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Operator: Greetings, and welcome to the 3D Systems Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to your host, [ Monica Gould ], Investor Relations for 3D Systems. Please go ahead, Monica. Unknown Attendee: Thank you. Hello, and welcome to the 3D Systems third quarter 2025 earnings conference call. With me on today's call are Dr. Jeffrey Graves, President and CEO; and Phyllis Nordstrom, Interim CFO. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of the presentation may do so on the Investor Relations section of our website. The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in our latest press release and our filings with the SEC, including the most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, you will find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable periods of 2024. And with that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks. Jeffrey Graves: Thank you, Monica, and good morning, everyone. I'll start today with a brief recap of our third quarter results. I'll provide some commentary on the overall market and then focus the remainder of my comments on our strategy and growth initiatives. I'll then turn things over to our Interim CFO, Phyllis Nordstrom, to provide details on the quarter's financials. And we'll then open the call for Q&A. So let's turn to Slide 5. I'll start by reviewing our third quarter results at a high level. The macro environment for our company and 3D printing OEMs broadly remains challenging. This can be seen in our third quarter revenue of $91.2 million, which was down 13.8% year-over-year, soft but consistent with our normal seasonality trends. As has been the case over the last several quarters, this overall softness continues to be driven by our customers' muted CapEx spending for new production capacity stemming from uncertainty around tariffs. As such, we've taken aggressive actions to adjust our cost structure while maintaining core R&D investments to position the company for long-term growth when market conditions improve. As part of this effort, we've been rationalizing noncore assets, including the recently announced sale of Oqton and 3DXpert, which closed at the end of October. As you may know, these software platforms are not proprietary, but were designed to serve the entire industry. And while we will continue to remain very involved with the software, we believe that transitioning these solutions to an independent software developer will help drive them as the industry standard, which will help accelerate OEM adoption of additive manufacturing broadly. We expect the financial impact of this disposition on our fourth quarter results to be approximately $1.2 million in revenue and $1 million on gross margin. This impact is reflected in our guidance for Q4. Turning to Slide 6. We remain very focused on our core assets and continue our strategic investments in metal and polymer printing technology with emphasis on R&D activities that will drive our future growth and profitability. During the quarter, we launched some very important new printer platforms derived in this case, from our expertise in photopolymer jetting technology. Jetting is a very special 3D printing technology that involves a simultaneous deposition of thousands of fine droplets of photopolymer. These droplets are cured by ultraviolet light as they're deposited onto the build platform. The process can be -- can simultaneously deposit multiple materials in a fast but precise pattern to create a monolithic structure, having distinct regions of coloration, geometry and mechanical performance. It's a preferred approach where speed, precision, surface finish and multi-materials are required for an application. In the Industrial segment, we introduced the MJP 300W Plus at the Istanbul Jewelry Show in early October. This new generation of jetting technology prints extremely intricate wax patterns used for casting precious metal jewelry, improving productivity by 30% and reducing gold, silver or platinum waste by 20%. While the global jewelry market is competitive, it's transforming rapidly into a digital manufacturing ecosystem where a designer can embrace custom creativity without sacrificing cost competitiveness in the market. Our advantage in this growing market is our recognized expertise in jetting technology, including both the printer itself and the custom wax materials that are essential for the post-print casting process as well as our expert channel partners that serve the thousands of local jewelry manufacturers around the world. Customer feedback on our new printing systems has been very positive, and we've already begun to accept orders for this new printer platform, which, given the size of this global market, we expect to accelerate rapidly in the quarters ahead. While fine jewelry is viewed broadly as a consumer business, it's embedded deeply in the culture of many countries around the world, which drives continuing demand growth and the uniqueness of our wax materials, combined with the high rate of their consumption and the casting process, continue to make it an attractive market for our company. On to Slide 7. In applying jetting technology to the dental market, in the third quarter, we announced the full commercial release of our NextDent Jetted Denture Solution for the U.S. market. Our consistent investment in this revolutionary dental technology has culminated in a truly outstanding denture product with associated excellent economics for dental labs across the Americas, Europe and even in Asia. This first-to-market solution for jetted monolithic dentures utilizes multiple materials in a single printing process to deliver a durable, long-wear, aesthetically beautiful prosthetic to patients. This results in a faster, more cost-effective and highly scalable alternative to traditional denture manufacturing, enabling both an outstanding patient experience and a strong return on investment for dental labs that provide these products to local dentist -- dental professionals each day. We've already placed these printers with a dozen of the leading U.S. dental labs that serve the American market and feedback has been excellent. We're building backlog for the fourth quarter and are very excited about this market opportunity, which we believe will reach $1 billion in industry revenue across the U.S. and Europe alone over the next several years as the market transitions to 3D printing and away from machining and hand assembly. Given the success that we've seen with our U.S. product launch in parallel with the European regulatory approval, which we're targeting for mid-2026, we continue to work aggressively through the regulatory process in other markets throughout Central and South America and in Asia, which we expect to follow rapidly. With the addition of our denture solution to our industry-leading positions in both aligner technology and our NextDent dental materials portfolio, we expect dentistry to be one of our single largest revenue streams in the years ahead, given the custom nature of the applications and the strict regulatory standards. Turning to Slide 8. Another core area focus -- core area of focus for us is the MedTech half of our health care business. For 3D Systems, MedTech comprises our historical personalized health services business, our small but important point-of-care business, medical implants and traditional printer and consumable sales to medical OEMs. While we are most often prohibited from discussing details of our point-of-care efforts for long periods of time, these groups live within leading research and specialty hospitals around the world, focusing on new and highly [ innovated ] applications of our medical 3D printing technology, which are extraordinary in terms of patient impact and provide the best indicators of where 3D printing can bring the most value to patients and hospital systems in the future. As these applications are successful, we're well positioned to gain any required regulatory approvals and then bring them to the market broadly. While there are quarter-to-quarter fluctuations in growth rates for MedTech, particularly driven by seasonality of preplanned orthopedic procedures, this business remains on track to grow at a double-digit rate once again this year. To drive this consistent strong growth, we continue to build on our market-leading position with new applications, materials and printing technologies, the vast majority of which ultimately require regulatory approvals. This not only provides a strong pipeline of new patient indications that we can address, but also opens new markets for medical 3D printing, such as trauma, which is now the fastest-growing element of our PHS business. A key area for focus for us in MedTech is accelerating the use of our printed medical-grade PEEK materials. That's Polyetheretherketone for short. These materials are biocompatible with properties very similar to native human bones and can be custom printed very quickly and economically. Importantly, they can complement titanium implants, which have similar strength and compatibility, but instead of blocking radiation used for imaging or the treatment of cancer, PEEK materials are transparent to it, allowing doctors to observe and treat the underlying tissue when required. These printed PEEK materials are now being used in real-life patient applications such as reconstruction of the face and skull from defects or injuries and even addressing post-cancer-related surgical procedures and even trauma cases. An example of printed PEEK for a spinal application is shown on the right side of Slide 8. In this case, we printed a porous PEEK implant tailored for enhanced bone growth, the results of which can easily be seen in the x-rays. In addition to the patient benefits, our technology investments have brought the cost and response time down to the point where bones can be repaired in hours or days instead of weeks, further opening the range of cases that can be addressed from preplanned complex surgeries to rapid responses needed for trauma cases. We expect this trend to continue in the years ahead. Now let's turn to Slide 9. In addition to new printer and materials technologies, we also recently announced several important milestones in our Saudi Arabian Growth Initiative. In 2022, we established the National Additive Manufacturing Innovation Company or NAMI for short through a partnership with the Saudi Arabian Industrial Investments Company. The goal of this venture was to enable Saudi Arabia's Vision 2030 program, which aims to create a strong local manufacturing base and enable the Kingdom to industrialize more rapidly through the adoption of industrial scale 3D printing. 3D Systems is the exclusive provider of printers and materials, both polymers and metals to the joint venture with NAMI providing local application expertise, service and support for customers. Recently, we were proud to announce that the Saudi Electric Company or SEC for short, the Middle East's largest electricity producer, signed an agreement to make a strategic investment in NAMI, acquiring a 30% stake in the venture with the goal of reducing costs and lead times for high-demand spare parts through the creation of local manufacturing capability combined with advanced digital warehousing. This partnership strengthens NAMI while deepening collaboration with SEC to establish new workflows that accelerate the adoption of 3D printing for critical energy infrastructure applications and to develop a skilled national workforce. Additionally, the Modern Isotopes Factory or MIF for short, a Saudi electric company -- a Saudi company established to support the expanding need for radioactive sources for industrial applications has signed a framework agreement of $26 million with NAMI for the manufacture of up to 2,000 tungsten core components used in nondestructive testing devices for pipelines and weldment inspection. And in the key market of defense and aerospace, Lockheed Martin recently announced a collaboration with NAMI to qualify and use additive manufacturing to develop critical military and aerospace components in Saudi Arabia, utilizing 3D Systems' Direct Metal Printing Technology. While it has taken time to establish the local capabilities needed to support these customers, we're very excited to see our efforts begin to bear fruit in what we believe will be an increasingly important element of our global growth strategy in high-reliability industrial markets in future years. Turning to Slide 10, I'll briefly touch on additional critical market opportunities before turning the call over to Phyllis. AI infrastructure as shown on the left-hand side of Slide 10 and aerospace and defense highlighted on the right are 2 of the emerging growth opportunities that I'm most excited about, given the exceptional level of investments now being made in these areas. Starting with AI infrastructure, there are 3 key areas where we participate. These include semiconductor chip manufacturing, where our 3D metal printing capability provides critical componentry for chip fabrication equipment, data centers where our ability to print 3D -- 3D print copper-based heat transfer components to help keep these high-intensity computational units cool are increasingly valuable and for components used in gas turbine engines that are used to create the electricity that powers the data center. These markets are beginning to receive enormous investments around the world, and we've been developing key applications for them for several years in anticipation of increasing demand. From an aerospace and defense standpoint, as printing technology has scaled and key materials for high-temperature and aggressive environment applications have come online, the applications for 3D printing have rapidly expanded. Our latest efforts, which range from rocketry to naval applications and from human systems to drones have shown great promise. These customers are not only working on a wide range of new applications of our technology, but encouraging us on a selective basis to support them from the developmental phase through initial component fabrication, particularly for low-volume challenging part types. We select this work very carefully such that we can ultimately bridge the customer from limited part supply to full-scale production, either within their factories or the supplier of their choice. This business model is unique, and we believe will be a highly -- will be highly effective as we work hard to grow this portion of our business, both in the U.S. and in Europe from our regional locations in Colorado and in Leuven, Belgium. So with that, I'd like to introduce Phyllis Nordstrom, our Interim CFO. I've had the pleasure of working with Phyllis in several capacities for many years, and I'm very pleased that she stepped into this important role at such a challenging time for our industry. Phyllis? Phyllis Nordstrom: Thank you, Jeff. I appreciate everyone joining us today. I began at 3D Systems in 2021, serving as the Chief People Officer and then Chief Administrative Officer. In early September, I stepped into the role of Interim Chief Financial Officer. My background is in finance and accounting and throughout my career I've held a variety of roles within these areas. Most recently, I led audit and risk management teams at MTS Systems and PricewaterhouseCoopers, where I focused on advancing strategic priorities, driving operational excellence and strengthening discipline around risk and controls. Before I begin a review of the third quarter results, I would like to remind you, we completed the divestiture of our Geomagic software business on April 1 of this year. As a result, throughout today's call, we will reference both reported results and adjusted comparisons that exclude our Geomagic business, allowing for an apples-to-apples comparison of our performance across periods. With that, let's begin with a summary of our revenue, which you'll find on Slide 12. Third quarter consolidated revenue was $91.2 million, down 19% year-over-year or 14% when excluding Geomagic. Sequentially, revenue declined modestly, primarily reflecting typical third quarter seasonality and the absence of a Regenerative Medicine milestone that was recognized in the prior quarter. Within our segments, Industrial Solutions revenue of $48 million declined 16% year-over-year or 4.5% excluding Geomagic. These declines were primarily driven by softness in our printers and materials sales in consumer-facing end markets. This was partially offset by continued momentum in aerospace and defense, which grew nearly 50% over the prior year. Healthcare Solutions revenue of $43 million decreased 22% from prior year, predominantly driven by lower sales within dental, with 2024 representing higher purchase volumes from a specific customer. Outside of our Dental business, MedTech delivered solid growth, up 8% from the prior year and slightly ahead of last quarter. Additionally, we continue to see momentum in our PHS business with year-to-date growth of 10% through Q3. Now to Slide 13. For the third quarter, we reported a non-GAAP margin of 33% compared to 38% in the prior year and 34% when adjusted to exclude Geomagic. The year-over-year gross margin decline was modest, primarily driven by lower sales volume and reduced material sales. These impacts were partially offset by reduced inventory reserves compared to the prior year. Gross margin declined sequentially, reflecting the absence of the prior quarter's Regenerative Medicine milestone as previously discussed, as well as higher manufacturing variances in the period. Turning to Slide 14 and 15. We continue to demonstrate strong cost management in the quarter with non-GAAP operating expenses of $44.7 million, down 24% year-over-year when adjusted to exclude Geomagic and down 4.5% sequentially. This improvement reflects the impact of our cost reduction initiatives, which run through the first half of 2026. Our cost actions are well underway and continue to focus on optimizing our organizational capacity, streamlining our facilities footprint and reducing expenses across the business. Looking ahead, we expect continued reductions in expenses through the end of the year and are targeting fourth quarter operating expenses to be marginally below the current quarter. To date, we are on track to deliver over $50 million in annualized savings by year-end. As we look ahead to the fourth quarter and the first half of next year, our cost savings initiatives will be closely aligned to the company's strategic priorities for 2026, focusing our investments on the products and markets that offer the greatest opportunity, both for growth and profitability. Turning now to Slide 16 to finalize the P&L. Adjusted EBITDA for the third quarter was negative $10.8 million, an improvement of $3.5 million compared to the prior year. We reported a GAAP net loss of $18 million for the quarter or a GAAP loss per share of $0.14, a meaningful improvement compared to the $1.35 loss per share in the prior year period. The improvement was primarily related to the absence of prior year asset impairment charges as well as lower amortization expense and lower operating expenses in the current quarter. On a non-GAAP basis, loss per share was $0.08, an improvement from $0.12 in the prior year period. This progress reflects our focus on cost reductions across the business. Turning now to Slide 17 for a review of the balance sheet. We closed the quarter with $114 million in total cash, consisting of $95 million in cash and cash equivalents and $19 million in restricted cash. Total debt net of deferred financing costs was $123 million as of the end of the quarter. Of that total, $35 million is due in the fourth quarter of 2026, with the remaining balance due in 2030. We have successfully reduced cash usage over the past 2 quarters and expect continued improvement as we execute on our remaining cost savings actions through the first half of next year. As we enter the fourth quarter, my priorities remain focused on completing our cost reduction initiatives while working closely with the business to prioritize key markets, products, services and investments. These efforts are aimed at delivering meaningful impact, both in the near term and throughout 2026. So with that, we thank you for your time and support of 3D Systems. We'll now open the line for questions. Operator? Operator: [Operator Instructions] Our first question today is coming from Troy Jensen from Lake Street Capital Markets. Troy Jensen: So a quick -- either one of you guys. Just gross margins kind of dropped a lot sequentially here. It looks like it was mainly in products, but maybe in both products and services. Can you just touch a little bit on the decline in gross margin? Phyllis Nordstrom: Thanks, Troy. I think looking at gross margins quarter-over-quarter, there's really 2 main components as I highlighted. RegMed, we recognized a milestone under our lung program in the prior quarter. That was about $2 million of that total revenue that dropped down to the bottom line. We also had some manufacturing variances recognized in the quarter, which also had an impact to our margin. I don't think those will repeat going forward, but there was some scrap and some inventory reserves or some slower-moving inventory that we had that we cleaned up this quarter. So looking ahead, you can see that we said gross margin would be flat quarter-over-quarter. Again, Jeff will touch on some of that printer revenue that we're seeing with the new products that will come in next quarter as well. Jeffrey Graves: So Troy, that explains Q3. If you look at going forward, there's offset -- there's offsetting factors. So on the positive side, volume is going up, the launch of our new products, we're selling more product, but it is concentrated in printers right now. Printers faster than materials. So it will be a mix effect going forward, offsetting the volume benefit through the factory. So that's largely it. We have a slight drag continuing on tariffs, but it's relatively constant. It's there. It's relatively constant quarter-by-quarter. That's it. It's pretty simple, pretty simple puts and takes. Troy Jensen: All right. Understood. And then, Phyllis, this is for you, too, on -- just on the OpEx, I think I heard you say down slightly sequentially. But is there more to do on the cost cut efforts? I know you guys had some facility consolidations that were depending on timing. I guess what I'd ultimately like to get to is, is there a revenue level you think you guys need to hit once all these cost cuts are in place that will get us to a breakeven? Phyllis Nordstrom: Troy, I'll start with the first part of your question, and I'll let Jeff handle the second part of your question. The first part of the question, there is still more to go get. We've taken a lot of the organizational capacity actions already. There's still a little bit left to do, but the vast majority of that is behind us. The facilities take a little longer. There's work to do. We've made, I think, significant strides in getting ourselves into a place where the facilities will be ready to be exited that we've identified. It's a timing issue just with the market and ensuring we can get those things closed out. So that will happen, I think, in the first part of next year. In terms of OpEx, you're going to see a continued decline through the first half of 2026. It will be a little bit of puts and takes in terms of timing to achieve our total cost savings objectives here. As far as revenue, I'll let Jeff sort of cover where our OpEx would need to be in terms of revenue outlook. It's something that we're doing right now as part of our 2026 budgeting. Jeffrey Graves: And the frustrating part of what Phyllis just said, Troy, is the timing around facilities. We've exited 5 or 6 facilities, and they're on the market now. It's just a matter of timing to get them subleased or have the leases expire. So that will flow through over the next few quarters, we're estimating, but they're all in the market right now. Just look, the other question is, to me, very important is where does OpEx need to be in order to really drive profitability and positive cash flow for the business. It's highly dependent, obviously, on the gross margin that we derive from sales. So it will be sales volume dependent, gross margin dependent. The good thing right now is we are selling a lot of high materials used printers. Our new products are largely focused on those. It's these jetting solutions consume a lot of materials in the markets they serve. The new SLA printers, we have the large SLA printers, the large SLS printer that we go to market with, those consume a lot of materials. So you'll continue to see us innovating on SLA and impacting all those product lines. They pull through a lot of materials. So there's a lag when you first sell the printer on gross margin, but we should see some nice continuous gross margin lift as they pull through materials. So the OpEx, you could argue it to a couple of different levels depending on sales volume for factory efficiencies and the gross margin we derive from those sales. So I'm not giving you a crisp answer. Our original target of $70 million for these rounds of cost takeout we believe in a little bit more normalized environment, but not great environment, but in a little bit more normalized environment through our gross margin estimates, we believe that would get us to positive cash flow and profitability. I still believe that. It's all-in-all is dependent on the volume and mix that comes with increased sales. Good news is sales are picking up in Q4, as we've guided to, and we all fingers crossed for 2026 if the world continues to improve. Troy Jensen: Good luck going forward. Jeffrey Graves: Thanks, Troy. Operator: Your next question is coming from Greg Palm from Craig-Hallum. Jackson Schroeder: Perfect. This is Jackson Schroeder on for Greg Palm. Just kind of wanted to talk a little bit more about the -- what was press released last week with some of the new partnerships talking about with Lockheed Martin, some of the stuff out in the Middle East. Can you talk a little bit more about that, give some detail and maybe -- I mean, obviously, the end market in A&D, but also kind of the products and what you're working on with them? Jeffrey Graves: Sure. Yes, absolutely. So we work with Lockheed Martin around the world. And obviously, in the U.S., they're a very big defense contractor. So very excited about business in the U.S. The unique thing about our Saudi initiative is when -- Saudi is a big consumer of American defense products, obviously, and with that consumption goes a commitment from OEMs generally to spend money in the Kingdom. And so it drives them to look for innovation and local manufacturing of products. So that is very consistent with why we set up our joint venture there in the first place. A lot of the JV is directed at the local Saudi infrastructure like oil and gas and electricity, but defense does benefit it substantially because of the requirement of the global defense OEMs to spend money in the Kingdom. So it's very good for us. It helps build things. The part types that they're interested in are very specific to what they sell in that part of the world. And I can't comment on those. So -- but it's all the normal systems you would associate Lockheed with both aircraft and missile systems that you'd associate them with. Their activity is very focused and aggressive because they have these local sourcing requirements. So it's a great end with a terrific customer, and we're uniquely positioned to serve that. Obviously, in the U.S., there's other folks that can serve them as well. But these relationships take a while to develop and the technology takes a while to prove. So whether we prove it in the U.S., we prove it in Europe or we prove it in Saudi Arabia, it all goes to the same endpoint. And in terms of the systems and applications, again, I shouldn't talk about that for any customer. But in that case, it's all the normal kind of flight systems you would expect and the things that propel those flight systems, engines and rocket motors, things like that are all fair game. Jackson Schroeder: And then as an off-topic follow-up, maybe I missed this, talking about cash generation for next year. Can you touch more on CapEx expectations for that? Jeffrey Graves: Yes. Our CapEx, we have -- we are now able to throttle back on CapEx pretty nicely because we've made some significant investments in past years. And our infrastructure needs don't evolve that quickly. We generally assemble products, we mix materials. They're not highly CapEx-intensive manufacturing processes. So that works in our favor. We have traditionally, if you draw a line through the past, said 4% of sales on CapEx is a good long-term average. But I would tell you over the next couple of years, the number can be meaningfully below that because we've spent pretty heavily in the last several years on building out what we needed in terms of building infrastructure, stuff like that. So 4% is a historic benchmark in a perfect world and everything is growing, that's probably the level to model us at. But for the next couple of years, I would tell you we can get by with substantially less than that, probably less than half of that. We're still putting things together for 2026. But we can get by with substantially less than that because, again, the nature of our manufacturing operations, not very capital intensive. Operator: [Operator Instructions] Our next question today is coming from Alek Valero from Loop Capital Markets. Alek Valero: So my first question is, I saw in the press release that you mentioned that the Dental business is seeing more stability. I wanted to ask what is driving the Dental business to stabilize? And I also wanted to ask on monolithic dentures. I want to see if you could speak to the opportunity there and when we can possibly see it become a meaningful part of revenue. Jeffrey Graves: Yes. Two good questions. So on the first one, in terms of stabilization, obviously, there are several -- we have several revenue streams today in dentistry. One is our historic stream in materials to repair teeth, if you will, which is NextDent and Vertex. That market is consistent, okay? It runs pretty consistently, and we've got approvals in the U.S. and Europe for a long time. So that's a pretty consistent performer. The volatility revenue stream, which is great. We love it, but it's more volatile is the aligner revenue stream. So that really -- you can follow that through public statements by the customers that we serve. That market fluctuates because in tougher economic times, some people -- consumers view those as luxury items and they don't spend as much money on them. There's also a number of different age groups that those OEMs try to serve from younger folks to middle-aged and older folks with the growth in video conferencing and stuff, straight teeth have become very popular. And it also varies by geography. So U.S., Europe, Asia. So we serve -- we're a big provider in that market. I think we're the leader in providing printing technology and materials in that market by far. And we kind of go -- we kind of live with the volatility that, that encounters. So if you want to understand the driver of that, you can easily -- they're public companies, you can easily tie into their earnings calls. And I think what you would hear right now is that market has declined in the last couple of quarters, but is now stabilizing for them in terms of end product sales. So if you work back through the supply chain, you would -- it's consistent with our commentary on we see revenue stabilizing in that market. And it continues to be a great business. It's stable now. Love to see it return to faster growth, but we're -- we kind of live with that volatility in consumer spending. The denture part of your question is very interesting. Dentures today are largely handmade products. I'm sure that patients -- the consumers of those products don't appreciate the labor content that goes into a denture historically. So you -- whether you make teeth by machining, which is the common way to do it or you print -- or you try to print them, the assembly of the product has historically up until now been very much a hand operation. If you walk through a dental lab, which is where these products are made, they're made regionally in the U.S. and Europe, and they serve all the dentists around the city. If you walked into that lab, you would see a lot of people that are involved in some way in making and finishing dentures, okay? Because it's labor-intensive, some labs have chosen to ship the assembly operation to Asia to access lower-cost labor, but that's the way it's gone. That is all going to change now. But with the digital dentistry, the scanners that dentists employ now are excellent. So you can get a good scan of someone's teeth or their needs from their jaw construction. You can send that image to a lab. But now instead of being made by hand, you can 3D print a denture. And you can print it in minutes and hours, not days, okay, and finish it. It is beautiful. It is durable. It in many cases matches or exceeds current product standards. And within a year or 2, it will be the full spectrum of colors, performance, everything that people expect today will be embodied in these dentures. So I'm thrilled with the product. I love the process because it takes enormous time and cost out of manufacturing. And what the patient experience is at the end when they buy the denture is excellent. So it wins on every front and the economics are absolutely compelling. So what is paced by -- and this is where the rubber hits the road for investors is, okay, you talk about a $1 billion market, what has to happen to make that happen? We need to -- we've got full regulatory approval in the United States. We need now to mimic that in Europe, and we're working our way through. That will happen in '26. We need then to have these dental labs try the manufacturing process and accept it and phase it in. And that's -- I wish that process were faster, but it is becoming a very sticky product. They like the product. They're going to ring it out and try it and make sure their economics work. I'm very confident they do. And then we'll be selling a lot more machines. So our production rates are ramping. We brought in inventory to make the product and the materials are fantastic. So I expect revenues to continue to grow in that market. We want to access as much of that $1 billion market as we can because I think this beats any manufacturing process out there. We are also because of requests now seeking regulatory approval in Central and South America. Several countries there would like to adopt the technology as well. Some of them use U.S. standards, some use European, some use a blend. Every country is different. It takes some time to get through those. But I have yet to see us ship a product to a lab and then say, wow, this does not work for me, okay? Everybody that tries it loves the output of it right now, right? And if there's any hesitations, it gets down to the details of the market they serve in terms of coloration, gums and teeth that varies by demographics, region of the world, all of that. So there's a little more work to do on some areas of the market, but fantastic acceptance. We're excited about the growth, and now it's just working through there. So all in all, dentistry for us, I think, is going to be a great business. It already is. The repair materials will always be needed for caps and crowns and all of that. The aligner product is very well accepted. It may become a little bit more of a volatile market with consumer spending in some parts of the world, but it's great. It will continue to consume a lot of material and printer investment. It is the most -- it's the largest application for 3D printing today. Well over [ 1 million ] of those are made per day through 3D printing because they're all unique to each person's teeth. So materials will be strong. Aligners will be strong for us. We're doing some really good work on night guards as well. And obviously, the -- and I would say, direct printing of aligners to change both the markets they serve and the way the product is manufactured. We're doing some good work there. And then, of course, dentures is our biggest new growth initiative. So thank you for the question. I'm super excited about the product and the process, the acceptance. Look forward to updating you more in the future. Alek Valero: I have a quick follow-up if that's okay. Jeffrey Graves: Sure. I'll give you a short answer [indiscernible]. Alek Valero: Now I was just going to ask on the denture opportunity, just digging a little deeper. So denture seems to be kind of like a more nondiscretionary product [ for that ], but if and when that initiative turns into revenue, would that become kind of like a more stable part of the dental revenue? Jeffrey Graves: Yes, absolutely. And that's a very good question, absolutely. If you look at aligners, they truly -- for many people that buy them, they are discretionary. I mean a lot of people have very good teeth. They're discretionary objects. Although I would tell you, the applications are expanding for aligners into folks that need more manipulation of teeth and beyond cosmetics, so for actual functionality of chewing stuff. So that's -- so that market is continuing to expand. Dentures are exactly what you said. They are, in my mind, an essential item to people, particularly in the developed countries and even in the nondeveloped countries, it's one of the first things people want. And life expectancies continue to expand. So you have an aging population. There's more demand, if you will, for teeth replacement. And this product wins both aesthetically and economically in addressing that need. So it should be a more stable revenue stream, a growing revenue stream as the manufacturing is converted and because of the aging population and growing demand profile. So we're thrilled by it. It's a great -- I think it will be a great business for us. And I think you'll see dentistry for us be neck and neck with our -- the balance of our health care business in orthopedics be 2 of our largest and most valuable revenue streams in the future. Operator: We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Jeff for any further or closing comments. Jeffrey Graves: So thank you all for calling this morning. We look forward to updating you again as we wrap up the year and report Q4 and full year results in the springtime. Thanks very much for the call. