilization continues to trend below historic levels. Our long-term target for this business is a 39% blended benefits ratio. Year-to-date, we are running around 37%, a strong position that enables us to invest confidently for growth. With each business segment performing in line with or above target, we're investing strategically to increase our share of the education market and drive future growth. Lead generation continues to scale rapidly with website visits up 120% year-over-year and online originated quotes nearly doubling. Our back-to-school celebration engaged tens of thousands of educators with more than half of those participants new to Horace Mann, an encouraging demonstration of increasing brand awareness. We're seeing record recruiting success as we continue to grow points of distribution, adding exclusive agents, licensed producers and benefit specialists as we expand local coverage and educator engagement. Through strategic partnerships, we are furthering our ability to reach more educators. A couple of examples. New partnerships with Teach for America and Grand Canyon University will provide us access to hundreds of thousands of educators to provide tailored solutions, including financial education resources and personalized support, teaching scholarships, student loan awareness programs and community outreach. For example, with Teach for America, we recently launched educator financial wellness sessions as part of their Career Acceleration Series. We're excited to see the impact of these partnerships, along with our upcoming sponsorship of Crayola Creativity Week in January as we continue expanding our engagement with educators nationwide. We continue to build on our integrated omnichannel approach to customer acquisition and service, allowing educators to engage with us when, where and how they choose. These efforts are driving tangible results. Life and Retirement sales were exceptionally strong in the third quarter, fueled by the success of our back-to-school campaign. Life sales increased 16% and Retirement deposits grew 9%, both impressive results in what is already a seasonally high quarter, highlighting the impact of our growth investments and brand momentum. In addition, we are accelerating growth in our Supplemental and Group Benefits segment, a high-margin, capital-efficient business that diversifies our earnings and reduces volatility. Individual supplemental sales rose 40% for the quarter and 47% year-to-date, reflecting expanded distribution and deeper customer engagement, driven by product enhancements that resonate with our core educator market. Over the past year, we have grown our network of benefit specialists, who help educators understand and optimize their workplace benefits by nearly 30%. And we introduced our newest generation of cancer coverage, including new and enhanced benefits that best protect customers from the unexpected costs of cancer treatment. Group Benefits sales nearly doubled in the quarter and are up close to 20% year-to-date, reflecting encouraging growth in our network of like-minded broker partners. As we invest in growth, we remain disciplined in optimizing enterprise spend. Our approach emphasizes efficiency, innovation, modernization and continuous improvement across the organization. As part of these efforts, we're leveraging GenAI to identify and test multiple use cases that enhance productivity and effectiveness. For example, in partnership with our customer care team, we identified call summary notes as a low value-add task where GenAI could enhance efficiency without sacrificing quality. By automating the process, which consumes 20% to 30% of a representative's day, we will be able to significantly reduce administrative burden. In our test, AI-generated call notes matched the accuracy and quality of human authored notes, quantifying clear time savings and productivity gains. As customer care historically has higher turnover than other departments, we expect to be able to realize expense savings organically through employee attrition. We continue to expand our framework for identifying, piloting and deploying GenAI projects across the company to create further expense synergies and savings. We're striking a balance between investing for future growth and maintaining expense discipline. We expect expense levels to be elevated in the near term as we build scale and execute on key initiatives that position us for long-term efficiency and sustained profitable growth. Before I turn the call over to Ryan, I want to highlight how our strong results are driving shareholder value creation. Over the past 15 years, our Board of Directors has authorized $200 million in share repurchases, including a $50 million share repurchase authorization in May. Through October, we have returned $20 million of capital to shareholders through share repurchases and $43 million through dividends. These actions reflect our disciplined capital management approach that balances profitable reinvestment in our business with consistent shareholder returns. This framework positions us to continue to maximize total shareholder return, while maintaining flexibility to fund strategic growth, the most accretive use of capital over the long term. To close, third quarter results were incredibly strong. All segments are operating in line with or above target profitability, and our multiline business model continues to deliver consistent high-quality earnings. On a year-to-date basis, we are clearly exceeding our 2025 objectives, and we are confident in our ability to achieve our long-term financial targets, a 10% average compound annual growth rate in core EPS, and a sustained 12% to 13% core return on equity by 2028. Horace Mann is operating from a position of strength, and our competitive advantages position us exceptionally well for sustained success. We are confident that we will continue to meet and exceed our strategic objectives, deliver sustained market-leading growth and accelerate shareholder value creation. Thank you. And now, I'll turn the call over to Ryan. Ryan Greenier: Thanks, Marita. Our record third quarter results reflect continued lower catastrophe costs, strong underlying performance and encouraging growth momentum across the business. Given our strong year-to-date performance, we are accelerating strategic investments to build on this momentum and position Horace Mann for sustained profitable growth. We are increasing our full year 2025 core earnings per share guidance to a range of $4.50 to $4.70, which includes the following assumptions: roughly $65 million catastrophe losses assumed for the full year and total net investment income in the range of $473 million to $477 million, with managed portfolio income of $373 million to $377 million. Reflecting our ongoing commitment to educators, we expect to make a significant donation in the range of $3 million to $7 million to the Horace Mann Educators Foundation in the fourth quarter. Thanks to our strong year-to-date business outperformance and by thoughtfully leveraging tax provisions under the Big Bill legislation, we're able to amplify our impact, aligning our financial strength with our mission to support educators and their students. Turning to the results. Core earnings of $57 million or $1.36 per share increased 64% over the prior year. Trailing 12-month core return on equity was 13.8% and tangible book value per share increased more than 9%, reflecting continued strong underlying profitability across the business. Total net premiums and contract charges earned were up 7% with total revenues up 6%. In the Property Casualty segment, core earnings were $32 million, tripling year-over-year. Net written premiums of $232 million increased 9% over the prior year, primarily reflecting higher average earned premium. The P&C reported combined ratio of 87.8% improved 10.1 points over prior year, reflecting much lower catastrophe costs, continued strong underlying results and favorable prior year development. The $3 million in prior year development was primarily driven by favorable property severity. Pretax catastrophe losses of $10 million were 71% below the prior year due to lower claim frequency and severity, as well as lack of hurricane activity. In auto, net written premiums of $132 million increased slightly over the prior year. The underlying combined ratio of 94.9% improved 3 points, primarily due to higher average premiums. Household retention decreased from the prior period to 84%, but remained largely stable quarter-over-quarter. Retention remains in line with expectations, given the current rate environment, and continues to be in the top quartile relative to industry benchmarks. Before I turn to Property, I want to remind you that fourth quarter auto results historically have had higher frequency due to weather. In Property, net written premiums of $99 million increased 20% over the prior year, reflecting the continued benefit of rate actions on average written premium and solid growth momentum with sales up more than 8%. The combined ratio of 75.3% significantly improved over the prior year, primarily reflecting much lower catastrophe costs. Policyholder retention remained strong at nearly 89%. In Life and Retirement, core earnings were $15 million, in line with the prior year, and net written premiums and contract deposits rose to $170 million. As a reminder, our non-P&C annual actuarial assumption reviews were moved to the third quarter this year, in line with industry practice. Annual reviews reflected favorable mortality, which resulted in a $3.5 million decrease in reserves for Life and a $5.4 million increase for Retirement pretax. These actuarial assumption review impacts are GAAP only and noncash, and as a result, have no impact on free cash flow. In the Life business, mortality was favorable for the quarter. And on a year-to-date basis, mortality costs continue to remain within our expected actuarial range. Life persistency remained strong, near 96%. In the Retirement business, net annuity contract deposits increased by 9% and persistency rose to 92%. Moving to Supplemental and Group Benefits. The segment contributed $18 million to core earnings, in line with the prior year, and net written premiums rose to $66 million. Annual actuarial assumption reviews resulted in a $2.4 million decrease in reserves for individual supplemental pretax, reflecting favorable morbidity. In individual supplemental, net written premiums of $31 million increased 3% over the prior year. The benefits ratio of 25.4% decreased 2.4 points over the prior year, reflecting the impact of the actuarial assumption review, in addition to favorable policyholder utilization trends. Policyholder persistency remained steady near 90%. In Group Benefits, net written premiums of $35 million increased 8% over the prior year. The benefits ratio of 35.7% was below prior year, primarily due to favorable policyholder utilization and disability products. Turning to investments. Total net investment income on the managed portfolio increased nearly 11% over the prior year. We continue to see very strong results from our core fixed income portfolio, reflecting the benefit of higher average yields. This is the 15th consecutive quarter that new money yields in the core portfolio have exceeded book yield. Limited partnership returns outpaced the prior year, driven primarily by equity-related funds. And we continue to see stable returns from commercial mortgage loan funds. As I mentioned earlier, with each business segment performing in line with or above profitability targets, we are investing strategically to position Horace Mann for sustained profitable growth. Sales are outpacing the prior year across all business lines, and we delivered outsized growth in the Supplemental and Group Benefits segment. Third quarter individual supplemental sales were $6 million, a 40% increase over prior year. And Group Benefits delivered record sales of $6 million, nearly double the prior year result. As we've mentioned before, the Group business is still relatively small, so results will fluctuate from quarter-to-quarter. We're encouraged by the growth momentum as we continue to scale this segment. As Marita mentioned, as we invest in growth, we remain diligent about optimizing enterprise spend. In addition to our ongoing enterprise focus on leveraging GenAI, we've made the business decision to terminate our legacy dormant pension plan. We expect to finalize the transaction in the fourth quarter. This will be a noncore charge and will result in ongoing run rate savings of over $1 million annually pretax. While our expense ratio remains competitive with peers, we do expect expense levels to be elevated in the near term as we build scale and execute on our longer-term financial goals. We will use periods of business outperformance to reinvest some of that success into initiatives that will drive future growth. Building scale is a key component of our plan to reduce the expense ratio by about 1.5 points over the next 3 years, and these investments are essential to achieving that goal. Before I close, I'd also like to touch on the prudent capital management actions we took this quarter. In September, we issued $300 million of senior notes due in 2030 at a 4.7% coupon. Proceeds were used to refinance near-term maturities with the balance allocated for general corporate purposes. The transaction had very strong investor demand and was more than 5x oversubscribed. As a result, we achieved a record tight spread for Horace Mann. We remain focused on driving shareholder value creation. Our dividend yield is strong. And we continue to opportunistically execute on our share buyback program. October year-to-date, we've repurchased 470,000 shares at a total cost of about $20 million at an average price of $41.70. We have around $57 million remaining on our current share repurchase authorization. In conclusion, third quarter results reflect the strength and stability of our diversified business. On a year-to-date basis, we are clearly exceeding our 2025 objectives. And we are confident in our ability to achieve our long-term financial targets: a 10% average compound annual growth rate in core earnings per share and a sustainable 12% to 13% core return on equity by 2028. We are confident that we will continue to meet and exceed our strategic objectives, deliver sustained market-leading growth and accelerate shareholder value creation. Thank you. Operator, we're ready for questions. Operator: [Operator Instructions] The first question comes from Michael Zaremski with BMO Capital Markets. Unknown Analyst: It's Jack on for Mike. The first question just on your organic policy count growth trajectory, especially in the P&C operations. It's good to see retention stabilizing in auto and margins are at healthy levels, which I imagine implies less of a need to increase rates. So just, I guess, in light of that, wondering how you view the growth outlook on a policy count basis over the coming quarters in both auto and home. Marita Zuraitis: Yes, it's a great question, but I think I might expand it a little bit. And when we think about growth, we don't really think about it as an on and off switch. We are always focused on educator household increase and that goal of sustained profitable growth. When we look at this quarter, I mean, I think it's a clear reflection that we have sales momentum across every business. I mean, new business for us is up across all our business and retention has been steady. If you look at individual supplemental up 41%; Group up 91%; Life is up 16%; Retirement is up 9%; Property is up 8%; auto is hanging in there, up 4%. And then, you look at the retention side of the equation, where Property is nearly 90% Life, Retirement, Supplemental in the mid-to-high 90s persistency. Auto is strong at 84%. Obviously, you see the effects of the increased competition across the industry there. But we are very well positioned for that sustained household growth that we're focused on and feel good that we're clearly going in the right direction when you see these kind of results across all the businesses. Unknown Analyst: Great. And then, just a follow-up on -- maybe a 2-parter, but just a follow-up on the EPS guidance. It implies, I think, sort of in the low-$1 range in the fourth quarter, a little bit of $1.36 this quarter. I guess just maybe if you could help us walk through the moving pieces. I guess, there's the kind of net assumption review this quarter. I think you called out auto margin seasonality being less favorable in the fourth quarter and then also accelerating some strategic investments. And on that last front, can you -- are you able to quantify or elaborate more on some of those investments that you're planning to accelerate over the coming quarters? Ryan Greenier: Sure. This is Ryan. I appreciate the question this morning. When I think about the updated guidance range that we gave you, the $4.50 to $4.70 on a full year basis, it implies $1 to $1.20 for the fourth quarter. We updated our cat assumption to reflect year-to-date outperformance. We narrowed the net investment income to the midpoint of the original range. And we did increase the corporate and other expenses by $5 million. That reflects known spend. We talked about the Foundation donation that we're excited to fund in the fourth quarter. In addition to that, when we think about guidance, we are reflecting our intent to continue to invest in growing our business. I'll flag for you that fourth quarter last year was an unusually strong quarter. It was $1.68, and it had a number of onetime items that we don't expect to repeat. So last year, fourth quarter, we had favorable Property prior year development, which was worth about a quarter. In our non-P&C operations, we did our annual reserve assumption review, and we had some prior year favorable development in Group, and that was worth over $0.30. And we had very favorable weather. Both cat and non-cat was quite favorable. So, on a normalized basis, I think about fourth quarter last year as being about $1. And if you think about the midpoint of our guide, that's a 10% earnings growth rate, which is what we talked about achieving at Investor Day. Marita Zuraitis: Yes. And Ryan touched on expenses a little bit, but if I could expand on that. I mean, we're clearly striking a balance here between investing for the future, while also maintaining expense discipline. And we think about it as both sides of the equation, both the numerator as well as the denominator; the numerator, obviously, through efficiency and the denominator by investing in growth to build scale because both are clearly important. I don't think any company can shrink their way to greatness, right? So both of those sides of that equation matter. On the expense discipline side, our leadership realignment, efficiency in high turnover areas that result in headcount reductions over time. Ryan mentioned in the script, the legacy pension termination, our review of vendor spend, process improvements like straight-through processing. We're really focused on driving that efficiency. But at the same time, I think it's also important for us to invest in growth to drive scale, especially in times of outperformance like this. And at Investor Day, we talked about our goal to reduce the expense ratio by 1.5 points. But again, that's over the next 3 years, and we're confident that we can do that. And I think if you look at our track record over the last several years, as we've invested in the PDI, the products that are relevant in our educator space, expanding our distribution, which we're obviously doing, and modernizing our infrastructure, we have done that and continue to do that, while we maintain expense discipline. So I think it positions us very well for sustained profitable growth. And I think our track record speaks for itself. Operator: The next question comes from John Barnidge with Piper Sandler. John Barnidge: My question is on Supplemental and Group Benefits. Lead management systems are increasingly required to get on the platform, and we're seeing a lot of investment over group benefit providers in the market. Can you talk about your capabilities, whether you're building your own lead management system or getting something out of the box? And really how important that is to winning business in Supplemental and Group Benefits for a core educator marketplace? Marita Zuraitis: John, great question, and it's a little bit of both. I want you to think about our individual supplemental and Group Benefits -- Supplemental and Group Benefits business a little bit differently. Obviously, we have a head start in individual supplemental, and you're seeing those very strong sustained numbers come through on the individual supplemental side. In the group supplemental side, it's new for us. It's relatively small for us. We feel really good about the progress we're making, and you saw that in this quarter as well. That can be a little more lumpy for us because it is small, but we look at that year-to-date number and that track record of that sustained growth in that area. And we are making investments not only in lead generation, but in expanding our distribution and building the product necessary for that space, as well as modernizing the infrastructure to do that and do it well. And I feel really good about our progress there. But we're in this for the long haul, and that will take us longer to build all those pieces. But we're really happy with our start here. We're focusing on where we're good in our educator segment, and I think we're doing it really well with some really strong partners. Ryan Greenier: The thing I will add, John, we do have a lead management partner in place. So to answer your question directly, we do have the capabilities with an experienced partner. John Barnidge: And then, my other question, more and more insurers have launched partnerships with alternative asset managers, not just to monetize their distribution, but to better position spread-related products and enhance net investment income. I know you do externalize some asset management functions. But is there an opportunity for a larger partnership here with a dedicated alternative asset manager? Ryan Greenier: John, I appreciate your question. When I think about what we've built from an investment management capability over the past 5 years, we talked about over that period, improving net investment income by over 30%. We mentioned that at Investor Day. And yes, rates were -- created an opportunity over that time period, but we were very thoughtful about the third-party partners that we work with on an ongoing basis. We've made some changes to those partners recently. And we believe in that sort of best-of-breed model and finding core portfolio managers that do the bulk, if you will, of our liability-driven investment strategy, but at the same time, supplementing them with specialized managers in certain verticals. So while I understand the nature of your question, I like our approach of going out and getting best-in-breed and allowing us to really diversify our asset management partnership. So hopefully, that answers your question. John Barnidge: Yes. I was also talking about maybe product creation. There's some regulatory reform in retirement accounts. Interval funds or evergreen funds have increasingly become more in demand and valued by distribution. So do you have those capabilities? Are you looking to build those capabilities? Ryan Greenier: So when I think about tailoring product, John, to our customer set, the educator marketplace is a relatively conservative investor. They prefer fixed and fixed index products. Even within our variable annuity sleeve, there's a fair amount of fixed account selection. We also distribute through captive distribution. And so, when I think about marrying the product design to the distribution to the end customer, a lot of those more exotic, if you will, or newer product entrants aren't really what our customer base is asking for at this point in time. And you can see, our Retirement sales were up 9% in the third quarter. So we're seeing strong customer reception to the product set that we have. Marita Zuraitis: Yes, Ryan is right. We're really not hearing from our registered reps out there working with our customers or even from the educators themselves that our affinity niche is looking for that, but yet we see what's going on with RILA products and other things in the industry. And if we felt there was a need, we could leverage a really good third party to offer that or we could build it ourselves, but there's no demand for that in our market segment right now. Operator: The next question comes from Wilma Burdis with Raymond James. Wilma Jackson Burdis: Cat losses this year were $65 million versus, I think, you guys expected $90 million kind of coming into the year. And we also realize that 2 things have happened. It's been a low activity year, but also you have a lot of catastrophe mitigation efforts that you've been rolling out. So could you just help us think through that? How effective has the program been? And what are you just thinking into '26? I know you may not be able to give an exact answer. Ryan Greenier: Wilma, this is Ryan. Thank you for the question. As a reminder, our original guide in 2025 was about $90 million of catastrophe losses. And you're right, we and the industry have experienced a good catastrophe weather year. From a cat perspective, this year was more than one standard deviation below our historic averages. But when I think about cat losses and I think about the book, every year, you grow your total insured value. So, as we continue to grow the property book, the value that is exposed and that we get premium off of continues to grow. So you'd expect an increase in average modeled losses as a result of that. Candidly, offsetting this, though, is the non-rate actions that we took like the deductibles and roof schedule changes. We believe they are working as designed, and we're seeing the benefits. But in a light cat year, it's kind of hard to prove out the full magnitude of what you would expect. But we're seeing encouraging signs. When I look ahead to 2026, while we don't have official guidance out, I would not expect a significant decline in actual total cat dollar losses in 2026. Wilma Jackson Burdis: Understood. And I guess, this kind of ties into my first question, but could you talk a little bit more about normalized P&C earnings into '26 between that and -- between the cat loss mitigation efforts and the effects of rate increases that you're taking and seeing right now? Ryan Greenier: Sure, Wilma. We talk about our long-term targets and what we're striving to maintain in our P&C business, and we give you 2 targets. We talk about a mid-90s combined for auto, and we talk about wanting to run Property at or below 90% to account for the increased volatility just inherent in the Property business. We are at target profitability and better than that in Property. And when I think about the loss trends going forward in the rate plan, we are targeting a mid-single-digit rate plan in auto for next year. That's in line with loss trend expectations and a high-single-digit rate increases. So think about that as rate and inflation guard, so the increase in insured value, and that's for Property. And that's a little bit ahead of our loss trends. But that should keep us on track to maintain those profitability targets within P&C. Marita Zuraitis: Yes. But I also think it's important, and I want to magnify what Ryan said about cats, it wouldn't be prudent for any of us to assume that this year will repeat. The only way you can do this right is to rely on the math, looking at 5 and 10-year averages, looking at probabilistic and deterministic models, all blended to give you a cat estimate in any given time frame and year. Obviously, the recency of this year is great for the industry and good for us, but it wouldn't make sense for us to assume that a year like this is going to repeat. It will obviously be factored into all the numbers. But I think the only thing anybody knows about cats is you're going to be wrong with your estimates. So you really have to rely on your math to determine that number. And obviously, building values are up. Insured values are up. We're larger as an organization. So I wouldn't expect that our forecasted cats would be going down next year, as Ryan clearly said. And obviously, we'll discuss this with our guidance as we normally would in our normal course when we have our next call. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Rachael Luber for any closing remarks. Rachael Luber: Thank you for joining us today. If you have any additional questions or would like to schedule a meeting, please reach out to the Investor Relations team. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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 Braemar Hotels & Resorts, Inc. Third Quarter 2025 Results Conference Call. [Operator Instructions]. I'd now like to turn the conference over to Allison Beach, Director of Public Relations. Please go ahead. Allison Beach: Good morning, and welcome to today's call to review results for Braemar Hotels & Resorts for the third quarter of 2025 and to update you on recent developments. On the call today will be Richard Stockton, President and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; and Chris Nixon, Executive Vice President and Head of Asset Management. The results as well as notice of accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday in a press release. At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the safe harbor provisions of the federal securities regulations. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated. These factors are more fully discussed in the company's filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them. Statements made during this call do not constitute an offer to sell or a solicitation of an offer to buy any securities. Securities will be offered only by means of a registration statement and prospectus, which can be found at www.sec.gov. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed on the Form 8-K with the SEC on November 4, 2025, and may also be accessed through the company's website at www.bhrreit.com. Each listener is encouraged to review these reconciliations provided in the earnings release, together with all the other information provided in the release. Also, unless otherwise stated, all reported results discussed in this call compare the third quarter ended September 30, 2025 and with the third quarter ended September 30, 2024. I will now turn the call over to Richard Stockton. Please go ahead, Richard. Richard Stockton: Good morning. Welcome to our third quarter earnings conference call. Before I begin, I'd like to remind you that back in August, we announced the initiation of a sale process for Braemar. The company has engaged Robert W. Baird & Co as its financial adviser and the sale process has been initiated. On today's call, we will not be providing any update on that process or be able to address any questions about that process. As we highlighted in the press release, there's no deadline or definitive timetable set for completion of the sale process and there can be no assurance that this process will result in the sale of the company. Additionally, we do not expect to disclose or provide any update concerning developments related to this process unless until the Board of Directors has approved a specific transaction or other course of action requiring disclosure. With that said, let me begin today's call by providing an overview of our recent results and our strategic priorities for the remainder of 2025, then Deric will provide a review of our financial results and Chris will provide an update on our asset management activity. Afterwards, we will open the call for Q&A. We have a few key themes for today's call. First, I'm excited to report that our portfolio achieved 1.4% growth in comparable RevPAR in the third quarter and total comparable hotel EBITDA growth of 15.1%. Importantly, our resorts continue to show strong growth with comparable RevPAR growth of 5.5% for the quarter. Second, we have significant renovations in process at 3 hotels, which significantly impacted our portfolio results. If you exclude hotels under renovation during the quarter, our RevPAR growth was 3.4%. Third, from a liquidity perspective, we remain very well positioned having addressed our final 2025 debt maturity earlier this year, completing the sale of the Mariott Seattle Waterfront in August and announcing the planned sale of the Clancy, which we expect to close shortly. Turning to our third quarter results. Our portfolio delivered solid results with comparable RevPAR of $257, reflecting an increase of 1.4% over the prior year quarter. This marks our fourth consecutive quarter of RevPAR growth, which I believe reflects an important inflection point in our performance. Additionally, comparable total hotel revenue increased by 3.9% over the prior year period, and comparable hotel EBITDA was $21.4 million, which reflected a 15.1% increase over the prior year quarter. 9 of our 14 hotels are considered resort destinations. And our luxury resort portfolio continues to return to a more normalized growth trajectory, delivering a strong third quarter performance. Our resort portfolio reported comparable RevPAR of $361 a 5.5% increase over the prior year period and combined comparable hotel EBITDA of $13.1 million, a 58% increase over the prior year period. The brightest spots within our resort portfolio this quarter included the Four Seasons Resort Scottsdale at True North, which delivered an impressive comparable RevPAR growth of approximately 25%. The Ritz-Carlton Lake Tahoe also performed exceptionally well with total revenue up roughly 32% year-over-year, reflecting strong group demand and the benefits from the recently completed renovation. And our Ritz-Carlton reserves Toronto Beach continue to be a standout, achieving approximately 20% growth in comparable RevPAR. This impressive performance was slightly offset by some near-term softness in our urban hotels we saw comparable RevPAR decreased 3.9% during the quarter. This reflects the extensive renovation of the Cameo Beverly Hills as well as citywide occupancy declines in Philadelphia, which created headwinds this quarter for the Notary Hotel. Looking ahead, our booking base continues to be strong, and we believe our portfolio is well positioned outperforming. As a reminder, on the capital markets front, in March of this year, we closed on a refinancing across 5 hotels at a very competitive spread. Importantly, this financing addressed our only remaining final debt maturity for 2025. In August, we capitalized on the strong credit market for lodging assets by refinancing the mortgage loan secured by the Four Seasons Resort Scottsdale True North. During the quarter, we sold the 369-room Marriott Seattle Waterfront for $145 million or $393,000 per key. The transaction aligns nicely with our strategic objectives to deleverage the portfolio while sharpening our focus on the luxury hotel sector. Additionally, subsequent to quarter end, we entered into a definitive agreement to sell the 410-room Clancy in San Francisco for $115 million or approximately $280,000 per key. The transaction is expected to close this month. Of note, we received a $3.5 million nonrefundable earnest money deposit, and the buyer has the right to extend the closing for 30 days with an incremental $1 million nonrefundable deposit. The sale price represents a 5.2% capitalization rate on net operating income for the trailing 12 months ended September 2025. We are strategically refining our portfolio is one clear objective to maximize its value for our shareholders, and this divestiture will help us to ensure that a future sale of the company results in the best possible outcome for our investors. Next, I'm pleased to report that to date, we have redeemed approximately $125 million of our nontraded preferred stock, which represents approximately 27% of the original capital raise. We expect to continue to redeem these shares as we seek to deleverage our platform and improve our cash flow per share. We are pleased with the performance of our portfolio and believe the renovations we are completing will drive strong performance going forward. I will now turn the call over to Deric to take you through our financials in more detail. Deric Eubanks: Thanks, Richard. It's important to remember that the third quarter is the weakest quarter for our portfolio from a seasonality perspective. For the quarter, we reported a net loss attributable to common stockholders of $8.2 million or $0.12 per diluted share and AFFO per diluted share of negative $0.19. Adjusted EBITDA for the quarter was $16.4 million. At quarter end, we had total assets of $2 billion. We had $1.2 billion of loans, of which $27.7 million related to our joint venture partner's share of the loan on the Capital Hilton. Our total combined loans at a blended average interest rate of 6.9%, taking into account in the money interest rate caps. Based on the current level of SOFR and our corresponding interest rate caps, approximately 13% of our debt is effectively fixed and approximately 87% is effectively floating. As of the end of the third quarter, we had approximately 43.2% net debt to gross assets. We ended the quarter with cash and cash equivalents of $116.3 million plus restricted cash of $47.7 million. The vast majority of that restricted cash is comprised of lender and manager held reserve accounts. At the end of the quarter, we also had $23.1 million in due from third-party hotel managers. This primarily represents cash held by one of our brand managers, which is also available to fund hotel operating costs. With regard to dividends, we again announced a quarterly common stock dividend of $0.05 per share or $0.20 per diluted share on an annualized basis. This equates to an annual yield of approximately 8% based on yesterday's stock price. As of September 30, 2025, our portfolio consisted of 14 hotels with 3,298 net rooms. Our share count currently stands at 73.6 million fully diluted shares outstanding, which is comprised of 68.2 million shares of common stock and 5.4 million OP units. This concludes our financial review. I'd now like to turn it over to Chris to discuss our asset management activities for the quarter. Christopher Nixon: Thank you, Deric. Despite temporary headwinds from ongoing renovations at several properties, our portfolio continued to demonstrate resilience during the third quarter. Comparable hotel RevPAR increased 1.4% and driven by a 4.7% improvement in ADR compared to the same period last year. During the third quarter, our portfolio GOP margin expanded by 160 basis points compared to the prior year period. During the third quarter, our resort properties were a key driver of performance, delivering a 5.5% increase in comparable RevPAR and a 57.7% increase in comparable hotel EBITDA. The Four Seasons Resort in Scottsdale was a standout with third quarter RevPAR up 24.9% and GOP growing 231.6% compared to the prior year period. The portfolio delivered strong third quarter results despite temporary disruption from ongoing renovations at Cameo Beverly Hills, Park Hyatt Beaver Creek and Hotel Yountville. Excluding these properties, RevPAR increased 3.4% for the third quarter compared to the prior year period. We remain confident in our ability to sustain operating momentum and deliver strong results in the periods ahead. I would now like to highlight a few of the key accomplishments achieved during the quarter. Group room revenue remained strong across the portfolio despite softening trends industry-wide. Group room revenue pace for the full year 2025 is up 9.1% compared to the prior year. For the third quarter, group room revenue finished 1.3% above the prior year period. The Ritz-Carlton Lake Tahoe was a standout during the third quarter, delivering exceptional group room revenue growth of 80.2% compared to the prior year period, driven by a sharp increase in group demand following its extensive 2024 renovation. The property realized more than 2,400 additional room nights during the period and achieved a $30 improvement in ADR compared to the prior year period. This momentum supported not only growth in rooms revenue, but also strong food and beverage performance as catering revenue increased 80.7% during the third quarter compared to the prior year period, further enhancing overall profitability. Recent property enhancements such as cabanas, fire pits, swing suites and new food and beverage outlets have further contributed to food and beverage revenue growth during the third quarter, which increased 43.3% compared to the prior year period. Portfolio-wide, catering revenue finished ahead by 31% in the third quarter compared to the prior year period, and we are becoming increasingly selective with group business to further capitalize on food and beverage opportunities associated with higher spend events. The remainder of the year reflects continued strength in the group segment with fourth quarter group room revenue currently pacing ahead 1.7% compared to the prior year period. Our ability to sustain momentum in capturing group demand within a competitive environment underscores the effectiveness of our targeted sales strategies and the advantages of our geographically diverse portfolio. As I mentioned earlier, our resort properties continue to be significant contributors to portfolio performance. A highlight this quarter was the Ritz-Carlton Dorado Beach, which continues to deliver impressive results with a 20.4% increase in RevPAR during the third quarter compared to the prior year period. reflecting strong demand and sustained rate growth at this premier Caribbean destination. During the third quarter, the property capitalized on 2 back-to-back buyouts, which helped drive group room revenue growth of 353% compared to the prior year period. In an effort to expand revenue streams for the property, our team continues to focus on optimizing and expanding the residential rental program, which currently includes 16 residences. During the third quarter, residents revenue increased 11.8% compared to the prior year period. The average daily rate for residences within the rental program exceeded $7,900 during the quarter. Recent operational enhancements including streamlined onboarding for owners and integration with the Marriott Homes and villa platform have contributed to steady growth and improved rental performance. Additionally, the Ritz-Carlton Sarasota delivered strong performance with total revenue increasing 5.2% compared to the prior year period, driven by a 15.5% increase in other revenue. The property has expanded access to its amenities for local and outside gas, resulting in a 38% year-to-date increase in related revenue compared to the prior year period. The previously underutilized kid space was converted into a commission-based arcade, which is outperforming expectations and plans are underway to further expand this offering to capture additional demand and enhance ancillary revenue. Moving on to capital expenditures. In the third quarter of 2025, we completed the conversion of underutilized space at Four Seasons Scottsdale into a new Gelato shop in Cafe and an epicurean market, enhancing the guest experience and creating new revenue streams. We also added 5 new luxury beach a cabana, the Ritz-Carlton St. Thomas, further elevating the resorts feedfront offering and driving incremental revenue. We made substantial progress with guestroom renovations at both Hotel Yountville and the Park Hyatt Beaver Creek. These projects are designed to capitalize on the luxury positioning within their respective markets with completion of both expected later this year. Additionally, we began the renovation at Cameo Beverly Hills to support its strategic conversion to Hilton's LXR luxury portfolio with completion planned for later this year. We also initiated multiple enhancements at the Ritz-Carlton Reserve Toronto Beach including beach-side cabanas and creation of a new event line to attract incremental group business. Later this year, we plan to commence the renovation of the pool deck and fitness center at Bardessono Hotel & Spa a project designed to further elevate the resorts wellness and leisure offerings and reinforce its positioning as one of Napa Valley's premier luxury destinations. These initiatives reflect our disciplined capital deployment strategy and continued focus on long-term value creation through portfolio quality and brand alignment. For 2025, we continue to anticipate spending between $75 million and $85 million on capital expenditures. In summary, we are pleased with our solid year-to-date performance and continue to see the benefits of operating initiatives focused on productivity and cost efficiencies. We are particularly encouraged by the return of normalized growth within our resort segment. Our momentum reflects the strength and resilience of our diversified portfolio and the strategic positioning we've built over time. In addition, we are actively advancing several initiatives aimed at further enhancing our well-diversified platform. We remain optimistic about the opportunities ahead and look forward to sharing continued progress in the quarters to come. I will now turn the call back over to Richard for final remarks. Richard Stockton: Thank you, Chris. In summary, I'd like to reiterate that we continue to be pleased with the performance of our hotels, in particular, the return to normalized growth for our resort assets. We also remain well positioned with a solid balance sheet and promising outlook. We look forward to updating you on our progress in the quarters ahead. This concludes our prepared remarks, and we will now open the call for Q&A. Thank you. Operator: [Operator Instructions]. Our first question will come from the line of Tyler Batory with Oppenheimer. Tyler Batory: A portfolio question for you first in terms of CapEx. Just a multipart question. What do you think is a good maintenance run rate CapEx number to think about for your portfolio, whether that's a dollar number or a percentage of revenue? And given some of the CapEx projects you completed over the past few years. Just talk about the overall quality of the portfolio as it stands today, if there's anything deferred or any sort of catch-up CapEx that might potentially be contemplated in the next couple of years? Christopher Nixon: Yes, Tyler. I'll take that. So in terms of maintenance CapEx, we typically target a percentage of revenue, I would say it's low single digits, in terms of maintenance and mechanical. In addition to that, we've got ROI CapEx and some of these larger renovations and repositionings. From a deferred standpoint, we've got a process by which the properties put in capital requests, and we've got an engineering team within our Ashford CapEx team that works with our property engineers to make sure that any mechanical or maintenance projects are being addressed appropriately. So we review those. We prioritize them. We'll will then deploy capital against the ones that we think are high priority. But there's nothing, I would say, significant or out of the ordinary that's been deferred. Tyler Batory: Okay. Great. And then my other question on RevPAR and portfolio performance. Obviously, you initiated the sales process at the end of the summer, and that was made public. Is that something that you think is weighed on results at all? Or maybe it's not that much of a distraction in the hotel level employees perhaps aren't really thinking about that? Christopher Nixon: Yes. I don't think it's affected anything at the property level or in terms of how our asset management team is working with the hotels. We were actually quite pleased with the results given some of the headwinds that we mentioned in our prepared remarks. We've got 3 significant hotels that are under major renovations. We've got a major repositioning. We've got some impact from government and some other segments. And with all -- despite all that, the portfolio grew RevPAR, we grew EBITDA. We grew EBITDA margin. We're still finding efficiencies. We're still finding controlling labor, controlling expenses, how is profit margin expanded within the quarter to last year. And so I think from a property level, as it rolls up to the portfolio, I think performance was quite strong in the quarter, and I don't think the sales process has impacted our approach at all. Tyler Batory: Okay. Then moving on, just a couple of strategic questions quickly here. Obviously, the company is externally advised was there plans or have ever been planned, discussions in terms of an internalization process? And just kind of wondering if you could unpack behind the scenes, if you did look at that and just kind of what you thought about it? Richard Stockton: Yes. Tyler, it's Richard Stockton. So yes, no, this is something that the Board has considered. When we announced that we're looking at various strategic alternatives. That was one of them. And so that was something that was thoroughly vetted by the Board. Ultimately, the conclusion was to opt for a company sale instead. And so that's the route that was chosen for various reasons. Tyler Batory: Okay. And then more broadly, Richard, I'll try to keep this question general here, but just any commentary or perspective you could provide on the acquisition backdrop for hotels, the appetite out there, availability of capital, things like that. Just interested to some of the larger entities, perhaps what they're view is on your portfolio of transactions and just kind of the overall environment out there and the desire to own hotels. Richard Stockton: Yes. That's a good question. I'd say it continues to improve. We saw the debt capital markets become much more favorable earlier this year. There is a widespread debt availability A lot of that is being provided through either the CMBS market or through private credit markets. That's a good thing. But also the big private equity funds and a lot of the private players are getting more interested in deploying equity capital into the sector. And that's something that we're seeing with some of our discussions and we're seeing that interest in size. So it does feel that whereas a lot of buyers have been on the sidelines, they're coming off the sidelines. Now I also think that our portfolio is pretty unique. Dare I say, it's the most attractive hotel portfolio on the market, for sure. And it's just the opportunity to acquire and own this kind of portfolio doesn't come around that long. So I think for that reason, I think people are certainly more interested than otherwise. But the general trend is very positive in terms of private capital looking at hotel assets. And so more to come on that. Operator: Our next question will come from the line of Michael Bellisario with Baird. Michael Bellisario: Thanks. Good morning, everyone. Two questions probably both for Chris here. But just first on D.C., can you just give us an overview of what you're seeing on the ground, how the government pullback affected the third quarter results? And then what the shutdown might do to near-term performance at the property? Christopher Nixon: Yes. I'd be happy to speak to that. So the government will primarily impact our asset in BC, which is Cap Hilton. Luckily for that asset, because of its location and the ADRs and demand, we're able to command, it doesn't have a lot of exposure to the government segment, government transient. It does single digits as a percentage of its mix in government transient business. And so we haven't seen a significant impact there. We are seeing some group cancellations, some negative rebounds where group sizes are shrinking and some catering impact from some programs in D.C. Besides that hotel, the impact of -- that we've kind of seen the government is fairly muted. We're seeing a little bit in Philly and some other markets. But in those other markets outside of D.C., the corporate business has been strong and it's been able to offset that. So again, in D.C., at capelin, has been primarily in the group segment. I cited for the portfolio group pace is up significantly for 2025. And Q3 and Q4 are up. And so on the whole, we've been able to mitigate that impact in government that's primarily come through group at cap. Michael Bellisario: Got it. That's helpful. And then just on leisure trends more broadly, what did you see in the third quarter relative to your expectations? Any change in consumer spending, out of room spend, booking channels? Are you having to discount more or less offer more promotions? Any commentary there would be helpful. Deric Eubanks: Yes, Michael. Leisure overall, revenue was up in the third quarter. So we're seeing leisure strength Occupancy was down slightly and ADR was very strong. And so what we're seeing from that luxury consumer is less price sensitivity. So they still want to travel. They're willing to pay a premium for the experience when they travel. We saw increased ancillary spend when they're on property, both in F&B and other departments. And so when they're there, they're willing to spend more. So overall, it was kind of -- it was what we expected. I think we've been pleasantly surprised with just the lack of price sensitivity to that customer and how resilient they are and wanting to travel and wanting to pay for experiences. So on the whole, the leisure segment has been a standout for us. Operator: And that will conclude our question-and-answer session. I'll turn the call back to management for any closing comments. Richard Stockton: Thank you for joining us on our third quarter earnings call, and we look forward to speaking with you again next quarter. Operator: This concludes our call today. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to the Global Medical REIT Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jamie Barber, Global Medical REIT's General Counsel. Please go ahead. Jamie Barber: Good morning, everyone, and welcome to Global Medical REIT's Third Quarter 2025 Earnings Conference Call. My name is Jamie Barber, and I'm Global Medical REIT's General Counsel. On the call today are Mark Decker, Jr., Chief Executive Officer; Alfonzo Leon, Chief Investment Officer; Danica Holley, Chief Operating Officer; and Bob Kiernan, Chief Financial Officer. Statements or comments made on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested from any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. Additionally, on this call, the company may refer to certain non-GAAP financial measures. You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP numbers in the company's earnings release and in filings with the SEC. Additional information may be found on the Investor Relations page of the company's website at www.globalmedicalreit.com. I would now like to turn the call over to Mark. Mark Decker: Thank you, Jamie. Good morning, everyone, and thank you for joining us today as we share the results of our first full quarter together as a management team. As you review our materials, I hope you'll find growing evidence of our focus on driving shareholder value. We're going to achieve this by delivering internal earnings growth, demonstrating disciplined capital allocation and capital markets acumen and executing on external growth opportunities when they present themselves. The team was highly productive on each of these fronts during the third quarter. The portfolio performed well, posting 2.7% same-store NOI growth. This is our first quarter reporting on this key metric and an improved focus on property performance will help our asset management team deliver stronger and more consistent results. On the balance sheet, we were able to address our upcoming debt maturities by recasting the revolver to 2029 and extending our $350 million Term Loan A and dividing the term loan into 3 distinct loans while extending our weighted average debt term by 3 years. Thanks again to our lending group and great work by our finance team. In investments, Alfonzo and team have built a pipeline of highly desirable opportunities, which we will only act upon with a green light from the market. Our current cost of capital dictates that we will remain disciplined, pursuing only our highest conviction ideas and funding those transactions with proceeds from asset recycling, but we hope that will soon change. More broadly, our full team is in the midst of developing a strategic plan to deliver outsized shareholder return in the years ahead. We're excited to share more when we're able to. On the whole, it's been an outstanding first 4 months as a new team. I'm appreciative to everyone for their pedal to the metal efforts. The journey is just beginning, but I'm ecstatic with our progress so far. Before passing the call to Bob, I'd like to comment on the large outpatient medical transaction recently announced by one of our public sector peers. First, the transaction demonstrates the meaningful institutional demand that exists for health care infrastructure assets, a huge plus for our existing owners. Second, we've been asked by many investors for a read-through on the mark-to-market value of our own real estate, which is a fair question. Answering that question requires agreement on what defines quality. We believe that quality assets are those that deliver cash flows that are predictable, reliable and growing. By that yardstick, we like our portfolio quite a bit. The GMRE portfolio is 95% leased with over 5 years of remaining WAULT. Our leases have an embedded annual escalator of 2.1%, and this quarter's 2.7% same-store print is repeatable and achieved without any carve-outs for redevelopments or assets that we don't wish to count. We'll let others speak to what that means in terms of cap rate, but any reasonable assumptions would indicate that we trade at a substantial discount to the fair value of our assets. Bob, can you please run through the numbers? Robert Kiernan: Thank you, Mark. During the quarter, we delivered funds from operations of $14.5 million or $1 per share in unit. Adjusted funds from operations, which excludes straight-line rent among other noncash and nonrecurring items, was $16.2 million or $1.12 per share in unit. Each of these metrics grew 4% on a per share basis relative to the prior year equivalent. Year-to-date, funds available for distribution, which accounts for CapEx, tenant improvements and leasing commissions, totaled $39.2 million, resulting in a payout ratio of 84% in our current annual dividend rate. In October, we amended our credit facility to extend the term of our revolver to October 2029 and to extend the term of our $350 million Term Loan A by breaking it up into 3 tranches with maturities ranging from October 2029 to April 2031. The amendment also removed the 10 basis point SOFR credit spread from all of our credit facility borrowings. We are extremely pleased with the execution of the facility amendment, I would like to thank our lending group for their support and confidence. In connection with the credit facility amendment, we entered into forward starting interest rate swaps to hedge the SOFR component of our Term Loan A through its new maturity dates. Based on the current leverage levels, the weighted average fixed rate on these new swaps will result in a weighted average effective interest rate of approximately 4.8%. It's important to note that our previously existing swaps on Term Loan A will remain in effect until the maturity in April of 2026. As discussed last quarter, we are also looking to expand our sources of debt capital to include longer-term debt providers such as insurance companies. By diversifying our lender and tenor mix, we will improve the quality of our earnings and broaden our access to debt capital. This diversification alongside our extended debt maturities and sound dividend coverage ratio has fortified our balance sheet and marks an important step on our journey toward earning an investment-grade credit rating. Danica? Danica Holley: Thank you, Bob. The third quarter was a productive one for our asset management team, headlined by same-store NOI growth of 2.7% for our portfolio. This performance was supported by positive year-to-date absorption and the successful re-leasing of our 85,000 square foot facility in Beaumont, Texas that was previously leased to Steward Health. Beyond Beaumont, we're seeing positive leasing outcomes across the portfolio as high construction costs have constrained new supply, enhancing our leverage when negotiating lease renewals. We disposed of 2 assets during the quarter, including 50,000 square foot freestanding health system administrative facility located in Aurora, Illinois. Following this disposition, our portfolio exposure to dedicated health system administrative space is reduced to less than 2% of total ABR. As of quarter end, the GMRE portfolio was 95.2% leased with a remaining term of 5.3 years. We have strong visibility on our near-term leasing pipeline and expect occupancy to trend towards 96% at year-end. CapEx and leasing costs have totaled $9.7 million on a year-to-date basis, putting us in a position to land within our full year guidance range of between $12 million and $14 million. I would now like to turn the call over to Alfonzo to discuss our investments. Alfonzo? Alfonzo Leon: Thank you, Danica. On the investments front, we have remained patient on new acquisitions in light of our cost of capital. Still, the team has been busy underwriting deals to keep an active pulse on the market, evaluating $11.5 billion in prospective transactions so far this year. This deal flow has provided us with a near-term pipeline of almost $500 million in potential deals at first year cash returns that blend to a 7.5% to 8% range. For now, execution on those deals will be limited to those which we can fund via asset recycling, but our team remains ready to pounce on this attractive market opportunity once we receive a green light from the capital markets. Mark? Mark Decker: Thanks, Alfonzo. I've been involved in the outpatient medical sector since 2001 and I don't think the setup for our niche has ever been better. We're poised to benefit from increasing demand for outpatient services, rising construction costs that limit new supply and competitors that are either out of the game or have lots going on internally. GMRE has the right team and skill set to drive FFO and FAD earnings growth, especially if pricing power continues to come our way. That said, we know that we'll need to keep on executing to earn a currency that enables external growth and we're ready and excited to do that work. Operator, let's open it up for Q&A. Operator: [Operator Instructions] your first question today will come from Wes Golladay with Baird. Wesley Golladay: I have a question on the -- you talked about the positive leasing momentum. Can you talk about the pipeline of leases that you have signed but will still need to commence rent over the next few quarters? Would you have like an ABR number for that? Mark Decker: I don't know that we have an exact ABR number, but Danica, do you want to speak to that? Danica Holley: Yes. I think in terms of an exact ABR number, I'm not sort of comfortable nailing that exactly down, but I would give you encouragement that the performance of the portfolio will continue to be consistent with what we reported out this quarter and that there's no surprises or any sort of bogeys in there. So I hope you're able to sort of go from that. Wesley Golladay: Okay. And then when you look at -- you mentioned about maybe sourcing insurance debt. Would you have, I guess, a framework for thinking about timing of when you may pursue that? Mark Decker: Yes, Wes, I mean, honestly, I think it would be to our benefit to have it sooner rather than later. It's just another market and another place where we could get financing and it allows us to go past 5 years. So I mean we have urgency around it but I mean, the trick is it's sort of binary. We're either able to access the market or not and it comes down to the view of our credit. It's our belief and expectation that the counterparty will price us like kind of a BBB- credit. And so if and when we can get that as we work through it, we will. And if we can't, we'll have to do a few things here and there to get ourselves in position for that, including possibly going to the agencies. But we feel like it's within reach to get that done. Operator: And your next question today will come from Juan Sanabria with BMO Capital Markets. Robin Haneland: This is Robin Haneland sitting in for Juan. I was curious what drove the occupancy increase during the quarter? And then on top of that, is it the year-end occupancy of 96% that is driving the sequential benefit to FFO in the fourth quarter or something else? Mark Decker: Yes. On the occupancy, I mean, it was mainly just driven by selling the empty facility at Aurora. That's the kind of math of it. And in terms of sequential Q4, it's probably the benefit of CHRISTUS but I don't know, Bob, do you want to chime in? Robert Kiernan: From an occupancy perspective, Q4 will have lease-up in it. We've got a number of lease-ups that are projected to come in during the fourth quarter. From an earnings perspective, we'll continue -- I think it is CHRISTUS, from a property NOI perspective, again, continuing that into the fourth quarter. This was our first full quarter with that in the numbers and we'll continue on that path. Robin Haneland: And then on the acquisition front, how low do you think leverage would have to get for you to look to flip to being a net acquirer? And what scale could you possibly be a net buyer? Mark Decker: Yes. I think, Robin, for how low do we want to leverage, I mean, our overall target leverage, I'd say, in the near term is sub-6x. And ideally, we could be in a spot where we could fund with permanent capital and then put it on our line, take it off with permanent capital and some longer-term debt would be an ideal state. We're not there today. I mean if we had access to capital, I think we could easily put $200 million to $500 million of external growth up per year and that would be mathematically compelling, I think, and as well as just improving the overall quality of the business. But for now, we're going to be kind of -- we're going to get a little bit less levered ideally and then probably be funding from recycling. Robin Haneland: On the topic of recycling and deleveraging here, could you maybe just help us understand the quantum of assets you're considering selling? And maybe like any rough expectations on yields would be helpful. Mark Decker: Yes, it really depends on type, but I'd say we have some things that we think would sell in the low 6s and others that we would put probably closer to 7, and we would be seeking to redeploy that kind of plus 100 to 200 basis points, taking the 2 ends of those spectrums. Operator: And your next question today will come from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: So Mark or Alfonzo, you highlighted the pipeline of acquisition opportunities as much as $500 million that sort of meet that criteria in the 7.5% to 8% cap rate range. I mean, how big is the disposition pipeline today that you think that you could sort of execute on that, maybe the near-term opportunity of capital recycling at a positive spread? Mark Decker: I think near term, it's probably 50 to 100, and we could probably do more -- I mean it all depends, Austin, because we have to get the sale we like. And so it's a lot of triple net leases that we have to kind of pull off to get the sales and the buys we like. But I mean, everything we have, I think, is salable. It's just a question of trying to manage it all together, the leverage, earnings and so forth. But I'd say we won't get at that $500 million in full without some meaningful change. So my guess is -- my hope would be we get 20% to 40% of that done. Pipelines, as you know, evolve. So if we have something nailed down now, we can't move on unless we have a sale pretty close to wind up. Austin Wurschmidt: Fair enough. Are there other assets in that disposition pool that are underleased or the lease yield is meaningfully below where it kind of helps both deleverage as well as allows you to reinvest at a positive spread? Mark Decker: The more likely scenario is, I'd say the underleased ones probably aren't as attractive a sale candidate. So our best sales will be well leased sort of sleep at night type items. And we actually probably will get -- I mean the way our leverage is counted in our facility is actually on a gross book basis. So if we bought something for $1 and we sold it for $1.15 as an example, we'd actually be chipping away a little bit more at our leverage just on the margin. So that would work kind of both ways for us. So yes, I'd say there's a little of that possible but it's more likely the fuller assets, not the opportunistic ones. Austin Wurschmidt: Appreciate it. And then maybe the last one. You mentioned the team is in the early stages of developing the strategic plan. But since you teased out the idea, anything you can share for just the central tenants of the plan at kind of a high level? Mark Decker: Yes. I mean, honestly, the central tenants will be unsurprising to you. It will be about capital allocation and balance sheet management and just execution. But yes, I guess I'd rather wait. But I don't think there'll be a huge reveal. We're not going to start getting into the metal stamping business or anything like that or data centers. We'll be focused in kind of what we would call health care infrastructure. Operator: And the next question will come from Rob Stevenson with Janney. Robert Stevenson: Bob, how much -- so the implied fourth quarter guidance is $1.13 to $1.23, if I'm doing my math right. When you're taking a look at that sort of $0.10 range, you talked about lease-ups benefiting fourth quarter earnings, but is that basically the predominant driver? Or is there some other stuff in there? Because that's like $700,000 plus sequentially just to get you to the midpoint of that. Robert Kiernan: I think it's a combination of things, Rob, but it's certainly -- I mean, it's some elements of the lease-up activity. It's -- there's a number of moving pieces to it. So it's really hard to flag any in particular. But from a run rate perspective, this -- the run rate that we're on from an AFFO perspective, this quarter, the incremental growth, I think the number is maybe a little bit lower than what you're citing in terms of what we need to get towards that range. But we have a number of opportunities from both rent growth and also from a cost side to fall into that range. Robert Stevenson: Okay. Because I mean, it looks like from the supplemental that you guys are $3.37 of 9-month AFFO and the guidance is $4.50 to $4.60. So my math is failing me here is that it just seemed like a big jump sequentially even if you got -- because you -- it's not like you're going from 80% occupancy to 95% or some sort of huge jump because you don't have that much vacancy. Robert Kiernan: The one other piece to keep in mind is interest also. I mean with the curve -- with some of the rate reductions that are there, that does have a pickup for us. The credit facility refinancing, we also pick up -- we no longer are subject to the 10 bps SOFR credit spread adjustment. So that's a piece there as well. Robert Stevenson: Okay. And then I don't know who's best to answer the question, but you guys talk about the tenant credit watch list today. I mean, even if it's not who's on it, but is that watch list expanding, shrinking? How should we be thinking about that at this point in time given some of the re-tenanting, given a couple of sales, et cetera? And how are you guys thinking about that internally? Mark Decker: I mean I'd say on the whole, Rob, it's shrinking. Our 2 main issues there, we're obviously Steward and Prospect. And I mean, we're always watching what our tenants are doing obviously to the extent we can. But those -- that was a pretty good size event for us. And for the portfolio, we don't have anything brewing that we're aware of at this time. Robert Stevenson: Okay. And then just last one for me. Mark, how are you and the Board thinking about preferred? Is that to you guys, is that expensive debt? Is that quasi-equity? Is that something with the common here that you could expand either reopening the existing or a new issuance to fund? How are you thinking about that capital stack, assuming that the -- if the common equity stays here for any prolonged period of time? Mark Decker: Yes. Candidly, I'm amazed at where the common is, but I guess we're in a decent company. The REIT market as a whole is pretty challenged. And among them, we are some of the most challenged as it relates to earnings multiples. But Listen, I like preferred. I think it is equity and I will go to my grave arguing that with anyone. It's -- we don't have to pay it back. So I can't understand how it would be debt. And in our capital stack, I think it's possible today that would be attractive equity. So I mean, I'd say it's definitely something we'd consider. And I would say the people who would argue with us that this said don't probably own our stock right now anyway. So... Operator: And the next question will come from Gaurav Mehta with Alliance Global Partners. Gaurav Mehta: I wanted to ask you on your occupancy comments. I think you mentioned 96% by year-end from 95.2% as of this quarter. Does that assume any sale of any vacant property? Mark Decker: No. Gaurav Mehta: Okay. And so when you say 96%, does that mean that the tenants are paying the rent? Or is it like you're signing 96% and tenants will probably start paying the rents later? Mark Decker: Those are all -- Gaurav, thanks for the question. It's really -- those are kind of leases that are underway. We're trading paper. So those are situations where we have a line of sight and have belief that it will get -- the lease will get signed by the end of the year. And by the way, I think we did sell one small building, although it wouldn't meaningfully move occupancy. So I retract my firm no. I think we sold a very small asset actually just yesterday. So... Gaurav Mehta: Understood. And as a follow-up on the G&A for fourth quarter, should we expect that to be in line with where third quarter was? Robert Kiernan: Gaurav, yes, it's -- from a cash G&A perspective, we're forecasting in that same type of range and similar on the cash. Operator: And your next question today will come from John Massocca with B. Riley. John Massocca: Maybe thinking about the buyback and kind of where your stock is trading today, as you look at dispositions and kind of capital recycling, how are you kind of thinking about utilizing the buyback, paying down debt or actually buying assets? I mean, kind of where are we today maybe within those 3 options? Mark Decker: Yes. Good question. Look, the stock is really attractive right now. We're trading over a 9% cap on an implied basis and that we can't find a portfolio that we have so much information on for that price. So that's a very attractive option. Obviously, that's permanent capital. It's precious. We have a lot of respect for that and are not trying to shrink it. But if -- but you could say the universe is telling us to sell assets and buy our stock back, and that's certainly under consideration, we'd want to do it. I think we talked about when we announced the buyback on a leverage-neutral basis. And just -- yes, so I guess I'd say that. So I mean, ideally, we could do a little from each delever, buy some stock back, buy some assets that are accretive, that would be ideal. That's what I'd say we're working on generally. John Massocca: As we think about and this maybe even be part of the strategic plan, I mean, is there an opportunity set to sell big chunks of assets within the portfolio? Or should we expect kind of disposition activity near term to be kind of granular like it has been in quarters past? Mark Decker: I think it's possible we could do big chunks. I mean it's just about getting a buyer you like. And I'd say the bigger it is, just the more complex it is because it really -- it really affects our corporate math. So -- kind of time that well. John Massocca: And then longer term, particularly as you're thinking about kind of strategy for GMRE, is there potential to do investments maybe outside of the traditional aperture or traditional focus of MOB? What are your kind of big longer-term thoughts on where you want to focus property level investments? Mark Decker: Yes. I mean I think that's a great question. I think the long term for us, I mean, we're trying to manufacture the best cash flow stream we can. And by that, we mean really FAD and ideally free cash flow generated back to the company to start to fund some internal growth, which we're really able to do for the first time, I think, in the company's history this quarter, albeit a modest amount. And so I think we would look at health care broadly, and we're not, I think, in most people's definition, a pure-play MOB or we're not pure-play medical office already. And I think that's an opportunity. And so yes, we are exploring that. And I'd say thinking where else in health care, we think we could craft an edge. Where I think our sort of strength as an investment team is, and I think this is real is we have some very thoughtful folks that know the business well and really go deep on underwriting and those are skills that are transferable. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mark Decker for any closing remarks. Mark Decker: I'll just pause on to thank everyone for spending time with us this morning. And hopefully, we'll see you this winter. Thanks so much. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the LTC Properties, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Before management begins its presentation, please note that today's comments, including the question-and-answer session, may include forward-looking statements subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in LTC's Properties' filings with the Securities and Exchange Commission from time to time, including the company's most recent 10-K dated December 31, 2024. LTC undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation. And please note that this event is being recorded. I would now like to turn the conference over to LTC management. Thank you. You may begin. Clint B. Malin: Hello, and welcome to LTC's 2025 Third Quarter Earnings Call. After some brief introductory remarks from me, you'll hear from Cece Chikhale, our Chief Financial Officer; followed by Gibson Satterwhite, LTC's Executive Vice President of Asset Management; then Dave Boitano, our Chief Investment Officer. Pam Kessler, LTC's Co-CEO, will close out our formal remarks. It's been a busy and productive 10 months for LTC. We've been executing on every front, initial cooperative conversions from triple net lease to SHOP, external growth through investments, capital recycling and transformation through SHOP. Following the announcement of our SHOP initiative in late 2024, we moved quickly to build our investment pipeline, outperforming our own expectations and growing the pipeline fourfold since the beginning of this year. As Gibson will detail later, today, we are raising our 2025 SHOP NOI guidance. We have closed about 85% of our projected $460 million investment pipeline, more than $290 million of which was in our SHOP segment. We expanded operator relationships and reduced the average age of our portfolio. Today, we have 6 SHOP operator relationships, 4 new to LTC. By the end of the year, we expect SHOP to approach 25% of our investment portfolio with an average age of less than 9 years. Our primary thesis for launching SHOP was the realization that LTC was effectively excluding itself from a vast opportunity set of new investments. With the robust volume of new investments we've made in 2025 and the backdrop of favorable demand fundamentals and supply constraints, our external growth trajectory remains strong. The transformation we've accomplished since the second quarter of this year is delivering meaningful results and positioning LTC to continue creating long-term value for our shareholders. Pam, Wendy and I want to extend a sincere thank you and express our gratitude to the LTC team. They have stretched themselves by tackling new tasks and responsibilities and are working together tirelessly and professionally to successfully execute on LTC's strategy. Now I'll turn the call over to Cece. Caroline Chikhale: Thank you, Clint. The numbers I'll be discussing today are for the third quarter of 2025 compared with the same quarter in 2024, unless otherwise noted. You can find a more detailed description of our financial results in yesterday's earnings release, our supplemental and our Form 10-Q. Core FFO improved to $0.69 from $0.68, principally due to an increase in SHOP NOI from Anthem and New Perspective compared with rents we received before those leases were converted from triple net, new SHOP acquisitions and a decrease in interest expense. These were partially offset by an increase in reoccurring G&A. Core FAD improved by $0.04 to $0.72 versus $0.68 last year. The increase primarily related to the same factors impacting core FFO as well as the turnaround impact of rent assistance provided to ALG in the third quarter of 2024, cash rent increases from escalations and CapEx funding in our triple net portfolio. These were partially offset by an increase in reoccurring G&A. During the quarter, we took a noncash write-off of Prestige's straight-line effective interest receivable balance of $41.5 million, resulting from the loan amendment that we discussed on last quarter's call. The amendment gives Prestige a penalty-free prepayment option on their $180 million loan within a 12-month window beginning in July 2026. Additionally, during the third quarter, we wrote off $1.3 million of straight-line rent receivable related to the Genesis Chapter 11 bankruptcy filing. During the third quarter and subsequent, we sold a total of 1.5 million shares under our ATM for net proceeds of approximately $56 million. Our pro forma debt to annualized adjusted EBITDA for real estate was 4.7x, and our annualized adjusted fixed charge ratio was 4.6x. Our pro forma liquidity stands at nearly $500 million. We have increased the low end of our full year 2025 core FFO guidance by $0.01, which now stands at $2.69 to $2.71. For the fourth quarter, we expect core FFO in the range of $0.67 to $0.69. Guidance excludes asset sales and includes only those transactions closed to date or expected to close over the next 60 days. Additional assumptions underpinning this guidance can be found in our earnings release, which is posted on our website. Now I'll turn the call over to Gibson. J. Satterwhite: Thank you, Cece. We're repositioning our portfolio with purpose, recycling capital from noncore assets, adding new operators and expanding SHOP to drive long-term value. At the close of the third quarter, SHOP included 21 properties with 5 operators, 3 of them new to LTC, including LifeSpark, Charter Senior Living and Discovery Senior Living. The portfolio's gross book value is $447 million or approximately 20% of our overall portfolio with average occupancy of 87%. We expect to convert 2 seniors housing communities in Oregon from our triple net portfolio into our SHOP segment on or before December 1. Upon conversion, we will terminate the triple net master lease with the operator and enter into a management agreement with Compass Senior Living, a partner new to LTC. The contractual rent under the lease agreement is approximately $2.5 million and the SHOP NOI run rate is approximately $1.2 million, which is expected to grow to exceed the contractual rent over the next couple of years. For the 13 properties originally converted to SHOP, we are increasing guidance to $10.9 million to $11.3 million, up from $9.4 million to $10.3 million. At the midpoint of guidance, pro forma NOI growth for these properties for the full year 2025 over '24 would approach 18%. For the remainder of the SHOP portfolio acquired through today's call and expected to convert, we expect fourth quarter NOI of $4.8 million to $5.2 million. While we are not providing formal guidance for 2026 today, we do expect continued strong SHOP NOI growth given the competitive position of our SHOP assets. Our expectation for rent from the 14-property portfolio, subject to market-based rent resets, remains steady at $5.7 million, which represents a 64% year-over-year increase. We will continue working to optimize value in this portfolio over the next 12 to 15 months. We have completed the sale of a previously discussed portfolio of 7 skilled nursing assets, generating net proceeds of approximately $120 million and a resulting gain of $78 million. Now I'll hand the call over to Dave for a discussion of our investment activity. David Boitano: Thanks, Gibson. The fall NIC conference echoed a powerful theme, confidence in the future of senior housing. LTC is poised to capitalize on this robust industry updraft and build upon our solid cornerstone of 2025 investment success, a foundation of strong senior housing operator relationships and accelerating deal flow. We're gaining strong traction, not only in the volume of potential investments, but in the quality and depth of opportunities we're seeing. Our conversations with potential and existing SHOP operating partners continue to generate a strong pipeline, including off-market deals sourced from LTC's deep industry relationships. Our current opportunity set stands at roughly $1 billion, and we already have nearly $110 million under LOI with a target close in January 2026. The majority of our 2025 pipeline is closed with more than $290 million in SHOP transactions completed since May. We expect to ramp up that pace in 2026 as we focus on executing on the substantial opportunities we are seeing with both existing and potential new SHOP relationships. I want to take a moment to thank Gibson for the over $100 million in sales proceeds that we're quickly redeploying into quality senior housing communities. Through the end of the third quarter, we closed 3 SHOP investments totaling nearly $270 million. After quarter