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Greetings, and welcome to Sunoco's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Scott Grischow. Thank you. You may begin. Scott Grischow: Thank you, and good morning, everyone. On the call with me this morning are Joe Kim, Sunoco LP's President and Chief Executive Officer; Karl Fails, Chief Operating Officer; Austin Harkness, Chief Commercial Officer; Brian Hand, Chief Sales Officer; and Dylan Bramhall, Chief Financial Officer. Today's call will contain forward-looking statements. Please refer to our earnings release and SEC filings for risk factors and reconciliations of non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. It has been another busy quarter for Sunoco, and I'd like to begin my remarks by providing a brief recap. Last week, we successfully completed the acquisition of Parkland Corporation. In a transaction valued at approximately $9 billion. This transaction has created the largest independent fuel distributor in the Americas and a leading operator of energy infrastructure. We are confident it will provide compelling financial benefits for our unitholders. As our asset portfolio has evolved over the past several years, we have significantly improved the stability of our income while also strengthening our financial position and scale. Over the past 12 months, Sunoco and Parkland on a combined basis, generated over $3 billion in pro forma adjusted EBITDA, across our field distribution business and our midstream operations. The Parkland acquisition will be immediately accretive to distributable cash flow per common unit, and we expect over $250 million in synergies by 2028, which will result in greater than 10% accretion. Additionally, our highly successful financing transactions executed in September outperformed our expectations and will deliver approximately $40 million of additional annual cash savings. This transaction, combined with our proven track record of disciplined capital allocation will create greater financial flexibility for ongoing distribution growth solid free cash flow and strengthened credit profile. Finally, I'm pleased to remind investors that tomorrow, Thursday, November 6, SUNCorp will begin trading on the New York Stock Exchange under the ticker SUNC. This new C corp tracker broadens investment options. As a reminder, SUNC is taxed as a corporation and issues of Form 1099, making it an attractive option for investors outside of the United States, domestic institutional investors and personal retirement accounts. Now turning to our financial and operating results. The third quarter continued Sunoco's strong financial and operational performance throughout 2025. The partnership delivered a record third quarter with adjusted EBITDA of $496 million compared to $470 million a year ago, both excluding onetime transaction-related expenses. Distributable cash flow as adjusted came in at $326 million for the third quarter. In the third quarter, we spent approximately $115 million on growth capital and $42 million on maintenance capital. This includes the partnership's proportionate share of capital expenditures related to our 2 joint ventures with Energy Transfer of $16 million for growth capital and $4 million for maintenance capital. Turning to the balance sheet. As of the end of the third quarter, a $1.5 billion revolving credit facility had no outstanding borrowings. Leverage at the end of the quarter was approximately 3.9x. Following the closing of the Parkland transaction, our credit facility was increased by $1 billion to $2.5 billion, which will provide greater liquidity for the partnership moving forward. As of today, our credit facility is currently undrawn. On October 20, we declared a distribution for the third quarter of $0.9202 per common unit or approximately $3.68 on an annualized basis. This represents an increase of 1.25% compared with the previous quarter and resulted in a trailing 12-month coverage ratio of 1.8x. This marks the fourth consecutive quarterly increase in Sunoco's distribution and is consistent with an annual distribution growth rate of at least 5%. I would like to conclude my remarks by stating that our financial position continues to be stronger than any time in Sunoco's history. Our legacy business remained strong as exhibited by our record third quarter adjusted EBITDA. Prior to closing the Parkland acquisition last week, we were on a path to achieve our 2025 adjusted EBITDA guidance. And intend to provide formal 2026 guidance for the combined company early next year. With that, I will turn the call over to Karl to discuss our operational results. Karl Fails: Thanks, Scott. Good morning, everyone. As Scott walked through, our teams have been very busy this quarter and the operational and financial results highlight the strength of our business and the benefits that come from accretive growth. We delivered strong results across all 3 segments. So let me walk through some of those details. Starting with our fuel distribution segment. Adjusted EBITDA came in at $238 million excluding $6 million of transaction-related expenses compared to $214 million in the second quarter and $253 million in the third quarter of last year. Volumes came in at 2.3 billion gallons during the quarter, up 5% from last quarter and up 7% compared to the third quarter of last year. This volume growth far outpaces total U.S. volume growth for both gasoline and diesel, showcasing that our investments are yielding tangible results in both our growth capital program and fuel distribution bolt-on transactions. Reported margin for the second quarter was $0.107 per gallon compared to $0.105 per gallon in the second quarter and $0.128 per gallon in the third quarter of 2024. When we look at margins across our system, there are a few perspectives worth pointing out. First, we believe that breakeven margins continue to be supported by many of the same factors that we have discussed over the past few years, including inflation resulting in higher costs, limited overall volume growth across the industry and higher interest rates. Second, we have seen some tempering of market volatility, which has not produced an outsized fuel profit quarter like we saw during the second and third quarters of last year. Even with that headwind, however, this has been a great year in our fuel distribution business. Once you normalize for the sale of our West Texas retail business in 2024 at a very attractive multiple, we expect that in 2025, we will have grown segment EBITDA for the seventh year in a row. The business continues to deliver very strong results. In our Pipeline Systems segment, adjusted EBITDA for the quarter was $182 million, compared to $177 million for the second quarter and $147 million for the third quarter of last year, all excluding transaction-related expenses. Segment throughput was 1.3 million barrels per day compared to 1.2 million barrels per day in the second quarter and 1.2 million barrels per day in the third quarter of last year. During the quarter, we saw strong performance across all our pipeline systems on both volumes and gross profit. Turning to our Terminals segment. We delivered adjusted EBITDA of $76 million, excluding $1 million of transaction-related expenses compared to $73 million in the second quarter and $70 million in the third quarter of last year, both excluding transaction-related expenses. Segment throughput was 656,000 barrels per day down from 692,000 barrels per day in the second quarter and 694,000 barrels per day in the third quarter of last year. Our transmix business continues to have a strong year supported by good performance in our terminals assets across all our regions. We expect to finish the year strong in our 2 midstream segments, highlighting the stability of the underlying assets and the work that our teams have done to optimize the expense structure with a focus on reliability and providing flexibility to our customers. Our third quarter results highlight our strong fuel distribution growth driven by our capital deployment strategy with a good mix of signing up new customers and bolt-on M&A, which continues to deliver market share gains and stable earnings. This strategy is complemented by our midstream operations. With the Parkland transaction now closed, our confidence in its highly accretive value has grown steadily over the past several months. It is another opportunity for us to deliver on our strengths, maintaining reliable operations, disciplined expense management, optimizing gross profit and effectively and accretively deploying capital. I will now turn the call over to Joe to provide his overall perspective. Joe? Joseph Kim: Thanks, Karl. Good morning, everyone. We delivered a very strong third quarter. Although 2025 is not quite over, I want to share some perspectives on this year as a whole. On the last earnings call, we stated that the back half of this year will outperform a good first half, with the third quarter results in the books is playing out as we stated and will deliver another record year. All 3 business segments are performing well. Our field distribution business continues to grow and provide stable earnings. Our Pipeline and Terminals segments also continued to perform at a high level. Last year's NuStar acquisition is proving to be outstanding. We have reduced expenses by 25% while improving gross profit and maintaining reliability. As for the Parkland acquisition, let me start off by publicly welcoming the Parkland employees to the Sunoco team. With the closing complete, we posted a new investor presentation earlier this week, I want to highlight some key insights. Both legacy Sunoco and legacy Parkland are performing as expected. As I said earlier, Sunoco will have another record year. As for Parkland, the 2025 year-to-date results have materially outperformed 2024. When you combine the 2 businesses together, our diversified portfolio spans across the U.S. Canada, the Greater Caribbean and Europe. We will deliver over 15 billion gallons of refined products. Scale is vital in our business, and we are now the largest fuel distributor in the Americas. Specifically within our midstream and fuel distribution portfolio, the Parkland addition greatly enhanced our position in the Atlantic Basin. We have over 7 billion gallons of contracted fuel demand from Eastern Canada to the U.S. East Coast to the Caribbean to South America. Throughout this footprint, we also have a leading position of terminals and the expertise to manage waterborne and other sourcing options. Bottom line, scale plus key assets equals a leading supply cost advantage. Moving forward, our immediate top 2 priorities are: number one, integrating Parkland; and number two, getting our balance sheet back to 4x leverage. Just like we did with the NuStar acquisition, we'll quickly make key decisions to integrate the 2 companies to achieve synergies as soon as possible. We expect more than $250 million in synergies. We're digging deep into every part of the acquired business. We will provide more precision and timing when we complete the process. As for the balance sheet, we expect to be back to our long-term target leverage of 4x within 12 months. This is faster than the time line that we gave back in May. Let me wrap up. As Scott mentioned earlier, the Parkland transaction is highly attractive with a greater than 10% accretion. Going forward, we expect free cash flow to be over $1 billion a year in the near future. The over 50% increase versus our stand-alone case puts us in a better position to execute on our capital allocation strategy, which is accretive investments, distribution growth and a strong balance sheet. Operator, that concludes our prepared remarks. You may open the line for questions. Operator: [Operator Instructions] Our first question comes from Spiro Dounis with Citi. Spiro Dounis: First question, Joe, maybe just to pick up on some of those closing comments around synergies. Looking like the floor now is sort of firmly around over $250 million here. I know you're a few days into this merger, but I also know you've been busy in the background, getting ready for this integration. So curious if you have a sense for just maybe how much above that $250 million we should have in mind? Are these more commercial or cost in nature, maybe how are you thinking about the cadence of realizing those over the next 3 years? Karl Fails: Spiro, this is Karl. Yes, really, to build on Joe's comments in his prepared remarks, there were really 2 updates that we provided in the release and in the investor deck earlier. One was the floor on the synergy number and then the second was tightening our time frame on getting back to the 4x leverage to within 12 months. And really, that comes because of the confidence we have based on the work we've done in the last 6 months. There are material synergies on both the expense and commercial side. I think the best way to think about the expense side of things, whenever you put 2 large companies together, you get to leverage the scale to find efficiencies and we've spent the integration planning period planning that. And I'd say, already a lot of those plans were started to be executed this weekend after we closed. Then you layer on that, that we have a very strong track record of good expense discipline. And so we feel there's a lot of opportunity there. But on the commercial side, our scale helps us as well. The teams have begun putting together plans. Most of those are on the supply side, but there are also going to be some opportunities on how we go to market that should yield results, as far as your question on the cadence, you should expect that when we issue guidance early next year that we'll give more details on what that ramp looks like through year 3 where the $250-plus million should be able to be delivered. And as far as your question on the ultimate upside looks like, here's how we think about it. The 2 primary measures on this acquisition that we're going to be focused on and both of them are very visible to The Street, are first, that we meet our commitment on getting leverage back to 4x within 12 months. And second, that we're going to show a double-digit accretion on a DCF per LP unit basis. So synergies clearly are the strongest lever we have to hit those metrics. But at some point in the future, those are going to merge with just improvements in growth in the base business that we've acquired. So -- so bottom line is we feel very confident and we're going to hit on those metrics as we've laid out. Spiro Dounis: Great. Second one, maybe just going to Sunoco Corp's dividend equivalency looks like the latest update points to minimal taxes for at least 5 years. Just curious, can you put a finer point on what that means for SUNC dividend equivalency over that period. And what's within your control to maybe push that out even further? Scott Grischow: Yes, Spiro, this is Scott. Look, there was no change to our 2-year dividend equivalency that we announced with the transaction in May. This was a feature that we granted as part of the Parkland transaction. Our intention is to keep the SUNC distribution very similar to Sunoco LP's past this time period and having minimal corporate income taxes is the foundation for achieving that. And as we laid out in our investor materials, we expect this to be the case for at least 5 years. I will continue to pursue opportunities and strategies that allow us to minimize corporate taxes at SUNC on an ongoing basis. Namely by deploying capital on organic CapEx and acquisitions, things of that nature, and we'll update investors when appropriate on the outlook past the 5-year period. Operator: Our next question comes from Justin Jenkins with Raymond James. Justin Jenkins: I guess I'd like to start on the distribution side of things. So obviously, growing at a nice 5% clip, but obviously a much bigger business and a more stable business with a lot of free cash flow with Parkland. Does that give you the potential to eventually maybe push that growth target up over time beyond the at least 5% window that you've looked at here recently? Joseph Kim: Justin, it's Joe. Obviously, I think I've said it like a broken record quarter after quarter, the foundation of our capital allocation is having a stable, reliable and growing distribution. And I think the foundation of that is we continue to grow cash flow. I think we've stated a few times that for the eighth consecutive year, we've grown DCF per common unit, and we expect that to continue for the future. Our coverage is hovering around 1.8. Our balance sheet is in a good position. So when we said, I think, last year that we expect a multiyear distribution increase, we said that pre-Parkland. You add in Parkland with double-digit accretion. So we we're in a good place before Parkland, we're in a better place after Parkland. As far as an exact amount for 2026 and above, we'll provide that as part of our kind of overall guidance early next year. But I think what you can take away that -- is that we're in a better position than we were even last year for meaningful distribution growth on a multiyear path. Justin Jenkins: Great. I appreciate that, Joe. Second question is on Hurricane Melissa impact. Certainly, you've got some presence in the Caribbean over time and Parkland is a bigger business in the Caribbean. Anything that you want to highlight here in terms of impact from the hurricane itself on the broader Caribbean portfolio for the fourth quarter and into 2026? Austin Harkness: Justin, this is Austin. First, I'd just start with -- on the human side of things. Our thoughts are with the people in the region and the loss of life and property associated with the storm. This is a powerful storm. From a business standpoint, specifically, the impact to our portfolio was largely limited to the Jamaica business. And fortunately, all employees in the region have been accounted for. I think this is a credit to the team. We've got a fantastic team down there. From the work they did, including their meticulous preparation in advance of the store, making sure that the area was as prepared as possible to the swift recovery or swift response, I should say, bringing necessary people, supplies, resources into the island to assist with recovery efforts. Just to put the business impact into a little bit more perspective, Jamaica is 1 of 25 jurisdictions and markets that we serve in the Caribbean region. And so overall, we don't expect there to be any material impact to our fourth quarter results for the segment or 2026 and beyond, but that's in no way intended to minimize, obviously, the human impact and devastation to some of the folks that were impacted in the region. Operator: Our next question comes from Theresa Chen with Barclays Bank. Theresa Chen: Looking at your comprehensive asset base at this point, could you share your perspective on potential opportunities for your West Coast terminaling assets as well as any incremental profitability upside for the Burnaby Refinery in light of ongoing California refinery closures? Karl Fails: Yes, Theresa, this is Karl. I think here's what I'd say. I'll start with the refinery. One is -- we're thankful and you see the results that the refinery team has delivered this year on improved reliability that's really been our focus and will be our focus going forward on the refinery operation. Clearly, California, there have been plenty of refinery shutdowns and different things in the news. Our strong asset base on the West Coast, while it's not as big as on the East Coast is growing and I think there's going to be opportunities. So while, I don't know exactly how the markets are going to shape out over the next 2 or 3 or 4 years. I think our track record shows that when product flows shift that we have the scale and expertise to be able to take advantage of them. So the refinery really is the platform for our fuel distribution business in Western Canada. And we have key assets down through the Pacific Northwest and into California. So if refinery shutdowns continue in the West Coast of the U.S. and Canada become import markets, we should have opportunity to supply from our refinery in Canada or we should have facilities that should enable imports coming in from outside the U.S. So I think we're well positioned to be able to take advantage of whatever wherever the markets shake out. Theresa Chen: Got it. And what are your expectations regarding how the recently announced refined product pipeline projects could impact or create opportunities for your own Gold Coast to Mid-Continent refined product pipeline infrastructure as well as your fuel distribution assets in pads 2 and 5? Karl Fails: Yes, Theresa. I think my answer is pretty similar to the California question. I think the -- what we don't comment specifically on certain competitors' projects, I think those, pipeline open seasons and projects that you mentioned really are an indication of some of the changes in U.S. refined product flows as a result of refinery shutdown in California. So I think the same principles are in play. We have a fuel distribution business that we have a track record taking advantage of changes in product flows. We now have an asset portfolio, terminals on the West Coast. Some pipeline systems in the Mid-Con and in Texas that we can use to invest in to provide services for either our own business or our customers. Obviously, when things change, sometimes there are assets that are impacted negatively, but we'll have assets that are impacted positively. So as we look at that all together and our ability to work with our customers, see where we can help, meet their strategic objectives, we feel really good about our ability to benefit from these changes. Operator: [Operator Instructions] Our next question comes from Jeremy Tonet with JPMorgan. Elias Jossen: This is Eli on for Jeremy. I just wanted to start on the outlook. I guess what went into the decision not to update the 2025 guide today to include Parkland contributions? Would that be part of the TanQuid assent closing and just thoughts there. And then maybe on to '26 and kind of early thoughts there. I think you said you'd release guidance earlier next year versus maybe December this year. Just what are the kind of key puts and takes, base business and synergies to expect as components to the '26 guide? Joseph Kim: This is Joe. Let me start with '25. I think the obvious reason is we just closed on Parkland and one of the statements we made earlier is that we expect to close on TanQuid in the fourth quarter. So trying to get put too much precision on when tank what's going to happen. It gave us a good reason to be sure about what we're going to provide for guidance for next year instead of just giving an update in '25. The other thing is that -- for the reason why we typically have given guidance in December of every year, we push it to early next year. We just got all the budgets that Parkland put together for their business. Going through that with a fine-tooth comb, we [indiscernible] base business is going to perform like and that will be a significant part of our guidance for next year. As far as early thoughts on '26, I can give you a few things, I think, that might be helpful. First of all, the Parkland business is performing year-to-date, better than 2024. So we're starting with a really good baseline with Parkland. Secondly, for Sunoco, legacy business, we continue to grow. We've grown year after year and 2026 on a stand-alone basis won't be any different. And I think Karl talked in depth about the synergies. We increased -- we put the at least $250 million in synergies. We think this is going to be an outstanding acquisition for us. We're in the process of going through more precision and exact timing and all that will come together when we give guidance. But I think the takeaway is that we feel even better about this acquisition than when we announced it in May, and we're well positioned to have another outstanding year in 2026. Elias Jossen: Awesome. And then maybe just back to the base business. I think you talked about kind of just steady improvement there. Maybe on the fuel distribution side, just thinking about the CPG margins following the integration of PKI assets, how should we think about those margins trending as we move forward? I know you guys are the largest fuel distributor in North America, and you have a lot of economies of scale. So should we see any kind of upward pressure on those margins going forward? Joseph Kim: Yes. Eli, let me give you a couple of thoughts about more on a segment basis. And I'll give you the pieces and then when we give guidance, all that -- all this will kind of tie out together. First of all, we'll start with the PKI Parkland U.S. business, their legacy business. I think it's been well documented that they've passed some struggles over the last few years. The exact reason, the detailed insider view. We don't have the exact details yet, but we will. And then -- but here's what I think to give you clarity on the U.S. business. We view Parkland's U.S. distribution business, just like a bolt-on acquisition, we've done time over and over again. So we're going to manage it for income stability. We're going to do gross profit optimization. We're going to cut expenses. So in due time, pretty darn quickly, we expect the Parkland U.S. business that struggled to perform in line with what Sunoco has done year after year. So we feel very positive about that. As far as the Canadian business, the way that I would probably look at it is they had strong third quarter results. I'm not surprised these assets in Canada on fuel distribution has performed well year after year. The Canadian assets has some key elements that I really like. First of all, they got scale. We got scale. 1 in 5 fuel station is fueled by Parkland. So incredible scale in Parkland in Canada. Secondly, the Canadian relative to the U.S., they've had a long history of sustained higher margins than U.S. We don't think this is going to change. And finally, we have channel management opportunities. We've done that with every acquisition we've done. We've taken the assets and we'll put it into the right channel where we think we can have the most income stability. So from a Canadian field distribution side, we think this is going to be additive to our overall fuel distribution portfolio. In the Caribbean, we see -- these are a bunch of niche markets with high margins, and we think this is going to continue. We have history in niche markets like Hawaii and Puerto Rico. And then some of these markets also have -- have material GDP growth in some of these areas that we think we'll share in the upside. So if you put it all together, I feel better about our field distribution portfolio, and that's the reason why we thought Parkland was a great fit for us. Operator: Our next question comes from Ned Baramov with Wells Fargo. Ned Baramov: I want to stay on the legacy Sunoco U.S. fuel distribution business here. A few factors in play on the one hand, the ongoing government shutdown and some signs of weaker fuel demand don't seem constructive for volumes. But on the other hand, as Karl pointed out, your CapEx program and roll-up transactions year-to-date add gallons to your system. Either way, you've already demonstrated an ability to protect the overall contribution from this segment across different environments. Just wanted to check if there is a change in how you think about the prospects of the fuel distribution business in the next 6 to 12 months? Austin Harkness: Yes. This is Austin. I think you hit it. Overall, I think what we're seeing from a fuel volume standpoint is in the U.S. more broadly, demand for refined products is roughly flat year-over-year. There has been maybe some softening in recent months. But our legacy business has outperformed the broader segment, right? We're up-mid to high single digits for Q3 on volumes. And a lot of that, as you pointed out, is owed to our capital allocation strategy and growth capital deployment, including growth CapEx and some of the bolt-on accretive M&A that we did in the first half of this year that's yielding benefits in Q3 and beyond. In terms of changes to expectations, we actually see the fundamentals as strong for the segment as they've ever been. The business is healthy and with our combined now asset base with the Parkland acquisition, we're well positioned to continue our historical trend of growing EBITDA for the segment accretively year-over-year going forward. Ned Baramov: Great. And I guess a quick question on growth capital. Could you talk about the key areas of investment for Sunoco in the third quarter other than the $16 million contribution to the gathering JV. Are you still primarily spending in support of the fuel distribution business? Or are there organic opportunities in your pipeline and Terminals segments? Karl Fails: Yes, Ned, this is Karl. Our growth capital is spread across all of our segments. But really, it is in a best project wins type of mentality. And I -- obviously, we haven't done any large projects in our pipeline systems or terminal segments, but there's plenty of what we call smaller to medium-sized optimization-type projects. Some of them unlock more opportunities with our fuel distribution business. Some of them unlock more ratable income from third-party customers. So really, it's fuel distribution pipelines and terminals all have growth capital in addition to our parts of the JVs. Operator: We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Scott Grischow for closing comments. Scott Grischow: Thanks for joining us on the call today. As we said, there are a lot of great things to look forward to in 2025 and beyond for Sunoco, and we look forward to updating you going forward. Please reach out if you have any questions. Thanks for tuning in, and I always appreciate your support. Operator: This concludes today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: " Adam Singolda: " Stephen Walker: " Jessica Kourakos: " James Kopelman: " TD Cowen, Research Division Jason Helfstein: " Oppenheimer & Co. Inc., Research Division Laura Martin: " Needham & Company, LLC, Research Division Mark Zgutowicz: " The Benchmark Company, LLC, Research Division Matthew Condon: " Citizens JMP Securities, LLC, Research Division Zach Cummins: " B. Riley Securities, Inc., Research Division Unknown Analyst: " Operator: Good day, and thank you for standing by. Welcome to Taboola's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jessica Kourakos, Head of Investors. Jessica Kourakos: Thank you, and good morning, everyone, and welcome to Taboola's Third Quarter 2025 Earnings Conference Call. I'm here with Adam Singolda, Taboola's Founder and CEO; and Steve Walker, Taboola's CFO. The company issued earnings materials today before the market, and they are available in the Investors section of Taboola's website. Now I'll quickly cover the safe harbor. Certain statements today, including our expectations for future periods, are forward-looking statements. They are not facts and are subject to material risks and uncertainties described in our SEC filings. These statements are based on currently available information, and we undertake no duty to update them, except as required by law. Today's discussion is also subject to the forward-looking statement limitations in the earnings press release. Future events could differ materially and adversely from those anticipated. During this call, we will use terms defined in the earnings release and refer to non-GAAP financial measures. For definitions and reconciliations to GAAP, please refer to the non-GAAP tables in the earnings release posted on our website. With that, I'll turn the call over to Adam. Adam Singolda: Thanks, Jessica. Good morning, everyone, and thank you all for joining us today. We're pleased to report another strong quarter, our third consecutive quarter in 2025, exceeding the high end of our guidance. Our new performance platform Realize is beginning to work for both advertisers and publishers. We're seeing an inflection point in our business and have greater confidence than we did even 90 days ago that we will get back to double-digit growth over time. This momentum gives us the confidence to once again raise our full year outlook. We've bought back 14% of the company year-to-date, and we're continuing to buy back shares aggressively. As a reminder, Taboola is one of the largest performance advertising platforms outside of search and social. Our platform Realize helps businesses get leads and grow sales. It operates similar to Google Ads or Meta ads, offering a simple-to-use platform powered by AI. The key difference is that while Google reaches users in search and Meta in social, Realize engages 60 million people every day across the open web on partners like Yahoo, NBC, ESPN, USA Today, Apple News, Samsung and Xiaomi, driving those people to action. Our competitive advantage lies in our AI and first-party data drawn from what people actually read about versus what people idealize themselves on social media, giving advertisers authentic insights into users' intent and high-performing outcomes. In 2025, we expect nearly $2 billion in gross revenue and more than $700 million in ex-TAC gross profit, which is what we keep after we pay our publisher partners who show our ads to their users. We expect to generate over $200 million in adjusted EBITDA at a 30% margin with strong free cash flow. As advertisers see diminishing returns on search and social, they look for scalable performance-driven alternatives like Realize. Taboola is uniquely positioned to take share in what we estimate is a $55 billion opportunity. Now let's turn to our Q3 results, which came in ahead of the high end of our guidance across the board. We delivered revenue of $497 million, ex-TAC gross profit of $177 million and adjusted EBITDA of $48 million, representing a strong EBITDA margin of over 27%. We also generated $46 million in free cash flow this quarter and $117 million year-to-date, which amounts to a 96% conversion of our adjusted EBITDA in Q3. This strong cash generation allowed us to repurchase approximately 10 million shares during the quarter for a total consideration of $34.4 million. Year-to-date, we bought back approximately $184 million worth of shares, representing 14% of the company. Driving ex-TAC gross profit growth is our North Star. It indicates that we're providing increased value to our customers and fuel our profitability and cash generation. In the third quarter, ex-TAC gross profit grew 6% year-over-year. The vast majority of our revenue is driven by scaled advertisers, those who spend $100,000 or more annually. As such, we guide investors to track 2 main metrics that affect our ex-TACs gross profit growth. The first is growing the number of scaled advertisers. The second is increasing average revenue per scaled advertiser. In the third quarter, we grew the number of scaled advertisers by 4% to 2,064. Our average revenue per scaled advertiser grew 11%, reflecting meaningful progress in driving advertiser success with Realize. Realize's expanded capabilities and strong performance technology are driving these improved results. One example can be found with a major online travel company that was interested in growing their cruise business. While using Realize's advanced targeting and bidding technologies, they were able to achieve 67% lower CPCs versus Meta while driving a 48% increase in traffic to their site. This performance was so strong, this travel company increased their initial investment 10x and has now become a scaled advertiser on our platform. Last quarter, we shared more about how our supply is differentiated. Overall, our exposure to search traffic globally remained in the single digits. And even as search traffic across the web declines, our total company traffic in Q3 grew year-over-year. This growth was fueled by strong double-digit increases in app traffic, now accounting for roughly 1/3 of our global supply, along with successful new publisher onboarding. We continue to monitor our traffic patterns, but at this time, it is a relatively small level of exposure. In summary, we're very happy with how the year is progressing. We think Realize can make us the leading performance advertising platform outside of Google, Meta, and Amazon across mobile, desktop, OEMs, messaging apps, and more. It is a big ambition, and the numbers make it clear that we're not there yet. That said, we see an inflection point in the business with Realize. And if you know his team as well as I do, you'd know we're motivated by big challenges. It is probably one of the reasons we were voted one of Fortune's Best Places to Work. We're taking on one of the toughest competitive landscape in the world in an enormous addressable market. We're hard at work, and we bought approximately $184 million worth of shares as we see the opportunity ahead of us. Before I hand it over to Steve, on a personal note, I want to say that over the past months, our teams and partners in Israel have shown incredible strength, resilience, and unity. Seeing things begin to come and people returning home safely fills me with gratitude and hope. With that, I'll hand it over to Steve. Stephen Walker: Thanks, Adam, and good morning, everyone. As Adam mentioned, we've had a strong year so far. In the third quarter, we continued that momentum, delivering results that exceeded the high end of our guidance across all metrics. In the third quarter, revenues reached $496.8 million, up 15% year-over-year. We believe this growth reflects an inflection point and realizes traction in the market. I have spoken about the fact that we have a large amount of very high-quality supply, so what we need to grow our business going forward is primarily to earn new advertiser budgets. We started to see traction in that area during Q3 as our new ad platform is helping advertisers succeed and helping us win additional budgets. This showed up in our scaled advertiser metrics, evidenced by a 4.4% increase in the number of scaled advertisers and a 10.9% increase in average revenue per scaled advertiser. Both of which primarily benefited from realized improving retention and growing ad spending levels with existing advertisers when compared to the same period last year. As I have said in prior quarters, we are particularly pleased to see the number of scaled advertisers growing as they tend to be the fuel for future growth. I should note that the growth in average revenue per scaled advertiser also benefited from an easier comparison with Q3 2024 because during that period, we were testing ad formats with Yahoo, and revenue from that test was recognized as an offset to traffic acquisition costs rather than as revenue. Normalizing for that one-time test, growth in this metric was more in the mid- to high single digits range, and taken together with our growth in scaled advertisers, positively contributed to our revenue and ex-TAC performance. Ex-TAC gross profit for the third quarter came in at $176.8 million, up 6.3% year-over-year, including a 55-basis point tailwind from foreign exchange rates. Ex-TAC gross profit growth was primarily driven by strong growth in advertising spend, thanks to the success we are seeing with Realize, and includes strong performance from Taboola News and Bided Supply. Ex-TAC gross profit margins were down year-over-year, primarily due to the one-time testing we were doing with Yahoo last year. Notwithstanding, overall Ex-TAC gross profit dollars grew year-over-year. And as I have said previously, I focus more on growth of Ex-TAC gross profit dollars rather than the margin percentage. Gross profit for the quarter was $139 million, primarily benefiting from strong ex-TAC gross profit growth. As mentioned in prior quarters, gross profit also benefited from reductions in our other cost of revenues driven by lower server and network infrastructure costs, some of which came from a reduction in depreciation expenses related to our servers due to a reassessment of their useful lives. Our net income was $5.2 million, with non-GAAP net income coming in at $34.3 million. Adjusted EBITDA for the quarter was $48.2 million, reflecting an adjusted EBITDA margin of 27.3%. We continue to focus on cost discipline across the business while strategically investing in areas that support growth. This quarter, we had a $2 million headwind for foreign exchange rates versus Q3 2024, $3 million higher operating expenses, partially offset by approximately $1 million in Ex-TAC tailwinds. The impact on operating expenses was primarily from the Israeli shekel, where we have a large employee and expense base. Without this headwind, our adjusted EBITDA margin would have been roughly the same as Q3 2024. We also had higher-than-planned hosting costs related to certain growth initiatives, and we decided this quarter to further increase our marketing spend for realize based on the traction we are seeing. In terms of cash generation, we had $53.2 million in operating cash flow in the third quarter and free cash flow of $46.3 million, representing 96% conversion from adjusted EBITDA in the quarter. Our free cash flow benefited significantly from a couple of factors, primarily high adjusted EBITDA margins and strong management of our working capital. Our free cash flow conversion from adjusted EBITDA continues to be over 70% over the last 4 and the last 8 quarters. Given our experience over the last couple of years, we think it is safe for investors to assume that we will convert free cash flow at a 60% to 70% rate over the longer term, which is above our prior 50% to 60% target conversion of free cash flow from adjusted EBITDA. For the full year 2025, I expect to do even better than the high end of that range. Turning to the balance sheet. We remain in a strong financial position. We ended the third quarter with a net cash balance of $41.5 million. Cash and cash equivalents totaled $115.5 million, which more than offset our long-term debt of $74 million. As a reminder, earlier this year, we secured a new $270 million revolving credit facility, allowing us to fully repay our previous long-term debt loan while maintaining approximately $196 million in available capacity as of September 30. This facility also allowed us to reduce our interest expense by $1.6 million in the third quarter. With this facility, we can operate with a lower cash balance while preserving access to significant liquidity. We continue to believe share repurchases are one of the most compelling uses of capital. In the third quarter, we repurchased approximately 10 million shares at an average price of $3.43 for a total consideration of $34.4 million. Year-to-date, we have bought back nearly 14% of our outstanding shares, reducing our total share count from approximately 337 million at the end of 2024 to about 291 million at the end of [Audio gap] Q3 2025. As an update to our share repurchases from Yahoo, we are no longer required to purchase shares from Yahoo for the remainder of 2025 due to meeting certain Israeli regulatory conditions. This means we have the ability to buy more shares in the open market. Moving to guidance. For the fourth quarter 2025, we expect revenues to be between $532 million and $542 million, gross profit to be between $166 million and $171 million, ex-TAC gross profit to be $204 million to $210 million, adjusted EBITDA to range from $83 million to $85 million and non-GAAP net income to be $52 million to $56 million. For the full year, we are raising our guidance across the board. We now expect revenues to be between $1.91 billion and $1.93 billion, gross profit to be between $550 million and $564 million, ex-TAC gross profit to be $700 million to $710 million adjusted EBITDA to be $209 million to $214 million and non-GAAP net income to be $139 million to $144 million. This guidance reflects continued momentum across our business. I would note that in Q4, the adjusted EBITDA guidance reflects a forecasted headwind from foreign exchange rates of over $5 million on operating expenses, partially offset by ex-TAC tailwinds, which reduces our adjusted EBITDA by approximately $1.5 million and reduces the adjusted EBITDA margin by over 140 basis points. Also, as a reminder, when you are comparing each of the quarters this year to the same quarter last year, you must keep in