end and as just recently announced, we acquired a stabilized senior housing community in Georgia for $23 million that is being managed by a new LTC operator, Arbor Company. These stabilized assets were underwritten to generate threshold year 1 yields of about 7% and unlevered IRRs in the low teens, tangible proof of our ability to source, structure and execute high-performing investments. And as with all our SHOP relationships, LTC's management agreements provide incentives for our operating partners to surpass base underwriting assumptions. During the third quarter, we also originated a $58 million 5-year mortgage at 8.25%, providing strong current returns and portfolio diversification. SHOP has proven to be a true external growth engine for LTC, built on disciplined underwriting, strong partnerships and consistent execution. As the market continues to evolve, we're focused on maintaining balance between opportunity pursuit and execution discipline, ensuring LTC's growth remains both sustainable and strategic. I'll now pass the call to Pam. Pamela Shelley-Kessler: Thanks, Dave. LTC's strategy today is clear and forward focused. We're building a company defined by growth, quality and consistent performance. Over the past year, we've established a strong foundation, and now we're focusing on scaling it by expanding our SHOP platform, deepening operator partnerships and driving long-term accretive returns. We're intentionally building a SHOP portfolio of newer assets with staying power, one that will compete well as the industry continues to evolve. The bifurcation between high-quality modern assets and older, less competitive properties is becoming more pronounced across all real estate asset classes, and seniors housing is no exception. By concentrating on newer, well-located communities operated by experienced partners, LTC is positioning itself to outperform over time. Underpinning all of this is a strong balance sheet. We maintain solid liquidity, a conservative approach to leverage and a disciplined payout ratio that gives us the flexibility to pursue growth while preserving financial stability. That foundation allows us to move decisively when opportunities arise. Our momentum is strong, our strategy is working and our opportunities ahead are significant. We're executing with discipline and confidence, and I couldn't be more optimistic about what's next for LTC. Operator, we're ready for questions from the audience. Operator: [Operator Instructions] The first question comes from the line of John Kilichowski with Wells Fargo. Unknown Analyst: This is [ Jesus ] on for John. Just looking at the guidance here to get started, looking at the moving parts, just talk about the underlying assumptions here for the low end and the high end of the range. Caroline Chikhale: Yes, [ Jesus ] it's Cece. The low range, we included all investments that have closed to date and then the high is all that we expect to close within the next 60 days. Unknown Analyst: Perfect. And let's talk about the pipeline as well and the makeup here. Are you purely focusing on SHOP deals at the moment? Or are you looking at other triple net and loans as well? David Boitano: So this is Dave. Predominantly SHOP. Certainly, we will consider other opportunities across our desk, but our primary focus is SHOP. Operator: And the next question comes from the line of Juan Sanabria with BMO Capital Markets. Juan Sanabria: Maybe just to start to piggyback on the prior question. Could you provide any color on expected yields and growth for $110 million in the pipeline to close in January and $70 million over the next 60 days? Clint B. Malin: So Juan, this is Clint. We've guided to 7% yields on our SHOP acquisitions, and you should think of the same for the $110 million deal we disclosed on our earnings release. Pamela Shelley-Kessler: Initial yield. Clint B. Malin: Initial yields. Juan Sanabria: Okay. And then just you guys -- or how should we think about funding the incremental capital that you've outlined? And then how do you think about your marginal cost of capital, both debt and equity? Pamela Shelley-Kessler: Yes. Thanks, Juan. This is Pam. So we have proceeds coming to us in the first quarter in the form of loan payoffs and purchase option exercises that we disclosed in the supplemental. And so that's about $90 million of proceeds and then funding the remainder on the -- with equity on the ATM. We've been very disciplined this year in issuing equity to match-fund our investments. And so you can anticipate that going forward as well. Juan Sanabria: Great. And just last one, if you don't mind. Any other options of prepayments that we should expect in 2026 or '27 that you think realistically would be executed? Clint B. Malin: The only thing you should think about is Prestige, which we talked about previously. And we gave them a prepayment window starting in July of '26, and they have improved performance, and we have been in communication with them, and they are going to be making loan applications in early '26. So at this point, we would think that they should be on track for hopefully 7%, Juan. It may take a little bit longer, but that's $180 million. Pamela Shelley-Kessler: And also -- so Juan, you should also think of this in the context of, this is all part of our -- the loan payoffs and the purchase option part of our strategy to recycle out of older skilled nursing properties and into higher-performing SHOP assets. And we also point out we have an accordion feature on our line of credit that we could also execute on in 2026 to increase our availability. Operator: And the next question comes from the line of Rich Anderson with Cantor Fitzgerald. Richard Anderson: So this is all very exciting. The pipeline growing $1 billion is not a number we've heard associated with LTC in the past. So congrats on that. But the thing that I think I find more valuable is the growth profile of the company in year 2 and onward after the investment. So can you can you talk about what happens to the overall growth of the organic growth of LTC? Let's say, you get to 30%, 40% SHOP in the next year or so, let's say, legacy LTC was growing 2% or 2.5% on escalators on triple net. Like what's the incremental growth picture for the company after the investment, not from the investment? Pamela Shelley-Kessler: You're talking about the growth through SHOP because if you're not looking at... Richard Anderson: The whole company, like if the company was growing at 2.5% prior to your RIDEA sort of movement, what do you see the growth profile, the organic growth profile of the company because that's what you're buying, right? You're buying a better growth story longer term. So that's the basic genesis of the question. J. Satterwhite: Yes. That's right, Rich. This is Gibson Satterwhite. Yes, going in at 7% cash yields, I think we communicated before that we expect a very minimum of 3%. That's just basically to keep up with inflation. So if you think about our cost of capital as that's adjusting as we're repositioning away from skilled nursing assets, considering the overall blended cost of capital, that's the minimum growth rate that we use to price these deals for newer assets to build out our SHOP portfolio. But certainly, we expect greater growth than that. We've targeted low digit -- low double-digit IRRs. And we do expect more than 3% growth with the supply-demand imbalance that's been much discussed in the industry. Preliminary conversations we're having with operators where they expect going into 2026 that RevPOR will outpace expense growth. We're working through budgets right now, so we can't quantify that exactly for you. But we expect that to play out and to have a greater growth profile to hit those low double-digit IRRs. Clint B. Malin: And Rich, in addition to that, the average vintage right now of the deals we're acquiring in SHOP in '25 is 2019. So we are buying and bringing newer assets that we think we're going to have pricing power continuing on into future years. And we've purchased assets that are stabilized from an occupancy standpoint but have further room to grow from their positioning in the markets for revenue growth and dropping to the bottom line for NOI growth. Richard Anderson: Okay. Yes. So I did note the 87% occupancy. Some of your peers are doing mid teens and more same-store NOI growth, a lot of that is occupancy lift. But on a RevPOR basis, do you think you could be sort of mid-single digits? Is that sort of the -- I know you said 3%, but what's the upside from there, again, with a mind towards growing -- creating a growth year story for shareholders. Is it -- is that... Clint B. Malin: Well, people are certainly targeting -- I'm sorry, Rich. Richard Anderson: Yes, please go ahead. Clint B. Malin: Yes, people are certainly targeting more than 3% RevPOR growth. And that would at least keep up with expense growth. We expect expense growth to be below that. So in the kind of 5-ish percent. People are talking about base rates of going up anywhere 6% to 8%, doing different things with levels of care. So that could all blend down to RevPAR growth of, call it, 5-ish percent. And so we don't -- we're not getting a lot of feedback from operators going into next year that they are seeing really acute wage pressure, which is the majority of your cost structure. So if you're starting at, I don't know, 4%, 5%, whatever that is, we'll know that when we get through budget season with our portfolio. We do expect that to outpace expense growth. So yes, I think mid-single digits is a fair assumption. Richard Anderson: Awesome. And then quickly for me, last one. You mentioned the conversion of -- to Compass previously, $2.5 million rent, $1.2 million SHOP with an expectation to pass that $2.5 million. Is that the typical model when you do a conversion where you're sort of giving up short-term rent? Or do you kind of sometimes start at a higher number on a SHOP execution versus the previous net lease structure? Just curious how typical that math is for other conversions. Clint B. Malin: This one is a little bit of an anomaly, Rich, and it's a fair question. So as you know, as I disclosed in my prepared comments that the current NOI run rate was lower than the contractual rent. So this was a specific operator issue that we dealt with that we had to address. We're really excited to start the relationship with Compass. These 2 particular properties have covered that contractual rent before, and we've just seen performance deteriorate. So we looked at this as a good opportunity, and we're really glad to have SHOP, the RIDEA platform and the toolkit to address a situation like this. So we really are confident that Compass is going to be able to drive NOI to more than exceed that contractual rent such that the value creation is going to more than offset the temporary reduction in our income. So if you think about the other conversions, Anthem that was cooperative, New Prospective cooperative, strategic. Those were really strategic important pieces for us to start our platform. And as you're seeing as we increase guidance on those, that it's really paying off for our shareholders. Operator: And the next question comes from the line of Michael Carroll with RBC. Michael Carroll: Yes. Maybe aligns with those last questions. I guess, Gibson, how many of the assets that you have in the portfolio were recently transitioned or how many of the acquisitions that you guys have are recent acquisitions where you're transitioning out the old operator and bringing in a new operator? And with regard to those, should we expect some type of disruption, so higher expenses or lower revenues as there's always some type of disruptions with those? David Boitano: This is Dave. So, so far, on our existing external acquisitions, the operator has remained in place, and it's actually been, as far as I'm concerned, sort of a twofer because we get to buy a great piece of real estate and we get to establish a great relationship with an operator. There will be some situations where we do have transitions. And obviously, we're very careful to plan well in advance with the operator to avoid disruptions. But predominantly, so far, we've been able to keep the operator in place on deals that we've executed. Clint B. Malin: And right now, Mike, on our pipeline, we only have one deal in our pipeline where there would be an operator transition, but that was a smaller operator that was a real estate owner that's exiting that. So it's cooperative transition. Michael Carroll: Okay. So there's nothing really in the existing shop right now where you just did a transition and we should expect some type of disruption. So like you've kind of already realized that in the numbers in the third quarter? Clint B. Malin: Yes, correct. Michael Carroll: Okay. Great. And then I guess, related to Prestige, I know you provided and I appreciate the color, Clint, earlier in the call. What do they need to get done to exercise that purchase option? I mean, is it just obtaining the loans? Or do they need to drive better results so they can get, I guess, better underwriting with any potential, I guess, HUD-type debt? I mean, do they need to drive performance in order to exercise that? Or is it just getting the loans done? Clint B. Malin: Driving a little bit more performance. And that's why we gave them a year to go ahead and to prepay. But they have been improving substantially, and we think they're on track to be able to -- we've been analyzing their financial performance. They've improved substantially. And for right now, it looks positive for us. They'll be able to exist and it brings down our -- oh yes, the interest rates going down, too, could be a benefit for them. So we feel good about that. We feel good about our decision to allow this prepayment to be able to redeploy that capital into higher quality assets. So we are keeping close tabs on it, and it looks positive right now for middle of the year next year. Michael Carroll: Okay. And how many trailing or how long of a trailing P&L do they need to get HUD debt and should we think about them utilizing HUD to take this out? Or could they find a bridge loan and get HUD at a later date when their financial results are more stabilized? David Boitano: So this is Dave again. So generally speaking, HUD's looking at a trailing 12, which you're right, there are bridge lenders out there that would probably happy step into the situation. So there'll be optionality for them as they approach that point. Michael Carroll: Okay. All right, great. Clint B. Malin: Mike, they're just seasoning through the remainder of the year. So the current -- as Clint mentioned, their current performance, we -- that looks like it's at a level to allow them to take it into HUD. So they're just seasoning through the remainder of the year to submit the application in Q1. Michael Carroll: Okay. So once you kind of get... Clint B. Malin: And then also... Michael Carroll: Sorry, go ahead, Clint. Clint B. Malin: Sorry, just one other good thing about because the trailing 12, so they had more challenging months that are in that trailing 12. So just as you continue in time, it's going to improve the underwriting. So -- and the other thing that Prestige was waiting for was their rate letters, which they got just to confirm their Medicaid rates, which were as expected. So that helps the consistency. But then within the portfolio that we have with them that will remain, they are the largest vent provider in the state of Michigan, and vents are expecting substantial Medicaid rate increases. So when you look at our portfolio that will remain with Prestige, we feel good about reimbursement that would be coming for the remainder of the portfolio because there are vent units within some of the remaining buildings we would have with them. Operator: And the next question comes from the line of Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Yes. So much talk on SHOP. Let's talk a little bit about skilled nursing. Curious, again, when you take a look at your skilled nursing portfolio at this point, if there are opportunities to also try to improve your earnings growth from your current portfolio? Again, one of your peers did something really interesting with one of their operators. Again, not wondering again, are you guys looking at structures like that, that could also kind of help you generate better earnings growth from the skilled nursing portfolio? Clint B. Malin: We have not looked at that, Tayo, as an option. We've mentioned previously on our calls, we've been selective looking at skilled nursing, and we have focused on more transitional newer transitional care, newer assets. And we continue to be in discussions with companies about that. So that would be what I'd see us selectively growing on skilled nursing. Omotayo Okusanya: Got you. That's helpful. And then anything from a regulatory perspective as well on the skilled nursing side, you guys are watching at this point? Clint B. Malin: Nothing new at this point. I mean I think everything that's been discussed as far as the staffing mandate, that's in the rearview mirror now. So no major issues that we're aware of on skilled nursing other than there has been a few states that have touched on potential Medicaid rate reductions. So that's -- I guess -- and that's a narrative that's out there in select states. We don't know if that will continue to grow or not, but that has cropped up in a few cases. Omotayo Okusanya: Do you have exposure to those states like North Carolina and some of the other guys you've talked about it? Clint B. Malin: Correct. Omotayo Okusanya: Okay. Got you. Clint B. Malin: Thank you. Operator: And the next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Pam, I appreciate some of your earlier comments around kind of the available liquidity. But going back to that earlier question on funding plans, you've talked about in the past over-equitizing the investments or at least kind of on a leverage-neutral basis. So just wondering how patient you're willing to be on the capital markets, just given this -- what seems to be a pretty substantive set of investment opportunities in front of you. Pamela Shelley-Kessler: Yes. Thank you, Austin. Yes, I mean, we will look to match fund. So you're asking about how much we'll issue on the ATM. I mean we will look to match fund. We do have the proceeds coming back in the first quarter, as I talked about, and then possibly Prestige in third quarter if they meet their open window period. So with that backdrop, there's not a ton of pressure on us. But we have been disciplined this year in executing on the ATM when the backdrop was favorable for us to sell shares. And so we would continue that discipline into 2026 as well. Austin Wurschmidt: Appreciate that. And then just how are you guys balancing the regional densification or sort of a clustering strategy and the benefits of scale within SHOP versus geographic diversification and just kind of thinking about those future SHOP investments. Clint B. Malin: Yes. I think that we're going to continue to evolve into that, Austin, but we've been out meeting with operators for upwards of a year now premarketing this. And I think where you see where the pipeline and our investments to date, this has been a result of that very intentional effort of going out and meeting with operating companies. So as we continue to work with these companies, I mean, we will look at density being a factor of concentrating in certain markets with certain operators. Pamela Shelley-Kessler: And we've done that. The operators that we're partnering with in our acquisitions, they are the market leaders in their area. And so that is a strategy of ours. Austin Wurschmidt: Helpful. Has the competition changed at all to a point where you felt you've had to increase your growth underwriting in sort of the 3 years out? I think you were in sort of the low to mid-single-digit growth you referenced last quarter with the expectation they would exceed that, of course. Clint B. Malin: Yes, I -- it's very competitive in the market as far as deals, and we've been focused on -- smaller transactions, we've been fortunate to be able to secure a couple of portfolios, but it is definitely competitive. But we feel we feel very good about our momentum and our positioning in the marketplace to be able to succeed on investments. And I think our investments to date plus our new investment we announced for '26 is evidence of that we're able to compete in the marketplace. Austin Wurschmidt: And last one for me. The transitions this quarter, I mean, it didn't sound like there was any other immediate kind of transitions that were available, but I think you'd referenced maybe evaluating some assets in the market-based rent reset, those 14 properties. Anything in the near term there that you're evaluating on maybe transitioning some additional assets from triple net or to the SHOP structure? J. Satterwhite: Sure, Austin, this is Gibson. Yes, we're certainly considering that as we look into 2026. We have a few options as it relates to those properties. We continue to work with current operators and set permanent rents. As a reminder, these are -- there were 14 properties that were all set up in short-term leases, basically 2 years in duration on average with regular market rent resets. And so there may be certain situations where we keep those with the operators once we're satisfied that we're at an occupancy level and margin that makes sense if that fits that relationship. But we'll certainly look at some of those assets to transition to SHOP. You'll probably see a little bit of movement on that early next year. And then we may make some decisions on a few as to whether or not we dispose of them. But those are our options to -- just to maximize value in that group of assets, and we certainly see upside in that portfolio from here. Operator: There are no further questions at this time. And I would like to turn the floor back over to Clint for any closing remarks. Clint B. Malin: Thank you, everyone, for joining us today. 2025 has been a pivotal year for LTC so far, and our focus on driving growth is working and will continue. We look forward to sharing our progress with you next quarter. Thank you. Operator: And thank you, ladies and gentlemen. That does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Daniel Segarra: Hello, everyone. My name is Daniel Segarra, and I serve as the Head of Investor Relations and Sustainability and Vice President at Grifols. Welcome to our review of the company's business results for the third quarter of 2025. Today, I'm joined by Grifols' Chief Executive Officer, Nacho Abia; the President of Biopharma, Roland Wandeler; and Grifols' Chief Financial Officer, Rahul Srinivasan. A few logistics before we get into the details. Today's call will last about an hour, including a Q&A session. As a reminder, this call is being recorded. You can find additional materials, including today's presentation, in the Investor Relations section of the Grifols' website at grifols.com. The transcript and a replay of the webcast will also be available on the Investor Relations website within 24 hours. Turning to Slide 2, please note that this presentation includes forward-looking statements regarding, among other things, the company's future operating and financial performance, market position and business strategy. These statements are based on current expectations and available information as of the date of the recording, and they are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected. Grifols financial statements are prepared in accordance with EU IFRS and other applicable reporting provisions, including alternative performance measures or APMs, prepared under the Group's financial reporting as defined by the European Securities and Markets Authority. Grifols management uses APMs to provide financial performance as the basis for operational and strategic decision-making. These APMs are prepared for all the time periods presented in this document. Now moving to today's agenda, and I will turn the call to Nacho to kick it off. Nacho? Jose Ignacio Abia Buenache: Thank you, Danny, and hello, everyone, and thank you for joining us. The results we are presenting today demonstrates the continued commitment to delivering on our value creation plan. The performance achieved in the first half of the year has carried through, resulting in solid operational and financial results for the third quarter. This quarter reflects the sustained underlying demand of our products, solid market dynamics and disciplined execution, while we continue to navigate exchange rate headwinds and the anticipated impact of the Inflation Reduction Act. This progress also stems from the operational focus and financial stewardship we established in our road map at the beginning of the year, which remains the central pillar of our plan. Our core business continued to perform well through the third quarter, led by the immunoglobulins franchise. This top line performance has supported margin expansion, while tight cost management and focus on free cash flow generation have driven meaningful improvement in our free cash flow. While we acknowledge the challenges of the complex global operating environment, Grifols has performed with consistency and confidence. Our structural advantage, including scale, solid vertical local integration in key markets and a globally diversified footprint have enabled us so far to adapt effectively, mitigate external pressure and sustain solid performance across key markets. Regarding exchange rate headwinds, the impact was reflected at both revenue and EBITDA levels, but it did not extend to our leverage ratio or free cash flow due to the significant levels of natural hedges within our business. In any case, we continue to implement mitigating actions and maintain vigilant oversight of evolving external conditions. As we track towards year-end, we remain attentive and measured in our approach. Year-to-date performance has been solid and in line with our expectations, reflecting disciplined execution and resilience. Looking ahead, we recognize that the external environment remains complex and dynamic, we continue to actively manage the factors within our control. By leveraging our structural strengths and maintaining discipline, we remain on track to meet our 2025 objectives. Before we move on, I want to pause and take a moment to thank the entire Grifols team for their ongoing commitment, focus and passion in executing our plan and advancing our mission. And with that, let's move to Slide 5. On a year-to-date basis, we achieved revenue of EUR 5.5 billion, representing a year-over-year increase of 7.7% and 10.5% like-for-like after IRA and gross-to-net adjustments, both at constant currency. Third quarter adjusted EBITDA of EUR 482 million built on a strong first half, bringing our year-to-date adjusted EBITDA to EUR 1,358 million, up 11.2% and 17.3% like-for-like, both at constant currency. Both figures are well ahead of revenue growth. Improved operational execution translating directly into a positive year-to-date free cash flow pre-M&A and pre-dividends of EUR 188 million, marking a significant EUR 257 million year-over-year improvement. This ramp-up in cash generation highlights our sustained financial discipline, keeping this as a top priority. Finally, deleveraging remains a critical financial priority, too. And at the end of Q3, our leverage ratios per credit agreement landed at 4.2x, representing nearly 1x improvement over the prior year. We continue to reinforce our structural foundation and these year-to-date results position us soundly to execute our capital allocation priorities and continue strengthening our balance sheet, ensuring we can create sustainable long-term value for all our stakeholders. As we have mentioned many times, the core tenets of our value creation plan are guided by 3 key levers: commercial growth, margin expansion and pipeline execution. Starting with commercial growth, we continue to build on the existing market demand and our robust commercial capabilities to expand sales across our portfolio. This includes deepening our penetration in existing markets and expanding into new geographies. Margin expansion remains a core priority, supported by operational leverage, optimized plasma sourcing and manufacturing efficiencies. And through pipeline execution, we continue to drive the innovations that define and sustain Grifols' leadership in plasma-derived therapies, while our Diagnostic division advances its 3 cutting-edge platforms currently in advanced development. These levers are supported by 2 critical enablers: our plasma supply and industrial footprint and our innovation strategy, as highlighted on the slide. Our resilient, diversified plasma manufacturing network represents