mind the onboarding of Yahoo, which impacts quarterly comparisons this year. As a result, we believe the full year projected growth rate of 6% at the midpoint of our new range normalizes for these dynamics and is the best representation of the true growth of our core business in 2025. In summary, we're very pleased with our Q3 performance and the strong momentum we've built so far this year. We're seeing an inflection point with Realize and remain focused on delivering against the goals we set at the beginning of the year. There's still work ahead, but we believe we're on the right path toward achieving double-digit growth over time. With that, let's move to Q&A. Operator, can you please open the lines for questions? Operator: Yes, Thank you. [Operator Instructions] Your first question comes from the line of Zachary Cummins with B. Riley Securities. Your line is now open. Zach Cummins: Hi, Good morning. Thanks for taking my question and congrats on the strong results here in Q3. So just starting off with Realize platform, nice to see the incremental traction that we're seeing on that front. Just curious, in terms of taking it to the next level of capturing more of these advertiser budgets, is it more just proving it out and testing it in the market? Or what are kind of the next steps in terms of taking this from strong traction to meaningful contribution to the overall P&L? Adam Singolda: Yes. So I think overall, we're seeing good momentum, which is encouraging for us to see. If you look at what we said when we launched it, taking a step back, there are really 3 things that move the needle financially. The first one is just going from native advertising to performance, and that takes time in order to shift kind of perception in the market and getting more advertisers to be aware of Taboola as a place, they can spend money beyond search and social. So that's one. The second thing is our focus on the sell side on ICPs. And that's important because when we sell to the right clients, we tend to see higher retention and more spend. And the third one is keep iterating on the tech front. So predictive audiences, new formats, new placements. So those 3 things, keep iterating on those, we believe will make a positive impact. Zach Cummins: Understood. And my one follow-up question is just building on Realize -- interesting partnership that you announced with Paramount. So can you talk about the performance multiplier product and how maybe Taboola could have more of a presence in CTV over time? Adam Singolda: Yes. So I mean, let me just say that it's financially small as of now, but very exciting. So what we've announced, which is essentially a demand generation opportunity for Taboola through Realize, we're tracking essentially the industry overall going more and more into outcome and measurement and performance-driven market. And even in television, which is about $100 billion market in the U.S., we're seeing these dynamics. So what we've announced, which is essentially a demand generation opportunity for Taboola through Realize, we're tracking essentially the industry overall going more and more into outcome and measurement and performance-driven market. And even in television, which is about $100 billion market in the U.S., we're seeing these dynamics. Advertisers are expecting to not only enjoy the benefit of a large screen when they get consumers exposed to ads, but also track and be able to drive conversions through that campaign. We're seeing this with Amazon, obviously, telling advertisers if you buy Prime, we can show ads also on Amazon.com and show you that someone ended up buying the product. It's a very powerful pitch to advertisers. So what we've announced with Paramount, which is a great partner of ours on the CBSI front for a very long time and now on the CTV front, is to bring the combined power of TV and performance advertising into one home, if you will. So if you're buying an ad and that ad is shown on Yellowstone as an example, and you see that ad in your living room, you, a consumer, and people like you may be through a matching integration with Paramount, may be seeing relevant ads on the open web through Realize. And the point here is that we're able to expand the audience. So even if one person saw an ad on TV, we're able to show maybe 10 other people ads that are relevant to the same advertiser and then report back, and this is the exciting part, reports back to the advertiser, how many clicks have occurred, impressions, conversions, price per acquisition. So, you're buying a TV and you feel like you're buying Meta. I'm excited about it, and I hope we'll continue to see traction, but it's like retail media for TV, if you will, it's still early days. Operator: Your next question comes from the line of Laura Martin with Needham. Laura Martin: Great numbers, guys. I have a couple. Can you talk about what's going on with traffic? And if you're not seeing any degradation in traffic, I'm very interested in the quality because these LLMs are searching sort of anywhere between 8,000 and 8,000 pages per query to give an answer. So my first question is on traffic, both volume and quality of is human traffic declining even if total traffic to your site is not? And then my second question is, you guys were really early adopters of using AI to improve your yields and conversion rates. I'm interested in an update on actual metrics of where you've seen improvements either in costs or in revenue or in yield from your updated AI implementations, please? Adam Singolda: Sure. Thanks for the question. So I can start, and we can bounce off of this. So the first thing we're seeing actually surge in traffic overall, which is interesting, obviously, as you say, in times of search traffic declining because of L&M engines. The main 2 reasons we're seeing traffic going up is, I would say, one, we're seeing an increase in direct traffic, actually specifically through apps. So many of our partners have a very strong brand name. So if you think about the ESPNs of the world, the CNBCs, Yahoo!, and OEM partners such as Apple and Samsung, and others, many of them have a very strong brand and are recognizable with consumers. And while search traffic is going down, we're seeing their app direct traffic going up, and that affects our overall traffic mix. So that's something that's really helpful. And the second thing is, we're doing a good job onboarding new partners. So think of new publishers and new devices through Taboola News, we've seen positive trends in adding new partners. So for those 2 reasons, overall company-wise, we are seeing growth in traffic. So, that's about that. Human traffic, we're not seeing any material change that I'm aware of. In general, the way we're doing it today, we have this index that actually allows us to constantly make sure that our supply has high quality for advertisers. When we onboard a new partner or as things change, we're able to see if the conversion rate from a certain publisher or the conversion rate from a certain page has changed. And if it's within a certain range of what we expect, we call that human and good. And if it's too far down, we actually part ways with that partner. We're not sustaining partners on our network that do not perform to advertisers. So we've been doing this for a long time. And I think advertisers really appreciate that because they know they can always rely on our traffic being high quality. Steve? Stephen Walker: Yes. And then in terms of your question about AI, and where are we seeing impact from that? So just to take a step back real quickly, we use AI across our business. We've been a deep learning-based business for better than a decade now. And that is what the technology basically drives, how we decide which ads or which pieces of content to show to which users in which particular context at any given time. So that is a key part of our business and has been for a decade. LLM-based AIs, where we started using, obviously, more recently, as they become more advanced, we use those primarily in 2 areas of our business. So one is we announced, obviously, Laura, you remember we demoed Abby with you, where we showed an LLM-based assistant for advertisers that helps them to get up and running on our platform. And now, over time, it is even helping them to optimize campaigns and to do more with the platform. So we use it there. And then internally, we're using LLM-based technology a lot more for productivity reasons. So a great demo I saw the other day was showing our sales team where they can say, "Hey, I'm about to go into a meeting with Nestle with this person, and an LLM-based tool will actually prep a whole kind of package of information that they should know. What has Nestle been saying about their goals as a business? What does this person do?” It's kind of amazing how much information they get going into the meetings that they come in prepped. So we're using it as a productivity tool in that way. In general, what I would say is that we will always see the biggest impact on our business with AI is anything that drives higher yields and higher success rates for our advertisers. And that's true. So when we talk about seeing an inflection with Realize, frankly, a lot of that is coming on the back of better algo, things like predictive audience is an AI-based prediction tool of where could you get more conversions on our network and what do you have to do to get those. So that's probably impact number one. Abby is definitely having an impact on our advertisers. So we're seeing more success, thanks to that. And then I'd say that we are seeing productivity, but we're probably earliest in that area in terms of where we're seeing impact. Adam Singolda: And lastly, Laura, just to add one more note is that we also launched deeper dive a few months back, which is our kind of ChatGPT for the open web driven by advertising as a revenue source. Still early days, but that's another thing that can generate surge in quality traffic, definitely human traffic because people have to type and engage with it. So that's another investment we're making to try to create more quality supply for advertisers in the form of LLM and support publishers in growing and getting into the AI era as we know it. Operator: Your next question comes from the line of Jason Helfstein with Oppenheimer. Jason Helfstein: I was on a few calls, so I apologize if this was already covered. But I'm struggling to understand kind of, again, why revenue ex-TAC on a year-over-year basis will decelerate, call it, seven points? And then why the other cost of goods, the non-TAC COGS is going to be up $5 million sequentially? So can you unpack that? And then I've just got a question about next year. Stephen Walker: Yes. When you talked about the non-TAC COGS, are you talking about the other cost of revenue? Jason Helfstein: Correct. Yes. Stephen Walker: Okay. Yes. So I guess I'll start with kind of the general discussion of ex-TAC and where we are with ex-TAC. So first of all, I think margins were down -- when you look at ex-TAC margin, they were down year-over-year, primarily due to the Yahoo testing last year. So remember, last year, we had a format testing with Yahoo where it was recognized on a net basis. Basically, it was a TAC offset. And that distorted our margins year-over-year. So I think if you're talking about a margin in Q3, it was down because of that. If you're looking at ex-TAC dollars, they were up 6% year-over-year in Q3, and that's kind of what we focus on more as the dollars. Q4 is going to be down year-over-year. That's mostly due to two factors. One is there was a -- the Yahoo onboarding last year basically caused some distortion between quarters. So that's part of it. And then we also had particularly strong demand from Chinese advertisers in Q4 last year that, frankly, was unusual. And with the tariffs this year, they did drop. We talked about that in Q1, and they have not gotten back to the same rates yet. So those are the primary two factors for Q4. In terms of the other cost of revenue and changes there, so first of all, we've changed the accounting on our servers. That actually has brought down other cost of revenue. But we have also written off or not written off, we've changed the way we're accounting for some of our capitalized projects. I believe that's a big part of the remainder of it. Jason Helfstein: Okay. And then just philosophically, I think we were previously thinking next year would grow low single digit. I mean, obviously, coming off this -- again, for revenue ex-TAC with this minus kind of 2% guide for the fourth quarter, is it still fair to assume that you think the company could generate positive growth in revenue ex-TAC for next year? Stephen Walker: Yes. So yes. And I think that generally, the way I think about it is, first of all, we're seeing good momentum with the business. Like I think we're happy with what we're seeing. I think I wouldn't look at quarters when you're thinking about the growth rate. And while we'll give you guidance, obviously, for 2026 in February, what I would look at now is our full year growth rate for 2025 is a good proxy for, I think, where you can start with thinking about 2026. Operator: Your next question comes from the line of Mark Zgutowicz with The Benchmark Company. Mark Zgutowicz: Steve, you talked a little bit about marketing spend. I'm just curious, if you think about Realize marketing spend returns, what adjustments have you made since launching Realize? Maybe you can talk about what's worked, what hasn't and perhaps how your sales capacity is there relative to where you'd like it or if it's where you are comfortable with? And then in terms of margins, if we look at the fourth quarter adjusted EBITDA margin guidance, is that a good proxy for us to think about in terms of 2026, excluding any potential rev ex-tech acceleration? And then maybe a last one for Adam, if I could. If you think about opportunities for investment alongside Realize incrementality, can you maybe prioritize Agentic, MCP, ad CP or any other areas? Stephen Walker: Sure. Thanks, Mark. So I'll answer the first two. So first of all, in terms of the marketing spend, yes, so I mentioned, obviously, in my prepared remarks that we've increased marketing spend intentionally over the last two quarters, Q3 and now heading into Q4. The reason we did that is we're seeing and again, it has to do with the inflection we're seeing with Realize. We're seeing that advertisers are more likely to be successful coming on to our network now with the launch of Realize and a lot of the new product features that are baked into Realize, they're more likely to be successful. So obviously, what that means is if I previously was spending and I'm making up numbers here, so don't take these -- don't build these into a model. But if I was previously spending $1,000 to get an advertiser onboarded in the U.S. through -- in terms of marketing spend, and they were -- had an X percent likelihood of being successful and then eventually having a certain lifetime value, that X percent likelihood of success has gone up, which means the lifetime value is still similar, maybe even improved a bit, means I can spend more on marketing, and I can basically still have a good positive ROI on it. So as we've seen that, we've started increasing our marketing spend, which has a smaller effect on the immediate term, but again, brings on more advertisers, which should help us grow faster in the future. So that's kind of what's going on with the marketing spend. In terms of specific areas that we're seeing that, geographically, it's been pretty broadly diverse, so globally, although we are seeing particular momentum in the U.S. in that regard. And then in terms of the types of advertisers, it's really those -- we talked about ICPs or ideal customer profiles where we talked about the launch of Realize. It's those verticals. It's finance, it's auto, its health, it's direct-to-consumer products. It's those verticals that we're seeing the best traction. In terms of your second question about expectations for adjusted EBITDA and kind of where -- what you should think in terms of that going forward, I think -- so Q4 is a seasonally strong quarter from an adjusted EBITDA margin perspective. So don't look at Q4. But I think what we've said repeatedly in the past, and I think it's still true today, we use 30% adjusted EBITDA margins as kind of a guardrail for ourselves to think about what we should -- how much we should invest in growth versus how much profitability we want. And I think that's a good starting point for how to think about our margins and our OpEx for next year. Adam Singolda: I can take that AI one. So, Juan, on the first part of your question, I think all of what we do is investing in AI in terms of driving primarily advertiser success. Realize is drive most of our revenue as a company now and making advertisers successful through Realize will be the main way we will go back to double-digit growth as a company. So -- and then Realize is -- we're tracking Realize, as you know, with scaled advertisers, how many of them do we have and then how much they're spending in average. The reason that's important is because if you do a good job making advertisers successful with unique data, a lot of distribution and advanced AI investment, then you should see more scaled advertisers and you should see them able to spend more because it means you have higher retention rates. People try you, they churn less, which means they get retained. And then once they're in, they're spending more and more over time. That's what you want to see. And as you saw in my remarks, we're seeing a 4% increase in scaled advertisers and 11% growth in average spend. So I think for us, it's laser focused on how do you get return on ad spend as fast as you can for advertisers so they don't churn. And then what technologies such as predictive audiences and other new formats and new supply, you can provide them as part of our technology so they can spend more and more over time. And that's -- these are the 2 areas of focus for us. When I think about Taboola and its position in the marketplace, you asked about MCP, I think we're well positioned because the vast majority of our revenue comes from advertisers who buy from us directly. That means that we're able to share more with publishers and keep a very healthy margin for us as a business. And that's not the traditional ad tech usually diagram where you have companies that are doing one side of the marketplace, and a lot of money gets lost along the way. So I think for us, it's important to track MCP in this industry and companies such as Taboola, which is a 2-sided marketplace. Publishers who work with us, work with us directly. Advertisers who buy from us, buy from us directly. This is similar to almost a consumer company. Only for us, we don't have our own Instagram. We have reach to consumers through publisher relationship. So I think we're well positioned, and you can see that in our performance. Operator: Your next question comes from the line of James Kopelman with TD Cowen. James Kopelman: The first one is for Adam, just following up on Laura's question on traffic. You mentioned that app traffic is now 1/3 of supply. Where do you see that trending over time? Do you think that could hit 50% or higher of supply? And do you expect double-digit app traffic increases in the fourth quarter as well? And then I have a follow-up question for Steve. Adam Singolda: Yes. I mean it's encouraging to see that traffic being already 1/3, almost 1/3 and because that's a good stable base that is not affected by search as much or at all. And so I think that's already encouraging from our perspective as I look into the future. I think it has a chance of going up faster because, one, it's a much more engaged audience tends to be. So if you talk to publishers, they'll usually tell you, and we see it that an app user is a significantly more engaged consumer. They spend more time, they read more, they generate a lot of revenue. So publishers are always motivated to move people into app. And with -- again, with the risk of LLM, I think I'm betting we'll see more dynamics of publishers trying to get consumers to download the app and using that. So I think that's going to be a positive trend. And two, -- we're seeing a lot of growth coming from Taboola News and in-app monetization through partners like Apple News is obviously an incredible one in Samsung. And we spoke earlier this year about LINE, which is a messaging app. So I think for us, we have aspiration as a company to keep working wherever consumers spend real time. So that over time, we have aspiration to be on every device, every lock screen, every swipe you may have, provide news if relevant as part of your utility app. So that's something that we invest in as a company. And I think there's a good product market fit with what we can provide, which is content, data and revenue to what the market wants. So I do suspect this will have a positive trend. James Kopelman: And then for Steve, in the third quarter, you were able to keep OpEx expense growth at a moderate level even as you accelerated growth in the business. What are your thoughts on investments and how we should think about headcount and expense growth over the next couple of quarters into 2026 as well, particularly as it relates to operating margin in the business? Stephen Walker: Yes. No, good question, James. So I think, generally speaking, the way we've always looked at our business is that we should invest in growth, obviously, where we think we have a positive ROI, but limit ourselves by saying that we'd like to always maintain a 30% plus EBITDA margin. So I think, generally speaking, the way we've always looked at our business is that we should invest in growth, obviously, where we think we have a positive ROI, but limit ourselves by saying that we'd like to always maintain a 30% plus EBITDA margin. So I think that's the way we'll still think about things going forward. And that's the way we'll probably plan 2026 as well. I think in terms of how to think about like what -- where do we invest and what are we going to spend our money on, I think it's really realized is going to be the primary area of investment for us going forward. Obviously, we always have, Adam, you used to call them speedboat type of initiatives, but we have things like deeper dive where we're investing a small amount of money just to see what we can learn and figure out. But the big investment is going to be realized going forward just as it has been. But I think you can expect the operating expenses to grow in line with growth and for us to maintain 30% plus type of EBITDA margins. Operator: Your next question comes from the line of Tyler DeMatteo with BTIG. Unknown Analyst: Adam, I wanted to come back to some of your comments at the beginning of the Q&A on kind of the sales approach. What's the biggest opportunity on the sales side of things to improve the brand perception and ultimately kind of realize adoption there? Like what are some of the learnings that you've seen where you can see an incremental improvement on the sales side and that opportunity? And then my second question is on the comments about the inflection point in realize, what are some of the underlying assumptions baked into that? Is that the number of advertisers? Is that the propensity to spend, the dollar value of spend? I'm just curious like what's the underlying assumptions there? Adam Singolda: So one, I think that's a great question. I think, one, we're investing overall from a perception perspective. We have -- we're putting our people to work in important events and things to interact with the market and put realize in the front as a way to attract performance advertising in a world that goes -- wants to go beyond search and social. So I do think that's a real need, and we have a shot at doing this in the market. So one, we're investing in being out there and telling our story. Two, show me who you work with, and I'll tell you who you are type of thing. So if you're able through your technology and your investment to get good advertisers to be successful with you, to tell the story for you, I think that affects your story the most. Your brand is what people say about you when you're not in the room. So for me, that -- to see advertisers like the ones we mentioned working with us, excited to tell the story is a great sign. And then taking a high-level view to have -- to look at the number of scaled advertisers and the average spend going out, these are the right metrics. So all of these are good initiatives. And like I mentioned also, our sales team now knows and salespeople go where they see money. They know that if they sell into the right segments in the market to the right advertisers tend to be those that have high consideration stage like travel, health care, auto, commerce, we tend to be financial services, we tend to be really, really good. I mean I always joke that if you run a business, a mortgage business or financial services business in America and you're not buying from Taboola, it is irresponsible. You have to try because we're very good at this, and our sellers know that, too. So by focusing on ICPs and going strong on those, we tend to see better results. So all of those initiatives are the right ones to eventually, I think, also affect the brand and the perception, but that takes time. There are no shortcuts. We spent a decade being the native advertising company, and we're going to spend the next decade, hopefully building the largest performance advertising company outside of search and social. Stephen Walker: And in terms of your second question about like what are the underlying assumptions around the realized inflection point, I think the way to think about it is from realize, I mentioned earlier that we're starting to see advertisers have a greater likelihood of succeeding with us, greater likelihood of being able to scale with us, greater likelihood of being able to meet their goals. And I think what that means is what I want to see is that our -- I've said this in the past, I want to see our number of scaled advertisers growing year-over-year consistently. That is to the best metric that indicates that we're having success. We obviously also would like to see the average revenue per scaled advertiser grow over time. But generally, as I've said in the past, the number of scaled advertisers is what is the fuel for future growth. So that's the metric we focus on the most. Operator: Your last question comes from the line of Matthew Condon with Citizens. Matthew Condon: My first one, maybe just shifting gears here a little bit. Can you just talk about the Taboola News? It looked like it was another strong quarter. Just what's the sustainability of growth there? And how should we think about that contributing in 2026? And my second one is also just on your partnerships with some of the OEM partners. Just how are these progressing and scaling up here? And should we expect these also to be key contributors in '26? Stephen Walker: So I can take the first half of that. So first of all, yes, Q3 was good for Taboola News. It's Taboola News is growing faster than the rest of the company, which is nice for a growth initiative like that. It's also -- I think the important part of Taboola News is it's part of our unique supply strategy. So it is a very unique type of supply that, by the way, obviously completely immune to LLM disintermediation and that type of issue. So that's great. It also is fresh users, good data. So it's -- when you're on the cell phone device natively, you know a bit more about what's going on than other times. So it's all part of that getting unique supply and advertisers really like it. It's before a user gets to their social network. It's before they start browsing the Internet. It's a very unique time to meet the user. So I think it's also great for advertisers. And so with everyone wanting advertising, including cell phone manufacturers and OEMs, I think there's big upside to this. Where it goes, we obviously haven't spoken specifically about guiding to that and we don't break it out, but I think we see a lot of upside potential to this over time. Sorry, operator, are we on still? Operator: Yes. Yes. I didn't know if there was going to be another question. So at this point, there are no further questions, and I'll turn it back to Adam Singolda for closing remarks. Adam Singolda: Thank you. Thanks, everyone, for being with us this morning. If you take 3 things from the quarter that matter, number one, we've hit an inflection point with Realize, which is our biggest investment. Customers are giving us good feedback and our product is driving good results. It shows in our scaled advertiser numbers, a 4% increase in the amount of scaled advertisers. That's obviously a good thing. And we're seeing 11% higher average spend. And we track those 2 numbers as a proxy for realized success and realizes most of our revenue. So that is our main way to grow in the future. Number two, we're feeling better about our financial performance. We like the direction we're heading. And as such, we bought 14% of the company year-to-date and intend to continue to buy aggressively. And number three, I'm proud of the team. We're taking upon ourselves a big challenge, and we're hard at work, and I believe we can do this. So I'm looking forward to interacting with many of you over the next few weeks, and thanks for joining us today. Operator: Yes. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Good day, and welcome to the Cargojet Canada Limited Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference call over to Mr. David Tomljenovic, Vice President of Investor Relations. Please go ahead. David Tomljenovic: Good morning, everyone, and thank you for joining us on this call. With me on the call today are A.J. Virmani, Executive Chairman; Pauline Dhillon, Co-Chief Executive Officer; Jamie Porteous, Co-Chief Executive Officer; Aaron McKay, Chief Financial Officer; Sanjeev Maini, VP, Finance; Remi Tremblay, General Counsel and Corporate Secretary. After opening remarks about the quarter, we will open the call for questions. I would like to point out that certain statements made on this call, such as those relating to our forecasted revenues, costs and strategic plans are forward-looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA, adjusted earnings per share and return on invested capital. Please refer to our most recent press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and reconciliations of non-GAAP measures to GAAP income. I will now turn the call over to A.J. Ajay Virmani: Good morning, everyone, and thank you for joining us today. In November 2023, we announced the first phase of our leadership transition. With my move into the Executive Chair role and the appointment of Jamie Porteous and Pauline Dhillon as Co-CEOs. Today, as we move into the next phase of that transition, I want to take a moment to recognize the outstanding contributions of Jamie Porteous and to officially welcome Pauline as Cargojet's next CEO. Both Jamie and Pauline were founding partners of Cargojet 24 years ago. From day 1, they have developed and built this company from ground up. They were guided by a share commitment -- shared commitment of reliability, customer service and excellence in everything we do. Jamie has played an instrumental role in transforming Cargojet from a small Canadian start-up into a global air cargo leader period. His strategic vision, discipline and customer-first mindset have been central to our success. On behalf of the Board, our employees and our shareholders, I want to sincerely thank Jamie for his incredible leadership and his 24 years of dedicated service. While Jamie will be stepping back from daily operations to spend more time with his family in the new year, I'm pleased to share that he will be -- he will remain available to provide strategic advice, support and ongoing guidance for this transition and ongoing business. His insight will continue to be a great asset to the organization, and we are thankful to Jamie for continuing on his role as a strategic adviser. As Executive Chair, I will also remain deeply engaged with the process, mentoring Pauline, working closely with the Board and the team to ensure a smooth and deliberate and thoughtful transition. The Board is proud to confirm Pauline Dhillon as our next CEO effective January 1, 2026. Pauline has been with Cargojet since day 1. And over the past few decades, she has worked in virtually every part of the business from network operations, customer relations, marketing, government affairs, Chief Corporate Officer and Co-CEO. As Co-CEO, she played a key role in building Cargojet brand, strengthening our customer relationships, driving employee engagement. And over the past 2 years, she has continued to lead with purpose, driving growth, innovation and operational excellence. Pauline has grown up with Cargojet system. She embodies our culture, our people-first values and our customer service obsession. The same ingredients that have made Cargojet successful over 20 years. She has my full confidence. She has the full support of Jamie Porteous. She has the full support of Board, and she has the full support of her team to lead this organization to the next chapter of our global growth. Thank you very much. And I will turn the call over to Jamie Porteous. Jamie Porteous: Thanks, A.J., and good morning, everybody. Let me begin by sharing how sincerely grateful I am for the career that I've had at Cargojet and to the many colleagues who have helped shape our business into what it is today, including, of course, A.J. and Pauline, whom I have worked beside since day 1 with a simple but bold plan to create a world-class air cargo carrier. We are truly a Canadian success story from both a transportation company and a public company standpoint and have built a legacy that will endure for many, many years for all stakeholders. As A.J. said, I am extremely optimistic about the company's future, and I am fully confident in Pauline's capabilities to lead Cargojet into the next chapter and wish her and the entire Cargojet family the best of success and will continue to support and cheer you on from the sideline while I enjoy my next chapter. Thank you. Now let me share some comments on the quarter. Entering the back half of 2025, the near-term impact of seismic shifts in global trade became more apparent as persistent tariffs and other trade barriers became the new normal. Demand remained uncertain as major policy shifts continued, including the removal of the U.S. de minimis exemption, disrupting transpacific e-commerce flows and tempering near-term growth expectations. The longer-term impacts of this new trade world order are still developing with new behaviors rippling through global supply chains and consumer behaviors. In that light, and as we noted last quarter, resilience is the key to thriving in this unprecedented period. This quarter, I would add the word discipline as well. Although in the longer term, we expect the world to adapt and global trade to reestablish new normal patterns, it remains likely that the near term will be characterized by continued uncertainty and some volatility. Through that environment, resilience and discipline will underpin Cargojet's ability to continue to deliver high-quality results. Periods of change bring opportunities as well as challenges. Historically, Cargojet has demonstrated a very successful capability to take advantage of macro level economic changes in the past, most recently through the boom of e-commerce during COVID, and our job continues to be to find opportunities for disciplined, profitable growth in this ever-changing trade environment. At the core of our business, our domestic network remains strong, growing by more than 6% year-over-year and over 12% year-to-date, primarily because of the continuing growth of e-commerce volumes within Canada as well as the increased business-to-business volumes and the impact of inflation-based price increases. As disruption in transatlantic trade routes continued, we saw a corresponding decline in our ACMI revenue year-over-year as we described in the second quarter. Despite the disruption, our ACMI partnerships remain strong, with the decline reflecting a shift of our ACMI operations to be more north-south focused within the Americas resulting in lower block hours year-over-year. However, I must point out with the same number of contracted aircraft. We remain optimistic that in the longer term, air cargo corridors will stabilize and Cargojet will be well positioned to take advantage of early returning opportunities with our ACMI partners. We also saw a year-over-year decline in our charter business as disruptions to transpacific trade, particularly e-commerce volumes meant that we operated 3 flights per week through the third quarter versus an average of closer to 5 flights a week in the third quarter of 2024 between China and Canada. We anticipate this frequency recovering late in Q4 as we enter the holiday peak season, and we continue to explore new opportunities for longer-term charter arrangements. We remain confident that discipline and resilience, coupled with our diversified revenue streams and flexible fleet will allow us to continue to deliver strong margins in any macro environment and to remain well positioned to take advantage of and seek out new profitable growth opportunities through this near-term period of disruption and in the longer term when demand returns. With that, I'll hand it over to my long-time partner, colleague and friend and our next CEO, Pauline Dhillon. Pauline Dhillon: Thank you, Jamie. I am honored to assume the role of CEO after serving alongside Jamie as Co-CEO for the past 2 years. Jamie's leadership and strategic vision have been instrumental in bringing -- building Cargojet into a market leader with a strong financial and operational foundation. I want to thank him sincerely for his decades of contribution and partnership and his continued support as my co-CEO and going forward, my strategic adviser. I'd like to sincerely thank Jamie for his friendship. I wish Jamie and his family all the very best as they embark on this new chapter of their lives. Looking ahead, I am as excited about the future of Cargojet as I was on day 1. I want to thank the Executive Chairman, along with the Board of Directors for their continued confidence in me. We have a clear strategy, a strong mission and proven capability. Our diversified business model, disciplined execution and a highly talented team position us well to capture new growth opportunities and to continue delivering long-term value to our customers and our shareholders. As Jamie noted earlier, our position as the #1 air cargo carrier in Canada is the result of years of resilient operations, delivering time and time again for our customers through periods of both opportunity and adversity. That resiliency comes directly from our unique culture and the efforts of the Cargojet team. I want to thank each and every one of those team members for their ongoing efforts, their dedication and their commitment to safety, especially as we enter our peak holiday season. As we discussed on our Q2 call, 2 of our largest customers renewed long-term agreements with us early in the third quarter, demonstrating the strength of those relationships and locking in long-term revenue sources and offering Cargojet preferred opportunities to fly additional routes as they develop. Even as we renew and reinvigorate relationships with our partners, we continue to look for new opportunities, as Jamie mentioned. To that end, we recently announced Cargojet return to transatlantic markets with scheduled service to Liege, Belgium, linking our extensive domestic network with direct access into Europe's leading cargo gateway. We also continue to explore new long-term charter opportunities globally as we see real market opportunity in that vertical. We also renewed our position as Canada's only ISO 9001 2015 certified air cargo carrier in the third quarter. And in October, renewed our IOSA registration, demonstrating our commitment to making safety the core of everything we do. During the third quarter, we announced the redemption of our 5.25% senior unsecured debt debentures due in 2026, which we completed subsequent to quarter end using proceeds from our offering of 4.599% senior notes, extending our overall debt maturity profile and reducing our interest costs. As in Q2, we saw block hours decline year-over-year as a result of the shift from the transatlantic ACMI flying to South American routes as well as lower frequency of China chartered flights. However, our disciplined approach to cost management continues to produce tangible results as we were able to successfully scale many cost lines along with operational activity, resulting in an adjusted EBITDA margin of roughly 32%, consistent with our historical results of adjusted EBITDA margins in the low 30% range. Discipline and flexibility in our fleet management are major drivers of Cargojet's success. During the quarter, we sold 1, 767-300 and leased 1, 757-200 to third parties, reducing our overall fleet size to 41. In the fourth quarter of 2025, we expect to take delivery of 1, 767-300 aircraft from conversion and complete the sale of another aircraft, resulting in no net change in our fleet size. While we expect to take delivery of a fully converted 767-300 in Q1 of 2026, we currently expect to lease that aircraft to a third party on or shortly after delivery. We will continue to look for opportunities to scale our fleet appropriately for the size and the needs of our business, something we have demonstrated a track record of successfully doing. I'll now pass the call over to our new Chief Financial Officer, Aaron McKay. We are excited to have him join our team for his remarks on the company's financial performance in Q3. Aaron McKay: Thanks, Pauline. I want to start off by saying how thrilled I am to be joining the leadership team of Canada's leading air cargo carrier. I'm passionate about aviation, and I've immediately felt the passion that all of our Cargojet team members have for this business as well. I'm looking forward to the challenges and opportunities we'll face together as a team in the coming months and years. As Pauline and Jamie noted, discipline and resilience are words that we're very proud to have described the financial management of the business. The resilience of the business in a very challenging environment this quarter is apparent in the diversity of our revenue streams. In the third quarter, domestic revenue came in at just under $100 million, up almost $6 million or 6% year-over-year, helping to partially offset declines in ACMI and charter revenue. As Jamie and Pauline mentioned, those declines were primarily driven by 2 very distinct changes linked to the macroeconomic environment. Fuel surcharge and other revenue was down 8.7% year-over-year, which compares favorably to the 9.3% decline in direct fuel costs, demonstrating our ability to pass on fuel and other costs as part of our pricing model. Against that backdrop, the business maintained a relatively strong adjusted EBITDA margin, as Pauline noted. One item to call out is the -- is that year-over-year in gross margin, because we include some less variable non-EBITDA impacting items like depreciation and heavy maintenance amortization that are driven by the timing of maintenance events and fleet size and direct expenses, our gross margin was squeezed with revenue declines. Excluding those items, our gross margin is much more stable year-over-year with some increases in direct costs being partially offset by reductions in SG&A at the adjusted EBITDA level. Prudent and disciplined capital allocation remains a key priority for Cargojet. Maintaining a net debt to adjusted EBITDA ratio of 1.5 to 2.5x over the long-term, supporting the investment-grade credit rating we achieved in the second quarter of this year is a key objective for us. The current operating environment as well as the timing of certain fleet transactions has pushed our expected return to a net leverage ratio below 2.5x, which we now expect to achieve in early 2026. We remain dedicated to that goal, and we'll balance that objective with returns to shareholders through continued dividend growth and the opportunistic use of our normal course issuer bid. Pauline walked through the fleet changes in the quarter, which resulted in growth capital expenditures of $22 million, a sequential decline from Q1 and Q2 as we believe the investments we've made to date as well as our near-term fleet plans are sufficient to meet near-term growth plans. Maintenance capital expenditures in the quarter were $45.5 million, again, a sequential decline from the first 2 quarters of the year. Net of proceeds from disposal, the third quarter, we saw an overall reduction in year-to-date net CapEx of roughly $41 million to just over $170 million by the end of September. We now expect Q4 gross CapEx to be in the range of -- gross CapEx to be in the range of $45 million to $55 million, with approximately half of that amount is growth CapEx, as a result of the expected delivery of 1, 767-300 aircraft from conversion. As we previously disclosed, we are actively looking at transactions that may reduce that incremental CapEx in Q4 to near 0. I'll close by saying how pleased I am to become part of the Cargojet family, and I look forward to spending more time with Cargojet team members, our customers and the folks on this call. With that, I'll pass it back to Pauline to close out before we take questions. Pauline Dhillon: Thanks, Aaron. I want to close by once again saying how proud I am of the Cargojet team members for their dedication to the success of our business, resilience and discipline they demonstrate in their work every day. We have the cargo pedigree. While the economic environment remains uncertain, we are confident that those qualities will continue to drive success of our business in the long run. Thank you for joining us. Kelsey, we'll take questions now. Operator: [Operator Instructions] And your first question comes from Konark Gupta from Scotiabank. Unknown Analyst: This is Nate in for Konark. Congrats, Jamie, for a great career and Pauline for succeeding. Just 2 quick questions. One is, how do you expect the recently renewed DHL contract revenue to ramp up through 2026 as you navigate the near-term route transition to short haul? Jamie Porteous: Thanks, Nate. Thanks for the comments. I mean, as I said in my remarks, we don't see -- we don't expect a rapid increase in revenues. It will really be dependent on what some of the global impact of the trade negotiations between the U.S. and other countries. And as those get resolved, I think we'll see a slow and steady ramp-up, but I don't anticipate it would be until later in 2026 and into 2027 at this point. Ajay Virmani: Yes. I just want to add in also that with DHL, we are one of the preferred carriers because of our strategic partnership with them. And when the Europe and other areas slowed down for them, we were given the opportunity to fly routes in South America where there are less block hours, but none of our aircraft were displaced. And I think DHL and Cargojet relationship being strong enough, we are the last carrier that gets any notice if there's any slowdown, but we are the first one to be brought in when things turn positive. Pauline Dhillon: And I just want to add to A.J. and Jamie's comments. When DHL does ramp up again, we are ready for the ramp-up. We will be prepared to continue to service their routes, both in the short term and the long-term. Unknown Analyst: Okay. That's very helpful. The second one I would ask is, what has led to a decrease in China frequencies from last year against the backdrop of rising e-commerce demand in Canada? Jamie Porteous: Yes. It's just been the overall sort of uncertainty from a geopolitical standpoint, the uncertainty regarding tariffs, which affect more the U.S. than Canada, but we saw a decline from the frequencies that we were flying in the third and fourth quarter of last week, really started at the beginning of this year. It started strong. We were probably flying 4 or 5 frequencies in the first quarter, but then demand seemed to soften down to 3 frequencies per week, which was consistent through the third quarter. And we're -- as I said, we're expecting stronger -- have already seen some stronger demand in the fourth quarter. Ajay Virmani: And also the elimination of de minimis, which impacted shipments to the U.S., but a lot of U.S. shipments transit from Canada. Operator: And your next question comes from Walter Spracklin from RBC Capital Markets. Walter Spracklin: Jamie, it's really been a great pleasure working with you all of these years. You're going to be -- you are going to be sorely missed, and I do wish you the best of luck. I envy a little bit on that regard. Yes. Turning to the question, I guess, fleet plan, it looks like you're not -- you don't have much in the way of new additions coming in after Q4. So I'm not seeing anything in '26 or '27. Is that right? And if so, are we looking at any growth CapEx? Or should we model in some feedstock purchases? Curious to see -- curious to hear about what we should model in for growth CapEx in light of limited new deliveries. Aaron McKay: Walter, it's Aaron here. We did mention we do expect to take delivery of 1 aircraft early in 2026, but it's our intent to lease that out either on or shortly after delivery. But beyond that, I think you're correct. We're expecting pretty minimal growth CapEx through 2026 at this point. Ajay Virmani: Walter, as you know, we have always kept our minds and doors open. If there is more business and if we have some guaranteed contracts, we do have access to 2 aircraft, which is 767-200s sitting in our possession right now that we acquired only for engine values, which we have already extracted. And those remain available to us to convert if the market picks up or if there's a demand or a guaranteed contract. Walter Spracklin: Okay. That's great. In terms of ACMI and charter revenue cadence, I don't know if looking at your historical is the right thing to do here given everything going on around us. But I know Q4 typically, certainly last year saw quite a pickup quarter-to-quarter from Q3 to Q4 in all-in charter, obviously, some of the new business there. And then in ACMI, we also saw a pickup. When we model now for Q4 and then also 2026, how do we look at Q4 cadence relative to Q3? And for '26, should we -- given our -- given the world around us today, should we be building in any growth in your overall ACMI and charter businesses, respectively, for 2026? How do you look at the -- or how do you approach the outlook from that angle? Ajay Virmani: Well, just quickly, quarter 4 -- and I'll get Jamie and Pauline on this after I make my comment. Quarter 4 is certainly, as we know, traditionally better than quarter 3. And that is just the nature of the business that the peak period, overall demand is up, whether it's charters, domestic or ACMI, everything is relatively up. So quarter 4, yes, it will definitely be better than quarter 3. That's all I can tell you right now. 2026, we are in the process at this time with our customers discussing the needs for the first quarter because at this stage, nobody is committing anything to quarter 2, quarter 3 or quarter 4 next year. So at this stage, our discussions are primarily focused on quarter 1 of 2026. And everybody, to be honest with you, as we know what the conditions are, wait and see sort of mode. So I wish we could give you a little more color on it, but this is exactly what we have right now is that in another week or 10 days, we will have most of our quarter 1 of 2026 finalized. Jamie Porteous: Just to add to A.J.'s comments, Walter, I think sequentially, you'll see an increase in both ACMI and the charter revenues in Q4 versus Q3 of this year, but it won't be of the magnitude of increase that we historically see sequentially from Q3 to Q4, similar to -- as an example for last year. And as A.J. said, I think going into 2026, at least in the first quarter, I think you'll see similar revenues that we saw in year-to-date in both the ACMI and the charter segments. Pauline Dhillon: Yes. Walter, it's Pauline here. And just to add to A.J. and Jamie, while that's what we expect from the customers and as A.J. explained in Q4, we do plan to see an uptick. Going into 2026, we're also going to look at new trade routes. We're going to look at new opportunities. We're going to go out into the market and see how we can expand the brand outside of the current customer base that we have today, starting with the Liege program that we announced last week. Walter Spracklin: Great. Okay. That makes a lot of sense. My last question here is on margins. And I'm not sure if this -- I know Pauline has been near and dear to your heart, but also Aaron, you explicitly called out your efforts to rationalize costs and spoke constructively about your margin profile going into 2026. And -- but by the same token, we did see some pressure on margin when -- due to some of the costs that Aaron you flagged in your prepared remarks being sticky with lower revenue. How should we look at margins in 2026? Is this something that you see enough line of sight that given a fairly consistent revenue profile, if we were to assume that, is this something you can get better margins on? Or is there something else we should consider when we look out to 2026? Aaron McKay: Yes, Walter, it's Aaron here. I think you're right. For 2026, we'll start to see more and more of the positive outcomes of the cost control initiatives we're taking. So I think you'll see the margins stay consistent, and you'll start to see that impact of those initiatives through the cost lines. Operator: And your next question comes from Chris Murray from ATB Capital Markets. Chris Murray: So first off, Jamie, I just want to wish you a good retirement. I want to thank you for all your help over the years. It's really been appreciated. And Pauline, congratulations on your new role. And Aaron, welcome to Cargojet. With that being said, maybe just trying to put together the ACMI and the charter, but also with the mainline business into Q4? And maybe just thinking about this a different way. Your block hours were down year-over-year about, I guess, about 15%. Just wondering how -- if we use block hours as a metric, how should we be thinking about block hour evolution over the next couple of quarters? Because it seems like the mix is going to change. And generally, we've seen that independent of where you're pointing the aircraft, it's really the block hours that drives the revenue. So just any thoughts maybe on a block hour basis on how to think about the next couple of quarters. Jamie Porteous: Yes. Thanks, Chris, for the comments. And in terms of block hours, you're right. I mean it's a big driver of revenue, especially on the ACMI and the Charter segment. Our domestic hours seem -- are pretty constant other than peak season. We obviously see a significant increase because of demand there. The biggest driver of the reduction in overall block hours by 16% in the quarter was the reduction -- a combination of -- the biggest part of it was a reduction in ACMI block hours flown by DHL. And as I noted in my prepared remarks, 2 things to point out. We haven't reduced the -- or DHL, our biggest ACMI customer hasn't reduced. We're operating the same number of aircraft that we've operated in previous quarters. We're just flying those on lower stage length routes. And as I've said previously, typical ACMI contracts are structured on a rate per block hour with a minimum number of block hours per month depending on the aircraft type. You get the benefit of the incremental revenue when you fly incrementally more block hours on longer-stage transatlantic, European transpacific routes that we've seen in previous years in the last few quarters as DHL has shifted capacity globally to meet the lower demand, and we've seen more flying from -- within North America and between North America -- so on a north-south basis between North America and Mexico and South America, you see a corresponding reduction in those incremental block hours. We still fly above the minimums, but I expect that, that will continue into at least the first half of 2026. On the charter hours, it's a combination. Our charter revenue is a combination of the scheduled charters we do with our Chinese customer between China and Vancouver, which you see some corresponding reduction in hours there based on the frequencies per week that we fly. The other portion of that revenue is our ad hoc charter, which has remained strong year-over-year. Chris Murray: Okay. That's helpful. And then, Aaron, maybe a question for you. There was a sale and leaseback in the quarter. And you're talking about maybe just for capacity management, looking at the sale or maybe a lease on the 767 coming in. But I guess the bigger question here is thinking about the -- how you're going to kind of finance aircraft and the balance sheet right now. I'm just trying to understand if this is a kind of a more structural move to just find a balance between owned aircraft and leased aircraft, or how you're thinking about managing the cap stack around the aircraft over the next few years and if there's any sort of shift that we should be aware of? Aaron McKay: Yes. No, thanks for the question, Chris. I don't think there's any sort of strategic shift. I think what you're seeing is we've grown the fleet a little bit in the recent past, and we're looking at the right ways to structure the financing of those aircraft. We mentioned earlier, we've got 1 aircraft coming early 2026, and we have opportunities with feedstock that we have if we need them. But ex that, our expectation is that growth CapEx for next year is going to be pretty limited. So I don't think you'll see a strategic look at financing aircraft in different ways. This is just a bit of catch-up. Chris Murray: Okay. Could you -- I just -- I also go back to like your comment about Q4 CapEx might be neutral. So I was just wondering if there's additional aircraft you're looking to do sale leasebacks with or something else going on there? Aaron McKay: That's exactly right. Operator: And your next question comes from Kevin Chiang from CIBC. Kevin Chiang: And again, echoing congratulations, Jamie and Pauline. Maybe if I can ask the fleet question differently. So if I just take a simple ratio of like block hours to maximum payload. You're running just rough math, let's call it, almost 20% below some of the peak levels you saw during the pandemic when I understand things were probably stretched at that point in time. But when you look at the volume environment ahead, you've kind of adjusted this fleet at the margin. But is there an opportunity to kind of reduce that what looks to be excess capacity in the number of aircraft you have just given the current volume environment? Or is that difficult to do just given some of the changes in length of haul or some of these longer-term strategic agreements you want to make sure that your service holds as volumes do recover with the likes of DHL and Amazon. Just wondering how you think about kind of the fleet composition from kind of 42 aircraft. Could you push that a little bit lower if volumes don't recover here? Jamie Porteous: Yes. Kevin, yes, the short answer is yes, we could. We've done that in the past. I think we have a very good track record. If we have excess capacity, we can just park aircraft, we can store aircraft on a short-term or long-term basis. We could sell aircraft ultimately if we need to. But I think some of the fleet rationalization that we did in the last -- really in the last 6 months and continuing to the end of this year is to put us in a position with the fleet that meets the requirements for all 3 segments of our business. Our domestic is pretty constant. The ACMI, the number of aircraft, as I mentioned, hasn't changed with DHL, but also positions us very well for when the growth cycle returns that we have -- it's all about timing in this business that we have the aircraft, and we have the capacity when customer demand comes. And the fact that we're very confident that we'll have very minimal growth CapEx requirements related to aircraft over the next couple of years because of the fleet size that we have today, meets all of our requirements, but also, I think, more importantly, positions us for when that growth cycle comes back that we can take advantage of those revenue opportunities without any delay. Pauline Dhillon: And Kevin, I just want to highlight something that Jamie points out. While block hours are down, the number of aircraft that we have are still being utilized in the network, ACMI and charter flying. So the aircraft fleet is consistent with what the customers are looking for and what the demands of the market are just not the block hours associated to the aircraft that you've seen in the past. Kevin Chiang: That makes sense. And maybe just my second question. You announced the expansion into Europe, a scheduled service here. I mean it looks like -- and you kind of noted in your press release, this is a key cargo hub, and I suspect you see opportunities there. I guess when you look at your broader expansion opportunities, just what are some of the key features you're looking for? Is it trying to match your trade routes with some of the stuff, I guess, that came out with the budget last night. Is it tapping into untapped opportunities you've always seen that maybe were just higher hanging fruit given some of the other opportunities in front of you? Just how should we think about this broader kind of international scheduled expansion just given the announcement last week into Liege there? Pauline Dhillon: Yes. Kevin, we're excited about it. We're looking at -- and we constantly look at different trade routes. We look at new opportunities. Liege, we're servicing once a week with the 767. The demand is there. We're seeing that from the marketplace. Obviously, we're going to continue with this flight. We're going to operate to Liege, and we're going to extend the brand into Europe and hopefully have connectivity through China and India and pick up cargo on the return. November, December looks strong for this route. It's one of the things that we know best is how to manage our customers' needs and expectations. So we're pretty excited about that, and we're also looking for other trade opportunities and trade routes. Operator: And your next question comes from Timothy James from TD Cowen. Tim James: Jamie, thanks very much. It's been a pleasure and not only working with you, but learning from you. And Pauline, congratulations on the CEO role. Jamie Porteous: Thank you very much. Tim James: My first question, can you talk about -- as we sit here sort of later in the year, can you talk about if you have any additional insights? And I know it's a little bit tricky to comment on this. But if you have any additional insights on sort of pull forward in demand that occurred in 2025, again, related to sort of impending tariffs and trade issues and what have you. Have you seen any indications or your customers giving you any that maybe the earlier part of the year did benefit more and you're feeling that effect here in the third quarter? And I'm thinking of both in the domestic market and sort of your international volumes as well in ACMI and/or charter. Ajay Virmani: Tim, as you know, we are very, very close to our customers, and we -- there's not a day goes by where we don't talk about what's happening in the marketplace. Because of the tariff situations, for example, many carriers, whether it's DHL, UPS, where everybody has reduced capacity from Asia connection into Europe and to North America. People who were building, buying 10 -- let's say, they were buying 10 of widget now is buying 2 or 3 because they don't know whether the demand will be there for them to sell or not. So the size of the shipments has considerably gone down because of the uncertain macro conditions. Now you're asking how do the customers feel about what their volumes are going to be. To be honest with you, our customers, certainly, they are in a zone where they're waiting and seeing. And their customers are also telling them the same thing that we are not going to commit anything right now because we don't know whether this is a permanent shift. I hope it's not. That's not what we feel. I think things will normalize. Tariffs do come into play and then trade normalizes at some point. And that's what our industry feels as a whole. And we are hoping that once people -- I don't think it's the tariffs that much. It's the uncertain nature of the tariffs that are going on and how it's implemented and when it's going to happen and the backlogs at the airports and the warehouses. So it's all totally connected with uncertain. That's the word that uncertainty is the word here. It's not the amount of tariffs and it's not what's happening. Everybody is aware of it. So until that clarifies, I think we are all in a zone of wait and see. But the good part is that Cargojet's model is quite adjustable to these changes. We can shave block hours. We can shave some variable expenses that we don't have to do. We can cut our cost infrastructure quite deep if we needed to without disrupting the service. And also our relationship with customers help us deploy those aircraft to other routes if one route is not working. So we are in the best position to ramp up when things clear up, but we are also in the best position to ramp down a bit. And as you can see on our SG&A, we saw some of that improvement. It's strictly because of our ability to bring the expenses down when needed. Pauline Dhillon: And to A.J.'s point, we have the ability to do that, and we proved to do that during COVID. We ramped up as market demanded, and we were able to readjust after COVID. Tim James: Okay. That's helpful. My second question, Pauline, you mentioned about looking at opportunities for new trade routes in 2026, like the lease route that you've announced. Can you just kind of give us a bit of an overview of how you evaluate those new route opportunities in terms of -- is it primarily with your existing customer base? Just kind of how you go about deciding on the value, the decision, the economics behind new route opportunities. Pauline Dhillon: Yes. Chris, we look at where trade happens, where -- what trade routes are required and in demand by the customer base. This customer base is a little bit more diverse than the domestic customer base. These are more freight forwarders and less couriers and integrators. We went to Liege because it is a cargo hub of Europe. It has got the best connectivity in Europe. We've taken our extensive domestic network, consolidated and are opening this trade route and servicing Europe and Canada and expanding our brand globally. So yes, we do look at the market. We look at where the market trends are going. We look at what the customers are expecting. We look at niche markets specifically that are cargo-driven that are not overserviced by passenger aircraft, allowing more cargo lift to go in and service the consumers and the markets that we strategically select. Operator: And your next question comes from Razi Hasan from Paradigm Capital. Razi Hasan: Congrats to both Jamie and Pauline. Just quickly on previous calls, you spoke about potential opportunities of flying directly into Canada given the tariff impact. I know it's still uncertainty out there, but is there any update on any potential opportunities that you guys are seeing? Pauline Dhillon: Sorry, flying into Canada? Razi Hasan: Yes. It's kind of bypassing the U.S. and flying into Canada. I think you mentioned that on previous calls, just given the tariff uncertainty. Is there any update there to that? Jamie Porteous: Yes. We have -- we've continued to have inquiries from customers, particularly out of China, looking at flying additional frequencies into Canada and even some into the U.S., but nothing that's -- that we're anticipating flying in the next -- at least in Q4 or Q1 of next year. Razi Hasan: Okay. Great. And then one last question just in terms of flight out of China, should we expect the [indiscernible] 3 flights a week into maybe the back half of 2026, just given the setup heading into the back half of 2025? Pauline Dhillon: Yes. We don't see any change there too. Operator: And there are no further questions at this time. You may please proceed. Pauline Dhillon: Thank you, everyone, for joining us on the call today. We appreciate you taking the time. We'll continue with the analyst calls throughout the day. We look forward to speaking with all of you soon. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you very much for your participation. You may now disconnect. Have a great day.
Operator: Hello, everyone, and welcome to Wallbox's Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the call over to Michael Wilhelm from Wallbox. Michael, please go ahead. Michael Wilhelm: Thank you, and good morning and good afternoon to everyone listening in. Thank you for joining today's webcast to discuss Wallbox's third quarter 2025 results. This event is being broadcast over the web and can be accessed from the Investors section of our website at investors.wallbox.com. I'm joined today by Enric Asuncion, Wallbox's CEO; and Luis Boada, Wallbox's CFO. Earlier today, we issued our press release announcing results for the third quarter ended September 30, 2025, which can also be found on our website. Before we begin, I would like to remind everyone that certain statements made on today's call are forward-looking that may be subject to risks and uncertainties relating to future events and/or the future financial performance of the company. Actual results could differ materially from those anticipated. The risk factors that may affect results are detailed in the company's most recent public filings with the SEC, including in the annual report on Form 20-F for the fiscal year ended December 31, 2024, filed on May 6, 2025. We will be presenting unaudited financial statements in IFRS format that reflect management's best assessment of actual results. Also, please note that we use certain non-IFRS financial measures on this call and reconciliations of these measures are included in the presentation posted on the Investors section of our website. Also, a copy of these prepared remarks can be obtained from the Investor Relations website under the Quarterly Results section, so you can more easily follow along with us today. So with that out of the way, I will turn it over to Enrique. Enric Asuncion: Thank you, Michael, and thanks, everyone, for joining us today. We will start today's call with an overview of our third quarter 2025 results, provide our perspective on the EV market and spend time discussing our strategic progress. Luis will offer a closer look at our financial results and our key financial metrics before I close the conversation to highlight what we are focused on for the remainder of the year. Q3 revenue landed at EUR 35.5 million, below our expectations, but up 2% compared to the same period last year. The largest offender has been AC sales across all global regions. In the case of Europe, there have been operational headwinds and changing product regulation, creating delivery challenges, impacting the overall order intake. For the North American market, the strong contrast in terms of EV market growth between the U.S. and Canada creates a blurred view. The U.S. had one of the strongest quarters ever, while Canada had one of the slowest quarters since Q1 2023, in terms of EV sales. These market trends we see are reflected in our results. The contribution of APAC and South America has been limited as resources have been shifted to focus on our key markets. DC sales has been the highlight of this quarter, reflecting the ongoing strong recovery we have seen during 2025. This category is showing strong growth compared to both last quarter, up 40%; and last year, up 34%. We have seen progress with our commercial partners and solid demand for our new generation Supernova product due to its solid performance and reliability. In total, during the third quarter, we delivered over 33,000 AC units and close to 170 DC units. Gross margin was 39.8% in the third quarter, which exceeds the 37% to 39% guided range. This reflects a 200 basis points increase compared to last quarter, resulting from improved bill of material costs, higher prices and the impact of carbon credits. Looking ahead, there are several levers we believe can be pulled to sustain and improve the gross margin, which Luis will comment on later. Moving to the organizational setup. Labor costs and operating expenses landed at EUR 22.9 million. This reflects a 6% improvement compared to last quarter and a 28% improvement compared to the same period last year. In the case of cash costs -- which is defined as labor cost and OpEx, excluding R&D activation, noncash items and one-off expenses -- the result is even more impressive as we achieved a 34% year-over-year reduction. I am pleased with the ongoing progress on efficiency while we are achieving consistent revenue levels, allowing us to make steps towards profitability every quarter. Going forward, we continue to balance cost reduction and investments to achieve a net positive efficiency impact. We plan to accelerate investments to reinforce our sales organization, including customer service to support revenue growth. One of the first major steps in this plan is the appointment of our new CBO, Ignasi Alastuey. Ignasi brings experience and expertise in developing scalable commercial models and driving expansion in strategic markets. In addition, we will integrate our different sales teams across product segments for a more holistic approach, centralized execution, and additional efficiency gains. Adjusted EBITDA for the third quarter of 2025 was minus EUR 6.9 million, below our guided range, but improving 8% quarter-over-quarter. Compared to the same period last year, adjusted EBITDA loss narrowed by 68%, and this comparison is impacted by one-off items incurred in Q3 2024. The main reason for the guidance shortfall was softer-than-expected sales, as mentioned before. As a global player, we operate in a complex environment characterized by volatile market demand, driven by evolving subsidy frameworks and continually developing product regulations across countries and regions. To manage this, resiliency is crucial, and we believe we are well positioned for growth with a strong brand name, complete product portfolio, well-known commercial partners, global reach, and a more efficient organizational structure. The main area of focus to accelerate our path to profitability is restoring revenue growth. For this reason, we are reinforcing our sales function and leveraging our existing market positioning to elevate our performance across geographies and segments. For the third quarter of 2025, Europe contributed EUR 23.6 million of consolidated revenue, or 66% of total top line. This reflects a 3% increase in revenue for the region compared to last year, but was subdued compared to the European EV market growth. We showed solid year-over-year improvements in selected countries such as Spain, France, Belgium and the U.K. However, growth for the entire region has been softer than expected. This can partly be attributed to operational headwinds and product regulations. In the quarter, the Radio Equipment Directive came into force in the EU, which required us to switch to a new product, which has additional functionality, but comes at a higher price point. This product shifts and related market education time impacted overall order delivery. In addition, shipments were subdued due to longer lead times as we shifted one of our most popular products, the Pulsar Max, to a new technology platform for additional functionalities and improved cost. Overall, we believe the positive trend in the EV market for the European region will provide additional opportunities, which we believe we can capitalize on with our strategic position and complete product portfolio. North America contributed EUR 11 million or 31% of the total revenue. Compared to the same period last year, this region is up 13% and 18% at constant FX. This is consistent with the trend we have seen in the last quarters as we continue to perform well in the North American market. However, breaking down the region in terms of revenue growth compared to last quarter, we saw growth in the U.S. offsetting a slowdown in Canada. This performance is even more impressive considering the Canadian EV market in the third quarter is down 49% compared to the same period last year. Both APAC and LatAm remain a small region for Wallbox, now contributing approximately EUR 160,000 or 1%, and EUR 725,000 or 2%, respectively, for the quarter. As mentioned last quarter, we believe these regions have significant future potential but are currently not prioritized in our resource distribution. AC sales of EUR 22.4 million, including ABL and quasar, represented approximately 63% of our global consolidated revenue, down 16% compared to last quarter and down 5% year-over-year. This product category had a weak performance across all global regions, partly due to the operational headwinds in Europe and the soft EV market in Canada just discussed. On the positive side, we continue to roll out the innovative Quasar 2 solution as commercial traction is gaining momentum and have discussions with additional OEMs to become compatible with the product. We are providing additional warranty on our Pulsar MAX at no extra cost, in addition to reinforcing the sales organization. This change reflects the products outstanding reliability and our commitment to delivering long-term value to every customer. In addition, we have launched and expect to launch new features for additional customer value and an improved competitive edge. Earlier this year, we introduced the time-of-use tariffs, allowing customers to optimize their energy consumption; and now we introduce a state-of-charge feature, for additional insights into the charging status of the car. Shortly, I will share more details about these functionalities and the expected long-term strategic impact. DC sales in the third quarter landed at EUR 5.8 million or 16% of sales, resulting in a significantly higher contribution to our total revenue for the quarter as compared to prior periods. Year-over-year, this category is up 34% and sequentially up 40%. As discussed in the previous quarter, we saw strong progress in the recovery of the DC sales, especially due to introduction of new generation Supernovas, and high demand in North America. Many clients are satisfied with the functionalities, quality and efficient installation, resulting in recurring orders. For example, in the third quarter, we have announced additional commercial partnerships in both Europe and North America with Hera Group and SureCharge Corp., respectively. In the case of Hera Group, Wallbox agreed to provide 58 Supernova 120 kilowatts DC fast chargers to be deployed across Central and Northern Italy by the end of 2025. SureCharge Corp. is building a new public charging network in Canada, across Alberta and British Columbia. The project will establish up to 24 high-speed charging sites, with 96 charging points along key travel corridors, creating an extensive regional fast charging hub and deploy Supernova 180 kilowatts DC fast chargers. In addition, we are working on an exciting new product, which is leveraging our existing DC technology. This new product will be announced soon, and we believe it will revolutionize the DC fast charging concept. From a technology perspective, we anticipate this new solution based on the Supernova platform will allow for higher power delivery than we ever offered before, but still have the cost efficiency, reliability, scalability, and small footprint our customers value in the existing solutions. We are very excited to launch this product as it underlines our flexibility to continue to innovate and leverage our existing future-proof platform, while in parallel rightsize our organization and limited CapEx investment. The category, Software, Services & Others remain a consistent contributor to our business, this quarter, generating EUR 7.3 million or 21% of the total revenue. This reflects a small decrease compared to last quarter, but an 11% year-over-year increase. If we break down this category, we see the same trend as the previous quarter. Our software activities with the largest contributor being Electromaps showed the strongest growth, more than doubling the revenue compared to last year. Installation & Service remains the largest contributor, but declined slightly compared to last quarter. We see opportunities for this category to continue to perform well as the EV fleet using our software continues to grow, and we will have more and more DC fast chargers in the field. Today, we would like to provide you with another update on the innovations we are working on to become the ultimate energy partner and enhance the value of our products for our customers. Last quarter, we talked about our bidirectional charger, Quasar 2, and its capability for enhanced energy management. Now we would like to comment on additional solutions we are bringing to the market, enabling all our chargers to provide additional energy management functionalities. As mentioned earlier in the call, at the beginning of this year, we have introduced the time of use tariff feature, which allow customers to input different daily tariffs provided by their utility. This information can then be used to schedule charging sessions within the Wallbox app and give customers the opportunity to optimize their energy costs based on the different tariffs available. Currently, we have time of use tariffs data from more than 40,000 customers, which allow these customers to extract more value from their charger on car. The next step, which we are introducing now is a state of charge feature, which provides the customer with insights into the battery level of the car and allows the customer to optimize the energy usage based on its driving needs. Combining the Wallbox energy meter at the home, time of use tariff from the utility, the energy generation of solar panels and the state of charge of the car, the customer has all the elements to do energy management at the home, all powered by Wallbox. With this complete solution, we have more insights and control to support the customer with optimizing their energy usage, receiving tailored energy price recommendations and in the long term, enhancing their energy security with the implementation of the Quasar 2, which is enabled