a decisive competitive advantage in the current global environment. It ensures reliable plasma supply and production capacity, allowing us to effectively meet growing global demand. Turning to innovation, I'd like to provide an update on our pipeline. We remain on track to launch fibrinogen in Europe by the end of 2025 with a planned U.S. launch in the first half of 2026. In the U.S., we are proceeding with the FDA biological license application for congenital fibrinogen deficiency, for which we expect a decision in late December as planned. For acquired fibrinogen deficiency and based on conversations with the FDA, we have decided to build additional clinical evidence before seeking regulatory approval. This will help us well to strengthen an even more solid case to sustain the market development efforts we envision in the U.S. market for the years to come. Roland will share more details on fibrinogen shortly, but I want to mention that this decision does not affect our current Capital Markets Day plan in any meaningful way, nor does this change our long-term strategy or the significant opportunity we see ahead. Other than Fibrinogen, we are maintaining disciplined investment in R&D while advancing clinical programs across both life cycle management and new product candidates. Key initiatives, including SPARTA and alpha-1 with subcutaneous formulation are progressing as planned, underscoring our commitment to sustaining innovation, patient impact and long-term value creation. And with that, I will hand this over to Roland to expand on these and other market and business updates. Roland Wandeler: Thank you, Nacho. I am pleased to share an update on our biopharma business and highlight the key factors driving our performance this year. As we continue to deliver on our value creation plan, I am proud of the dedication, the passion and commitment our team shows every day to deliver for patients and drive forward towards the goals we set out in terms of commercial growth, margin expansion and innovation. With that, let's turn to Slide 8 for our commercial performance. In the third quarter, our biopharma portfolio grew by 10.9%, lifting our year-to-date growth to 9.1%, both at constant currency. Our immunoglobulins franchise led the way, outpacing the market with 18% growth in the quarter and 14% year-to-date, both at constant currency. This performance was driven by GAMUNEX and XEMBIFY with IVIg and subcu Ig delivering 12-month growth of 13% and 62%, respectively. We remain confident in XEMBIFY's strong trajectory, supported by continued strength in the U.S. and expansion into new markets in Europe. I'll dive deeper into our Ig franchise on the next slide. Turning to albumin, third quarter volumes remained solid, but were offset by ongoing pricing pressure in China as market demand slowed down in face of government-imposed cost controls. This resulted in a contraction of 4.5% for the quarter and 3.9% year-to-date, both at constant currency. While these dynamics were anticipated, we continue to work with our local partner, Shanghai RAAS, on how to best manage market dynamics and sustain a strong position in China as the principal market for albumin. At the same time, we are working on strengthening our presence and unlocking additional growth opportunities in the U.S. and other markets in order to help us balance albumin with our IgG growth over time. Looking at our Alpha-1 and specialty proteins franchises, we continue to make solid progress. In the third quarter, revenues grew by 3.3%, bringing growth to 4.3% year-to-date, both at constant currency. These results reflect our continued market leadership in alpha-1 and HyperRAB. I'll share more detail on this franchise in a later slide. Now let's turn to immunoglobulins or Ig as the main growth driver of our business on Slide 9. Over the last 2 years, we saw an opportunity to use our strong Ig inventory position to accelerate Ig growth, build momentum in key markets and win back market share in the U.S. We have since delivered on this plan. We have strengthened our U.S. organization and commercial capabilities, expanded subcu Ig penetration through XEMBIFY and leveraged the strong profile of GAMUNEX as a leading IVIg to win share in strategic accounts. These actions have delivered clear results. Our Ig business has posted double-digit growth over these last quarters, ahead of the market and driven by demand as we regained share in the U.S. and Europe and thus reset our position in the Ig market. Looking ahead, from this higher base, we now expect to grow more in line with or slightly ahead of the market, consistent with the 6% to 8% CAGR range we shared as part of our value creation plan. The fundamentals for continued growth of Ig remain strong, as key indications continue to be underdiagnosed and increasing global awareness of Ig as the treatment of choice in many conditions means that more patients get to benefit from our medicines with a long track record of proven efficacy and safety. Looking at our 3 main indications, growth remains solid in primary immunodeficiency, where increased awareness and better diagnosis are expanding access to therapy. In secondary immunodeficiency, the largest growth opportunity within Ig, demand continues to rise, driven by an aging population and an increase in immunocompromised patients. And in CIDP, we are seeing continued growth, albeit at a lower level after the significant step-up in diagnosis last year with the entrance of FcRns, which has helped expand this market. CIDP is a complex neurological condition with multifactorial origins, meaning the disease can present very differently across patients. This is precisely where Ig therapy stands out. With its broad and well-established range of immunomodulatory and immune-supportive modes of action, Ig can address multiple disease mechanisms and improve functional outcomes across a wide range of patients. As we build on this strong foundation, innovation continues to be a cornerstone of our Ig strategy. We're advancing next-generation products, new formulations and expanded indications that strengthen our competitive position and enhance patient experience. In terms of next-generation Igs, YIMMUGO, our novel IVIg from Biotest has launched in the U.S. in the fourth quarter of 2025, adding another differentiated therapy to our portfolio. XEMBIFY continues to gain strong traction, growing more than 60% over the last 12 months, and we're expanding into new markets through 2026. In terms of life cycle management, we are advancing new delivery formats, including XEMBIFY and prefilled syringes to improve convenience and adherence. In parallel, we are progressing with our studies to expand indications in the U.S. with GAMUNEX-C and XEMBIFY advancing in SID and XEMBIFY in CIDP. Together with our ongoing improvements in end-to-end Ig yield and operational efficiency, which will help us expand margins, this focus on innovation will ensure that our Ig franchise remains a cornerstone of sustainable and profitable growth for Grifols. Now turning to Slide 10. Let's take a closer look at our alpha-1 franchise and our strategy and progress in this area. Grifols has established itself as a leader in alpha-1 with today approximately 70% market share across both the U.S. and ex U.S. Our position is testament to Grifols' leadership in building this market, our best-in-class patient support programs and our unique testing capabilities. Despite important progress throughout these last decades, we are today still only treating about 10% to 15% of the alpha-1 patient population across the world, leaving a large unmet need and untapped market opportunity. Testing is the key to unlocking this potential. We have, over the last years, complemented traditional screening with the rollout of our point-of-care and at-home direct-to-patient screening kits. Still, we only see a part of physicians systematically testing their COPD patients for AATD. We believe that we have a possibility to change this and dramatically increase the number of diagnosed patients with the readout of our outcome study SPARTA, continued advances in AI-enabled screening of electronic medical records to highlight patients at risk as well as increasing awareness in the market for new entrants. Raising awareness and improving diagnosis remain critical levers to enhance patient outcomes and enable market growth. As a company that firsthand gets to see the continued unmet need and the difference our medicines can make for the grievous illnesses we get to treat, we always welcome innovation that raises awareness and might provide additional options for patients, especially in a condition where the vast majority remain undiagnosed and untreated. As a leader in this space, we want to meaningfully contribute to this innovation, both through our outcome study that will address important questions for the field as well as both the subcutaneous and a long-acting treatment option in our pipeline. SPARTA is the largest efficacy study ever conducted in alpha-1 antitrypsin deficiency and is designed to show clinical outcomes in real-life lung tissue preservation different from other studies primarily focused on pharmacokinetic endpoints. The results of this study have the potential to significantly strengthen the clinical and payer value proposition for augmentation therapy, increase testing awareness and improve patient access in the U.S. as well as support broader reimbursement in Europe. The trial also includes a double-dose regimen, which could represent an important advancement in treatment. We expect the readout of SPARTA in the second half of 2026. In parallel, we are advancing a 15% subcutaneous formulation and a next-generation alpha-1 therapeutic to enhance patient convenience, expand access and continue strengthening our position in this growing market. In summary, we remain confident in the continued success of PROLASTIN, supported by its value proposition and proven 30-plus year track record of safety and efficacy. Turning to Slide 11, innovation is at the heart of our business. Our pipeline reflects a focused and disciplined approach to advancing high-value programs that drive life cycle management, expand indications for our existing medicines and bring new products to market both within plasma as well as beyond plasma. We have already covered the innovation underway for our Ig and alpha-1 franchises. Turning now to fibrinogen, as Nacho mentioned, we have refined our go-to-market approach to maximize our long-term opportunity. In the near term, the largest opportunity for fibrinogen lies in Europe, where markets such as Germany and Austria have adopted fibrinogen concentrate as standard of care. For these markets, we are on track for our launch of this product later this year. We have received the end of procedure notice from Germany and are awaiting approval in this key market shortly to be followed by additional countries in Europe. We are confident that our differentiated product positions us well to effectively compete and gain share over time in these markets. Longer term, the largest opportunity remains in the U.S., where the use of fibrinogen today, though, is still low and the market has a long way to go to fully embrace this more targeted approach to bleeding management as standard of care. Here, we are on track with our BLA for congenital fibrinogen deficiency or CFD, with a PDUFA date end of December. We expect to launch this indication in the first half of 2026. As Nacho mentioned, following conversations with the FDA and observing the slow growth of fibrinogen in the U.S. over the last year, we have decided to focus our BLA on CFD for now and use the time to further strengthen our body of evidence with U.S. patients for an sBLA for acquired fibrinogen deficiency or AFD at a later point in time. While this delays our indication for AFD in the U.S., this staged approach allows us to provide access to our medicines for U.S. patients with CFD in the first half of next year, while giving more time for the market to evolve, further strengthen our position for a possibly differentiated label in AFD and set us up for a leading position in the U.S. over time. As Nacho noted, these updates do not affect our guidance and the long-term goals outlined during our Capital Markets Day, nor do they change our broader development efforts and our conviction in a meaningful opportunity ahead as the standard of care continues to evolve toward concentrate-based therapies. We remain confident in the program's progress and long-term success as we continue to invest in its global rollout for the benefit of patients. Taking a step back, while we certainly look forward to the launch of fibrinogen, our pipeline reflects our focused and disciplined approach to advance innovation and create value across all our therapeutic areas. We've already covered our advancements in immunology and pulmonology. In infectious diseases, our trimodulin Phase III trial in severe community-acquired pneumonia is progressing steadily. With its innovative polyclonal antibody profile, trimodulin has the potential to address a significant unmet need. And in ophthalmology, our ocular surface Ig program for dry eye disease in Phase II has the potential to expand use of Ig into new therapeutic areas. In the earlier stages of development, our pipeline spans both plasma-based and non-plasma programs, including a next-generation GAMUNEX process with improved yield, recombinant therapies and novel treatments for infectious diseases. Overall, our pipeline reflects a balanced mix of near-term launches and long-term innovation aligned with our value creation plan and reinforcing Grifols leadership in plasma-derived medicines aimed at driving sustainable, profitable growth for years to come. With that, I now hand it over to Rahul to provide more details on our financial performance. Rahul Srinivasan: Thanks, Roland. On Slide 12, the words continued resilience sum up not just the Grifols' financial performance, but also very aptly describes both the Grifols business that has been built over many decades as well as the Grifols spirit of our over 24,000 teammates and our shared commitment towards the Grifols mission. Slide 13. From a financial performance standpoint, Q3 was a robust quarter across the board that presents an equally robust across-the-board year-to-date picture. There have been some favorable phasing and mix benefits that have contributed to this robust year-to-date financial performance that I will elaborate on in the upcoming slides. As a reminder, our reported figures included the impact of IRA and the fee-for-service GPO reclassification, which could distort the underlying performance and hence, to improve comparability to prior periods, we will continue to disclose the like-for-like column for the remainder of the year, which we believe will be helpful to all our stakeholders. Starting with Q3 financial highlights. Net revenues of just under EUR 1.87 billion, up 9.1% versus Q3 '24 on a constant currency basis, led by Biopharma, and adjusted EBITDA of EUR 482 million, resulting in an adjusted EBITDA margin of 25.8% for the quarter. And a slightly higher impact on group profit than was the case in Q2 this year. And free cash flow pre-M&A pre-dividends for the quarter of $203 million, up meaningfully versus Q3 '24. Moving on to year-to-date financial performance. Net revenues of over $5.5 billion, up 7.7% on a constant currency basis, led by Biopharma that, as Roland mentioned earlier, is up 9.1% on a constant currency basis. Year-to-date adjusted EBITDA of over $1.35 billion is up 11.2% versus 2024 on a constant currency basis despite the impact of IRA, albeit benefiting from some phasing and favorable mix that I referenced earlier. Both gross margin and adjusted EBITDA margin are up versus 2024, notwithstanding the impact of IRA. Year-to-date group profit of $304 million is up over 245% versus year-to-date 2024. Free cash flow pre-M&A pre-dividends is up $257 million versus year-to-date 2024, and I will elaborate on the drivers of this free cash flow improvement a couple of slides later. Furthermore, the leverage and liquidity picture has significantly improved versus Q3 2024. And with secured leverage at only 2.6x, we have almost 2 EBITDA turns of secured leverage capacity, giving us material flexibility, thus rounding out the robust and improving balance sheet that is referenced in the title of the slide. And finally, I have deliberately not dwelled on the like-for-like performance that you see on this slide as we consider the impact of IRA as part of our regular cost structure now. But the numbers in this column are eye-popping, and are helpful context to the underlying momentum of the business. Slide 14. Notwithstanding the impact of IRA, year-to-date revenue growth was up 7.7% on a constant currency basis, whilst clearly Biopharma led, we also had a positive contribution from our Diagnostics business that continues to execute in keeping with our plan. As Roland alluded to earlier, the Biopharma revenue growth continues to benefit from robust underlying Biopharma demand on the back of continued Ig momentum as well as progress from our alpha-1 and specialty protein franchise. Albumin, however, is an area that we continue to keep a close eye on. And finally, year-to-date performance has benefited from some phasing-related gains that have also contributed to a 9.1% constant currency growth versus 2024. Slide 15. Year-to-date adjusted EBITDA in 2025 is at $1.358 billion, up from $1.253 billion in 2024 after absorbing the year-to-date IRA impact of $75 million with adjusted EBITDA up 11.2% on a constant currency basis and adjusted EBITDA margins improving versus 2024 by 60 basis points to 24.5%. The EBITDA growth was mainly led by Biopharma, supported by each of the following: strong volume growth aided by some phasing benefit, a favorable geographic mix adding to the phasing benefit with a proportion of EBITDA from the U.S. better than expectations and up meaningfully year-to-date, continuing improvements in CPL and finally, continued focus on OpEx discipline and driving the benefits of operational leverage. As for the IRA impact, it is broadly in line with the guidance we provided in Q2, and we expect full year impact to be between $100 million to $125 million. Whilst the impact on EBITDA of a weakening U.S. dollar is considerably more sheltered than revenues as a result of the various natural hedges in our cost structure, it has still been a stiff headwind. Whilst the weakening U.S. dollar has been the main issue from an FX standpoint, other currencies have also contributed to the total FX impact versus the FX rates embedded in our guidance for the year as set out in our Capital Markets Day presentation. Slide 16. Over the last number of quarters, we have talked about our expectation for continued convergence between adjusted and reported EBITDA on a cash basis or said another way, focusing on reducing the amount of cash adjustments between adjusted and reported EBITDA. And we are pleased to see that convergence trend on a cash basis continue over the last couple of years, and there are 3 specific outcomes that I would like to call out. Number one, continued reduction in cash adjustments between adjusted and reported EBITDA. And as you will see on this page and the detail on Page 30 in the appendix, there has been a 56% reduction in cash adjustments on an LTM basis, primarily due to lower cash adjustments pertaining to restructuring costs and transaction costs. Number two, reported EBITDA is growing at 15.7% on a constant currency basis, faster than adjusted EBITDA despite its robust 11.2% growth on a constant currency basis. And finally, three, the gap between reported and adjusted EBITDA margins is reducing. And as at Q3 '25, this gap has narrowed to 120 basis points, having been 210 basis points at the end of 2024 and 340 basis points as at the end of 2023, mainly on the back of lower cash adjustments and the convergence tends to happen rapidly, often within around 6 to 7 months, validating the credibility of these cash adjustments. We also want to proactively flag the potential of noncash adjustments in Q4 that importantly do not at all have any impact on the go-forward EBITDA growth story or free cash flow growth story. These potential noncash adjustments are simply the other side of the capital allocation discipline coin, where prioritizing our valuable capital mainly on the projects that we talked about at our Capital Markets Day in February this year, means that some other projects remain dormant or on hold and potentially there could be an impact on their carrying value. But to be clear and to repeat, we are confident that these potential noncash adjustments will not impact our go-forward adjusted EBITDA growth or free cash flow growth story. Slide 17. A quick update on our progress towards our free cash flow pre-M&A, pre-dividends goal for the year. As you will recall, we improved our free cash flow pre-M&A, pre-dividend guidance at H1 from $350 million to $400 million up to $375 million to $425 million, considerably up from the $266 million free cash flow outperformance in 2024, and we expressed our confidence that the business could do meaningfully better over time. And finally, recall that unlike EBITDA, free cash flow pre-M&A, pre-dividends is more insulated from euro-dollar volatility. The punchline on our year-to-date free cash flow performance is that we are tracking well versus our improved free cash flow guidance provided in our H1 call, as at the end of Q3, we are EUR 257 million better than we were in 2024 at the same point. The principal driver of the improving performance is greater vigilance on cash flow across the entire organization. In addition to that, improved EBITDA contribution, lower cash adjustments, tight working capital management, disciplined CapEx and capitalized IT and R&D spend and an improvement in cash interest expense as a result of debt paydown in 2024 and significantly lower utilization of RCF has supported our year-to-date progress on the free cash flow front. And more on free cash flow guidance for 2025 on the next slide. Finally, on Slide 18, updates on both capital structure and our outlook for the year. First, on capital structure. The clear tightening of our longest-dated bonds in our capital structure by over 200 basis points in just the last 3 to 4 quarters is evidence of the clear progress in the re-rating of the Grifols story. And by that, we mean not just from a credit perspective, but also our clear focus on progressing on the immense equity re-rating opportunity we believe there is. And it is also pleasing to see a number of our banking partners further corroborate the re-rating progress implied by our tightening bond yields by proactively offering meaningful upside support for a potential upsized RCF as part of the refinancing that we are targeting in H1 2026. All very helpful steps forward on the capital structure front and preparations are ongoing. We have also just a short while ago launched a harmonizing exercise to align the documentation of the 2 bonds we currently have maturing in 2030. As I alluded to before, both bonds continue to trade very positively, hence, the launch of this nice-to-have action. Before speaking about outlook, it might be helpful for us to contextualize our year-to-date performance. Notwithstanding very stiff FX headwinds and the IRA impact, our performance has been robust for the reasons we have already discussed. We have also benefited from some positive phasing and mix gains and thereby accelerating aspects of our EBITDA performance for the year, which we expect will partly reverse in Q4. When considering year-over-year comparison to Q4, please remember that we are lapping our best quarter in history from an EBITDA perspective, a quarter that itself back then benefited considerably from phasing. And taking that together with IRA and the FX headwinds, we expect a robust Q4 '25. However, it will compare less favorably to Q4 '24 in absolute terms. The team remains very focused on ensuring that we execute with the same discipline and intensity as we have all year. It is also worth reminding the market of our updates in prior quarters of the impact of a weakening U.S. dollar and how that headwind reduces as we move down our P&L as a result of the natural hedges embedded in our business, from a weaker U.S. dollar having a significant impact at the revenue level to being broadly neutral at the net income or group profit level and indeed broadly neutral on free cash flow, too. And absent any abrupt movements in FX, euro-dollar in particular, as we move to the end of the year, we expect it to be broadly neutral on leverage, too, which then leads me to the final section on guidance. On the right-hand side, we compare our updated guidance to the original guidance we provided at our Capital Markets Day on 27 February 2025 at guidance FX rates. And on the left-hand side, we estimate the full year FX impact to be roughly around EUR 70 million on adjusted EBITDA if FX rates stay as they are currently for the rest of the year versus the guidance FX rates in order to assist all our stakeholders with their analysis. As you will see on the right-hand side, our updated guidance at guidance FX rates compares favorably to the original guidance we provided at our Capital Markets Day, improving updated guidance at guidance FX rates for both revenues and free cash flow pre-M&A, pre-dividends. And on the latter, we are once again improving our guidance further to EUR 400 million to EUR 425 million. And adjusted EBITDA guidance FX rates is reaffirmed to be consistent with the original guidance provided and that we are currently tracking very comfortably within the guidance range provided, which, as I mentioned at the start of the financial performance section, speaks to the resilience of the Grifols business, notwithstanding the highly dynamic markets that we have navigated well thus far this year. With that, let me hand it back to Nacho for his concluding remarks. Jose Ignacio Abia Buenache: Thank you, Rahul. I would like to conclude today's presentation with just a few final remarks. Our third quarter results confirm that the strategic road map we set in motion this year is delivering results. The value creation plan is driving measurable progress from continued market share gains and sustained top line growth to a significant improvement in free cash flow generation. This performance underscores our focus on strengthening financial fundamentals and executing with the discipline required to turn a strategic vision into financial performance. We have also further strengthened our balance sheet through deleveraging, enhanced free cash flow generation and a disciplined financial and capital allocation. This combination provides the flexibility to invest in growth while maintaining a prudent approach to leverage and liquidity. As we approach year-end, we remain vigilant as market conditions continue to be dynamic with foreign exchange pressure and other external factors still present. These potential headwinds are being closely monitored. And as in previous periods, we are confident in our ability to respond with resilience and execution. Therefore, we reaffirm full year 2025 revenue and adjusted EBITDA guidance and the exchange rate presented at our Capital Markets Day and updated free cash flow guidance to more than EUR 400 million. Finally, I want to recognize once again the dedication of the entire Grifols team whose commitment to our value creation plan continues to drive this company forward. We are executing with focus, accountability and discipline and remain fully committed to creating long-lasting value for all our patients, donors and stakeholders. Thank you, as always, for your continued support. And with that, Danny, back to you. Daniel Segarra: Thank you, Nacho. Now let's turn to the Q&A session. [Operator Instructions]. Let's start with Charles from Barclays. Charles Pitman: Just first one on fibrinogen. Just I want to clarify what the driver there is behind the fibrinogen and AFD being delayed to the U.S. Is this kind of FDA pushback on -- is that reflective of their internal resourcing? Or is it reflective of the quality, quantity of your supporting data for the indication? Just because thinking about this asset previously, a key differentiating factor for Grifols was to be the first U.S. approved asset with both forms of the disease as part of the label. So just to your point about not impacting the midterm guidance, kind of how do you expect to be able to continue to differentiate against the competition? Or is this just set to be a very short delay? And then my other question is just for Rahul on the refinancing. Just coming back to terminology there, you're highlighting the harmonization