by this Wallbox infrastructure. In the future, we aim to leverage this infrastructure and this integrated Wallbox solution by introducing additional intelligence powered by AI for faster data processing and completely automatized smart charging. Until now, many of these features we just discussed have been provided in collaboration with partners. But by centralizing more and more of these features within the Wallbox ecosystem, we take another step towards establishing Wallbox as a leading energy player. The EV market continued to perform well in the third quarter of this year. And in our addressable market, which we define as all regions, except China, 2.1 million EVs were sold, reflecting a 39% growth compared to the same period last year. Europe, the largest EV market, continues to recover well compared to the last 2 years, and is up 41% compared to the same period last year. It is great to see this momentum with positive trends emerging for Wallbox in certain countries such as Spain, France, Belgium and the U.K. However, this rapid growth is not yet fully reflected in all countries and therefore, in our results. But we believe we can better capitalize on these trends going forward with the reinforcement of our sales teams. Long-term commitment to carbon emissions reduction is essential with many European countries, including Spain and France, and various organizations convened under the political initiative Take Charge Europe, pushing to uphold the EU's 2035 zero emissions target, not only to decarbonize transport, but also to remain competitive globally in the long term, as many indicators show that the future is electric. In the case of the North American market, different elements impacted the growth in Q3, which was up 22% compared to last year. First, the Canadian market has been soft all year due to 100% tariffs on Chinese-made cars and the end of the iZEV incentive program. This softness was offset by strong growth in the U.S. market during the quarter, which was driven by the pre-buying effect as consumers took advantage of the disappearing 30D tax credit at the end of September. As mentioned during our last earnings call, in the U.S., EV sales still significantly depend on incentive and in addition to the changing sentiment under the new administration. We believe that in the short and midterm, the EV market will be impacted. Therefore, we work closely together with our key commercial partners to maintain our residential AC sales, but also shifting our focus more towards commercial AC sales and further accelerating our DC sales, as these categories are less correlated with EV sales and more with the charging demand of existing fleet. The fastest-growing EV market was the rest of the world, which includes APAC and LatAm, with 63% year-over-year growth as we continue refocusing resources. And on Europe and North America, we have not been able to benefit from this growth, but it does underline the potential of these markets in the future, as mentioned earlier in this call. Luis, I'll turn it over to you to comment further on our financial details. Luis Boada: Thank you, Enrique. Good morning and good afternoon to everyone. The third quarter revenue was softer than expected and landed at EUR 35.5 million, outside our guided range, but did improve 2% year-over-year. There were different factors impacting the top line, but the largest factor was lower-than-expected AC sales in all global regions. DC sales performed very well, growing 34% compared to the same period last year and up 40% sequentially. This product category was responsible for seeing mild growth in Europe and double-digit growth in North America. Gross margin improved significantly with 200 basis points, landing at 39.8% and exceeding our guided range. The positive trend resulted from improved bill of materials, the impact of carbon credits, higher prices and a reduction of warranty costs. The bill of materials is improving due to the switch to a new technology platform for selected AC products, which in parallel is improving the reliability and therefore, reducing the warranty cost. We expect this impact to be more clearly visible as we continue to reduce our inventory and start to deliver these new products. A new item contributing positively to our gross margin stems from carbon credits generated in the Canadian market through our existing products. The proceeds from these credits are reinvested into the EV market, offsetting discounts on our new products. The impact of higher prices resulted from the new generation Supernova sold in the U.S., which have better margins compared to the older version. Overall, we believe there are different levers we can pull to stabilize gross margins and find additional improvements in the future. Q3 labor costs and operating expenses totaled EUR 22.9 million, representing a 28% improvement compared to the same period last year. We continue to rightsize the organization while investing in our sales organization, as explained by Enrique. The key objective is to improve top line revenue, but to remain lean in our operations. Cash costs, which is defined as labor costs and OpEx, excluding R&D capitalization, noncash items, and one-off expenses declined even further, down 34% year-over-year. Considering the significant efficiency measures implemented over the past 2 years, we are pleased that we continue to identify new areas for optimization. Consolidated adjusted EBITDA loss for the quarter was EUR 6.9 million, slightly outside the guided range. This represents an 8% improvement versus the prior quarter, continuing the positive sequential trend observed throughout the year. The variance to guidance was primarily driven by softer top line performance as all other key variables met or exceeded expectations. To reach positive adjusted EBITDA, the reacceleration of revenue growth remains critical, a goal we are pursuing by reinforcing our sales organization and strengthening commercial execution. We ended the quarter with approximately EUR 27.7 million in cash, cash equivalents, and financial instruments. Loans and borrowings totaled EUR 179 million, representing a slight sequential decrease and consisting of EUR 67 million in long-term debt and EUR 112 million in short-term debt. During the quarter, as part of our constructive ongoing conversations, we reached a standstill agreement with the majority of our banking pool, temporarily suspending payments of principal and interest. This agreement provides a stable framework to facilitate the development of a long-term solution of our existing debt and for our capital structure in general. Our objective is for the remaining debt holders to join these discussions as we work toward a structure that aligns with Wallbox's business plan and long-term growth objectives. CapEx was light again this quarter and landed at EUR 0.3 million, of which negative EUR 0.1 million was related to investments in property, plant and equipment. The reason for the negative impact of PPE investments is an accrual adjustment during the quarter and stricter cost controls, which resulted in higher efficiency gains than expected. Compared to the same period last year, CapEx investment decreased 82% Inventory continued to trend downward, totaling EUR 50.8 million at the end of Q3. This represents a 34% year-over-year reduction and a 10% decrease versus the previous quarter, equivalent to approximately EUR 6 million. We are pleased with this progress as we continue to release cash from operations and the lower inventory levels position us to replenish at a more efficient bill of materials, supporting further gross margin improvement in the coming quarters. In recent quarters, we have been focused on stabilizing Wallbox's financial position. While we have made strong progress across multiple fronts, further improvements remain ahead. We will continue to prioritize sales expansion, operational excellence, disciplined cash management, inventory reduction, and limited CapEx investment alongside constructive ongoing discussions with our banking partners to establish a long-term capital structure as soon as possible. Enrique, I'll turn it back to you to provide some closing commentary. Enric Asuncion: Thank you, Luis. The third quarter 2025 results were mixed. Revenue came in below expectations, but overachieving expectations on gross margin, efficiency gains and operational improvement. Overall, I believe we are still heading in the right direction, especially considering strategic achievements such as constructive progress with our banking partners, but we are now looking to accelerate this momentum. The EV transition continues to move forward, though at different speeds in different regions. And after a period of rightsizing the organization, we have identified where to invest in our sales organization to capitalize on that growth. In parallel, we continue to expand and improve our leading product portfolio by commercializing our bidirectional solution, Quasar 2, introducing a revolutionizing DC fast charging concept and launching new software features to develop the Ultimate energy management solution. All of these give us a solid platform, together with our strong commercial partnerships to continue to drive revenue growth and progress toward profitability. Even though we are not yet where we want to be, the positive trend is clearly visible, and we make incremental steps each quarter. With that, I would like to discuss next quarter's guidance. For the fourth quarter of 2025, we have the following expectations: revenue in the EUR 36 million to EUR 39 million range, gross margin between 38% and 40% and negative adjusted EBITDA between EUR 6 million and EUR 4 million. With that, we are ready to take questions from our analysts. Operator: [Operator Instructions] Your first question for today is from George Gianarikas with Canaccord Genuity. George Gianarikas: I sort of wanted to focus on market share, particularly in Europe. You gave some explanation around some product issues that you may have had. But can you just sort of talk about how that market share is trending and how you expect it to trend over the next few quarters? Enric Asuncion: George, this is Enrique. So it depends on the product line and the country. I will say that a big part of the growth in EV sales that we share, first of all, it's based on PHEVs and EVs, and PHEVs obviously is a big part of the EV sales or at least 50%. So the attachment rate on -- of PHEVs versus EVs in terms of chargers is not the same. So normally, an EV has an attachment rate of 80% with an EV charger. And therefore, the user charges at work or in a public space if they don't have a home charger. And the same happens with PHEVs where the attachment is around 30%. So it's lower attachment. And also, I think it's important to remark that some of these Chinese EV manufacturers like Tesla are bringing their own products. And they, therefore, we don't include it in our market share assessment when we look at the serviceable market. With all in all, in general, we believe that in countries like Spain, France, Belgium, the U.K. and Germany, our market share remains stable or trending up. And markets like Benelux -- sorry, Netherlands, Italy and the Nordics, we've seen this quarter a trend going down. So if we look at the overall Europe, it will depend on the EV sales. But in general, what we are trying to do, given all these operational headwinds we've seen this last quarter with the change of platform and so on is to maintain it or to increase market share moving forward in AC. George Gianarikas: Maybe just to focus on the last question on the balance sheet. You mentioned the standstill agreement. When should we expect maybe some -- a little bit more of a formal announcement from the company around what should happen with the EUR 179 million in debt. Luis Boada: George, I'll take that one. As we announced, the standstill matures as of the 9th of December, and so that's what we're working towards. George Gianarikas: So, we should expect some sort of news between now and the 9th of December. Is that the guidance? Luis Boada: Correct. Enric Asuncion: That was it from us today. Thank you all for joining. We hope you found today's call a good use of your time. Let us know if we can help you in any way. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Hello, and welcome to the Power Integrations Q3 Earnings Call. [Operator Instructions] I would now like to turn the call over to Joe Shiffler, Director of Investor Relations. Please go ahead. Joe Shiffler: Thank you, Hayden. Good morning, everyone. Thanks for joining us. With me on the call today are our CEO, Jen Lloyd; and Interim CFO, Eric Verity. We're doing a premarket earnings release this morning since we'll be traveling later today to Chicago, where we'll be attending the Stifel Midwest 1x1 Conference tomorrow. We look forward to seeing some of you there. Later this quarter, we'll also be attending the UBS Technology and AI Conference in Arizona on December 3 and the Virtual Northland Securities Growth Conference on December 16. Our discussion today will include forward-looking statements denoted by words like will, expect, should, outlook, forecast and similar expressions look towards future events or performance. Such statements are subject to risks that may cause actual results to differ from those projected or implied. Such risks are discussed in today's press release and in our most recent Form 10-K filed with the SEC on February 7, 2025. During this call, we will refer to financial measures not calculated according to GAAP. Non-GAAP measures in the third quarter exclude stock-based compensation expenses, amortization of acquisition-related intangible assets, expenses associated with an employment litigation matter and the tax effects of these items. A reconciliation of non-GAAP measures to our GAAP results is included in today's press release. This call is the property of Power Integrations and any recording or rebroadcast is expressly prohibited without the written consent of Power Integrations. Now I'll turn it over to Jen. Jennifer Lloyd: Thank you, Joe, and good morning, everyone. I'm going to cover 3 topics in my remarks today. First, I'll review current business trends and the Q3 results. Next, I'll expand on the opportunity for Power Integrations in data center following the announcement last month of our collaboration with NVIDIA on their 800-volt DC power architecture. And finally, I'll offer some thoughts on my first 100 days in the CEO role and priorities for the months ahead. Starting with recent trends, we said on the Q2 call that we had seen a slowdown in orders in July with bookings down about 20% compared to the monthly run rate of the first half of the year. The lower run rate continued through the third quarter, accompanied by a weaker distribution sell-through. Appliances are by far the largest driver of the slowdown with orders down about 40% in Q3 compared to the first half. Appliances make up the bulk of our consumer category, which accounted for about 40% of our sales in the first half. Throughout the year, we have called out the sensitivity of white goods and other appliances to tariffs owing to their high dollar value and their steel content. We've talked about the unusually strong growth in our appliance business in the first half and we've highlighted commentary from the largest U.S. appliance OEM regarding what they've called "extensive preloading" of imports from Asia in the first half. This was a key topic again on their Q3 earnings call last week. All of this is to say that the softness we're seeing in the second half is not a surprise. Appliances are a great business for us and typically generate a steady and fairly predictable revenue stream. But tariffs have severely disrupted that industry, adding to the difficulties caused by stagnant home sales in the U.S. and China's weak housing market. And because it's such an important part of our business, we are seeing volatility in our revenues. We expect fourth quarter revenues of $100 million to $105 million with the consumer category driving a large portion of the decrease compared to the third quarter. We also expect industrial to be sequentially lower, directionally consistent with recent Q4 seasonality. But our industrial business continues to be strong with revenues up nearly 20% for the first 3 quarters of 2025. That growth is coming from a broad range of applications where we are capitalizing on big picture trends like electrification and grid modernization, encompassing renewables, energy storage, high-voltage DC transmission and smart meters. Our high-power gate driver business sits squarely in line with these trends and continues to gain momentum with revenues up more than 30% year-to-date. In Q3, we built on our already strong position in the growing Indian rail business, adding a major new customer with our first design win at one of India's largest suppliers of systems for electric locomotives. We also won our largest design yet with our scale EV automotive driver boards at a major German manufacturer of drive systems for heavy vehicles. In low power, we continued our progress in passenger cars with 6 more design wins in Q3, adding to the 40-plus EV models now on the road using our products. We continue to win a robust share of inverter emergency power supplies and are using that foothold to go after other high-voltage sockets like auxiliary power supplies for battery management and onboard charging. We see strong interest in our GaN-based solutions helping to drive the market to higher power micro DC to DC converter architectures. We have a strong pipeline of design activity in these applications and expect a healthy revenue ramp over the next several years. Eric will cover the finer details of the quarterly numbers, but I do want to highlight our cash generation and return to stockholders. We generated $30 million in cash from operations in Q3 and are on track for more than $80 million in free cash flow this year. We naturally expect free cash flow and free cash flow margins to rise as revenues recover and that confidence is reflected in our cash returns. Including our fourth quarter dividend, we will return nearly $150 million to stockholders this year through buybacks and dividends. Our Board has also declared a $0.005 per share dividend increase effective in Q1 of 2026. Turning now to data center. At last month's OCP Global Summit, we published a paper demonstrating the advantages of our 1,250 and 1,700-volt GaN technologies in 800-volt DC AI data centers. We also announced our collaboration with NVIDIA to help realize the potential of the new architecture to improve efficiency, use less copper and reduce the amount of data center space consumed by power infrastructure. The white paper is available on our website and I encourage you to take a look at it. In short, our proprietary 1,250-volt GaN accommodates an 800-volt input in a conventional power supply topology, while standard 650-volt GaN requires stacking of multiple devices, compromising power density and reliability while adding complexity. Another alternative silicon carbide can handle 800 volts but has significant limitations in terms of power density due to its slower switching speed. The paper also explains why our 1,700-volt InnoMuX2 is an excellent fit for the auxiliary power socket in the 800-volt architecture. The white paper includes reliability data comparing PowiGaN to other GaN technologies. Reliability has been an obstacle to GaN adoption in the data center as well as the automotive market and the fact that we're seeing traction in both these markets speaks to the superior reliability of our unique GaN technology. In fact, one of the key attributes of our technology that NVIDIA and others in the data center ecosystem have found attractive is the fact that it is automotive qualified and already shipping into the automotive market. While we're excited about the 800-volt opportunity, GaN can also bring significant improvements in power density to existing AI data center architectures, which are expected to remain prevalent for years to come. By the end of this year, we expect to deliver early samples of our system-level GaN product for rack-level AC to DC converters with production release planned for late 2026. And now I'll conclude with a few thoughts on my first 100 days in the CEO role. As I said on our call last quarter, just after I joined, that I was excited about our unique technologies and the depth of our expertise in high-voltage processes, packaging and systems. I could also see that the need for innovative high-voltage technology is growing because of the global trends that we've talked about, grid modernization, electrification, decarbonization and of course, AI. A 100 days in, I'm just as excited about the opportunities ahead of us and developing a clearer picture of the steps we need to take to best capitalize on them. As I said last quarter, our core power supply business is back on a growth trajectory with a mix moving toward higher-margin industrial applications. The growth in our high-power and automotive businesses shows that our products and expertise has significant value in those markets, while our collaboration with NVIDIA validates the unique capabilities of our GaN technology. We continue to receive encouraging feedback in our conversations with other key participants in the AI ecosystem. I'm confident we have a lot of what we need in terms of technology and engineering talent, though it's clear to me that we need to adapt our organization and our processes to increase the ROI on our R&D spending and better match the needs of the markets that we expect to drive our longer-term growth. Data center, auto and high power have different requirements and a different geographic footprint than the mass market power supply business and we'll be taking steps in the months ahead to better align our R&D and go-to-market resources with those markets. And while we need to reallocate some resources, I don't believe we need to spend more to accomplish what we need to do. We have important hires to make, including some at the senior level, but are limiting hiring to critical needs and I'm pushing the team to tighten up on OpEx and capital spending. Our top priority is to drive shareholder value by growing our cash flow. While revenue growth is really the key to that, disciplined spending will enable us to expand cash flow margins faster as we grow our revenues. So it's something I'm emphasizing as we plan for 2026. And now for a review of the financial details, I'll turn it over to Eric Verity. Eric has been with Power Integrations for more than 15 years, serving as Senior Director of Finance for most of that time and we're very pleased to have him step into the interim CFO role. Eric? Eric Verity: Thanks, Jen, and good morning, everyone. I'll focus my remarks on the non-GAAP results, which are reconciled to GAAP in our press release. Third quarter revenues were up 3% sequentially to $119 million. Looking at the sequential changes, Industrial was up high single digits on strength and traction in high-voltage DC transmission in our high-power business as well as growth in metering and automotive. Communications was up high single digits, driven by strength in cell phones due in part to a design win that we announced earlier in the year for a GaN accessory charger recently launched by a major device OEM. The computer category was up mid-single digits, driven by tablets and aftermarket chargers. Consumer revenues were down mid-single digits, driven by softness in major appliances as well as seasonality in air conditioning, offset by strength in gaming. Revenue mix for the quarter was 42% industrial, 34% consumer, 13% computer and 11% communications. Non-GAAP gross margin for the third quarter was 55.1%, in line with our guidance and down 70 basis points from the prior quarter, driven by higher input costs flowing through our inventory as well as smaller benefit from the dollar and exchange rate. Non-GAAP operating expenses were $47.4 million, in line with our guidance and up sequentially due mainly to higher legal expenses. The non-GAAP effective tax rate was 2%, resulting in non-GAAP earnings of $0.36 per diluted share. Diluted share count was 56.2 million, down about 200,000 from the prior quarter, driven by repurchases. Inventories on the balance sheet fell by 18 days to 278 days. As Jen noted, we saw lower distribution sell-through in the quarter, which resulted in higher channel inventory of 9.8 weeks at quarter end. Sell-through has exceeded sell-in thus far in the fourth quarter, drawing down a significant portion of the channel inventory that accumulated in Q3. Cash flow from operations was $30 million for the quarter, while CapEx was $6 million. We used $42 million for the buybacks during the quarter, repurchasing 919,000 shares and completing our buyback authorization. We also returned $11.8 million during the quarter in the form of dividends. As Jen noted, the Board has increased the dividend by $0.005 to $0.215 per share effective in the first quarter of 2026. Turning to the Q4 outlook. We expect revenues of $100 million to $105 million. We expect significantly lower consumer revenues driven by the softness in appliances as well as somewhat lower industrial revenues. At the midpoint of the Q4 range, full year revenue growth would be about 6%. We expect non-GAAP gross margin for the fourth quarter to be between 53.5% and 54%. The decrease in Q3 reflects a less favorable end market mix with appliances and industrial driving the sequential revenue decline. Lower back-end production volumes will also contribute along with the increase in the yen versus the dollar that took place in September of last year. As a reminder, at our current level of inventory, changes in the yen-dollar exchange rate take roughly a year to affect our gross margin. We expect gross margin to rebound from the Q4 level in the first half of 2026 as mix swings back toward industrial and appliances and the impact of the yen moves back in a favorable direction. The yen has weakened considerably against the dollar of late, which should provide further support for our gross margin towards the end of 2026. Non-GAAP operating expenses for Q4 should be around $47 million, down slightly from Q3. The effective tax rate for the fourth quarter should be around 3% before rising to high single digits in 2026, driven by a lower exemption for overseas income, a provision of the 2017 tax reform legislation. Finally, I expect share count to come down by 400,000 to 500,000 shares compared to Q3, bringing our share count below 56 million. On a split adjusted basis that's significantly below the share count at the time of our IPO in 1997. And now operator, let's begin the Q&A session. Operator: [Operator Instructions] Your first question comes from the line of Tore Svanberg with Stifel. Tore Svanberg: Yes. Jen, I was hoping you could talk a little bit more about the consumer business directionally here. Obviously, there was some pull-ins into the first half that are now being digested in the second half. But it does sound like you expect consumer to bounce back in the first half of next year, at least based on Eric's gross margin comments there. So help us understand some of the dynamics there. And maybe also you could include what the -- what this would mean for the channel inventory, whether it's going to be back sort of to that 8-week level as you exit the year? Jennifer Lloyd: Sure. Yes. So first, maybe let me talk about the decline that we saw what we're expecting and then maybe talk a little bit about slightly longer term. So we knew that the appliance decline was happening. We knew that Q4 was going to be sequentially lower. It was difficult to forecast just because of the lack of visibility. And the inventory situation there is really finished goods that were shipped into the U.S. and we have very limited visibility to that. But what we did see at our distributors is they did bulk up in Q3. So as you said, the sell-through ended up being somewhat soft. But we are already seeing that channel inventory coming down right now where we are in the fourth quarter. So we are expecting that to bounce back. We're just not 100% sure where the timing is going to be when that comes back. But we have heard from, for example, Whirlpool said in 2026, they're expecting that to normalize as that preloaded inventory clears out at the end of this year. So we are expecting our consumer business to get back to growth in 2026. Just it's a little bit hard to predict the timing of that. I don't know if Joe or Eric wants to add to that. Eric Verity: Yes. We did see a significant sell-through in October to take down that inventory that you are mentioning. And we do see it normalizing next year and we're expecting moderate growth in appliances for 2026. Joe Shiffler: One more point on that, Tore. The consumer business typically has some positive seasonality in the first half of the year because the air conditioning builds are going on for the summer. So that should -- that piece of the business should grow sequentially in Q1. The bigger question mark, obviously, is around major appliances, which is the biggest component of the consumer category. And as Jen noted, the world expects the preloaded inventory to be largely cleared out by the end of this year. The bigger question really for 2026 is just what happens with consumer demand for appliances. As you know, housing has been a challenge, certainly in China, but also in the U.S. There's not a lot of turnover in existing homes, which is a pretty big driver of major appliance sales. So with rates coming down, that could potentially help with demand for major appliances. Jennifer Lloyd: Maybe I'll add one last comment on that is that we still do see a great future for appliances. It's a great business for us. And I just wanted to reemphasize some of the growth drivers for that are really efficiency standards and the GaN adoption, which means more dollar content. So we do think there's going to be growth in units. And yes, on top of these macro and cyclical factors, the growth drivers are there. Tore Svanberg: Very good. That's very helpful. As my follow-up, I had a sort of longer-term question. And I think, Jen, you mentioned a little bit of this on the call where it does sound like data center, automotive and high power are going to be a big focus for the company. So I'm just wondering, does that mean you're going to change a little bit how you go to market, how you're structured internally? Obviously, today, you have the 4 main end markets and you've got tons of applications within each one. But yes, just wondering if that's going to cause a reorg and sort of the focus being more on data center, auto and high power? Jennifer Lloyd: Yes. Yes, maybe 2 comments there. The first one is you're correct, we are going to be focusing more on those markets, both in terms of our R&D investment, but also in terms of our go-to-market approach. And we've already taken some steps realigning our project spend to accelerate some of the developments that are in those areas. But I did want to comment that we still have a very strong core business and we will still be investing to drive that business. We're just being -- we are going to be pivoting more towards the data center, automotive and high power. Operator: Your next question comes from the line of Christopher Rolland with Susquehanna. Christopher Rolland: I guess, first, if we could maybe talk about next quarter and how you see things playing out in terms of strength or weakness between comms, computer, consumer and industrial, that would be very helpful for us. Joe Shiffler: You mean Q4, Chris? Christopher Rolland: Yes. Yes. Joe Shiffler: Yes. I think the -- as we indicated in the script, consumer, we expect to be down pretty significantly after the accumulation of the channel inventory in Q3 that took place when the sell-through there didn't quite match what the distributors were buying for. And this is very consistent with what we've heard from Whirlpool about the pull-ins that happened in the first half, shipments coming and being preloaded from Asia. So there's clearly one more quarter there of inventory burn in the finished goods and that needs to happen. So consumer makes up the biggest part of the decline. Industrial also down sequentially. That's really just kind of a function of some seasonality in parts of the market like tools, some of the electrified or battery-powered lawn equipment and other tools that have a seasonal aspect to them. Also, some of the other parts of the business, high power has just some kind of normal lumpiness in order patterns. These are big project-driven. It's a project-driven business. So the timing of orders in high power and also metering, which is driven by government tenders in India. So it's really just a timing of orders thing there. But as Jen said, the industrial business is still doing very well. So those 2 are really going to drive the sequential decline. I think computer and comms are probably closer to flat, maybe slightly down, but the bulk of the decline comes from consumer and industrial. Christopher Rolland: And then Jennifer, maybe a data center question for you. So as I understand it, you're doing -- I believe it would be the main power conversion in the PSU for data center AI power supplies. And I think originally, this is silicon, I believe most think this is going to move to silicon carbide. Of course, you have this unique high-voltage GaN product. And so it does seem like maybe there could be a debate here, silicon carbide versus high-power GaN. How are your engagements going with the PSU OEMs? How do you guys ultimately view share shaking out? And do you think you will be the primary here or the backup here? It seems like GaN would have some cost advantages over [ SEC ]. So I'm curious if you have any prognostications as to how share shakes out between these 2 technologies longer term. Jennifer Lloyd: Okay. Let me try to address that. Maybe I can address that by talking about where we think the opportunities are for GaN. I can talk a little bit about silicon carbide. I think it will be difficult to say how the share is going to shake out. There are, as you know, a lot of players going after this market. But what we talked about recently is about what we think is the future opportunity as the data centers move to higher voltage like 800-volt DC. So the first opportunity there really for Powis and the aux supplies. And that's an application we already address in existing data center architectures. But in the 800-volt DC architecture, that really requires a 1,700-volt switch. And that is where the other option would be silicon carbide, but we think the 1,700-volt GaN provides some advantages. So that remains to be seen, but we believe that the power density achieved by the GaN will be stronger and make that a better choice. There's also opportunity for POWI in the 800-volt DC to DC conversion and that's where we think the 1,250-volt technology will come in and we talked about advantages there. That technology is shipping into other markets, but now we're working to build products for it -- sorry, for the 800-volt data centers. And we're engaged there with NVIDIA, but others as well at the architectural level to build products that will best suit their specs and just add that that product we expect to be released in 2027. We also think there's other opportunities, the high-power AC to DC converter that sits at the front end of the data center. We have gate driver boards there that are a good fit for that. And we have drivers for the silicon carbide modules that will be used there. So that's a place where silicon carbide will show up. So I think it depends socket to socket, whether you're going to see GaN or silicon carbide, but we believe that the GaN -- the high-voltage GaN will prevail in the aux supplies and the main DC to DC conversion. Christopher Rolland: And Jennifer, do you have wins at the power supply OEMs or through the supply chain? Or is it too early given the 2027? Jennifer Lloyd: We do have wins in the OEMs, yes, with the aux supply. Operator: Your next question comes from the line of Ross Seymore with Deutsche Bank. Ross Seymore: Why don't I just stick with the long-term question first, which is, Jen, what do you view to be the TAM opportunity for where POWI is playing in the AI data center side of things? And roughly speaking, what's the kind of time to revenue? What sort of slope are you looking at? And it was great that you guys got added to the collaboration list, definitely a positive, but you are just 1 of 13 other companies. So it seems like it is going to be a competitive field. Jennifer Lloyd: Yes, definitely. There are quite a few involved. And as far as the TAM, I think we think it's -- for us, it's too early to know. I mean, I think it's too early for everybody to know how fast the 800-volt DC market will take off. So it is really hard to estimate the size of the market. What we focused on is looking at what our content would be in the AI server rack. So we feel like at this point that our content is probably somewhere around 1,000, but higher in the 800-volt DC. So that's a little bit about -- you can size based on what our rack content is. As far as time to revenue, I mean, we have products today that can serve the existing data center market. The content will go up, as I said, as it shifts to the 800-volt DC architecture, but meaningful revenue generation is going to be a few years out for us. So I think 2027 is when we'll be releasing the first products that can go into the main supply of the data center architecture. Joe Shiffler: One more point, Ross. That list of 14, there are a lot of different sockets in play here and not every one of those 14 players is going after every one of those sockets. So in the 800-volt architecture, the 2 sockets that we're best positioned for are the auxiliary power supply with the InnoMuX2 products and the main converter, the 800-volt to either 12 or 54-volt socket. And we think you really need high-voltage GaN for that socket. And not everybody on that list has high-voltage GaN. So it's not that we're competing against 14 other companies for these sockets. Everybody is going after different pieces of that market. So -- and then just to add one more thing. We're talking here about the 800-volt opportunity. But the bigger piece of the AI data center market for the -- at least the near future is still going to be the existing architectures where you have rack-level AC/DC converters. We have a product that's going to be sampling, as Jen mentioned in her prepared remarks, going to be sampling here before the end of this year and then be ready for release in the latter part of 2026. We've got a good lineup of customers interested in those early samples. And that's a product we can start to generate revenue sooner than the 800-volt opportunity. Ross Seymore: And I guess the near-term question I have, I guess, it will be more on the consumer side. But just thinking about the channel inventory side of things, it seems like you guys are burning a ton in the December quarter. As that normalizes, do you expect -- how big of a tailwind do you expect, I guess, the first half of the year in the consumer business? So whether you want to talk about what the revenues would be without the inventory burn in the fourth quarter guide or the size of that revenue on kind of a normalized consumer quarterly run rate? Whatever is the easiest framework. I'm just trying to figure out how much pain you're taking now and when it bounces back to normal, what does that really mean? Joe Shiffler: Yes. Well, the -- we were at, I think, 7.6 weeks of inventory coming out of the third quarter. We added a couple of weeks here during the third quarter -- sorry, coming out of the second quarter, we were at 7.6, added a couple of weeks largely in the consumer category. Based on what we're seeing so far through October, it looks like we'll burn off most, if not all, of the inventory that accumulated during Q3. Where that lands us in terms of weeks exactly, it's hard to say. It kind of depends on the denominator a little bit, but we should be in a much cleaner position as we start the first quarter. And then from there, it really just depends on end demand in the appliance category as to what happens with consumer growth. As I mentioned earlier, the air conditioning part of the business typically trends up in the first half. Major appliances, really more of a question mark. Tariffs not only kind of disrupted order patterns with the pull-ins, but also there's a little bit of demand destruction aspect to them as well because you get -- it affects pricing for consumers. And there's -- some of the inflation data earlier this year showed some pretty significant increases in appliance prices. So a lot of variables there. But what seems pretty clear is the preloaded inventory should be cleared out by the end of this year, at least that's according to Whirlpool and our own channel inventory should be in better shape as we exit the year. So from there, it will be a question of demand. Operator: Your next question comes from the line of David Williams with The Benchmark Company. David Williams: Maybe first, if we're thinking about the PC market and potential adjacent opportunities there to expand the business, how do you think about maybe more of the -- on the PC side and compute, just where you think some additional opportunities could be for you guys? Eric Verity: So let me clarify the question. Are you talking about the data center, the server or more in the... David Williams: Yes. No. No, outside of the server, more on the PC, just more on the compute side, the more mainstream consumer-based type products. Joe Shiffler: Yes. David, I think the real opportunity in that -- in the PC market is really in GaN penetration in notebooks. I mean, that's the key opportunity for us. And that's an area we've been making kind of steady progress. There hasn't really been a mass move yet by the PC OEMs towards GaN, but there have been some. We've had some good design wins and notebooks become a pretty meaningful part of our consumer category over the last couple of years. So I think the story in PC for us is really just how quickly does GaN get adopted over the next few years. We have a lot of design activity going on. And it's really just a question of how quickly the PC OEMs who haven't gone towards GaN yet want to do that. David Williams: Great. And then maybe just on the automotive side, you mentioned some nice design wins there this quarter on top of the 40 that are already on. Can you talk maybe about the traction you're seeing there, what those opportunities look like? And do you see that as a large -- or I guess, how would you size the magnitude of that potential opportunity going forward? Jennifer Lloyd: Yes, I'll talk about the design win that we were referencing was for heavy vehicle win. So let me describe that a little bit. Basically, that was a win with a systems company that sells to vehicle manufacturers. So kind of like a Tier 1 for passenger cars. And we believe that that design is for a mining vehicle. So the unit opportunity there, it's much smaller than what you'd see for passenger vehicles, maybe 15:1, but the content is higher. So our content there is probably about 10x with current products. And that's where we're selling gate drivers for the traction inverters in addition to power supply chips. So we think that's a good area where we can see more wins. But it is a bit fragmented of a business, so difficult to grow rapidly, but we do expect it to be part of the mix in our auto business over time. Joe Shiffler: Yes. And then on the passenger side, which is obviously going to be the bigger part of the automotive business for us. We talked a little bit about it in the scripts. It's an area we're seeing a lot of success. The emergency power supply in the inverter is an application we're doing extremely well in, winning most of the opportunities that we go after. We just -- we have a very elegant, very effective solution for that with our automotive qualified InnoSwitch products. And that's a socket that we're using as a foothold in the automotive space. And it's getting us on the group vendor list for a lot of these OEMs, getting us access to more sockets. The architectures in EVs are evolving in a way that's very favorable for us. More power supply sockets are being built into these evolving EV architectures, auxiliary power supplies for some of the subsystems. We mentioned micro DC/DC converters, which are small power supplies that allow some of these ancillary systems to run more efficiently, handling things like over-the-air updates and video surveillance that the cars are doing when they're not being driven. Those kinds of functions all need power and they all need efficiency because you don't want to be draining the battery while your car is in what you might call standby mode. So a lot of opportunity in automotive. The SAM long term, of course, is going to depend on EV adoption. But it's going to be a very large -- continue to be a very large SAM for us and we're having a lot of success there. Operator: [Operator Instructions] There are no further questions at this time. I will now hand it back to Joe Shiffler for closing remarks. Joe Shiffler: All right. Thanks, Hayden. Thanks, everyone, for joining. There will be a replay of this call available on our website, investors.power.com. We look forward to seeing some of you tomorrow in Chicago, and thanks again for listening. 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 Third Quarter 2025 Louisiana-Pacific Corporation 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, Aaron Howald. Please go ahead. Aaron Howald: Thank you, operator, and good morning, everyone. Thank you for joining us to discuss LP's results for the third quarter of 2025 as well as our updated outlook for the full year. On the call this morning are Brad Southern, Alan Haughie and Jason Ringblom, who are LP's Chief Executive Officer, Chief Financial Officer and President, respectively. As always, after prepared remarks, we will take a round of questions. During this morning's call, we will refer to a presentation that has been posted to LP's IR web page, which is investor.lpcorp.com. Our 8-K filing, earnings press release and other materials are also available there. Finally, I will caution you that today's discussion contains forward-looking statements and non-GAAP financial metrics as described on Slides 2 and 3 of LP's earnings presentation. The appendix of the presentation also contains reconciliations that are further supplemented by this morning's 8-K filing. Rather than reading those materials, I will incorporate them herein by reference. And with that, I will turn the call over to Brad. William Southern: Thanks, Aaron. Good morning, everyone. Thank you for joining us. As usual, I'll discuss some highlights from the quarter before Alan shares more detail about our results and updated guidance. After that, Jason, Alan and I will be happy to take your questions. As expected, Siding volume in the third quarter was flat. This result in a softening market, especially compared to the difficult comp from last year reinforces our confidence in our ongoing share gains. 5% growth in Siding sales revenue, driven primarily by price and a strong mix, exceeded our expectations and guidance. While we anticipated the normalization of demand in the shared component of our Siding business, our ExpertFinish, prefinished siding product primarily designed for R&R applications saw sales volumes increased by 17% year-over-year. The April launch of our ExpertFinish naturals collection, which is a new line of nature inspired 2-tone colors has contributed materially to a beneficial price mix effect. ExpertFinish accounted for 10% of overall Siding volume and 17% of overall Siding revenue in the quarter showing once again the power of SmartSide innovation to drive price, volume growth and share gains. Inventory levels and sell-through rates held steady through the quarter, consistent with servicing seasonally normal demand levels. The only exception is ExpertFinish, which remains in such high demand that we have implemented a managed order file until new capacity comes online early next year. Total sales in the quarter were down 8% compared to prior year and EBITDA of $82 million was also down significantly. The extended trough in OSB prices was the main drag on both metrics. While we obviously cannot control OSB prices, we can manage the OSB business effectively, and our teams did that exceptionally well in the face of what remains a difficult market. The OSB business achieved 80% overall equipment effectiveness or OEE in the quarter, up 2 points from last year. Increasing OEE is never easy, and it can be particularly challenging when we are also managing our capacity with discipline to balance supply and demand. I want to congratulate and thank everyone on the OSB operations team who contributed to this impressive achievement. Our results are only possible because of our teams and the strong culture we have built. In the third quarter, LP was named one of the 50 Best Manufacturers in the United States by IndustryWeek, debuting on the list at #24, and one of very few specialty building products manufacturers to be recognized. We were also named by Newsweek as one of America's Most Admired Workplaces. Finally, as you saw, I informed LP's Board of Directors of my intention to retire this coming February after more than 25 years of service. It has been the honor of my career to lead LP's 4,300-person team. Ultimately, the job of a CEO is to build an engaged culture focused on safety, growth, innovation and execution to deliver value long after her or she has gone. When we launched LP's transformation strategy, I was daunted by the challenges we faced and the aggressive goals we've set for value creation. I am proud to say that we exceeded those goals. As LP's team and strategy have evolved, the magnitude of the opportunity before us has only grown and our confidence that we can continue to execute our strategy and achieve our ambitious goals has never been stronger. Jason Ringblom and I have been friends and colleagues for over 20 years. He was instrumental in the development and execution of LP's strategic transformation. He led LP's OSB and EWP businesses for 5 years and for the last 3 led LP Siding business before being named President. This perspective makes him uniquely suited to serve as LP's next CEO. I have total confidence that with Jason, LP's future has never been brighter. And with that, I will turn the call over to Alan. Alan J. Haughie: Thanks, Brad. Before discussing the results, I do want to take a moment to say that working for Brad has been a personal and professional highlight for me. And while they may be tough shoes to fill, I can think of no one better suited for this task than Jason. And with that, Slide 7 of the presentation shows Sidings results for the quarter. As expected, the bulk of growth came from price. Average selling prices were up 5% with prime products of 3% and ExpertFinish prices up 12%. And there were 2 mix phenomena helping this along. First, as Brad mentioned, shed segment volumes normalized after a very strong first half. And as I'm sure you'll recall, strong shed volumes have been a drag on prices earlier in the year. So part of the 5% year-over-year price performance this quarter is simply the lower mix of shed relative to prime and ExpertFinish products. The other mix factor was within ExpertFinish itself, where demand for LP's 2-tone naturals and other higher-priced prefinished products drove outsized year-over-year price gains. This mix shift is also evident in the year-over-year volume column which shows relatively flat volumes in total, but within which prime volumes were down 1% and ExpertFinish volumes were up 17%. Selling and marketing investments, raw material inflation and other factors were fairly typical but there are some moving pieces in the other column that they're mentioning. You may recall that the third quarter of last year saw an unusually high EBITDA margin, in part because of delays in maintenance projects and the resulting inventory build. Impacts, which then reversed in the following quarter. So much of what you see in the $20 million of other costs in this waterfall is the nonrecurrence of those events from last year. Among them, inventory absorption is actually a double hit, i.e., we built inventory in the third quarter of last year, which boosted EBITDA, whereas this year, we've reduced inventory, which temporarily hurts EBITDA. But in the long run, it's all just timing, viewing the second half of the year in total simplifies the year-over-year comparisons considerably. The $2 million tariff impact is the retaliatory tariffs LP had been paying to import ExpertFinish into Canada. Those tariffs were ascended in late August, so we are not currently incurring that expense. Also, as I'm sure you're aware, the Section 232 tariff announcements did not impact LP's OSB or siding manufactured in Canada and imported into the U.S. So other than minor tariff impacts on some of our raw materials, LP is currently bearing minimal tariff costs. The OSB chart on Slide 8 tells a simplest bleak story of soft OSB prices in a challenging demand environment. OSB prices spent most of the quarter barely above variable cost driven by sluggish demand, particularly in the Southeast. Price realization fared somewhat better than expected due to a combination of the lag in contractual prices and structural solutions mix. And while the small nonprice variance is masked rather well, the OSB operations team played the hand they were dealt exceptionally well. Overall efficiency hit 80%, up 2 points from last year, and aggressive cost control helped the OSB segment outperform our algorithmic guidance. Now superficially, this waterfall suggests that price is the only thing that matters in OSB. Perhaps a more accurate reading is that it prices this low, everything matters. So I tip my hat to the OSB team for making the best of a very difficult market. Slide 9 shows cash flow for the quarter of which, while straightforward, very much continues to reinforce the value of LP's transformation. $82 million of EBITDA translated to $89 million of operating cash flow after minor puts and takes for working capital, taxes and interest. We invested $84 million in CapEx to support growth of ExpertFinish and Structural Solutions as well as to ensure that our plants continue to operate safely and efficiency. And after $19 million in dividends, we ended the quarter with $316 million in cash and over $1 billion of liquidity, including our undrawn credit facility. Which brings us to guidance on Slide 10. Regrettably, OSB prices have scarcely moved since the last call, so our fourth quarter OSB guidance has only slightly improved. The beneficial lag factors that helped the third quarter have dissipated given how long prices have remained in the doldrums. So all else equal, price realization in the fourth quarter will likely provide less of a tailwind than it did in the third. The resulting $45 million of EBITDA loss in the fourth quarter and breakeven for the year are, as always, algorithmic projections of current prices and utilization. For Siding, we reaffirm our full year EBITDA guidance of $430 million. However, for the fourth quarter, the market has continued to weaken, so we anticipate slightly softer growth. We still expect a year-over-year revenue increase in the coming quarter, but of about 3% and this mostly from price. And much like the third quarter, we expect an outsized contribution from ExpertFinish to both volume and price. We are, therefore, guiding to fourth quarter revenue of about $370 million and to EBITDA of about $82 million. Now this slightly reduces our full year revenue growth rate from 9% to 8% for revenue of roughly $1.68 billion, while increasing our full year EBITDA margin guide to about 26%. Now our South American business is also struggling with a sluggish economy and its results are not fully offsetting our corporate overhead at the moment. Therefore, total company EBITDA for the fourth quarter and full year are both expected to be about $5 million lower than the sum of the Siding in OSB. Nonetheless, our expectation for full year total company EBITDA has actually risen by $20 million from $405 million 3 months ago, to $425 million today. But we're also cutting our CapEx guidance, and there are 2 factors in play here. First, given the current emphasis on capacity management and cost discipline in OSB, we are deferring even more projects in OSB. In Siding, we're balancing steadily improving OEE and initiatives to optimize LP's entire manufacturing portfolio against the backdrop of persistent market softness. As a result, the sense of urgency that motivated Houlton's expansion as the fastest route to additional capacity is now somewhat diminished. And this makes our OSB mill in Maniwaki, Quebec a viable candidate for conversion to Siding an option we are now exploring. So should we ultimately proceed down that path, it would most likely still provide additional Siding capacity in advance of market demand and would likely do so at a larger scale and with greater capital efficiency. So while we weigh these options, we have paused any further mill-specific spending while continuing the longer lead time mill-agnostic investments. And with that, we'll be happy to take your questions. Operator: [Operator Instructions] Our first question comes from the line of George Staphos with Bank of America Securities. George Staphos: I appreciate all the details everyone. And I know everyone will say it, congratulations, Brad and Jason on the news, and we wish you continued progress and success in the next chapters. I guess the first question I had, Alan, if you could just give us a bit more detail in terms of the potential shift from Houlton to Maniwaki, what's behind it? How will we ultimately see it, one, manifest itself versus the other in terms of operations and performance? And the second question I had maybe more for Jason and Brad, there have obviously been some headlines in the last couple of days about -- in the last couple of weeks about marketing battles, some of your peers extending relationships with some of the building products distributors to push product. That maybe is a more competitive backdrop. Would you agree with that? Does that change the way you market? Or does that actually help you because your peers might have some other things that they're focused on relative to the Siding business? Alan J. Haughie: George, thanks for the questions. Before I will address your 2 questions. But before we get to that, I just realized that I did misspeak slightly in my prepared remarks a moment ago when I was describing the impact of LPSA on the full year EBITDA guide. In the fourth quarter, the difference between LPSA and corporate unallocated expenses is indeed $5 million. For the full year, as you'll note from the published materials that went out this morning, the difference isn't $5 million, but it's $10 million. So just to be clear, the full year EBITDA is expected to be $420 million about $10 million lower than the sum of Siding and OSBs breakeven, but still an increase on the previous guidance. So I've got a fog in my thought, hold on. And now I'm going to turn over the question on Maniwaki to my friend and colleague, Jason. Jason Ringblom: Yes. Thanks for the question, George. I'll touch a little bit on mill conversion options. I guess when you think about it holistically, the beauty of our position here at LP is that we have multiple options. I'll go through those just quickly. We've mentioned them on previous calls, but we have the opportunity to expand existing Siding plants. So imagine a line parallel to an existing line at a current Siding plant also had the opportunity to convert additional OSB facilities and Aspen wood baskets. So Maniwaki, as Alan mentioned, is an option along with Peace Valley and then also the potential for a greenfield that would leverage sites that we own today in Wawa, Ontario or Cook, Minnesota. With that said, what I would say is the decision on the next mill will really come down to timing and capital efficiency, really coupled with the network optimization benefits that any given option has the potential to add. So we're still assessing all of those options that I mentioned. But as Alan stated, Maniwaki has surfaced to the top here more recently, just given the OSB market. And then the second part of your question just around the competitive dynamics. What I would say is, generally, we have not seen a whole lot of disruption within the channel. I mean, this is the time of year where new programs are being put in place. We're navigating RFPs with different customers. But right now, we're just -- we're focused on our strategy and really trying to minimize the noise and continue to focus on gaining share. George Staphos: Jason, just a quick one, and I'll turn it over. Aside from the fiber basket for Maniwaki, what else makes it potentially rise to the surface more quickly? Jason Ringblom: Yes. So Maniwaki is a large OSB facility. So it's got the ability to produce 600 million to 650 million feet of OSB, which translates to, call it, $400 million-ish of Siding. So just the scale and relative cost position of that facility, coupled with just the network optimization opportunities that it presents will all be factored into the analysis. Operator: The next call comes from the line of Susan Maklari with Goldman Sachs. Susan Maklari: And let me have my congrats to both Brad and Jason as well, looking forward to working with you. My first question is talking about the pricing environment in Siding. You've traditionally announced an increase late in -- or sometime in the fourth quarter for effective in early the following year. Just given the world that we're in and the varying dynamics around housing and the consumer, how are you thinking about pricing as we look to 2026? Jason Ringblom: Thanks for your question, Susan. I'll take that one. So as of -- I guess, within the last 7 to 10 days, we did announce a price increase, very consistent with what you've seen us do in prior years. Along with that, we are managing our order intake to really minimize any sort of inventory build in the channel in advance of our price increase. So really, those orders that are placed throughout December and in our January order file will come at the new price list. So nothing unusual here. What I would say is increases vary by product category and geography, but we are really targeting the net somewhere between 3% and 4% in '26. Susan Maklari: Okay. And then turning to OSB. When you think about the environment that the builders are facing and the commentary we're hearing, especially from the big publics around pulling back on start to end this year and then even into early 2026. How are you thinking about balancing that capacity? The near-term pressures that are there relative to the longer-term outlook for housing and just adjusting the cost structure on a relative basis given those factors? Jason Ringblom: Yes. So demand for OSB has certainly been soft for the better part of the year. And as a result, our focus has really been on matching capacity to demand. No different than what we've done in prior years where we've experienced soft markets. What I would say today is our utilization rate for OSB is in the high 60s, which is essentially -- which essentially matches our committed volumes for the business. So what we felt is if we sell open market wood or bring cash wood to the market. Largely, it ends up in lower prices. So right now, we're focused on really managing costs and optimizing our network relative to the demand we see today. Operator: The next question comes from the line of Ketan Mamtora with BMO Capital Markets. Ketan Mamtora: Brad, I wanted to extend my congratulations as well. I mean it's been a remarkable transformation. This is a much different company today than what it used to be even 10 or 15 years back. So congratulations. William Southern: Thank you, Ketan. Ketan Mamtora: And Jason looks forward to working with you. Maybe to start with, can you talk a little bit about you mentioned shed volumes are normalizing in Q3. Can you talk about sort of what you saw there in Q3? And what's contemplated by way of volume as you think about Q4? Jason Ringblom: So I would say, Ketan, and I'll take that one. I mean, throughout Q3, our order intake and sell-through rates were pretty consistent. In fact, I would say they held up better than maybe we anticipated given the broader softening in the housing and repair/remodel markets. And I think that's a testament really to our commercial team and our focus on innovating around the needs of our end user customers, specifically ExpertFinish, smooth Siding, naturals, as Brad mentioned, being great product additions that have helped offset the weakness in some of the market segments we play in. Specific to shed, what I would say is, yes, business has normalized in that segment, but we were up year-over-year. So we're very pleased with the progress we continue to make in that particular segment. And we see that continuing going into Q4 as well. Really where the softness resides is more in the new construction segment, particularly in the southern markets. And we see a little bit more resilience in repair remodel especially in the northern markets where we have a more dominant share position. William Southern: Jason, I'll just add to that. Sorry, Ketan. I'll just add, that historically, we've kind of seen a bit of seasonality in the shed business where our distributor partners and the shed builders tend to build some inventory in anticipation of spring and summer sales. And that kind of backing off as we get through the summer. And I think what we saw seasonally in shed is pretty consistent with the historic trends that have driven our order file in the past. Ketan Mamtora: Got it. That's helpful. And then just one more question. It seems like you are also sort of -- in the way you are selling sort of your Siding products and your OSB product, it seems like there is some transition happening where you're trying to align both these products and sell it kind of more as a bundle. Can you talk to sort of what is driving that move? And what kind of reception you're getting with your customers? Jason Ringblom: Yes. I'll take that one, Ketan, and I appreciate the question. So back in April, we announced the integration of our OSB and Siding businesses. And really, the main reason for that was to better leverage our resources and better leverage the breadth of our product portfolio in the marketplace. So you're right, we are working on some bundling of programs to help us execute our segment strategies in all areas that we play in. But I would say we're still very much in the infancy stage of that process. We've made some good progress in the big builder segment, but it's still an area we're exploring largely. Operator: The next question comes from the line of Sean Steuart with TD Cowen. Sean Steuart: I'll extend my congratulations to both Brad and Jason as well. I want to follow up on the Maniwaki pivot. Can you give us a sense of the time line to at least start this project and when you think it might be producing Siding product? And attached to that question, does the Section 232 determination, which exempts OSB and Siding from Canada. Does that factor into the decision at all? And I guess, broader perspective, the determination on Section 232 sort of left it open-ended, that the administration can consider changes to the assessment as time unfolds. I guess the short question is, are you comfortable that this will be an extended -- a permanent exemption for OSB in Siding from Canada. I'll leave it there. Aaron Howald: Yes, Sean, this is Aaron. I'll take the 232 component of that question. I don't think anybody is comfortable that policies are current in the current administration. But I will say that the decision to shift to Maniwaki should we make it, will be a long-term decision based on our long-term expectations about the evolving OSB and Siding markets. The current situation for the 232 tariffs is that neither of those products is subject to a tariff importing it from Canada into the United States. And perhaps a less understood component of the 232 discussion is that the importation of some heavy equipment categories into the United States is less favorable than it is into Canada currently. So for example, if we were to acquire a press or other large equipment for a conversion of an OSB plant in Canada, we would be able to import that equipment at a lower cost into Canada than into the U.S. because of those tariffs. Alan J. Haughie: I would like to stress, though, that, that would be a potential benefit, but it's not a reason... Aaron Howald: Exactly. Yes. The 232 issue is not the decision maker. It is noise that currently is a net benefit. But the long-term reasons for Maniwaki should we make that decision would be the fundamental market dynamics and the efficiencies that, that mill would bring. William Southern: Sean, the process is, as you can tell, as we've gone, we try to be transparent on these calls and talk about the different options. And some rise to the top and in some fade from the top. And so it is certainly dynamic. But the valuation that we do is financially driven, long-term financial driven, as Aaron said, and there are components specifically to tariffs or -- but when you look at wood cost, you look at particularly network optimization, Maniwaki is in a really interesting place for us when you align it with our existing infrastructure, including what we're doing around ExpertFinish growth. And so -- but as we continue to do the evaluation over the next several quarters, we'll continue to evaluate all options in the face of a good strong financial analysis. And then when we get ready to present to our Board, that's when the rubber hits the road around crystallizing around 1 facility and being able to explain from a return standpoint while that was chosen. So more to come on that, but we did think it was worth mentioning Maniwaki as a prime candidate or might perhaps the prime candidate right now, given that we haven't talked about that much in the past. Sean Steuart: Understood. And then maybe just one follow-up there, Brad. Part of this reordering of the options is the extent to which OSB markets unraveled here the last several months. I mean you've positioned this as it's a long-term decision based on optimization of the fiber basket, the portfolio you have. Is there any read-through on you view this OSB downturn as potentially extended beyond what we would normally see? And you're considering Maniwaki in that context as well. This could be a longer trough than we're accustomed to seeing for OSB? William Southern: No, we were not intending to signal that at all. Certainly, the near-term outlook for OSB is pretty abysmal, but we believe in the business in the long term. Really what put this one up was, as Jason mentioned or I mentioned in the prepared remarks, the timing -- we were leaning on Houlton because we felt that we could get there faster with a conversion. And so when really it's the overall softening in the housing outlook overall gave us, say, another year of capacity in our existing network, which allowed us to take a step back and say, if we're not in much of a hurry as we thought we were in 6 months ago, what are other options. And that's really when we started focusing in on Mani. It's not OSB-related that drove... Operator: I believe your mic just went out for a minute. [Technical Difficulty] And Sean, you're still there? Sean Steuart: I am. I'm all good guys, you can go onto the next. William Southern: Did you hear? I mean it was such a great -- it's probably the best answer in my CEO career and I got cut off in the middle. Sean Steuart: You're leaving on a high note. I think I got the gist of it. Operator: The next question comes from the line of Mark Weintraub with Seaport Research Partners. Mark Weintraub: I don't know, Brad, I don't know if I should ask any more questions after that. That high note. But congrats to all, of course. So maybe just a little bit more on the thinking on the Maniwaki Houlton. So I mean your volumes this year aren't that different from what you were expecting. So I mean, it seems to suggest that you're taking a little bit more of a cautious perspective on next year. And obviously, it's pretty early. Maybe help us think that through a little bit. And when you say several quarters, does that mean you're kind of thinking it's like -- you don't need it for close to a year later than what you would have initially anticipated wanting the volume up? William Southern: Mark, it's really the key driver is we were forecasting internally, improving housing starts at a pace higher than the current forecast is. And so when we were looking at, I don't know the industry adding 75,000 to 100,000 new starts each year, year over year over year. That was got us on a path of sooner rather than later on this conversion. But as we've looked at the most recent starts forecast that we follow, it seems pretty flat or low single-digit growth year-over-year. And so that difference in outlook for housing has given us some degrees of freedom on timing for it. I will say it's been really nice to see Sagola operating at the level that it's operating at now, which has provided a good bit of near-term headroom on that. And so -- but I do feel like the -- I mean, I know that the reason we were able to take a breath on expediting a mill conversion is Houlton as we just looked at the housing forecast that folks are putting out there. And as we aligned with that, we felt like we had another year of time to make a conversion versus being very rushed. And rush caused us to go to Houlton because it would be the quickest, but it also rush would have significantly increased the capital expense, too. So I think we're in a good place to where we still got headroom that we need if housing was to get stronger than forecasted, which we certainly hope happens, but we feel really good about having options other than Houlton, which will be a little more capital efficient for us. Mark Weintraub: Super. And maybe could you expand a little bit on that in terms of capital efficiency, recognizing you're still in the evaluation stage, but order of magnitude, how much capital might be required for a Maniwaki conversion? And also, does this mean that your cap spend in 2026 is actually going to be more reduced than maybe what some of us would have been thinking previously? Alan J. Haughie: Great questions, Mark. None of which we're really in a position to answer with sufficient reliability or confidence yet. We'll deliver more on this topic on our full year earnings call in February. Great question. Sorry, we're just not in the position to answer. Mark Weintraub: Understood. And then just last, if I could. So with the sheds business, obviously, it had been quite weak last year, much stronger this year. Can you give us any sense as to like where the sheds business, and I recon even you guys don't have perfect visibility on this, but your best estimate is where that business is now relative to kind of trend line? Or I mean, did we have some catch up this year so that there is downside risk to next year in a normal environment? Or is it more that it was just so bad last year, this really strong growth just got us back up to what you'd consider to be kind of a typical year? Jason Ringblom: Yes, I'll take that one. So what I'd say there is a fair amount of pull-forward demand in shed during COVID. So our business was very strong in those years. And to some extent, we supported that segment to a higher degree than others while we were on a managed order file. That pullback that we felt in late '23, '24, I think, was a result of that. We've seen the shed business return back to normal levels. If not, maybe a hair better. A lot of the fabricators that we talk to are saying their business is up a couple of points relative to kind of a normal rate. So we feel good about that business, and it's been very consistent for us through the years and feel good about opportunities we have to improve our share position there as well. Operator: Next question comes from the line of Kurt Yinger with D.A. Davidson. Kurt Yinger: Congrats, Jason and Brad. I just wanted to go back to some of the comments, just around the fourth quarter Siding volumes. Can you just talk about, I mean, what you're hearing from your customers in terms of maybe a little bit of demand degradation? And then how perhaps managing inventory levels and the price increase factored in, if at all? Jason Ringblom: Yes. Thanks, Kurt. What I guess I said this earlier, but I mean the process is very consistent with what we've done in prior years. We look at historical purchases, kind of where demand is trending and then come up with allocations for our distributor partners and then obviously work with them closely through that process. If they're communicating that they're going to short a customer on the other end by no means will we hold them to that allocation specifically. So it is pretty fluid in nature with the end goal being not to increase channel inventories as we go into the new year and work through a price increase. So far, I think that's been well received. And there are customers that are certainly asking for more. but that's something that we closely manage on a week-to-week basis. Kurt Yinger: Okay. That's helpful. And then just looking forward to 2026 a little bit. I mean, what areas of the Siding portfolio do you maybe have the highest conviction or visibility to at this stage in terms of delivering kind of above-market growth and continuing the momentum? And separately from a marketing or channel standpoint, kind of what are you most focused on there in terms of strengthening your position with different channel partners and whatnot? Jason Ringblom: Kurt, I'll take that one as well. What I would say is we've got very focused segment strategies for new construction, repair, remodel and then off-site, which includes shed and manufactured housing segment. And those are 3 segments that we will be relentlessly focused on improving our share position. And we're investing resources in all 3 pretty equally, maybe a little bit heavier in repair/remodel. But we feel like there's an opportunity to continue to take 0.5 point to 1 point of share of the addressable market on an annual basis as we think about the future. Operator: The next question comes from the line of Adam Baumgarten with Vertical Research Partners. Adam Baumgarten: Just on ExpertFinish, can you kind of update us on where margins are there especially with the managed order file currently? Alan J. Haughie: Margins still have -- they're good, but they still have a long way to go under this kind of circumstances. So again, I'd still see both outsized. We've certainly had outsized price increases on ExpertFinish, and we're making progress on the cost side. So I think the future is bright for continued margin increase, but they're still lagging our -- fundamentally, our prime offering. So there's nothing but opportunity there. Operator: Our last call comes from the line of Steven Ramsey with Thompson Research Group. Kathryn Thompson: This is Kathryn Thompson on for Steven today. Answered many good questions, but I wanted to follow up just on a few on ExpertFinish and have been taking some share gains. Like I suppose for the quarter and as you think about the year, can you parse out the drivers between channel versus winning shelf space and end market demand? And then against the second part of this is against a pretty challenging R&R market. How sustainable do you feel these market share gains are on a go-forward basis? Jason Ringblom: I'll take that one, Kathryn. So we're very pleased with the growth that we've seen an ExpertFinish after getting into the prefinished business, I think it was back in 2020. We are on a managed order file right now, but we have incremental capacity coming online at the end of Q1, early Q2 next year in the neighborhood of 50 million to 70 million feet. We believe that we've got a very strong value prop with our ExpertFinish line and we've only added to that with the naturals collection that was launched in April. And that repair remodel contractors really enjoy using that product. So we think the demand is sticky. Obviously, you need to get the contractor to get placement in the channel with our dealer partners. And that's really our focus going forward is getting downstream as much as possible to pull that demand through for our dealer partners. William Southern: Kathryn, I'll just add to Jason's answer that the -- keep in mind that our market share in that segment is tiny relative to the opportunity. And as our product gets accepted, as Jason mentioned, as contractors get to use. And as you mentioned, as we secure shelf space with the one-step distribution network, there's just a ton of upside in our ability to continue to grow that ExpertFinish line. And have a higher -- a much higher market share of a large repair and remodel market. Kathryn Thompson: And do you need to step up marketing expenses next year keep being that share gainer or are there other ways beyond to increase stickiness? William Southern: Marketing is a big component. It's in-home selling to consumers primarily. And so as -- if you parse our sales and marketing budget, particularly the marketing budget, it is skewed toward support of the repair and remodel segment more than any other segment but a pretty large margin. But I think what you'll see next year in our budgeting will be consistent with our guidance to be consistent with the kind of spend we've had historically, especially if you like a percent of revenue or anything like that. Kathryn Thompson: And since you brought up distribution, given the ongoing changes in the distribution landscape in the U.S., are you seeing any type of behavior changes for you as a supplier to the distribution market, given some of the fundamental changes in distribution? Jason Ringblom: Yes. I would say right now, we're very pleased with the partners we have from a 2-step distribution perspective and that those relationships are on very solid footing, and we look forward to continuing to work with our partners. But no real significant disruption, no. Operator: One additional question comes from the line of Mike Roxland with Truist Securities. Michael Roxland: I'll just echo what everybody else has said, Brad, congrats on your upcoming retirement, well deserved. And Jason, congrats on the new role. A lot of my questions have been addressed, but I just wanted to ask if you could give us some more color