process of the 2030 bonds. Can you confirm whether this means that you're also considering refinancing of these 2030 maturities as part of the 1H '26 targeted refinancing for the '27 maturing bonds? And just wondering, as part of that refinancing as well, is there any potential to renegotiate the terms of the GIC deal? Jose Ignacio Abia Buenache: Thank you, Charles. On fibrinogen, I think that we always have stated and have been aware of the fact that in the United States, we would need to change the standard of care, which currently is based on cryoprecipitate in order to boost the sales of fibrinogen to the level that we expected. This is a mission that we are very committed to do. We believe, based on what we see in other markets that, that certainly will bring benefit for patients. But as I mentioned, based on the conversations with FDA, we feel that it's important to bring even more solid clinical information and clinical data with U.S. patients in order to help with that standard of care. At the same time, I think, obviously, our focus in the short term is going to be to develop markets outside of the U.S. And in the U.S., obviously, with the congenital fibrinogen deficiency, certainly, we will start working with physicians for them to know and be more aware about the benefits of fibrinogen versus other alternatives. I don't know, Roland, if you want to add anything else? Roland Wandeler: Perhaps just commenting on how this compares to the plan that we laid out at the Capital Markets Day. As mentioned, today, the largest opportunity is in Europe, north of 200 million. And there, we remain on track for our launch in Germany this year, and we believe that we can differentiate and gain share in this market and actually have some opportunities in ex U.S. -- ex Europe market as well to gain share. In our considerations, the U.S. was always a slower build. And therefore, a delay of AFD at this point does not materially change our outlook in the near term. And at the same time, we believe that with a possibly differentiated label at the time of launch of AFD in the U.S., we have an opportunity to still lead that market and capture the long-term potential of north of EUR 800 million that we laid out at the Capital Markets Day. So that's where the comments come about that we don't see a change in our outlook. Rahul Srinivasan: And Charles, on the 2030 bond harmonization, that's just a harmonization exercise between the conditions or the documentation, if you like, between the 2 bonds. Your comment around 2030 refinancing, of course, we have the optionality if we so choose to refinance those. Those bonds are callable on the 1st of May 2026, if I recall correctly, which just gives us -- we have that optionality. And clearly, as you can see with where those bonds are trading today, there is value as we think about refinancing those in due course. But it is a part of refinancing options that are available to us. It doesn't have to be in 2026. We can decide on the right time for that. And then finally, on GIC, you're absolutely right, there is -- those are 8% dollar bonds and the way we look at that is at sort of unsecured risk. There is value there. Again, we -- in terms of the right time to optimize a possible redemption of that, we'll decide that in close partnership with GIC. GIC has been a partner of us for some time. We'll work through that at the right time. But clearly, there is also possible value there. In due course, we can seek to capture that from a redemption and refinancing standpoint. Daniel Segarra: Now let's move to the next one, Jaime from Santander. Jaime Escribano: So a couple of questions from my side. The first one, could you elaborate a little bit more on the dynamics of the albumin in China? Basically, if this pricing pressure comes from the offer side, so more competition? Or is it the demand or the reimbursement or the social security there that is putting lower prices? And the second one regarding also fibrinogen, just for my understanding, so it seems that there are 2 segments, so AFD and CFD. So out of the $800 million addressable market, how much is AFD and how much is CFD? Basically, my question tries to understand the short-term opportunity when you launch for CFD versus the [ additional ] indication, AFD? Jose Ignacio Abia Buenache: Thanks, Jaime. And let me start with the second one, and then Roland will address the one about China. So on the fibrinogen, I mean, it's not possible to see or to assess really what is the market opportunity right now because the market development effort needs to be done. I think that we know that at this point, the use of fibrinogen in the U.S. is limited. It's very limited. It's small. And we know as well that what is the potential that fibrinogen can have. If we managed to get the standard of care at the levels that we see in other markets like Germany or Austria. So at this point, both AFD and CFD are small. And our work is going to be to really prove and bring clinical evidence that those markets will develop to the level that we expect they will be of this $800 million Europe that over time, we are confident it will happen. And on China, Roland will comment now. Roland Wandeler: Yes. On China, the key underlying driver are the government-imposed cost controls that we talked about across the whole health care sector. That had an impact on prices and also had an impact in terms of the demand in the market slowing down. But it is important to note that while we see this impact at this moment, China remains to be the key market and the prices actually still compare favorably with other parts of the world. Also, as we think about China for the future, it's a key market for us. It's important. We believe that our partnership, our strategic partnership with Haier and Shanghai RAAS puts us in a strong position to navigate this market, and we are working to seize opportunities to realize growth in other parts of the world, particularly U.S. and ex U.S. to see how we can aid to continue to balance our albumin with the Ig growth that we foresee. So in terms of the driver, it's really coming down on this market. It's a dynamic situation, but we believe that we are in a good position to navigate this with our strategic partnership. Daniel Segarra: Now we will go to Alvaro Lenze from Alantra, please. Alvaro Lenze Julia: The first one is on the EBITDA guidance for the year. If I take the range you provided and I subtract the EUR 70 million expected FX impact implied Q4 in the lower range would be about EUR 450 million adjusted EBITDA and on the upper range would be around 500 -- sorry, EUR 500 million. That is on the low end, a 15% decline, and that would put Q4 less than either Q3 and Q2. So I don't know if there is any phasing there. I know Rahul explained the comparison base for Q4 last year is quite tough, but still in absolute terms, the low range of the guidance would look a bit underwhelming. So I was just wondering what your thinking process for that guidance was. And then a second question would be, you mentioned some impairments for Q4. I just wanted to know what sort of assets are you thinking of for the impairment and when did those assets join the balance sheet, just to understand whether you are looking at past or very old investments that you no longer think are as valuable as represented in the balance sheet or if it's more recent investments that you're cutting? Rahul Srinivasan: Sure. Let me start with the second one on impairments. It's certainly, as you -- as I mentioned in my prepared remarks, we laid out at our Capital Markets Day, R&D and innovation plan and none of those from our standpoint are impacted at all. This really is some of the efforts in our portfolio that perhaps have not had the prioritization from a capital standpoint. And all we're doing is proactively flagging that. But importantly, Alvaro, this does not impact our go-forward adjusted EBITDA growth story or indeed our go-forward free cash flow growth story. So just to give you an idea that just in terms of lower prioritization in terms of -- from a project standpoint. So that's on the second question. On the first question around guidance and ranges, I said 2 things on our -- as I described the guidance. One, I said we are very comfortably within our guidance range for adjusted EBITDA. And then the other thing I said is we expect a robust Q4 2025. The only thing I caveated there was that the absolute comparison versus Q4 '24 that also benefited meaningfully from phasing last year is something that we just wanted to make sure that we prudently guided on. But from our standpoint, as you look at those ranges, I think the bottom end of the range that you feel very comfortable about managing and beating, and, as we've always done, focuses head down on execution with discipline and intensity. So we'll see where we get to, but we're tracking on that basis. And what we want to do is make sure we flag the phasing aspects as we've done. Daniel Segarra: Thank you so much. Now we would like to get Charlie Haywood from Bank of America. Charlie Haywood: Charlie Haywood, Bank of America. Two questions, please. First one, unless I've misunderstood, could you clarify what the FX headwind to your reported revenue guide would be for the full year? And then just on the sort of FX impact, what specifically on FX has changed since second quarter when, I guess, guide was reiterated and there wasn't an implied FX impact there? And then the second question, just wanted to get your thoughts on, obviously, the competitor readouts we've had in alpha-1, your confidence in rebuttal of that, especially on the margin level, which I understand is slightly higher than your standard products and given also fibrinogen delay today might lead to more of a margin impact. So just high-level thoughts on how you can rebut that impact. Rahul Srinivasan: Thanks, Charlie. I'll take the first one. So if you go back to our Q1, go back to our Q2 and indeed repeating now in Q3, we've been consistent around the headwind of U.S. dollar weakening on EBITDA. But remember, it remains broadly neutral from a leverage standpoint and indeed broadly neutral from both the group profit, bottom line net income and from a free cash flow standpoint. Number two, you will also -- if you go back to each of those presentations, you will also see that we have been reiterating, I think, Q1 and Q2, we've always taken you back to the basis on which guidance was provided, and there's no change in that respect now in Q3 either. So that's why we're always saying is that as you compare our our guidance or implied guidance now relative to -- on a guidance FX rates basis, we continue to track well from a revenue and free cash flow standpoint, in fact, improved and maintain the -- or reaffirmed guidance from an EBITDA standpoint. Equally, we want to make sure that we are being completely upfront. We provided a sensitivity analysis in Q2. And what we're trying to do now is just give you a number if the rates as at the end of Q3 persists through to the end of the year, what that implies from an adjusted EBITDA headwind. The question around revenue impact, we've not provided that. But I mean -- but if you just assume that roughly about 2/3 or 65% of our revenues is U.S. dollar-denominated. And if you do the rough math around that, depending on what your exchange rate assumptions are for the rest of the year, that could have an impact of anywhere between $300 million to $400 million, give or take. But on the basis of the guidance FX rates, we are guiding to an improved revenue guidance for the year. So let me leave it at that. And on the second question, I'll hand it over to Roland. Roland Wandeler: Yes. On alpha-1, we always, as part of our plan, assumed positive top line data of the pharmacokinetic endpoints. So this was as we expected. What we hear from thought leaders are basically 2 questions at this point. One is waiting to see the detailed data and understanding safety of this recombinant approach. And the second question is around the pathway to approval. And we're obviously also eagerly waiting to see what this means. But as we think about Alpha-1, we just want to bring it back to the immense opportunity that still remains. We only are treating 10% to 15% of patients today, which means 85% of patients are undiagnosed. And we just saw with CIDP how a new entrant can actually dramatically improve and accelerate diagnosis. Beyond that, we know that with our outcome study, SPARTA, we have it in our hands to raise awareness of this disease in the U.S. and ensure that we can have a broader reimbursement in Europe, which gives us a growth lever. And then lastly, as we mentioned, we're excited about our subcu treatment, 15%, which we're advancing into Phase III and planning to submit an IND there in the coming months and our long-acting option. So as we look in -- at this market, a new entrant, but most importantly, the growth opportunity that this market has, we remain committed and confident about alpha-1. And as you think about fibrinogen concentrate, as we outlined, the path to growth is not materially affected by what we just shared. We are still in a position to compete and possibly accelerate our uptake ex U.S. and we have an opportunity to strengthen our positioning in the U.S. and see that we can lead in this market in the long term. Daniel Segarra: Thank you so much, Roland. I appreciate the question, Charlie. Next up is Thibault from Morgan Stanley. Thibault Boutherin: Just on the free cash flow guidance, so obviously, versus beginning of the year, EBITDA and change at constant currency, I mean, using February FX as a base, free cash flow guidance has been upgraded a couple of times since. If you can just remind us the moving parts in between for the free cash flow improvement and any risk of seeing some of these elements reversing in the future? So for example, working capital, if you could comment on your expectations for working capital position at the end of the year and what it means for potential reversal in Q1 next year? Rahul Srinivasan: Yes. So just -- so your question is on just the various constituent parts of our free cash flow improvement. You're absolutely right in that we have improved our guidance on free cash flow a couple of times this year. The drivers of that free cash flow improvement come from the improved EBITDA on a year-to-date basis, our adjusted EBITDA is up meaningfully. And even if you eliminate some of those cash adjustments, they continue to track very well compared to 2024. On a net working capital basis, we talk about tight working capital management, notwithstanding the impact of a depreciating dollar on just sort of inventory levels and so on, our inventory levels continue to be managed on a tight basis as is the case on both from a receivables and payables standpoint. So that is tracking well and tight. As you look at CapEx and capitalized IT and R&D, clearly, we are -- as we anticipated at our Capital Markets Day, we saw 2024 as being a sort of a peak from a total CapEx. And here when we talk about CapEx, I also include what we used to refer to as extraordinary growth CapEx previously. So the total CapEx number to sales was at a peak in 2024. And all that's happening here is it's playing out as we expected, prudent and disciplined CapEx spend. And then finally, as you look at interest cost, we had the significant deleveraging benefit in 2024 from the partial disposition of our Shanghai RAAS stake that has helped leverage, helped debt redemption. And in addition to that, what has also helped significantly is our meaningfully lower utilization of RCF from a financing standpoint. So all of that translates to free cash flow improvement of $257 million versus last year. As I look at the picture for the rest of the year, we remain confident about executing on our improved guidance of $400 million to $425 million for free cash flow pre-M&A, pre-dividends for 2025. And then -- and with respect to the impact in 2026, we will cover that off when we provide guidance in -- at the end of February next year. But certainly, we're not anticipating significantly different variations. If you recall, in Q1 this year, we had a meaningful improvement from a free cash flow standpoint versus Q1 2024. And one of the things that we will seek to do is maintain that to the extent possible. But that's something that we'll pick up in a bit more detail when we provide our guidance for 2026 at the end of February next year. Daniel Segarra: Thank you so much, Rahul. Very clear. Guilherme, I think that you were waiting. Guilherme Sampaio: Yes. So 2, if I may. The first one, I assume that the Ig growth acceleration was positively impacted by some pricing benefits that you alluded to, but also some volume gains in the U.K. You're guiding for a slowdown in terms of [indiscernible] growth going forward. Just to understand a bit how going to be the phasing between Q4 and Q1, taking Q1 as a potential reference for going forward. So this 6% to 8% is something that we should consider only for Q1 and Q4 could be a bit below these references? Or is the run rate -- the 6% to 8% is the run rate that we can assume going forward? And second question regarding 2026. So from your comment, I assume that we should expect a lower underlying growth, at least in Biopharma. But the FX typically has a positive impact in terms of margins, the weaker U.K. U.S. dollar. So at the Capital Markets Day, you guided for a uniform margin progression across the plan. This less favorable effects on the absolute EBITDA standpoint could impact positively margins. So we might have in 2026, a faster margin expansion than what you were planning in the Capital Markets Day? Roland Wandeler: Guilherme, happy to add a bit more color on the Ig side. As you may recall, in our Capital Markets Day, we said that we aim to grow Ig in line or slightly ahead of the market and gave that 6% to 8% CAGR rate, which just reflects the potential that Ig has, and we expect it to be in there. The other part that I want to just bring up again is you may recall that in the 2023 call, leadership at the time announced a plan to win back share in the U.S. During the pandemic, we have lost share in the U.S. and we have announced that we want to win it back. We have since executed on this plan using a strong inventory position that we had at the time, and that translated into this double-digit growth, well, well ahead of the market during this time. We have since regained the market share and at this higher market share, we now expect to grow in line with the market or ahead of the market. So from that perspective, I would look at these last 2 years as our ability to actually reposition us in the market and from here to grow with or ahead of the market moving forward. Rahul Srinivasan: And then finally, on the question around margins. No real change in terms of the building blocks driving our margin improvement story over the coming years. And with respect to what we had guided from a margin standpoint for 2025 was adjusted EBITDA margins to be in line with 2024, having fully absorbed the impact of IRA. And year-to-date, we're doing exactly that. You can see on a like-for-like basis and even on a year-to-date basis, our margin improvement is up. So that remains the story for 2025. And with respect to 2026 and beyond no change, we will update the market with respect to 2026 guidance specifically when we come to it at the end of February. Daniel Segarra: Thank you, Roland. Thank you, Rahul. We have time for the very last question. It's going to be Justin from Bernstein. Justin, please. Justin Steven Smith: Yes. Justin from Bernstein. Just a quick one on fibrinogen, and apologies if I've missed some remarks here. But when you talk about the new evidence that you need to bring, are we talking about new clinical data? If so, could you just share some thoughts on execution risk there? I mean, is it a case with acquired patients? It's quite difficult to locate those patients and run the trial. So any thoughts there would be very helpful. Roland Wandeler: Yes. The one thing to highlight is that we are obviously looking at the study in the U.S., and we have different proposals on the table, and we'll be looking at the best way with an eye on making sure that this obviously helps us with speed to the market at the same differentiation possibly in our label. And we do not see an execution risk there. We see the need and interest to conduct a trial like that. Daniel Segarra: Okay. Thank you so much, Roland. I say that was all for now. Thank you so much for all your questions and for joining us today. If there is any follow-up, please let us know. There is an IR team dedicated for that. Thank you so much.
Operator: " Robin Sidders: " Wasef Jabsheh: " Waleed Jabsheh: " Michael Phillips: " Oppenheimer & Co. Inc., Research Division Operator: Good day, and welcome to the International General Insurance Holdings Third Quarter and Nine-Month 2025 Financial Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Robin Sidders, Head of Corporate Relations. Please go ahead. Robin Sidders: Thanks, Bailey, and good morning, and welcome to today's conference call. Today, we'll be discussing the financial results for the third quarter and the first nine months of 2025. You will have seen our results press release, which we issued after the market closed yesterday. If you'd like a copy of the press release, it's available in the Investors section of our website. We have also posted a supplementary investor presentation, which can be found on our website on the Presentations page in the Investors section. On today's call are Executive Chairman of IGI, Wasef Jabsheh; President and CEO, Waleed Jabsheh; and Chief Financial Officer, Pervez Rizvi. As always, Wasef will begin the call with some high-level comments before handing over to Waleed to talk through the key drivers of our results for the third quarter and the first nine months of 2025 and finish up with our views on the market conditions and outlook for the remainder of this year and the upcoming January 1, 2026, renewals. At that point, we'll open the call up to Q&A. I'll begin with some customary safe harbor language. Our speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words. We caution you that such forward-looking statements should not be regarded as a representation by us that future plans, estimates, or expectations contemplated by us will, in fact, be achieved. Forward-looking statements involve risks, uncertainties, and assumptions. Actual events or results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors set out in the company's annual report on Form 20-F for the year ended December 31, 2024, the company's reports on Form 6-K and other filings with the SEC, as well as our results press release issued yesterday evening. We undertake no obligation to update or revise publicly any forward-looking statements, which speak only as of the date they are made. During this conference call, we use certain non-GAAP financial measures. For a reconciliation of non-GAAP financial measures to the nearest GAAP measure, please see our earnings release, which has been filed with the SEC and is also available on our website. With that, I'll turn the call over to our Executive Chairman, Wasef Jabsheh. Wasef Jabsheh: Thank you, Robin, and good day, everyone. Thank you for joining us on today's call. IGI once again delivered excellent results both for the third quarter and the first nine months of 2025. We generated net income of $33.5 million and $94.9 million for the third quarter and first nine months, respectively. And this resulted in an annualized return on average equity of 20% for the third quarter and 19% for the first nine months of the year. We continue to outperform and deliver superior results even in what is becoming a more competitive marketplace. We have consistently demonstrated our ability to perform well no matter where we are in the market cycle through focus, discipline, and consistent execution. That really is the hallmark of our strategy and why we have successfully managed the cyclicality of our business for well over two decades. Our value at IGI is in our ability to actively manage our capital so that we generate consistently high-quality returns in any stage of the market cycle. So far, in 2025, in addition to strong earnings, our active capital management has resulted in us growing book value per share by almost 10% to $16.23 per share in the first nine months of the year and returning a total close to $100 million to shareholders in dividends and share repurchases. Before I hand over to Waleed, I want to congratulate all of our people at IGI on the tremendous news of our S&P financial grade upgrade to A with a stable outlook. When we started writing business back in 2002, we were unrated. It was only three years later, in 2005, that we assigned our first rating of BBB from S&P. To see how far we have come since the early days of IGI through sheer hard work and decision focus gives me immense pride. We have grown largely organically from $25 million of initial capital to almost $700 million in shareholders' equity. This is quite an achievement. I will now let Waleed discuss the numbers in more detail and talk about market conditions and our outlook for the remainder of the year, and I will remain on the call for any questions at the end. Waleed, please go ahead. Waleed Jabsheh: Thank you, Wasef, and good morning, everyone. Thank you all for joining us on today's call. Just reiterating what Wasef emphasized at the beginning, we had an excellent third quarter with strong underwriting and investment performance, leading to a very solid bottom-line result. As Wasef indicated, I mean, we're in our strongest position ever as we close out 2025 and look ahead into 2026 in what is becoming a more challenging environment. But before I go through the numbers in detail, I'd like to highlight a couple of important points to begin with. First, as Wasef mentioned, the recent announcement from S&P that they've upgraded our financial rating to full A, I mean, this really is a fantastic achievement for us. And while it's very difficult to quantify the short-term benefit, the upgrade undoubtedly will open more doors for us to new business and more clients and cedents as well. Like Wasef, I'm also extremely proud of this outstanding achievement. And I congratulate all our teams on the strong track record and the foundation that we have built together at IGI. I would note that this doesn't really change anything about the level of capital we hold. We've always held capital to the highest level of S&P's capital adequacy and confidence level requirements, and we'll continue to do so. Second, you will have seen our announcement this morning that our Board has authorized a new $5 million common share repurchase authorization, now that we've exhausted the prior program of 7.5 million shares. We view share repurchases as a strong value generation lever. And at current levels, we believe that repurchasing our shares is highly accretive and excellent value for our shareholders. So as always, we're working with all the tools we have in our toolbox, and that's really what cycle management comes down to. Now moving on to the results of the third quarter and the first 9 months. We'll start with the top line, where gross premiums written in Q3 were just over $131 million, reflecting a decrease of about 5%, driven by a slightly lower volume of GWP in our reinsurance segment and much more so in our long-tail segment. And now this is a segment, as we've been saying for several quarters now. It's a segment where competitive pressures are more prevalent and where we also made a decision, as mentioned on last quarter's call, to non-renewal large PI account. For the first 9 months, gross premiums were up marginally to just over EUR 525 million, and that was primarily driven by growth in the reinsurance segment and, to a lesser extent, the short-tail segment. Net premiums earned were just under $115 million for Q3 versus just over $126 million for the same period last year. For the first 9 months, net premiums earned were $342.5 million versus $362.5 million for the previous year. For the first 9 months of 2025, the net premiums earned included the impact of reinstatement premiums. We've mentioned on previous calls, reinstating premiums is are loss-affected business, mainly on losses incurred in the early part of the year, which amounted to just over $11 million. I'll say again that we are strategic buyers of reinsurance to help mitigate really the volatility in some of the high-severity lines of business we write. Combined ratio for Q3 was 76.5%, and that had the benefit of about 4.5 points of positive currency revaluation in the quarter due to the strengthening of the U.S. dollar. The third