around volume growth by end market in terms of single-family R&R and sheds in manufactured housing in 3Q? And how should we think about Siding volume growth as you look into 2026? I know it was asked recently, but just trying to get a sense of whether you think volumes will be flat to slightly up next year versus low single digits? Jason Ringblom: So I'll touch on the first part of the question. Just looking at Q3 versus prior year by segment. As I mentioned earlier, even though shed volume came off slightly versus Q2, it was up over year-over-year, more than the other 2 segments. Repair/remodel was second strongest as evidenced by our performance in our ExpertFinish business or line. And then single-family, I think it was a mixed bag. We had decent volume in some of our core markets, but in the southern markets that are dominated a little bit more by the big builder and our stress by some affordability challenges and just consumer confidence in general, we have -- that was our weakest segment in the quarter. Alan J. Haughie: I'm going to address the second question briefly. I think it's too early for us to make a sort of convincing call on 2026. As you know, we have pretty good visibility within a quarter. And when we get to February, what we see within the first quarter behavior will, of course, color our view of 2026 at which point we'll provide some full year guidance. Michael Roxland: Understood. And then just one quick follow-up. If you see housing rebound more quickly next year than you're now expecting, what levers do you have available to meet that increased size in now that you're pushing out some of your capital projects? William Southern: Plenty of capacity. We can add shifts in existing facilities. So yes, we will have no problem responding to almost any imaginable demand scenario over the next couple of years in either of our businesses or South America. Operator: This does conclude the question-and-answer session. I would now like to turn the call back to Aaron for closing remarks. Aaron Howald: Okay. Thank you, everybody, for joining the call. We'll look forward to continuing the conversation and follow-up calls later today and conferences throughout the quarter. Thank you very much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Sophie Lang: Good morning, everyone, and welcome to Barry Callebaut's Full Year Results Presentation for 2024-2025. I am Sophie Lang, Head of Investor Relations, and today's session will be hosted by our CEO, Peter Feld; and our CFO, Peter Vanneste. Following the presentation, we'll have a Q&A session for analysts and investors. Please do limit yourself to no more than 2 questions. Before we start, please take note of the disclaimer on Slide 2. And I'd also like to inform you that the webcast and conference call today is being recorded. With that, I'll hand you over to our CEO, Peter Feld. Peter Feld: Thank you very much, Sophie. Good morning, everyone, and welcome to our fiscal year results presentation for '24-'25. Today, we will also be sharing a strategic update covering the actions we have taken and are taking to build a more resilient Barry Callebaut, delivering on our Next Level objectives and how we are unlocking future growth and shareholder value. Let me start with a few key messages. As you will hear in more detail from Peter Vanneste shortly, in H2, we returned to cash generation and made strong progress on our deleverage agenda. This was supported by actions we've been taking on our BC Next Level journey and to step up resilience to market volatility. As we look to the year ahead, we have three clear focus areas: deleverage to less than 3.5x net debt to EBITDA and delivering strong cash generation; preparing for a return to growth with a clear focus on customer experience, competitiveness, and unlocking new innovative solutions for our customers; and third, relentlessly addressing optimization opportunities for the new environment. With that, I will hand over to Peter Vanneste to talk to the results. Peter Vanneste: Thank you, Peter, and good morning, everybody. Let me walk you through the full year performance in a bit more detail now. Starting with a short summary. After significant cocoa bean price increase and volatility in half year 1, the market has stabilized in half year 2, and we have been taking decisive actions to reduce working capital, enabling strong cash generation and deleveraging. At the same time, the cocoa market turbulence created a challenging B2B environment, and we took some prioritization decisions within cocoa, both of which impacted our volume development at minus 6.8%. When it comes to profitability, recurring EBIT growth of 6.4% in constant currency was supported by pricing through the increasing cost of financing and mix. After major pressure on net profit in half year 1, half year 2 net profit benefited from the further cost pass-through actions we have taken. Let me go into more details. Starting with leverage. We delivered major progress in the second half of the year, enabled by our working capital actions, which I will talk more about in the next slide. Back in half year 1, we saw a step-up to 6.5x net debt over EBITDA as higher prices during the peak harvest meant that we needed to finance significantly higher inventory value. For the full year, our intentional actions enabled us to land at 4.5x leverage, significantly progressing towards our ambition of being below 3.5x by the end of fiscal '26. Our leverage adjusted for cocoa beans or RMI is actually today at 2.7x. But in fact, if we also adjust it for cocoa inventories as well as beans, so only cocoa, not even excluding chocolate and other stocks, our adjusted leverage is below 1x. But actually, you can see that on the right-hand side of this slide, and it's important to realize that our net debt of CHF 4.3 billion is actually fully backed by high-quality inventory at CHF 4.7 billion value. When it comes to reducing our net debt going forward, we have very intentionally established a balanced debt maturity profile with around CHF 700 million falling due in the next 5 years on average every year, enabling repayments with our strong liquidity position. So going through those working capital actions in more detail. We have been diversifying our sourcing with increased purchases from origins like Brazil and Ecuador, which do have significantly shorter cash cycles and reduce our forward contracting. This goes hand-in-hand with our actions to step up our bean blending capabilities so that we can optimize recipes for our customers. Next to that, we've also been optimizing our purchase timing and inventory levels and reducing forward contracting, for example, when it comes to safety stocks, where we have been somewhat overcautious in the past. At the same time, we also took action to enhance the flexibility of our financing options with the introduction of a letter of credit facility last August. And this allows us to replace futures margin call cash outflows with a letter of credit, benefiting from both liquidity and agility in volatile times. It delivered 200 million operational cash inflow now, but it's especially an important buffer in case of potential future bean spikes and volatility. The next level focus on improved planning and logistics processes with better end-to-end coordination also had an important impact on our inventories. And finally, of course, the increase of EBITDA is also contributing to our good progress on the leverage through the pricing through of the higher cost of capital, delivery of the next level savings and prioritizing higher return segments within Global Cocoa. So what does that mean for free cash flow? Free cash flow declined by CHF 312 million for the fiscal year with a return to a strong cash inflow of CHF 1.8 billion in half year 2. When we look there at the moving parts, let's maybe start with the brown box, which is the cocoa bean price impact. This had a negative CHF 1.1 billion cash impact for the year with CHF 664 million positive inflow in half year 2. The bean price did close at a similar level at year-end versus the start of the year, which was around GBP 5,300, but with much higher prices, of course, and higher volatility during the year. We saw a negative impact from the bean price for the fiscal year still for two reasons: one, liquidity swaps; and two, some phasing. Now as you might remember, in fiscal '23, '24, we had taken significant liquidity swaps to better allocate our cash flows to our business cycle. And this has postponed margin call payments in the range of several hundreds of million Swiss francs into fiscal '24, '25, so this fiscal year. And this has been the main driver of this. Secondly, also our long cycle of business between the bean contracting and the customer sales and given the much higher prices a few months ago, there's also a bit of a phasing impact when the bean price comes down. So we do expect some further benefit to come if the bean price, of course, stays stable at a lower level. Moving to the green boxes, which is the operational free cash flow. We see here a positive contribution of CHF 1.2 billion for the fiscal year, of which CHF 1.4 billion in the second half of the year. Here, we see the major operational benefits from the next level actions on working capital reduction and financing flexibility that I just described in the previous page. Finally, looking at the yellow box, we invested 388 million for the fiscal year behind investment in CapEx and we see next level. Looking ahead with all of this, given the harvest timing and a typical H1, H2 cash trajectory profile, half year 1 of this fiscal year, the coming fiscal year is expected to see negative free cash flow before we see further strong progress in half year 2. Moving to the market disruption now that we have seen over the past years. I will only talk briefly here as Peter will also go into more detail. But we all know, of course, that the bean prices have increased significantly in the first half of the year. In response to that, the strength of our cost-plus business model allowed us to successfully pass these higher prices through to our customers, driving 56% pricing for the fiscal year and even higher at 85% on our cocoa business. We saw our peak pricing in quarter 2, with pricing remaining high though in half year 2, but a bit lower sequentially. At the same time, it does take our customers some time to price through to the end consumer. So we have been impacted by a challenging B2B market as they manage the transition and adjust to the higher prices. And in particular, our customers have been reducing pack sizes and reformulating in some cases, certainly also adjusting their stock levels and their forward cover, calling off orders sometimes later. And finally, a few of our very large customers who also produce chocolate in-house have been prioritizing capacity as they saw temporarily lower demand. Nevertheless, our customers have also taken significant pricing with Nielsen data showing chocolate prices in the market that are around 30% higher than what they were before the bean price increased. Within the next few months then, we know that it will still be challenging, but we do expect market dynamics to improve because of this and also given the recent decline that we've seen in the bean price. We, therefore, expect our customers to take only limited further pricing, and we have seen customers willing again to contract further out in light of these lowering prices. On top of the market dynamics, there's also been a number of BC-specific factors for the decisive actions we took in this environment. In Global Cocoa, we sharpened our return focus to prioritize volumes within cocoa and also towards chocolate, where we see the higher returns in the context of higher bean prices and our deleverage agenda. The impact is expected to continue into half year 1 of fiscal '26. In North America, the intervention in our Toluca, Mexico factory at the start of the fiscal year saw a residual impact as we worked through all of that to get customers back and requalified. And finally, our SKU rationalization efforts, which are now complete, impacted volumes for Gourmet, especially in Western Europe. At the same time, we did focus our strategic direction on the growth platforms, which have shown resilience. Cacao coatings, which we used to call our compound business saw positive growth overall, particularly driven by high single-digit growth in Western Europe and double-digit growth in Latin America, where we have supported our customers with innovation and reformulation. In Specialties, we saw particularly strong growth in our inclusions business. And finally, in EMEA, the region was impacted by the China microclimate, but we saw double-digit growth in key geographies like India, Indonesia and the Middle East, supported by innovations, our actions to delayer our route to market and portfolio segmentation. These market dynamics have led to 5.3% decline in chocolate volumes. And for the group, we saw a decline of 6.8%. So the group decreased more than chocolate as Global Cocoa declined by 12.8% with a strong impact from the negative market demand to the higher prices on the one side, but also due to the prioritization reasons that I outlined before. I will, therefore, focus this slide on Global Chocolate first by region and then by segment. Starting by the regions to the left of the page, Western Europe saw a 6.6% volume drop as the demand there continue to be impacted by higher prices and the knock-on effects of all of that on customer behavior as well as some effect of SKU rationalization. Central Eastern Europe declined by 4.4% with a very challenging customer environment, particularly for food manufacturers that are local. North America saw a decrease of 6.7% as new customer wins were offset by the difficult market environment and the impact of the Toluca intervention I talked about. Latin America saw a strong growth of plus 6%, driven by innovative customer solutions, particularly for cacao coatings, again, compound. And finally, EMEA saw slightly negative growth as the demand pressures in China and the developed markets offset the double-digit growth I just discussed for India, Indonesia and the Middle East. By segment, to the right of the page, Gourmet has been more resilient as growth in EMEA, Latin America and CEE was offset by the challenging environment we saw on that in Western Europe and North America, again, here impacted by the SKU reduction and the Toluca intervention. Meanwhile, the Food Manufacturers segment was impacted by customer behavior shifts in this context of volatility and significantly higher prices as we've seen across the whole market and as I talked about earlier. Moving to profits. And first, recurring EBIT. Later, I'll talk about net profit. Recurring EBIT was CHF 703 million, increasing by 6.4% in constant currencies. Looking at it per tonne, we saw a 14% increase, showing that the impact from the lower volumes was significant. Now EBIT benefited from mix as the higher profit segments like gourmet specialties and cacao coatings saw better growth than the overall group. Importantly also, the cost-plus model enabled us to successfully pass on the higher financing costs of this high bean price environment with a strong improvement in pass-through in half year 2 after some gaps we had seen in half year 1 as it does require time in a forward selling business to pass this through. Third, delivery of the BC Next Level cost savings also benefited EBIT. At the same time, we've also seen a number of offsetting costs, some temporary, some structural. In particularly, unprecedented market disruption costs, especially in half year 1, such as the impact of steep backwardation on rolling costs and high market prices that are raising carry cost of our inventories. These already improved significantly in half year 2. Also, we saw an impact of the lower volumes on the fixed cost base and inflation. And finally, we made some structural investments in customer experience and internal capabilities. For example, digital investments, supply chain investments such as enhancing our bean blending flexibility and capabilities, people investments and some other cost inflations, partly due to the cocoa environment like higher insurance costs on the much higher value of the beans that we are transporting around. Closing this section on recurring net profit. Net profit was at CHF 250 million or CHF 267 million at constant currency, down 36% in local currencies. However, it's very important to distinguish between half year 1 performance of minus 69% and half year 2 performance, which was flat versus last year. Half year 1 net profit was heavily impacted by the speed and the magnitude of the bean price increase and the corresponding working capital impact and the time it takes to fully pass through this higher cost in a forward selling business. Half year 2, however, we did see a strong improvement to being flat versus last year, showing the strength of our actions with around 3% profit generation versus half year 1, driven by further actions to price through higher cost of financing, our cost of financing increased sharply to -- with 170 million year-on-year in sync with the higher working capital needs that we had throughout the year and the additional funding we raised for that. And we took actions to price through those financing costs, which further took effect in half year 2. Second, a bit of market stabilization with significant easing of the backwardation in the cocoa market. And this means that the gap between the near term, the more expensive prices has been narrowing versus the long-term less expensive prices. So that has been helping in half year 2. And third, the impact of our end-to-end value chain projects and planning improvements. With that, I will hand over back to Peter, who will talk more about the actions that we take to enhance the resilience of BC and make us an even stronger leader in this industry. Peter Feld: Thank you very much, Peter. So the last 2 years have been, in many ways, unprecedented. The market environment has radically changed. The entire industry was disrupted. Today's full year results presentation provides an opportunity for us to reflect about what we've done and about the journey ahead of us. So looking back, how we have been delivering BC Next Level while taking decisive actions in a radically changing environment. And looking ahead, how we are pulling all levers to deleverage and decouple from the bean price while enabling growth and returns. So let's dive in. So BC has seen unprecedented time over the past 2 years. We are unlocking our full potential with BC Next Level by progressing relentlessly to weather the new normal. We've launched our strategic investment program, BC Next Level 2 years ago. We are advancing Barry Callebaut to become the trusted adviser of our customers, best value, best service, best sustainability and food safety and quality with the goal of creating a better customer experience, a better scaling Barry Callebaut and a onetime cost improvement of 250 million. As you know, due to the disruption and bean crisis and also the tariff situation in North America, we announced a delay by 12 months. Now let me be clear. BC Next Level is delivering. More than 30 initiatives are hardwired, way more than halfway through. But unfortunately, due to these external shocks, the savings uplift will only be visible in the bottom line later. We have achieved a lot since we have started our journey 2 years ago. We've talked about the BC Next Level transformation during our results presentation about our new operating model, our footprint optimization, the SKU reduction to name a few topics shared so far. But BC Next Level is much more than this. It is a strategic investment program with 36 initiatives that bring tangible benefits to Barry Callebaut and importantly, our customers. Now we won't have time to look at all of the 36 initiatives today. I want to focus on a few to illustrate the benefits that BC Next Level brings to BC and our customers. Before we go there, I want to thank our teams in Barry Callebaut who have worked tirelessly to get us where we are today. Thank you very much. Starting with food safety, a cornerstone of our business. We have elevated food safety to the next level and installed 3 fire lines for safety to provide certainty to our customers at all times. One, full product testing before releases, 100% positive release; two, rigorous supplier compliance; and three, investments into technology and factory design. A great example are the auto samplers we have been installing, precise, repetitive and efficient sampling for best results. All of this is part of our larger food safety agenda. As part of Next Level, we've done many things to improve our supply chain performance. I want to share 2 examples today. The first one that you see on the page right now, we have introduced real-time track and trace for all our road shipments in Europe and North America. We are testing this as we speak and will soon be ready to have everything at our customer fingertips. Customers will know when their order is ready, when it leaves our factory, when it arrives at their factory, if there is any delays. On time, in full, in spec and quality delivery is a critical part of our customer journey. The benefits are obvious. With a similar intent, we've launched Ocean Edge with DHL to give end-to-end visibility on our ocean freight. We've massively improved ocean shipments with efficiency benefits, detailed tracking, centralized document repository. BC Next Level is a key enabler for a more scalable Barry Callebaut. The next example I want to give is our new factory operating system, BCOS, a milestone in Barry Callebaut's history, a global standardized way of working to be established in all our factories. 29 locations are going live by the end of this year. We see remarkable results in a factory where we have already introduced BCOS so far. The training and the mindset shift enabled a 20% more efficient production on a 6-month period across the lines that started first. This is huge and the benefits will be coming in the future. All our new factories like Brantford in Canada and Neemrana in India that we've started up this fiscal year are starting with BCOS from day 1 with all its benefits. BCOS is a backbone to create a better scaling Barry Callebaut for the future. The next example is our global business services that now operates from our 4 hubs: Lódz in Poland, Hyderabad in India, Monterrey in Mexico and Kuala Lumpur, 24/7 capabilities around the globe. All four hubs are fully up and operational. Lódz and Hyderabad drive global processes, Monterrey and Kuala Lumpur support regional operations. GBS brings significant benefits and efficiency benefits for Barry Callebaut. But importantly, it is also the base for better, more consistent service to our customers around the globe. Integrated processes, standardized workflows, end-to-end process ownership, clear benefits for BC and for our customers. And the last example for today, and we're only covering a fraction of the BC Next Level programs. If you haven't realized by now, our annual report and this presentation looks slightly different. We've launched Masters of Taste as our new brand purpose with our global power brand Callebaut. It underscores our deep commitment to be #1 trusted adviser for our customers. As you know, taste is by far the most important purchase driver in the chocolate industry, confirmed by 84% consumers globally. This brand purpose for us brings all of Barry Callebaut employees and our partners together and helps to drive a stronger value perception with our 15,000 customers globally, especially in the Gourmet segment. As earlier and shortly after announcing BC Next Level, the cocoa crisis hit the industry. For decades, cocoa and chocolate prices have been comparatively stable with relatively low volatility. We all know what happened over the past 2 years. The first price spike in '24, making chocolate 3x more expensive within 4 months, a second spike in '25. Today, we're still 2x higher compared to historic levels. This unprecedented situation on bean price, volatility and supply introduced challenges and require decisive action. We needed to tackle a lot of challenges resulting from the high and volatile bean prices and the more difficult supply situation. Increased working capital requirements to fund the inventories, rapidly increasing our leverage as well, changes in customer behavior, more short-term bookings, delayed call off, a lot of conversations with customers not used to such rapid changes in prices. Challenges for the industry to source the beans from the right origins and the right quality. Demand and supply forecasting challenges in uncertain environment with ripple effects throughout the entire value chain, a lot in parallel, and we have been addressing it. We have acted swiftly and decisively, including by deciding to push forward with BC Next Level. To address the bean price volatility, we installed cross-functional task forces to effectively respond to the temporary price spikes, clear action plans in rapidly changing market conditions. I would say it brought all of Barry Callebaut closer together as a team. The level of collaboration across cacao, chocolate and the different departments is probably the highest it has ever been. As a joint team, we've secured the right financing for this environment, including the 2 billion of bond issuance in January and February '25, less cash-consuming solutions for daily market volatility as explained by Peter earlier. But also lots of actions to secure the bean supply. We quickly diversified and expanded our traditionally more Ivory Coast and Ghana-focused origin mix. We drastically reduced our bean and produced stock inventory through various measures to minimize working capital needs. And we have a clear plan what needs to happen in the future to make Barry Callebaut even more resilient. Let's look ahead. The focus forward is clear: deleverage and return to growth. Before we get into it, I want to provide an outlook on the cacao market. Our views differ short term versus long term. Short term, in other words, for the upcoming crop cycle over the next 6 months, we are cautiously optimistic on supply. It is expected to be broadly similar to this past year, likely a slight decrease in West African crops to be offset by growth in the other origins. Cacao prices at 2-year lows, also positive, but the volatility remains structurally higher than before the crisis and customers are all still adjusting to the changing environment. So temporary price spikes are not out of the question yet. Long term, structural challenges remain for the industry to solve, climate change, diseases, farming conditions. We are leading the industry to secure supply, and I will share more details in a minute. The main message I want to leave with you, we are preparing Barry Callebaut to weather higher prices and volatility for longer while working to decouple the business from bean price fluctuations. Let's get into the crop. Prices. We've all observed the recent significant drop in cacao prices. Three topics I want to highlight. One, the cacao terminal market is now below GBP 5,000, a level we believe our customers have largely priced through in retail. That's good. Short term, the market seems to have found a price that works for farmers, processors, our customers and consumers. Too early to tell, but cautiously positive to see. Two, for the first time in 2 years, the forward curve is flat. You pay the same for cacao delivered in December of this year and December of next year. This is very important. It incentivizes our customers to book rather than wait for lower prices in the future. It also reduces rolling costs associated with hedging significantly. The flat curve is good news. Three, volatility has reduced, but it is likely here to stay, which brings us to the next slide. Volatility. Looking at the daily change in cacao prices, let us think in before '24, cacao prices changed around [indiscernible] changes on a daily basis. This is unprecedented in terms of speed of change. Volatility has come down, yes, but we continue to observe strong reactions around selected news and [indiscernible]. To be resilient in this environment and to protect us. Volatility is likely here to stay, and we are prepared for it. Our quarterly pricing, which is tied to cacao prices, of course, has peaked in quarter 2, '24, '25. Nielsen quarterly pricing, the sellout data is only now starting to stabilize, in line with a typical 3 to 6 months B2B to retail delay we see in the industry. We believe customers and consumers are adjusting to the new normal. Consumers' appetite for chocolate remains strong. It is the #1 preferred consumer flavor by distance. Customers, we believe, have largely priced through the current terminal market levels, and we are proactively collaborating with them on recipe optimizations, new product launches and other efforts. Short term, our customers will still continue to navigate consumer readjustments on a case-by-case basis, but we believe we are through the worst as an industry. Let me also say, chocolate has been far too cheap for far too long. We believe actions are required to ensure long-term supply of our beloved cacao. As I said in the beginning, the long-term structural challenges are not resolved. A significant part of today's cacao supply is at risk due to climate change and disease. We are tackling this proactively, and we are leading the industry to ensure a predictable long-term supply across four areas with ingredient innovation. Mid-July '25, we announced our partnership with the Zurich University of Applied Sciences to explore cacao cell culture technology. And today, we are pleased to announce a long-term commercial partnership with Planet A Foods. More on a few slides, 2 examples amongst many taken to deliver new chocolate experiences with less or no cacao content. Through our sustainability program supporting the leading consumer goods companies of the world, the scale of these programs is massive and by far the largest in the industry. I want to use the opportunity to reiterate that we are ready for EUDR. We are supportive of the legislation. It is important to give the entire industry a level playing field. We are ready for -- at Barry Callebaut for our customers, and we believe traceability is the right thing to do. And we are also driving investments into small order farming and large-scale high-tech farming. So how are we progressing with our Future Farming Initiative? Our Future Farming Initiative is designed to modernize sustainable cacao farming at scale, a catalyst to the industry to invest in farming. Under the leadership of Steven Retzlaff, who led over 2 decades our Global Cacao business, we are going forward, and we are having good news on that side. Many elements are in place to scale the future of farming. The team is making strong progress. We've built a team of industry-leading experts working tirelessly. We have the largest nursery established in Brazil, two farms to test and improve farming methods, and we're driving productivity investments such as our AI-based cacao port harvesting robot. We've also identified a funnel of properties that fit our criteria for large-scale cocoa farming. Advanced discussions with partners and landowners to put funding and scaling models are in place. So the ingredients to really unlock the future farming opportunity are here today. The team is now working on executing the plan. So talking about our long-term priorities. We remain focused on our four strategic growth priorities and continue to drive improvements in execution. A few thoughts how we are progressing on each of them. One, deeper partnerships. We are the trusted partner of choice for innovation and reformulation. Customers are looking towards us to provide our solutions or our new commercial centers of excellence are driving capabilities and impact while our new customer segmentation allows us to be more tailored in our service offering. Since the cacao crisis, outsourcing was not the top priority on our customers' agenda. Today, we are making progress nicely on some larger opportunities for the future. We remain bullish on outsourcing as a key enabler to strengthen our strategic partnerships and by more deeply interlinking our supply chain to bring benefits of our scale to our customers. Two, as shared, we've launched Callebaut Masters of Taste. We also successfully launched our pilot direct-to-consumer web shops in Germany and Austria for our Gourmet business and launched our digital Callebaut Academy. Three, we are continuing to improve the scalability of our specialty offering through a more focused portfolio, accelerating innovation in cacao coatings and expecting and expanding into non-cacao solution and experiences. Four, we continue to see a huge opportunity in getting to fair share in EMEA with China completely untapped. The team is progressing nicely in key markets as evidenced in the numbers that Peter has shared with you earlier. We are preparing for a return to growth to innovate, lead and grow. Our Net Promoter Score that our customers have given us has increased significantly compared to last year, a great step towards the ambition of delivering best customer experience. This increase is driven by a few factors. Our customers especially highlight our product quality, the effective solution advisory, our understanding of their business needs and the breadth of our portfolio. This is our ambition, being the trusted adviser to our customers. Great to see the progress on customer experience. We have in Barry Callebaut chocolate solutions for any customer needs from cacao products to decorations and inclusions. Our ambition is clear, leading in chocolate, growing in cacao coatings and launching non-cacao. I spend -- I want to spend a bit more time on 2 of them, cacao coatings previously named compounds and non-cacao solutions, and we will go a little bit more into these exciting news. There are many reasons to accelerate our growth in cacao coatings or as we call them before, compounds. It is very high on any customer's innovation agenda right now, and it makes financially sense. Lower capital intensity than chocolate, you need less beans per ton of product, higher returns than chocolate with attractive profitability, higher growth than chocolate driven by current cacao price dynamics and push into reformulations. You see this reflected in our numbers. Cacao coatings is outperforming chocolate in most regions. I want to call out Western Europe, in particular, the largest chocolate region in the world, where we see promising growth in cacao coatings. While our global chocolate business overall has declined, cacao coatings have grown substantially in many regions, if I may add. More to come. We are continuing to invest in this exciting category, and this brings me to another exciting news to share. Earlier today, we have announced our commercial long-term partnership with Planet A Food, the German food tech innovator behind ChoViva. This partnership marks a key milestone in diversifying our portfolio and capturing the exciting opportunities in chocolate alternatives without cacao. It is also exemplary in how we innovate, lead and grow by embracing technology to open further avenues for growth while enhancing our resilience to today's cacao market volatility. Let me be clear, these non-cacao innovations are not meant to replace traditional chocolate, but to complement them, expanding our portfolio to keep -- to meet growing customer and consumer demand. Together with the team at Planet A Food and its motivating founders, Sarah and Max, we can scale the production of irresistible chocolate-like creations that broaden choice without compromising on taste, quality and our commitment to the planet. So let me zoom out again. We are well on our way with many strategic actions spanning our entire value chain to make Barry Callebaut less bean price dependent and drive growth. The goal is simple: deleverage, decouple from bean price, enable growth. This is guiding our actions throughout the organization. We are increasing our financial agility, solutions that breathe with the bean price and consume less cash. We are reorienting the purpose of cacao with a clear focus on ROIC targets for the third-party sales. We're driving a step change in digitization and analytic capabilities. We have improvements in sourcing, as discussed previously, and conscious decisions on product and geographic portfolio to drive growth. Many new products are requiring less working capital. We've improved our operations already significantly, reducing transport time, improved visibility on stock levels, better end-to-end collaboration across cacao and chocolate, all to capture incremental value across our value chain. Our ambition is clear: deleverage, decouple from the bean price and enable consistent profitable growth. So with that, we're moving to the outlook for the year ahead. While we've seen a stabilization in cacao bean prices, it is clear that we are still operating in a challenging environment. Our customers and the entire industry are still digesting cacao prices 2x above historic levels and the ongoing B2B efforts of that will remain pronounced, particularly in the first half of this fiscal. Our working assumption is for a bean price in and around GBP 5,000 with continued volatility, albeit at lower levels than last year. While we've taken steps to enhance our resilience to temporary cacao bean price spikes, of course, if this were to happen, it would have an impact on our delivery of '25-'26. As you know, the largest impact of our cacao bean prices on cash and leverage with a likely knock-on impact on volumes and profit as our customers are likely delaying orders and adjusting their purchase behavior as we saw last year as well as further prioritization in Global Cocoa. When it comes to guidance, our clear focus is to deleverage below 3.5x and prepare for a return to growth. H1 '25, '26 is expected to remain challenged as customers and consumers continue to manage higher prices, while we aim for improvements in H2. On volume, global chocolate is expected to see mid-single-digit volume decrease. With a focus on ROIC in global cacao, this will result in mid- to high single-digit volume decrease in Global Cocoa. As a consequence, we see group volume is expected to see mid-single-digit decrease related to bean price developments impacting global cacao return prioritization. In particularly, while we don't typically provide guidance by quarter, we wanted to be transparent and proactive share what we expect as a significant volume decrease in Q1. The key reason relates to North America, where we temporarily paused our production site in Saint-Hyacinthe in Canada due to a technical malfunction with one piece of our roasting equipment. The factory is a significant contributor to the overall North America production was closed for around 3 weeks. The site is back up running. And while we are doing everything possible to deliver our customer orders as soon as possible, this will have an impact on H1 performance for North America. We've agreed with the Board to invest in a new facility in the United States as well as taking significant upgrade investments in existing network. This decision earlier this year comes with a delay following more clarity on the tariff situation. On profit, we expect low to mid-single-digit growth in EBIT recurring and double-digit growth in profit before tax recurring, both in local currencies. These are on a recurring base and exclude remaining BC Next Level onetime OpEx investments of around CHF 60 million to be spent on digital and on growth initiatives. So to conclude with three clear focus areas for us this fiscal year. First, deleverage to less than 3.5x net debt to EBITDA and delivering strong cash generation. Second, prepare for a return to growth with a clear focus on customer experience, competitiveness and unlocking new solutions for our customers, leading in chocolate, growing in cacao coatings and launching non-cacao solutions. We will be third, relentlessly addressing optimization opportunities for this new bean price and quality environment. So with that, we are building an even stronger leader, and we are confident that Barry Callebaut can win in the new market reality. Thank you very much for listening. We will now move to the Q&A session, and I will hand over to the moderator to start the Q&A. Thank you. Operator: [Operator Instructions] Our first question is from Jörn Iffert from UBS. Joern Iffert: Two as guided. The first one would be, please, on your volume outlook being down mid-single digit in fiscal year 2026. I mean, don't you expect that as you also highlighted, the GBP 5,000 COGS impact on the beans is worked through. We are maybe even entering a deflationary environment in chocolate going to 2026 or at least incremental price will be quite limited. So why do you expect to underperform the global chocolate market volume growth again in 2026? Is there anything on in-sourcing happening? Is there anything where you see ongoing SKU rationalization on customers? Have you lost the customer? This would be the first question. And the second question on the cost savings, can you please remind us what is the total aggregated net saving run rate we have seen now in fiscal year '25 in the EBIT? And what