quarter was also relatively benign from a large loss perspective. That's versus the 86% combined ratio for Q3 of last year. We noted the impact of currency revaluation on our results during last quarter's call as well as the previous quarter's call. During Q3, the U.S. dollar strengthened against our major transactional currencies. So this had the opposite impact during the quarter than what it did during the first 2 quarters of the year when the U.S. dollar weakened. The impact, however, during the third quarter is much less significant and much more immaterial. For the first 9 months, the combined ratio was just over 87% with a combined ratio of just over 87% includes the negative impact of about 7.5 points of currency revaluation, which, as I said a moment ago, had a negative currency impact for the first 2 quarters, slightly offset by the positive one in the third quarter. Again, as well as the lower volume of net premiums earned, from the reinsurance impact I mentioned earlier. This is versus an 80.5% combined ratio for the first 9 months of 2024. All in, we delivered net income of $33.5 million per share for the quarter versus $34.5 million for the same period in 2024. That resulted in $0.75 for both quarters per share, net income of $0.75 per share. For the first 9 months of the year, we generated net income of just under $95 million or $2.14 per share, versus just over $105 million or $2.31 per share for the first 9 months of last year. The period-over-period decline in net income for the same reasons in the first 9 months results lower level of underwriting income due to the currency revaluation movements and again, the higher level of net reinstatement premiums paid on our outwards reinsurance programs. Core operating income was $38.6 million or $0.87 per share in Q3, compared to $30.7 million or $0.67 per share for the same period the year before. First nine months of '25 core operating income was just under $81 million or $1.82 per share, versus just under $104 million or $2.29 per share. With the difference primarily attributable to the lower level of underwriting income, which for that period was negatively impacted by almost $24 million of currency revaluation movements, as well as heightened loss activity from the beginning of the year, which amounted to about 13.4 points of current accident year CAT losses in 2025. Prior year development was favorable in Q3, amounting to about $10.5 million versus unfavorable development of $7 million for Q3 of 2024. For the first nine months, prior year development was favorable by $30 million versus $34.4 million for the same period last year, with the lower volume in 2025, primarily attributable to currency revaluation of about $20 million. So on a constant FX basis, we would have seen favorable development of approximately $50 million for the first nine months of this year. The G&A expense ratio was 21.3% and 20.5% for the third quarter and first nine months of '25, respectively, which, when compared to the same period in 2024, were just impacted by the lower level of net premiums earned. A few comments on our segment results. I'll start with the short-tail segment. Gross premiums were up 2% in Q3, down 2.7% for the first nine months of the year when compared to the same periods in 2024. Net premiums earned were down about 10.4% and 8.1% for Q3 and the first nine months of '25, respectively, compared to the same period last year. The decline for the nine-month period reflects the lower level of written premiums as well as the impact of the reinstatement premiums on our reinsurance purchases. Underwriting income was down 14.7% in Q3 versus the same period last year, largely due to the lower level of net premiums earned again. For the first nine months, underwriting income was just over $80 million, down 12% when compared to the first nine months of last year. I mean, similar to what we said on last quarter's call, we continue to see new business opportunities in a number of lines, particularly engineering and construction, and marine lines, and to a lesser degree, contingency and property lines. Broadly speaking, pricing remains adequate. Engineering, in particular, continues as a healthy growth opportunity with infrastructure projects and opportunities coming to many of our markets across the globe. And we're seeing a healthy pipeline of deal flow in this line of business, though competitive pressures are there. The reinsurance segment, as we've said, is well diversified geographically and by business line, and generated gross written premiums of just over $11 million in Q3, slightly below the same period in the same quarter last year. In the first nine months now Q3 is not a significant renewal quarter for us. So in the first nine months, which is a more accurate representation, gross written premium growth was almost 25% on the reinsurance segment to just under $98 million when compared to the same period in 2024. Conditions generally remain strong, pricing adequate in the business that we write here. But as I'm sure you've heard from everybody else, there's increasing evidence of competitive pressures, which is also what I noted in my comments earlier. Earned premium was generally flat in Q3 this year versus last year, but more than 21% in the first nine months of this year when compared to the same period last year. Underwriting income was up 35% and almost 50% for Q3 and the first nine months of '25, respectively, when compared to the same period last year. The significant increase in underwriting income in this segment reflects really the shift in focus, which we always talk about that we made a year ago to higher margin areas of the business, in this case, obviously, the reinsurance business, and we're now seeing this flow through the financial results. Long-tail segment continues to be the area of our portfolio that has definitely been the most challenging for the past several years, with increasing competitive pressures and consistently declining rates and thus, obviously, margins, albeit from high levels. We, as you can see in the numbers, have steadily contracted the book during that time. I mean, you'll recall on last quarter's call, we announced the decision to non-renewal a roughly $50 million GWP professional indemnity account where the profitability profile was simply not meeting our requirements, was out of step with our required threshold, and unlikely to improve in the near-term. From a top-line perspective, this had some effect in the third quarter and resulted in a big chunk of the overall decrease in GWP in Q3. But the most significant top-line impact of this, which is roughly going to be about $25 million, will be seen in the fourth quarter of 2025. And as we said on last quarter's call, the rest will be spread out over the first 2 quarters of next year. In the third quarter and first 9 months of '25, gross premiums in this segment were down 12.6% and 7.5%, respectively. We recorded underwriting income of around $11.5 million for the third quarter versus an underwriting loss of $1 million for the same quarter last year. For the first 9 months, we recorded underwriting income of $1 million versus just over $25 million for the same period in 2024. And as we mentioned in the first 2 quarters with the difference was largely due to the negative impact of currency revaluation movements, and that amounted to about $17.5 million in the first 9 months of the year. The one thing I would say here is that the pace of rating decline continues to slow in the lines of business that we're writing. And whilst it would be a bit premature to predict any turnaround in these markets, we're hopeful that there will be signs of improvement in 2026 and into 2027. Obviously, that comes with a big caveat. Turning to the balance sheet. Total assets increased by just over 4% to $2.12 billion. Total investment cash was $1.32 billion. Our allocation to fixed income securities, which makes up approximately 80% of our investments in the cash portfolio, generated just over $13 million in investment income in Q3, which was flat in the same period in '24. For the first 9 months, investment income increased just under 7% to $40.6 million with an average annualized yield of 4.2%. And we hedged out our duration slightly to 3.7 years during the quarter just to lock in higher rates on new bonds. In Q3, we repurchased almost 800,000 common shares at an average price per share of $23.79. As of the end of Q3, we had exhausted the $7.5 million repurchase authorization. And as I noted at the start of the call, we announced that our Board has approved a new repurchase authorization of 5 million common shares. Total equity was just under $690 million at the end of Q3, and that includes the impact of $53.8 million in share repurchases and the payment of just over $44 million in common share dividends, including the special dividend that we distributed earlier this year in April of $0.85. This compares to the total equity of just under $655 million at the end of last year. Ultimately, we recorded a return on average shareholders' equity of about 20% for the third quarter and about 19% for the first 9 months of 2025. So from a total return perspective, we grew book value per share by almost 10% in the first 9 months up to September 30, and we returned a total of about $98 million to shareholders in share repurchases and dividends in that same period. So all in, it was an excellent and great quarter and first 9 months of the year for us. Now turning to our outlook for the remainder of the year and the next major renewal period at 1/1, which is only a few weeks away now. The story is fairly similar to what we've said on last quarter's calls. There's very clearly an elevated level of competitive pressure across much of the market. But I would characterize it mostly as orderly and quite disciplined up until now. Given our size, our relative position in the market, the makeup of our portfolio, and the actions we've taken in recent years to enhance our visibility and our scope of offering, we're confident that we will continue to find opportunities to grow our portfolio, write new business. Obviously, there are pockets where there's more pressure than others. But as we've always said, we have that ability to shift focus to those areas where we believe the best returns are going to be generated. And that's always part and parcel of how we conduct our underwriting business. We continue to see rate adequacy across much of our portfolio. And I think with our strong network of relationships, we're continuing to pursue opportunities to enhance our distribution capabilities, and that will ultimately generate additional margin and add value to our proposition. We're focusing on those lines and markets that remain healthier. And where necessary, we're reducing our exposures in areas where we can't generate an acceptable level of risk-adjusted return. Again, all part and parcel of the dynamic cycle management required. I mean the benefit of our diversified strategy, both by line of business and geographical territory, means that we can still and will still find profitable opportunities to write new business across many lines and geographies within our portfolio. I mean, we've done a good job of uncovering these opportunities, and I commend our underwriters for their efforts on really getting out there and working their relationships and pushing to find those opportunities. And without a doubt, the rating upgrade from S&P will benefit us here and again; it surely will open doors for us and move us up the so-called league tables and what is acceptable security, which is critical, given where we are currently in the market cycle. So the timing of this upgrade is not lost on us. And I would say it is particularly fortuitous. Having said all that, given that the market, broadly speaking, is softening, it would definitely be a reasonable assumption that we're likely to see some contraction in top line in certain areas of our portfolio where we decide to walk away from business that simply does not meet our embedded profitability and/or coverage targets. And that's the discipline we talk about so often. We've talked on prior calls about the strengthening of domestic markets across the world and the growing desire and the ability to retain business in those domestic and local markets. Our strategy, as we've said all along, has our people with the required expertise, a specialist expertise situated in most major regions across the globe, which is a clear benefit when we're on the ground, have the ability to interact face-to-face, and understand the dynamics of how business is transacted in those local markets. I mean, if we look at specific segments of our portfolio, I'll start with the reinsurance lines. Margins here remain very healthy and carriers are mostly behaving, as I mentioned earlier, in a relatively disciplined manner from a structure, terms, and wording perspective. Because of this, this is also where we're seeing the greatest push for market share. You may recall our recent announcement that we brought on board a seasoned London market specialty treaty underwriter last week, and this will complement our existing U.S. and international treaty team, while also developing our specialty treaty business with a focus on certain lines such as marine, energy, terror, PV, as well as aviation and cyber. This is where we've had a limited presence, and we haven't really had any dedicated resources to focus on these areas. And definitely, again, here, in particular, the S&P upgrade will help quite a bit. Our short-tail portfolio, as you know, is traditional property, energy, marine books, as well as some other pure specialty and niche lines. That remains a bit of a mixed bag as it has been for several quarters now, and overall continues to be a little tougher than a year ago. I mean, similar to reinsurance, where carriers tend to take big lines, the most significant pressures continue to be on property and energy, where the line sizes in those lines of business are, by nature, larger. We recently added senior talent to our property team focusing on the U.S., and we're adding to our energy team, specifically in downstream and power, and renewables. And that is a reflection of the opportunity we believe continues to be there in these lines of business. As I mentioned earlier, I mean, we continue to see healthy opportunities in some of the more specialist lines like construction and engineering, specifically some of the smaller projects in the U.S. and also in other regions like Asia Pac and the Middle East as well. Elements of the marine book, cargo, in particular, continue to be steady and present new opportunities to us, especially in the niche segment of the cargo market that we focus on. Contingency has been a great line of business for us in a very bright spot. And you'll recall that we entered that market after COVID. And since then, we've built a market-leading book with an amazing team. In our long-tail segment, net rates overall are still relatively adequate, but that adequacy is reducing as rates come down. But as I said earlier, the pace of rating decline continues to slow at a modest rate. And again, I don't want to go out of the NIM here, but there are indications there may be some brighter news later in 2026 and in 2027. Again, this comes with a big caveat. The PI business, which is the largest portfolio in this segment, is, as we've said before, largely facilitized. But I mean, there's been a fair bit of talent movement here with underwriters moving or setting up shops. And that with our relationships across this business, that's providing us some new opportunities and a good deal of flow, especially in the more niche segments of the PI market. In the geographic markets, I'll say a few words here. Again, a similar story as last quarter. The U.S., whilst competitive pressures are increasing, remains a big focus for us and presents probably one of the bigger opportunities for us to write new business, especially in our specialty treaty and short-tail portfolios. I mean, simply also because of the sheer size of IGI compared to the sheer size of the market. We also remain focused on building our profile, as we've mentioned many times before, across Europe and growing the profile in the MENA region and Asia Pac markets. As I mentioned earlier, they're all retaining more business locally, and we've got the network to capitalize on that. So our expanded presence and capabilities on the ground here will definitely continue to pay benefits. So we're clearly, I mean, at the stage of the broader cycle where portfolio and exposure management is critical. I mean, I cannot emphasize this enough, so I'll keep saying this again that we will not sacrifice the bottom line for the benefit of the top line. It really is all about discipline right now. intelligent risk selection, paying attention to the small print, and being aware of what's going on around us. That's what the prudent management of the cycle and sound management of the cycle is all about. I mean, we're coming off 5 years of excellent profitability. And I say that not just about IGI, but the broader market as well. It's not difficult, in all honesty, to do well during a hard market. But good underwriters don't just do well in hard markets. They do well throughout any and all stages of the cycle. And that is what we have at IGI, and that is the talent we attract and retain, and that is the discipline we exercise. We have the right strategy and the right footprint. We've built great teams and put the right people in the right places, and we've built a very solid foundation, a very well-diversified portfolio, particularly given our size. And all this is backed by a fully unlevered and solid balance sheet. We have a proven track record, and IGI's visibility in the market has improved dramatically over the last few years. That is what's earned us our recent upgrade, and that is what gives us the resilience to succeed throughout market cycles. So, rest assured, we'll continue doing what we do best, which is to focus on generating superior value for the long term with a razor-sharp focus on underwriting profitability, quality, and bottom line. I'm going to pause here, and we're going to turn it over for questions. So, operator, we're ready to take the first question, please. Operator: [Operator Instructions] The first question comes from Michael Phillips with Oppenheimer. Michael Phillips: Well, I always appreciate all your comments on the market conditions. I guess another good quarter on the margin side, you're fighting the tape that the industry is fighting on the top line. I guess with that, on the long-tail side of your business, the segment there, can you talk about are you closer to the point with rates declining? I think you said in your ending comments there that the pace of decline is starting to slow; maybe it's not good news. But are you closer to the point where the nonrenewal account that you did last quarter? I know you constantly look at that. Are you close to the point where there might be others that are not meeting your threshold that you kind of have to walk away from? Waleed Jabsheh: Michael Phillips, thanks for the question. The simple answer is no. That book of business that we walked away from had its particular characteristics and segment that you can simply isolate in terms of the niches and the behavior of the market in that regard. So outside of that, no, there isn't anything on our screens that we are contemplating walking away from. If anything, we're identifying other segments of the PI market. As I mentioned on the call, people moving shops, wanting support, whilst I can't go into lots of details at the moment, but these are underwriters that we know very well, have some of the strongest track records in the market, understand their businesses inside out, and are looking for support. We're trying to capitalize on those opportunities where we can access portfolios of businesses that we deem extremely healthy that can more than make up, especially on a net written premium basis, can more than make up for the PI account that we walked away from. Michael Phillips: I guess maybe turn to the reinsurance segment for a second. There, it seems like we're getting closer to 1/1 renewals here. And as you said, year-to-date, you're up, and the third quarter is not a big renewal period for you. But as you look at the beginning of the year here, do you think that there's going to be more pressure on the top line for your reinsurance book than what you've seen in 1Q each quarter each year for the past couple of years has been pretty strong. This quarter this year might challenge that. I guess what are your thoughts on reinsurance if we enter 1/1? Waleed Jabsheh: I mean, listen, Q1 this year was strong. Q1 last year and the year before were very, very strong because we were in a different stage within the cycle for the reinsurance market. There's no doubt about that. Is that going to continue? Of course, it's not going to continue because you're seeing pressure coming in, where, following a very benign wind season this year, we've got less than 2 months left in the year. If barring any major events in that time period and ahead of discussions and negotiations for the 1/1 business, the market is going to generate another great set of results, generate excess capital, and that's going to put pressure on feeling that capital. Is Hunger going to increase as we stand today at 1/1? I have no doubt that it will. One thing that you need to take into consideration, number one, we're adding the specialty bit. So that's a new source or relatively new source of income for IGI. And number two, our book is so diverse by business line, by geography. It's not your traditional large reinsurer type portfolio, not your traditional European reinsurance portfolio, traditional Bermudan reinsurance portfolio, or U.S. reinsurance portfolio. So, we've got a lot of levers to pull here. And we've said this before, and I'll say it again, Mike, ultimately, this is not a top-line game. We are in this for underwriting quality, underwriting profitability. And I think I recall a comment I said to you a couple of quarters ago, I'd rather write a $700 million book generating 80% combined ratio rather than $1 billion book generating a 90% or 95% combined ratio. We are underwriters, plain and simple. We manage the cycle. But I do see runway for us in reinsurance, definitely, as we, would you call it, enter into new areas, not just in specialty, but others. We've got a team across the globe, honestly, that pretty much understands what they're doing. And you can see that in the results. We put emphasis on reinsurance a couple of years ago, and we said that's where the area where we think the healthiest returns will be generated. And as you're seeing now, that's exactly what's happening. Michael Phillips: And I'm glad you reminded me of the quote that you gave a couple of quarters ago. That was one of my favorite quotes all the time. You'd rather focus on the bottom line, and you guys do that. I guess, given your comments, your reinsurance book, as you said, is not traditional large reinsurance. So maybe just lastly, to the extent you can comment on industry comment here, in the U.S., we're hearing a mixed story. Some reinsurers are saying that large account property has reached a floor and will start to improve from here. Others are saying, heck, a way, it's still going to continue to decelerate from here on large account property in the U.S. I don't know if you have any perspective on that or not. I appreciate it. By large account property, you mean risk covers or cat covers? Waleed Jabsheh: Risk covers, yes. Michael Phillips: Risk covers. Waleed Jabsheh: I don't think it's bottoming out, to be totally honest with you. That's not what we're seeing. But again, that's not an area we play in hugely, especially on a reinsurance basis. But I think the hunger will continue to be there at 1/1. I don't anticipate things turning in the opposite direction in that area. But again, I would say I'm not the best person to answer that question. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Waleed Jabsheh: Just some final words. Again, thank you for joining us today. Thank you all for your continued support of IGI. If you have any questions, as always, you can contact Robin, and she'll be happy to assist. And we look forward to speaking to you on next quarter's call. In the meantime, I wish everybody a Merry Christmas and happy holidays. I know it's a bit early, and happy New Year to all. Thank you. Operator: The conference has now concluded. You may now disconnect.
Operator: Good morning, and welcome to the Sabre Third Quarter 2025 Earnings Conference Call. My name is Olivia, and I'll be your operator. As a reminder, please note today's call is being recorded. I will now turn the call over to the Senior Vice President of Finance, Roushan Zenooz. Please go ahead, sir. Roushan Zenooz: Good morning, and welcome to our third quarter 2025 earnings call. This morning, we issued an earnings press release, which is available on our website at investors.sabre.com. A slide presentation, which accompanies today's prepared remarks, is also available during this call on the Sabre Investor Relations web page. A replay of today's call will be available on our website later this morning. We advise you that our comments contain forward-looking statements that represent our beliefs or expectations about future events, including results of our growth strategies, transactions and bookings growth, commercial and strategic arrangements, the effects of the sale of our Hospitality Solutions business and our financial guidance, outlook and expectations, pro forma financial information, free cash flow, net leverage and liquidity, among others. All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's conference call. More information on these risks and uncertainties is contained in our earnings release issued this morning and our SEC filings, including our Form 10-Q for the quarter ended September 30, 2025. Throughout today's call, we will also be presenting certain non-GAAP financial measures. References during today's call to adjusted EBITDA, adjusted EBITDA margin, normalized adjusted EBITDA and normalized adjusted EBITDA margin have been adjusted to exclude certain items. The most directly comparable GAAP measures and reconciliations for non-GAAP measures are available in the earnings release and other documents posted on our website at investors.sabre.com. Normalized amounts have been adjusted for estimated costs historically allocated to our Hospitality Solutions business, which was sold on July 3, 2025. We are also presenting certain financial information on a pro forma basis to give effect to the sale of the Hospitality Solutions business and we have removed the impact of the $227 million payment in kind interest that was recorded in conjunction with the refinancing activity in the second quarter of 2025 from pro forma free cash flow. Unless otherwise noted, results presented are based on continuing operations. Participating with me are Kurt Ekert, President and CEO; and Mike Randolfi, CFO. With that, I will turn the call over to Kurt. Kurt Ekert: Thanks, Roushan. Hello, everyone, and thank you for joining us. Earlier today, we reported third quarter results and provided an updated outlook for the remainder of the year. 2025 has been a dynamic year, and I'm encouraged by recent positive commentary from airlines and believe the broader travel environment is stabilizing compared to what we saw earlier this year. Third quarter operational results met our expectations as we focused on controlling what is within our control. I commend our team members for their continued progress against our strategic priorities, generating free cash flow and delevering the balance sheet and driving sustainable growth through innovation. We delivered positive air distribution bookings growth in the third quarter, driven primarily by strong performance in September. Based on our progress around the implementation of new business and our outlook for the remainder of the year, we remain confident in our ability to continue to drive air distribution bookings growth going forward. We have strengthened our balance sheet by growing adjusted EBITDA, generating free cash flow, extending debt maturities and proactively using cash to reduce debt. We have made significant progress over the last 2 years on our strategy for delevering, and we anticipate reducing our net leverage by approximately 50% by year-end 2025 compared to year-end 2023. While there is more work ahead to achieve our long-term leverage goal, we are proud of the progress we have made. Innovation is key to Sabre strategy, and we have been leveraging AI to transform travel. This quarter, we announced two industry firsts, agentic APIs for travel, enabling a new era of AI-driven retailing and Continuous Revenue Optimizer, an offering within our modular AI-native SabreMosaic platform. Further, our payments business continues to see strong customer demand and is growing at a very healthy rate. We have extended our industry-leading position with 41 live NDC integrations. New agency wins and renewals, first-mover product launches and continued innovation increase our confidence that we are well positioned competitively. Moving to Slide 5. I will provide some detail on our third quarter results. Overall, operational and financial results were positive. Total distribution bookings grew 3% year-on-year and air distribution bookings increased more than 2%. Consistent with broader airline commentary, we experienced softness in July air bookings and then saw improvement through the balance of the quarter. September finished strong, up 7% year-on-year. The acceleration in air bookings was primarily driven by contributions from newly converted business as a result of our growth strategies. In July, air distribution bookings from our growth strategies totaled $2.5 million. And in September, that grew to over $3 million. For the third quarter, air bookings from our growth strategies contributed 10 percentage points to total air bookings growth. This growth was partially offset by two notable headwinds. First, GDS industry air distribution bookings declined approximately 1 percentage point year-on-year. Second, Sabre's air booking mix was a headwind in the third quarter. This reflected Sabre's higher exposure to U.S. government and military and corporate business as well as the impact of regional mix. We continue to believe these headwinds are transitory, and we are encouraged with the improved performance of certain regions as we move into the fourth quarter. Hotel distribution bookings growth increased 6% in the quarter, and the attachment rate to air bookings increased over 100 basis points year-on-year. Within IT Solutions, passengers boarded grew 3% year-on-year. Solid operational execution resulted in third quarter revenue growth of 3%. Top line growth, combined with ongoing expense management resulted in normalized adjusted EBITDA growth of 23%. Normalized adjusted EBITDA margin improved over 300 basis points to 21%. Moving to Slide 6. We are transforming our broader platform into a modern open travel marketplace that seamlessly integrates and normalizes content and capabilities from a wide range of sources. In multisource content, Sabre continues to demonstrate industry leadership. We are leading the industry with 41 live NDC connections, providing seamless shopping, booking and workflow integration. We are also on track to launch our new low-cost carrier solution in the first quarter of 2026. Our distribution expansion strategy is progressing well. In addition to adding new agencies and significant conversion volumes, we recently announced that World Travel Inc. has expanded its strategic partnership with Sabre and is converting substantially all of their volumes onto the Sabre platform. This momentum further advances Sabre's position as a strategic technology partner to leading agencies around the world. Hotel B2B distribution gross booking value transacted through the platform continues with an annualized turnover of over $20 billion, a 7% increase year-on-year. Our digital payments business also continues to scale rapidly, and I will provide a deeper look into this business on the next slide. We are also making considerable advances related to AI, which I will touch on shortly. Overall, we are making significant progress against our strategy and transforming the business to capture long-term value in the dynamic and evolving travel marketplace. Moving to Slide 7. Sabre Payments is an integrated fintech hub. It is one of our fastest-growing businesses, processing over $20 billion in annual transactions and quarterly gross spend grew over 40% year-on-year. Payments provides travel-focused solutions that simplify operations, enable global payment flexibility and automate risk and fraud management for our customers. The fintech hub is comprised of two key components: Sabre Direct Pay and Conferma. Sabre Direct Pay is our travel payment service that streamlines financial operations across the travel industry. Travel payments and automated chargeback management services run through a single integrated interface. This interface provides customers with greater efficiency, faster dispute resolution and improved win rates. Conferma is a virtual card and payment platform providing issuers, corporate buyers and suppliers with real-time control, enriched data and automated reconciliation. This enables faster, safer, broader business payments. We are scaling this business quickly and seeing strong growth in digital wallets and virtual cards. By the end of this year, we expect to have approximately 100,000 connected hotels. Conferma is developing new API integrations that we expect could accelerate additional virtual card deployments and further adoption. We believe strong ongoing customer demand positions our payments business for continued robust growth. On to Slide 8. AI represents an incredible opportunity for the travel industry and for Sabre provides a road map for future growth. We have leveraged our deep partnership with Google to embed AI within our platform in three ways: First, optimization AI, which delivers value today. Sabre IQ already powers live AI-driven products, which generate measurable ROI for airlines and agencies today. These include Lodging cross-sell, which intelligently recommends hotels with air bookings and e-mail parser, which automates traveler requests and agent actions and dynamic pricing, which optimizes fares and ancillaries in real time. Next, generative AI, the current phase of acceleration. We have built digital assistants and chatbots to make travel planning and servicing more intuitive. As a trusted content provider, Sabre's Gen AI solutions help ensure accurate and contextual information across customer touch points. And finally, Agentic AI and consumer LLMs. This is our innovation horizon. Agentic AI anticipates traveler needs and takes actions on their behalf. We believe this new conversational commerce will be how consumers search, shop and experience travel servicing in the near future. That is why we have taken a first-mover position with Agentic-ready APIs and a proprietary MCP server. These Agentic solutions make the language of travel understandable to any AI agent. Google has spotlighted Sabre's latest AI innovations at its global events, drawing strong industry acclaim. On to Slide 9. Moving to our outlook for air distribution bookings for the fourth quarter and full year. The chart on the right shows reported quarterly air distribution bookings growth for the first 3 quarters of the year and our outlook for the fourth quarter. Our view for the fourth quarter is largely consistent with what we have said previously, excluding the anticipated impacts from the government shutdown. We exited September with strength that carried into early October. However, the government shutdown impacted October air distribution bookings by approximately 3 percentage points, and we expect this impact to carry through the fourth quarter. As a result, we now anticipate fourth quarter year-on-year air distribution bookings growth of between 6% and 8%. The commentary around the broader travel industry is encouraging and could signal a normalization of trends going forward. We continue to believe the challenges we have navigated during 2025 are largely transitory and as volumes from our growth strategies accelerate through the end of the year, we are well positioned for growth. Additionally, we are optimistic that our positive momentum as well as the launch of our LCC solution in early 2026, positions Sabre for mid-single-digit air bookings growth in 2026. In summary, we are focused on controlling what we can control, namely delevering the balance sheet and driving sustainable growth through innovation. With continued execution, the development of our AI solutions and opportunities in adjacent spaces such as payments and hotels, we believe Sabre is well positioned for long-term growth. Thank you. And now over to Mike. Michael Randolfi: Thanks, Kurt, and good morning, everyone. Please turn to Slide 11. For the third quarter, Sabre reported revenue of $715 million, up 3% year-on-year, consistent with our guidance range of low to mid-single-digit growth. Distribution revenue grew $24 million, driven primarily by an increase in air and hotel distribution bookings as well as an increase in product revenue. IT Solutions revenue of $140 million was flat year-on-year as growth from passengers boarded was offset by a decrease in license fee revenue. We continue to expect fourth quarter IT Solutions revenue to remain in a similar range of $140 million to $145 million. On a normalized basis, gross margin decreased 130 basis points in the third quarter versus the prior year. The decrease in gross margin is due primarily to two items: lower-than-expected revenue from certain higher-margin product sales and continued FX impacts of the weaker U.S. dollar, where Sabre generates revenue in dollars but pays some agency incentives in local currencies. Looking forward, we expect these gross margin pressures to continue into the fourth quarter. Third quarter 2025 normalized adjusted EBITDA of $150 million increased 23% year-on-year with normalized adjusted EBITDA margin expanding by 340 basis points to 21%. Pro forma free cash flow was $13 million, and we ended the quarter with $683 million of cash on the balance sheet. Moving to Slide 12. As Kurt outlined, third quarter results were largely in line with the expectations we outlined on our second quarter earnings call. Revenue growth of 3% met our guidance for low to mid-single-digit year-on-year growth. Normalized adjusted EBITDA of $150 million was at the high end of our expectations. Pro forma free cash flow of $13 million was below our expectations. The variance was driven approximately 1/3 by lower receipts and 2/3 by higher disbursements. Receipts were lower due to the cadence of the quarter. There is roughly a 30-day lag between bookings and receipts. July and August air distribution bookings were relatively flat year-on-year, which was lower than our forecast and virtually all bookings growth in the third quarter occurred in September, which did not benefit third quarter receipts. Regarding higher disbursements, certain payments that were forecasted to be paid in the fourth quarter of 2025 and in 2026 were paid in September. Based on our updated working capital forecast, we now expect free cash flow for the full year 2025 to be approximately $70 million. Turning to Slide 13. Over the past 2 years, we have made significant progress on our capital structure, lowering overall debt and extending our maturities. This year, we have paid off over $1 billion of debt. As part of that, in the third quarter, we repaid approximately $825 million of debt from the proceeds of the Hospitality Solutions sale. We have pushed out maturities as well with over 60% of our debt maturing in 2029 or later. With our current outlook, by the end of 2025, we expect our pro forma net leverage will be approximately 50% lower versus year-end 2023. We regularly look for opportunities to efficiently refinance our debt and extend our maturities. As we look to 2026 cash interest, we expect 2026 to reflect our projected 2025 full year interest expense of $441 million that is included in our GAAP to non-GAAP reconciliation, plus the impact of any potential refinancings as well as any changes in the forward curve. On to Slide 14 and our outlook for the rest of this year. We anticipate fourth quarter air distribution bookings growth of between 6% and 8% with a midpoint of 7%. This compares to our prior fourth quarter guide of 6% to 14% with a midpoint of 10%. The 3 percentage point reduction in the midpoint of our guide is driven primarily by the impact of the government shutdown. We expect low single-digit fourth quarter year-on-year revenue growth, and we expect pro forma adjusted EBITDA of approximately $110 million. Our fourth quarter adjusted EBITDA guidance incorporates a $10 million to $12 million impact from the government shutdown. We expect to generate pro forma free cash flow in the fourth quarter of approximately $130 million. As a reminder, the fourth quarter is typically our highest free cash flow quarter due to the seasonality of working capital. Our full year outlook for air distribution bookings growth is positive and is within the guidance range we shared on our second quarter call. With our updated outlook for the fourth quarter, we expect full year air distribution bookings growth to be near the low end of our previously provided range of 0.5% to 3.5% -- we expect full year 2025 pro forma adjusted EBITDA to be approximately $530 million, representing year-on-year growth of 9%. We have not made any changes to our assumptions for either CapEx or cash interest. We expect full year 2025 pro forma free cash flow of approximately $70 million and to end the year with a strong cash position of approximately $800 million. In closing, we are making progress on our strategy to generate free cash flow and delever the balance sheet and drive sustainable growth through innovation. We expect the anticipated acceleration of volumes in the fourth quarter will provide solid momentum into 2026. And with that, operator, please open the line for questions. Operator: [Operator Instructions] Our first question coming from the line of Josh Baer with Morgan Stanley. Josh Baer: I was hoping we could just run through the updated FY '25 guidance again and help bridge from what it was last quarter to this quarter. And really focusing on EBITDA and free cash flow. I know you called out some of the headwinds from government shutdown, but really just wondering why EBITDA is now $20 million lower from the midpoint and free cash flow $50 million. And I know you were talking through some of the receipts and disbursements. I would think some of that would sort of normalize or those September receipts come in, in Q4. And so why the bigger move in free cash flow versus EBITDA? Michael Randolfi: Yes. So I'll take that question. So if you go from the midpoint of our guide last time at $550 million to $530 million, the biggest component of that is going to be the $10 million to $12 million impact from the government shutdown. The other difference is, as you look from Q3 to Q4, as we highlighted in our prepared remarks, we did have lower margin from FX and lower high-margin product sales. We do expect that to continue into the fourth quarter. And so that's essentially your difference between your $550 million and $530 million. If you recall, your -- what correlated in terms of free cash flow to $530 million of EBITDA was $100 million of free cash flow last quarter. And as I articulated this quarter, there was a difference between our expectations of around $27 million. We expected to come in around $40 million of free cash flow. Instead, we came in around $13 million. And to be clear, about 1/3 of that was due to receipts, 2/3 was due to disbursements. On the receipts, the way to think about that is as we came through the third quarter, as we articulated, receipts are essentially determined by the prior couple of months in the quarter. And August, in particular, fell short. And we had a strong September, which would bode well for receipts in October. However, we had a step down in bookings that wasn't in our original projection because of the government shutdown. So that gets offset in the fourth quarter. So when you get into early next year, because we would expect this quarter to be back-end loaded, we would expect to have slightly higher receipts than we would have otherwise, but it won't necessarily show up in the fourth quarter. On disbursements, essentially, there were elements there that were timing. So of the disbursements, the way I would think about it, is there's a portion of our disbursements that were made in September that we either contemplated in forecasted for Q4 or early 2025. However, because of timing of work, because of timing of combination of invoices, commercial negotiations, disbursements were slightly different. For example, we had a $7.5 million disbursement in the September month that we originally had forecasted for Q1 of 2026, and it was tied to an agency commercial agreement. But because of what was best for the commercial agreement overall, the payment was made in September. So you don't necessarily get that back this year, and that's what drives you from the $100 million to the $70 million. Josh Baer: Okay. That's really helpful. And just to clarify on the government shutdown impacts, maybe everyone else knows this, but is this because of like staffing, airport and safety? Is it actual government travel spend that's impacted? Or is it more related to the impacts to the consumer and the macro when you quantify that? Kurt Ekert: Yes. Thanks, Josh. To date, the impact is almost entirely travel by government employees and/or U.S. military. We have a high concentration of the U.S. military and government as a component of our business. Just for clarity, for example, in 2024, U.S. military government represent about 4% of our global air distribution volumes. That number is quite de minimis in terms of current trading volumes. To date, we've not seen a material impact in terms of the overall industry. But obviously, if you look at operating issues in airports with air traffic control, that is a risk going forward, but not something that's, again, material to date. Operator: Our next question coming from the line of Victor Cheng with Bank of America. Unknown Analyst: This is Carla for Victor Cheng at Bank of America. Two questions from my side. The first one is what's the mix of your air bookings that is tied to the U.S. government travel? And how can we think about the impact of bookings in Q4 if the shutdown continues? And second question, do you have any updates on your current NDC mix? Is it still in the low single digits? Kurt Ekert: Yes. Thank you, Carla. For clarity, when you say what is the mix of U.S. military and government, can you clarify what you're asking there? Unknown Analyst: Yes. So just the mix of your air bookings that is tied to the U.S. government? And how can we kind of forecast our bookings estimates based on the shutdown? Kurt Ekert: Okay. We don't break out the details of our military and government if you're asking domestic versus long haul, for example. Again, if you go back to last year, that was about 4% of our air trading volume in the distribution business. That number is quite de minimis in terms of current trading right now. NDC remains a low single-digit number for us. That's between 2% and 3% of our air distribution volumes. It is growing at a rapid rate. We do expect it to scale as we go forward. And I will emphasize, as we noted during our prepared remarks, we now have 41 live NDC connections. These are the same API connections that you would get if you were a direct connect or any other provider. We have leading functionality that is facing buyers and travel agencies. We feel we are very well positioned in this two-sided market as NDC scales to be a grower. Operator: Our next question coming from the line of Jack Halpert with Cantor Fitzgerald. John Halpert: Just two quick ones, please. So kind of coming back to the government travel piece of this. I think you're pretty clear about the headwinds for 4Q. But I guess, historically, when there's been government shutdowns and they kind of come to an end, like do you typically see like an immediate payback in demand? Or is there sort of a bit of a lagged recovery? That's kind of the first one. And then second one, just quickly on payments. Obviously, growth there has been pretty solid the past couple of quarters, and you had the slide about it in the deck. But can you talk a little bit more about the strategy here and how incremental you think you can -- this can be to your business going forward? And then maybe talk about sort of the margin profile of the business as well. Kurt Ekert: Thanks, Jack. On the government, -- we don't know obviously when the shutdown will be resolved. We imagine it will happen in the fourth quarter, but who knows. We anticipate being back to normalcy in the first quarter, but it will probably phase its way between here and there. With respect to payments, the payments business, again, which is comprised of Sabre Direct Pay, which is a set of product capabilities that we have both in our distribution and our IT business as well as our Conferma Virtual Payments business. That business is scaling at a 40% top line rate. Really, it's very compelling what we have there. We have not, at this point, broken out the revenue or the margin details of that business. That may be something that we do prospectively. But we think the value opportunity and the scale opportunity there is tremendous versus our current position. Operator: [Operator Instructions] Our next question coming from the line of Alex Irving with Bernstein. Alexander Irving: Two for me, please. First, on Agentic API. Could you please help us to understand how you intend to monetize this? Specifically, are airlines unable to do their own Agentic API to do the same thing essentially for free. So who's going to pay you and for what specifically? Second, on booking growth for 2026, I think you mentioned earlier about being positioned for mid-single-digit bookings growth. What assumptions underpin that? If you could please break that down between, say, known new business migrations, specific headwinds lapping and your expectations for underlying industry growth? Kurt Ekert: Thank you, Alex. Let me deal first with the booking growth for 2026. As we indicated, we expect mid-single-digit bookings growth in 2026. That assumes a flattish GDS or distribution marketplace and then strong organic performance by Sabre with continued converted business as well as the implementation of our incremental low-cost carrier solution. With respect to Agentic AI, it is very early. I think you're going to see, number one, Agentic AI emerge as a new channel in and of itself, maybe similar to the way online travel agents emerged starting about 30 years ago. And I think that will take share away from both intermediary and supplier direct channels. What we have developed in terms of our API solution is, we think, the leading intermediary API solution for the marketplace. This can sit directly behind an API, Agentic API agent and/or a large tech platform. And it's also fit for purpose that it can be used by our travel agency and our airline or hotel customers to help them power their Agentic AI profile going forward. In terms of what is the commercial model, obviously, we think the largest opportunity is for us to be an intermediary distribution player, but there may be an IT element to this as well. That will become more apparent in the quarters as we go forward. Operator: And our next question coming from the line of Dan Wasiolek with Morningstar. Dan Wasiolek: So two, if I may. The first, your booking fee looks like it was pretty strong and stable this quarter at -- I think, around $6.06. Just wondering how we should think about that as we look into 2026. And then wondering if you could maybe provide some more detail in your prepared comments, you kind of talked about a stabilization in the overall industry and industry demand, just the conversations maybe you're having with your partners and customers to kind of arrive at that? Michael Randolfi: I'll take the booking fee. If you look at the strength in our booking fee year-over-year, it was driven by significant nontransactional revenue that's benefiting us. So it's not necessarily tied to a specific booking. And we expect that to continue to be additive over time. With regards to 2026 booking fee, at this stage, we're not going to provide any other commentary beyond what was in our prepared remarks with 2026, but we'll give you a lot more context on that in the February call. Kurt Ekert: Thanks, Dan. With respect to industry demand, it's a bit of a mixed bag. What you're hearing and seeing from commentary from many different intermediaries and then supplier customers, and this is underpinned by a lot of private conversations that we've had with our clientele is leisure demand is positive year-on-year, fairly robust. Our corporate demand, what you're seeing is prices elevate or strong yield, and you've seen some improvement on a sequential basis in corporate demand, but it is still negative year-on-year on a unit basis. And so a lot of the commentary you hear from suppliers is around yield accretion or yield improvement relative to where we were 6 months. The volume environment has improved, but it's still -- when you look at the mix of corporate plus leisure is mixed. It's not that positive. As we go forward, our expectation is typically, what you see in this industry is GDP growth and airline volumes tend to approximate one another. If that is the assumption next year, you're at low single-digit passenger growth in the United States and globally. The question will be what the mix is, and we're going to learn our way into that. But again, our expectation for our volume assumptions next year in distribution are that the intermediary industry is relatively flat and that we're growing share against that metric. Operator: Our next question coming from the line of James Goodall with Ruschild. Rothschild & Co Redburn. James Goodall: So firstly, just coming back to Slide 9 and focusing on the Q3 air booking growth of 2%. I think your original guide was 2% to 6%, which was based on a negative 9-point impact from mix in industry and plus 13 from growth strategies. Just given that the industry improved to down 1% from down 4% through Q3, what caused Q3 to be at the bottom of the range despite the fact that industry got better through the quarter? Was it that plus 13% of new wins coming on more slowly? And then -- in terms of my second question, just coming to the low-cost carrier launch for next year. Can you give us a flavor of how many incremental bookings you're expecting that to drive on an annual basis? And how many LTCs you currently have signed up or in the pipes to be signed up? Kurt Ekert: Yes. Thank you, James. When you look at Q3 volumes, what we saw was that both July and August were relatively flat in terms of our intermediary bookings. September was actually up 7%. The very good news there is that when you look at the quarter, there was positive 10 points of volume performance tied to the implementation of new business that was converted this calendar year. And in fact, that number was 12% in September, so that continues to ramp and accelerate. We indicated that was 3 million bookings during the month. Why was that below the prior estimate? Despite the GDS, the improvement in the GDS number, it comes down to the mix of our business. Number one is we are adversely impacted as compared to the industry by our exposure to both the U.S. military and government. We have nearly a full share there. And two is a vast majority of corporate and TMC business globally goes through Sabre. And that was still down several percent year-on-year in the quarter and then the impact of regional mix as well. With the launch of the low-cost carrier platform, there's two important components here. One is similar to if you're familiar with Travelfusion, which is a non-GDS aggregated solution in the market, and there are a number of these kind of solutions. What we are launching is a new platform that integrates 50-plus new low-cost carriers. That is with a bit of a different technical and commercial model. We will be in full production launch in the first quarter of next year. Separately, we've also signed up a significant number of new low-cost carriers that we did not have in our system previously that are participating in more traditional means, either [ EDIFACT ] or Direct Connect versus this new low-cost carrier solution. Long term, we expect this could contribute multiple tens of millions of transactions to our business. It will be a subset of that for next year as we ramp this up. We're not going to go into detail on the specific number. Operator: And there are no further questions in the queue at this time. I will now turn the call back over to Mr. Ekert, CEO, for any closing remarks. Kurt Ekert: Thank you so much, everyone, for the continued interest. We look forward to sharing additional progress next quarter and in the years ahead. Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.