are the incremental net saving benefits in fiscal year '26 and then also '27? Peter Feld: Yes, first from my side, thank you very much for your questions. Let me just come back to your first question, which was on volume. Look, I think, as you know, we are a forward-looking business. And as we've just shared, we obviously continue to look very closely at what customers are doing. We believe, as per our information that our customers have about price through 30% of the price point that we see today. However, there's still discussions and we see still discussions happening between our customers and the retailers as they -- or the end customers as they bring the products into the market. So that is one of the elements why we're cautiously positive on it, but we have to recognize that we're coming from a low run rate there. The second thing that we have informed you about is the incidents that we had in the Saint-Hyacinthe facility in Canada that obviously had an impact and that we are having behind us, but that obviously will impact the first half year outlook on the business. The second question that you've asked on -- Next Level synergies. Let me tell you that we've had in the end of the fiscal year '25, about 60% in the numbers and about 70% hardwired for synergies going forward. So progress in line with what we had set out on the agenda there. But as we've explained to you earlier, we have other cost elements that we have to address, and there's a whole array of task forces underway to deal with the new bean price and bean quality environment as we speak. Operator: Our next question is from Jon Cox at Kepler Cheuvreux. Jon Cox: A couple of questions for you. One a point of clarity. i.e., I'm trying to ask another two on top. This Saint-Hyacinthe in Quebec facility closure, that is your biggest facility in North America. Am I right thinking it's like 300,000, 400,000 tonnes capacity? You said it's just closed for a few weeks and you lost some customers. Can you just elaborate a little bit on that? I'm just trying to parse out what the impact of this thing will be on the guidance for the year. Second question, just to come back on the cost savings. Your EBIT level recurring is the same as it was last year. And I know there's a load of different things going on, but we're not even 10% above we were in terms of recurring EBIT from when you actually started this program. I'm just trying to get a handle on how much is gone in FX. I'm guessing half of it is gone. So that 187 net EBIT gain we should have expected over 3 years now to 4 years is probably half of that amount. And as part of that, what should we see, because we can see EBIT per tonne is improving. Is it just a matter of seeing that volume growth even when it does improve, we're going to see a big step-up in EBIT growth because you're saying that eventually, it will be shown in the bottom line, but we're just not seeing it at all. So that's a sort of broader cost savings and final impact. And then just lastly, on the financials line, we had a minus CHF 370 million there, you're talking about CHF 700 million of debt falling due, which is maybe 20% of the debt, which you've sort of used as part of this problems with the balance sheet. Why can't we expect that financials line, the net financials to come down by 20% per year over the next couple of years? It just -- it's sort of like -- it's a big balloon on that net financials and probably going to contribute to pretty high EPS cuts on FY '26 because it just doesn't seem to be moving down much, even though your efforts on deleveraging are far better than expected in H2. Peter Feld: Thank you, Jon. Thanks for the questions. Let me take the first one. So the St-Hy impact has been an impact that was driven by an equipment that shut down one of our roasting facilities. You're right, it's one of the big factories, especially also for the cocoa that goes into North America. So there's a triple effect that we actually see from that. For me, the important aspect is that we have concluded with the Board to invest significantly in the North America network to bring it to the same performance level that we expect to have in reliability. And combined with the work on BCOS, we were confident that we actually will make the improvements needed for that facility. This incident has been with us for about 3 weeks. It's a proactive activity that we have done. And obviously, there's a trickle-on effect for our North American customers. Look, we want volume back from any of those incidences that we had from the decision we took in Toluca last year, the same situation here. It's extremely painful. But as I said in my introduction, we have a clear obligation to our customers when it comes to quality, performance, reliability, and that's the rigor that we're putting into Barry Callebaut's new product supply infrastructure to really go forward. So it's a lot of work that actually is impacted there and that we're doing. I'm thrilled to see that we have approval from the Board to build a new facility in the United States as well as to upgrade significantly the network across North America as we speak. Peter Vanneste: Yes. And I'll take your next two questions, Jon, on the -- first of all, you're talking about EBIT and the savings. I wasn't really sure you talk about backward or forward, but let me give the overall picture. EBIT has gone up indeed by 6% over the last year. We talked about the moving parts just now in the presentation. There's a positive about the mix for sure. There's positive about passing on those financing costs, right, throughout the year. There's positive about Next Level savings rolling in, as Peter was talking about. But there is important offsets as well, which are linked to the disruption that we see in the market. Some of them being temporary because we need to price much faster, much more frequently pricing teams in place to do that. Some of them also a bit more structural, which is really about part of the backwardation costs that we're carrying that were very high, carry costs that are higher, some investment in capabilities like digital insurance costs. There's a lot of offsetting costs as well that have been not making it see as much as you would have seen and we would have seen in the EBIT otherwise. You asked about ForEx. We had a 45 million ForEx impact. If you then look at the reported, right? We had a 45 million impact indeed last year canceled out with the ForEx and the strengthening of the Swiss francs. We do expect another CHF 15 million on that next year, especially driven by the Turkish lira and the U.S. dollar. So also next year, we'll have smaller, but also as it looks now, a CHF 15 million impact on the ForEx. So that's what played on that line. And then your last question was about financing costs and the pass on and especially the level, I think you asked. Yes, we landed the year at 377 million finance cost, which is obviously a big increase versus last year, an increase of about 170 million. Very much linked, obviously, to the bean price that spiked and the fact that we then, of course, had to finance this. There's a lot about the value of the inventories, as I explained in the presentation. So we did the two bond issuances in early this calendar year, which obviously played a big role. That's a step-up that we are seeing. Next year, we will have lower levels. Actually, H2 has been lower than H1 last year already despite this funding of the two instruments in the beginning of the year because we already -- we're working on some of those levers that we've explained in the presentation. And I think that's the positive news, right, that we are building on the operational sourcing and financial agility to bring back our working capital, which allows us to bring back our financing costs. So for next year, we do expect to be at least 40 million lower than where we've been reporting finance costs this year. We stay in a very volatile period. We are -- we have the harvest -- the peak harvest coming up, so we need to be a bit prudent. The good news is that we're making this good progress on working capital. The other good news is that we have maturities of 700 million every single year for the next year. So it allows us to pay back debt that we don't think is we need to hold. We are doing that already. We pay -- we are reducing commercial paper. We paid back some bilaterals. So we're certainly going to push on that lever as much as again, the bean price environment and the working capital progress is allowing us. Operator: Our next question is from Alex Sloane at Barclays. Alexander Sloane: Some follow-ups. Just in terms of the volume outlook, I appreciate you haven't sort of quantified the impact of this incident. But I mean, in terms of the phasing of that mid-single-digit decline through the year, would you expect to be in positive growth in the second half of the year? And then secondly, if I can just come back just on -- in terms of -- there's a lot of moving parts on the next level. But in terms of the CHF 187 million kind of net impact that you're targeting to the bottom line, could you maybe spell out sort of how much of that you actually think will have landed and be visible in fiscal '26? And how much of it will have landed and be visible in fiscal '27 at this point just in terms of sort of how much more is to come because I'm a little bit confused on the moving parts there. Peter Feld: Yes. Thanks, Alex, for your question. Let me just start on volume with a different focus. I think we need to be very clear that we're driving volume growth in the chocolate solutions, which is chocolate is our global chocolate, and we are focusing on that. As we've said in the outlook, we will have a tough quarter 1 start, and we are seeing H1 to be down. We hope to recover that quite a bit in H2. And that's, I think, the key message that lands us into the outlook that we've given to you on global chocolate mid-single-digit decrease for the fiscal year. When you look at cacao, then we have guided you that we're focusing the cacao on the core KPI to be ROIC. And for us, that is very important to understand, specifically when it comes to liquor and to butter sales to third party. That obviously correlates with leverage and our objective to decrease our leverage, and that needs to be the #1 priority. So we're focusing Global Cocoa third party on ROIC, which will then result at current bean prices of 5,000 as we have assumed, to a decrease of mid- to single high digits. As I've explained earlier, when we see the bean price change and just looking back 1 year, you will remember that from the 1st of November '24 to the end of November '24, we literally had seen a doubling in bean price just in 30 days. That obviously has a big implication, and that's why we're giving the guidance in a distinct difference between chocolate, where we will clearly focus on regaining market share and volume. And on the other side, on Global Cocoa, where we'll focus on ROIC in order to manage our leverage -- deleverage objectives. Peter Vanneste: Yes. And Alex, on your question on the Next Level savings and then the total EBIT, again, and I'll try to be a bit more specific, right? The individual projects that we're delivering on Next Level, as Peter also mentioned, they are delivering, and we do get those savings on, let's say, GBS. We moved all these people in shared service centers. So there's certainly labor arbitrage element, which is straight into the pocket. There's the factory closures that obviously also help directly. So it's undoubtable that these savings are landing in the P&L as such. But at the same time, we do have significant costs about disruption -- the disruption, the bean quality has worsened, which means that leads to higher cost in our factories. We need to manage higher volatility over the last year that led to our impact on our cost, which means that net, you didn't see the effect. If we look forward specifically, we will do two things, right? We will continue to deliver and some of it will now roll of those savings of the individual projects into the fiscal year. At the same time, we will be focused on building down some of those temporary disruption costs that I've been talking about. Order of magnitude, I think you can talk about, about CHF 100 million that will be contributing to the P&L next year. But again, it's a combination of delivering the project as such and managing the cost of disruption down in parallel. Operator: Our next question is from Edward Hockin at JPMorgan. Edward Hockin: I've got two, please. One quick one is embedded within your volumes guidance for the coming fiscal year, can you tell us what assumption you're making on the end market volumes, so versus that minus 3.5% that the market declined by in FY '25, what you expect for '26? And my second question, please, is on the free cash flow building blocks. So if I'm looking at Slide 8 in the presentation. Can you maybe talk about FY 2026, how some of these moving parts should evolve to the operational free cash flow? Should we think of this 1.1 billion, 1.2 billion as a new steady-state level? To what degree should the bean price free cash flow turn positive? And just remind us of CapEx plans, what kind of level we should be expecting for FY '26? Peter Feld: Thank you, Edward, for your question. On the volume guidance, and specifically, when we look at the end consumer market, we continue to be very positive that chocolate will remain the #1 ingredient in any food product globally. It's the key driver for our business. And as I always say to our employees, we have a great luxury to operate in this business that creates a little happy moment for consumers around the world whenever the sun shines or it's raining. And I think for me, that is the paramount important element here. We have 2.5 billion consumers entering the market in Asia that now have the opportunity to invest in this category. So great trajectory looking forward. It's a great category, and I'm convinced that we will see stabilization as consumers will also adjust to the higher price points. What we've shared earlier in the presentation is that our customers have in the latest Nielsen report, seen in FMCG, so in what Nielsen really tracks, not Gourmet because that is less covered, actually hardly covered by Nielsen. We see on the FMCG side that 30% of consumer price has gone up, driven by the chocolate industry. We had guided for that a while ago that, that is roughly by category a little bit different because you always have more or less chocolate on the product, but that's certain of what we've seen. So we believe that consumer prices have been taken at this point in time to the current bean price level of about EUR 5,000 or less or GBP 5,000 or less. So that's the part there. So we keep on being hopeful that the category, and convinced that the category going forward will be a great category to invest in. However, as our customers are bringing that price further into the market and especially on the gourmet side, where we operate around the world with many distributors who then actually serve the end customers, the smaller bakeries, the patisserie shops, that obviously is a longer cycle that our customers have to work through. And that is why we believe there's a disconnect still that needs to happen as in that specific industry, the prices probably have not yet gone completely through. So this is why we are thinking that the guidance that we've given to you is an appropriate guidance on the chocolate business because we think that we believe on the long term very clearly that there's a fantastic category to invest and operate in. And on the other side, we still believe that there is some digestion that needs to happen as the entire industry moves to a 2x price point on its key ingredient, cocoa bean. Peter Vanneste: And on the second question on the cash flow page in the presentation and looking forward, we are looking at, and obviously, that is needed, because we're deleveraging towards 3.5x at least. We're looking at a positive -- a strong positive free cash next year of about CHF 1 billion in our planning, which is based again on that assumption that we made about 5,000 bean price. Of course, it fluctuates as you -- we all know very well by now, fluctuates a lot around that. Thanks to continuing to work on those big pillars that help us to make the big step in half year 2, the operational agility, the sourcing agility, the financial agility that helps to bring it down. So specifically to your questions on those components, we will have -- if you're looking at the page, the yellow part, the investment CapEx and Next Level CapEx will have a number next year, which is similar as what you've seen in fiscal '24, '25 with about CHF 300 million CapEx and CHF 60 million one-off investments that we plan to do in Next Level. And then the rest will mainly be operational free cash flow progress, which is the green part on the side. There's a little bit still rollover of bean price benefit because we're -- if the bean prices come down and the fact that we're forward selling, there's a bit of the benefit that we still need to come, but that's really the small part of what's remaining. The big part to get to the CHF 1 billion will be operational free cash flow further improvements. Operator: Our next question comes from Tom Sykes at Deutsche Bank. Tom Sykes: Just trying to sort of nail down the bridge on getting to EBIT growth. So are you expecting the gross profit to be up on volumes being down mid-single digit? Then on the volume outlook, are you expecting volumes -- what are you expecting to happen to volumes, excluding North America, please? And then finally on -- just to understand the sort of customer behavior, where do you think inventories are for your largest customers vis-a-vis the, the kind of run rate of demand? Because I guess part of the bull case is that there's potentially a restocking as some of those volumes come back or at least as some demand comes back. But it's difficult to understand where quite the sort of industries or your customers' inventories are relative to the run rate of demand. So if you had any thoughts on that, that would be great, please. Peter Feld: Do you want to take the EBIT? Peter Vanneste: Yes. Your question on EBIT, I think, was specifically on the gross margin and the moving parts on EBIT for next year. Obviously, the biggest impact on EBIT next year will be the impact of the volume, right? The mid-single-digit negative volume is impacting obviously, on the gross margin line. While there will be a mix positive level because we will have as this year, right, over proportionally growing in those areas, specialties, gourmet, that delivered the better margins. There will be a plus on Next Level savings, which is somewhat above, somewhat below gross margin and offsetting some of those structural cost disruption costs that I've talked about, reducing those. So those are the four big moving parts. There is one other part, which is the pass on of the financing costs, which also has a play on EBIT. If we have less financing cost to pass on, that might have a mechanical effect on EBIT, which is why we're guiding also on net profit before tax. But really, those are the 3, 4 components that drive the EBIT for next year. Peter Feld: Yes, Tom. And then to your other two questions on volume, let me start there. So obviously, we are impacted in North America quite a bit because of the size of Saint-Hyacinthe, as we discussed before. We do see Europe a bit more stable in that situation compared to North America very clearly, as our motives for the factories have improved significantly across all of Europe. We are also in significant reformulation activity as I mapped out to go from certain chocolate solutions into the cacao coating side of things. And actually, we're leading with innovation on that, which is -- which we're thrilled by our customers actually coming to Barry Callebaut to ask for those innovations to really make a step change. So that's the positive things that we're seeing on Europe. On EMEA, excluding China, I want to leave China aside for a second. And LatAm, we are a bit more positive, clearly striving to deliver positive growth on these environments. And in China itself, as we've said many times, chocolate hardly exists. It's a long-term growth opportunity for the industry and for Barry Callebaut, and that's what we're trying to unlock, probably not having a huge impact in this fiscal year on China, but we believe that there's a great opportunity going forward in that aspect. On inventory, let me just share that one of our Next Level activities is also to have a better understanding of our inventory levels at our top customers, especially on the gourmet side. You can imagine that we have good discussions with our larger accounts where we will soon talk about the G20, more than the GCAs, as historically we've done that make up about 65% of the volume of Barry Callebaut globally. On that volume, we have good discussions with our customers to understand where they are. They have clearly shortened the inventory cycle significantly as the bean prices spiked last year and going into '25 -- calendar year '25, and they retained at low level. So now the good thing is we see a bit more positive momentum since 3 months ago, the bean price actually came down a bit. So we had a bit of a catch-up in that, and we're excited about it, obviously. And as Peter has shared in his presentation, the forward curve is obviously very attractive to actually book today, right? So that's the aspect there. On the Gourmet side, our new Next Level capabilities is bringing our top customers in Gourmet, the top distributors in Gourmet to actually allow us to see their inventory levels. We're building that database up. The software has been established. We're now in deep discussions with our customers to have far better visibility on that, and that will give us a far better understanding of the flow-through of products as we have that long supply chain from the beans all the way to the end consumer. Operator: At this time, the Q&A session has now concluded. So I will hand the call back to Peter Feld for closing remarks. Peter Feld: Well, thank you very much for attending our annual results conference today. We're very much looking forward to the individual discussions that we will have with many of you later on. Thank you very much for attending, and I'm handing back to the operator. Operator: Thank you. This concludes today's conference. You may now disconnect from the call.
Operator: Good morning, and thank you for holding. My name is Dani, and I will be your conference operator today. Welcome to Alight's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded and a replay of the call will be available on the Investor Relations section of the company's website. And now I would like to turn the call over to Jeremy Cohen, Head of Investor Relations at Alight, to introduce today's speakers. Please go ahead. Jeremy Cohen: Good morning, and thank you for joining us. Earlier today, the company issued a press release with its third quarter 2025 results. A copy of the release can be found in the Investor Relations section of the company's website at investor.alight.com. Before we get started, please note that some of the company's discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in the company's filings with the SEC, including the company's most recent Form 10-K and Form 10-Q as such factors may be updated from time to time in the company's periodic filings. The company does not undertake any obligation to update forward-looking statements, except as required by law. Also, during this conference call, the company will be presenting certain non-GAAP financial measures. Reconciliations of the company's historical non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's earnings press release. Financial comparisons related to prior year free cash flow made on today's call are on a pro forma basis, giving effect to the payroll and professional services transaction completed in July of 2024 and are consistent with the presentation we have published on our Investor Relations website. On the call from management today are Dave Guilmette, CEO; and Jeremy Heaton, CFO. After the prepared remarks, we will open the call up for questions. I will now hand the call over to Dave. David Guilmette: Thank you, Jeremy, and good morning, everyone. We've made significant progress during the quarter to strengthen our position as a technology-enabled employee benefit services company. We've accelerated our technology road map and delivery capabilities while reimagining the client and participant experience with new solutions already in use by some of our largest clients. Through our AI and automation investments and rapidly expanding partner collaborations, we are bringing immediate benefit to clients and ensuring our competitive advantages for the long run. We feel good about the substantial improvements we have made in our product line with more to come. Likewise, our service delivery is unmatched. Clients are impressed with our new AI-centric services and delivery capabilities. The next step is improving our commercial effectiveness, starting with a new leader with deep industry expertise. Our emphasis includes the diversification of our revenue streams, including through our partner network, while continuing our operational progress. With the current macro environment, the continuing and unprecedented rise of health care costs for our clients and the advancement of AI, I'm more confident than ever that our initiatives, coupled with our track record position us best to tackle these dynamics. With that, let's review our quarter. For the third quarter, revenue was $533 million compared to $555 million a year earlier, and adjusted EBITDA was up 17% to $138 million. Free cash flow year-to-date remains strong and is up 45% from the prior year to $151 million. Jeremy will provide additional color on quarterly results in a few minutes. As I mentioned, one way to accelerate our financial performance is by expanding our comprehensive partner ecosystem. Our refreshed strategy in this area is making fast progress to meet the changing needs of clients and participants while sharing in the value creation with our partners. Our relevance with 35 million participants is unmatched and potential partners are looking for ways to work with us to unlock their own value. For example, recently, we welcomed Sword Health to the Alight Partner network, complementing our long-term partner, Hinge. Participants now have access to an additional leading clinical grade resource for managing pain and avoiding surgery as well as access through behavioral health and mental well-being platform. Our Goldman Sachs Asset Management integration into Alight Worklife, which we mentioned last quarter is well underway. We've already signed our first client with several more active client conversations taking place. And just last week, we introduced a new guaranteed income solution through MetLife. This arrangement allows participants to purchase solutions that convert a portion of their savings into predictable monthly income as they prepare for retirement. Over a dozen proposals are outstanding from additional top-tier partners, and you should expect a regular cadence of announcements on this front. At the same time, our investments in the most impactful technology and service capabilities are moving at an aggressive pace. Within the call center, we enhanced our automated voice response system. This technology drives a better user experience and has contributed to a 13% drop in call volumes year-over-year. Our new AI agent assist software is in pilot with nearly a dozen clients. This tool assesses calls in real time to provide customer care agents with next best actions to more effectively service participants. Finally, in September, we brought critical delivery and technology talent back in-house, which allows us to better manage service quality and productivity. These actions, along with previous improvements are strengthening our service quality. Our participant satisfaction scores increased to 90%, which is the highest level achieved since completing our technology transformation. Regarding product, advancements in our AI road map continue to accelerate. The embedded value in our petabytes of data is unmatched, which means we can drive a far more accurate, predictive and differentiated user experience than anyone in our market. And our carefully curated mix of technology and services provides a trusted high-tech human touch experience that is core to our success. I want to share a few highlights from the last 3 months. First, we piloted a conversational AI agent solution with 2 of our largest clients to assist with annual enrollment this season. Broadly available to all clients in 2026, this is a game changer to help participants feel more confident in their benefit selections while requiring less human intervention. Next, we've rolled out Gen AI-enabled search summaries to more than 95% of our clients. AI-enabled searches are growing exponentially, and we delivered over 300,000 summaries in October alone. The breadth and depth of our platform will only get stronger as more users interface with this feature. And finally, we announced our expanded collaboration with IBM, a decades-long business partner to deploy IBM's watsonx Orchestrate agentic framework across . Alight. These advancements in our capabilities are critical to our Renew Everyday program agenda. We have been successful at retaining top clients with a large majority of our largest clients going through the renewal process in the past 2 years. Since our last earnings call, some of our noteworthy renewals include Campbell's, EssilorLuxottica, Ally Bank, Air Canada and MetLife. Our client management team is focused on proactively renewing and expanding relationships with our tremendous client base. Our renewal rate in the large market was up significantly in '24, and we're pleased to maintain that same level in 2025. And we're working hard on expanding Renew Everyday to all of our clients, strengthening the approach to supporting smaller clients and point solutions. We are making great progress with the Renew Everyday program and expect continued improvement to our renewal levels over time. I'm very pleased to share that Steve Rush has joined as our new Chief Commercial Officer. Steve's long history with Alight, along with his deep understanding of our clients' needs, position him to make a meaningful and quick impact. Steve is a highly respected leader in the benefits industry, and he's excited to rejoin a team and business he already knows very well. As I step back on where we are today, our progress has been substantial in moving us forward to our future. I'm proud of how our team members have come together to advance our technology and operations, and I want to thank them for their hard work and dedication. We have more scale, scope and talent than any of our competitors today and the resulting opportunity in front of us is immense to drive higher bookings, retention and new streams of partnership revenue. Operational results of our initiatives will be evident before they play through the financials, and we are confident in our ability to deliver an unmatched benefits experience for clients that are emboldened in new technology. And with that, let me turn it over to Jeremy. Jeremy Heaton: Thanks, and good morning. We continue to make operational progress and competitively, we're well positioned for long-term success, validated by the third-party evaluators and brokers in our space and echoed by the many clients who have renewed or expanded with us. Our primary focus continues to be on adding value for our clients and their people every day. Moving into the quarter. Revenue was $533 million, which includes a $4 million onetime revenue reduction from finalizing the commercial agreement with the divested Strada business. Normalized for this, total revenue would be $537 million. Nonrecurring project revenues were down $7 million or 14% for the quarter. Adjusted gross profit was $206 million, up 3% from the prior year, reflecting 260 basis points of margin expansion. Similar to prior quarters, our adjusted gross profit is impacted by costs to support the divested business, which are reimbursed through the TSA and other income. Normalized for this, adjusted gross profit would have been higher by $7 million. Adjusted EBITDA was $138 million for the quarter, up 17% and adjusted EBITDA margin expanded 460 basis points. Free cash flow for the first 9 months was $151 million, up 45% from the prior year period. Given the business trends this year versus expectations, our profitability and cash flow results include a nonrecurring impact of lower variable and performance-based costs. While we've made tremendous progress, there is more work ahead to improve our top line results. Longer term, we expect improved commercial results with an optimized go-to-market function along with key product enhancements. We feel good about our renewal rates in the large market and expect the 2026 cycle to have over 30% fewer dollars up for renewal. We also have near-term revenue opportunities through in-year bookings, partnerships and engagement services that our team is highly focused on to close out the year. Our operational and technology initiatives continue to drive increased efficiency while delivering a better experience for our clients, and this has benefited our profitability and cash flow metrics. Turning to the balance sheet. Our quarter end cash and cash equivalents balance was $205 million and total debt was $2 billion. Our net leverage ratio improved sequentially to 3x. We continue to actively manage our debt, which is 70% fixed through 2025 and 40% through 2026. While having strong confidence in the long term, with our market valuation change over the past quarter, combined with current business trends, we recognized a noncash goodwill impairment charge of $1.3 billion. With respect to the tax receivable agreement, our payment in the first quarter of 2026 is expected to be lower by $25 million compared to our previous estimate, reflecting the completion of tax filings for 2024. We returned $47 million to shareholders this quarter via our quarterly dividend and through the repurchase of $25 million worth of shares. Year-to-date, we've repurchased close to 14 million shares or approximately 3% of shares outstanding. We ended September with $216 million remaining on our share buyback authorization. Management and the Board of Directors will continue to evaluate our capital allocation policy as it does on an ongoing basis. With today's earnings report, we have updated our 2025 outlook and enter the quarter with $2.25 billion of revenue under contract. For the year, we expect revenue between $2.25 billion and $2.28 billion, adjusted EBITDA of $595 million to $620 million, free cash flow of $225 million to $250 million and EPS of $0.54 to $0.58. We are intensely focused on execution and improving our top line performance and remain confident in our position for the long term. This concludes our prepared remarks, and we will now move into the question-and-answer session. Operator, would you please instruct participants on how to ask questions? Operator: [Operator Instructions] The first question we have comes from Kyle Peterson of Needham & Company. Kyle Peterson: I wanted to start on the update to the guide, see if you guys could walk us through some of the moving pieces on the reduction here. It looks from the slides, it looks like it's from kind of a combination of volumes and new business wins. But I guess any clarity or context as to what you guys are seeing and when -- at least on the new business wins, obviously, you made some announcements during -- in the release today. But I guess like when should some of the fruits from those wins start to pay dividends? Jeremy Heaton: Sure. I'll start, Kyle. So yes, still in the guide, we reduced at the midpoint revenue down $40 million. It's really split between project and recurring. Project is the biggest with, again, a $20 million update there on project. And we just have not seen an inflection in pipeline and activity. I think some continued cautiousness as we're going through the annual enrollment process right now. So even on a low comp, we had expectations to see more build in the pipeline coming into the fourth quarter and just not seeing that. On the recurring side, it's a bit of volumes. You see in the update in the deck that we've got. Some in that is really -- we've seen modest declines so far year-to-date, but just a sentiment overall, just a cautiousness around that. We're not going to certainly expect with the headlines, see any upside there. So really just expecting flat to slightly down on the volume side. The Strada update on the customer care agreement was impacted in the third quarter, and so that's part of the update as well as going through. And as you said, a small amount of just the in-year revenue from the bookings that we've had so far this year. So those are the guide. As you think beyond revenue, the biggest piece is just the project update for us is really the biggest piece that drives the EBITDA and free cash flow aspects in the guide and the update there is we still feel really good in terms of the initiatives underway around the operational side, around delivery, around the AI and technology and the customer care side of the house on the call centers. It's just, again, as you know, that's about a 90% to 100% drop-through. And so seeing project at this levels is just what we see in terms of the roll-through around profitability and free cash flow. There's always going to be elements of retiree health and some other areas within the business that can drive upside into the higher end of the range here, but that's -- those are the dynamics we're seeing as we go into the fourth quarter. Kyle Peterson: Okay. That's helpful. And then maybe just a follow-up. I want to see if you guys are seeing any impact or whether it's client decision-making around open enrollment related to the government shutdown. Obviously, it's been getting kind of long in the tooth here. But I guess, any impact on your business, client decision-making, employee decision-making? Anything you guys are seeing? Or so far, has it been something you guys have been able to work through? David Guilmette: Kyle, it's Dave. Thank you for the question. Let me take that. So as Jeremy mentioned, you've got a few of the headlines that are out there. But in general, whether it's the government shutdown and the impact on federal employees or it's what passes through to clients, we've really not seen anything material come through at this stage. And just keep in mind that even if there is an action, a reduction in force with a big company, there's a pretty big lag factor associated with that. You'll have individuals who will be on COBRA for a period of time. Sometimes they're furloughed, so they're still sort of there. So -- or in the case of the federal government, you've got people working and not being paid in some circumstances. So longer term, the volume that would typically tick up, we're not anticipating, but we haven't really seen a material negative impact, at least through this quarter, and we're not envisioning that through the fourth quarter. Operator: The next question we have comes from Scott Schoenhaus of KeyBanc Capital Markets. Scott Schoenhaus: So if we stripped out the project revenue noise, recurring revenue down low to mid-single digits implied here, and you walked us through some of the assumptions just now and on the slides. But how do we think about returning to flat to low single-digit growth for the business? Is it obviously securing renewals? It sounds like the sales cycle like you talked about last quarter is elongated. You talked about upselling opportunities as well, and we're seeing maybe some slowness on leads. Can you walk us through like how do we get this business back to flat to up in growth on the top line? David Guilmette: Thanks, Scott. It's Dave. I'll take that one. So there's a few elements here that we're sharply focused on, and you've touched on a little of those in some of those in your question. Firstly, just on the renewal activity, we're seeing good results as it relates to our largest client base, and that's coming through the Renew Everyday program initiatives. And we're looking to cascade that through our entire client portfolio. So one, we think improving upon the retention rates for our existing clients, kind of locking the back door to the house, so to speak, is important, bringing more clients through, so new logos or expansion on existing clients. Again, we've got some good activity out there in the leave space. We've got a number of opportunities that were deep in discussions or near to contracting on core ben admin from middle market up to some of the larger opportunities. So that's kind of taking the clients in through the front door as well. So all of that really bodes well for the return to the growth that you're asking about. There's a lag effect involved in that. If this is a big client, large client ben admin, typically, you're looking at implementation cycles that could run 12 to 15 months, right? So some of that revenue on a new business win that could occur now might not make its way through to our financials until 2027 or beyond. Smaller deals have shorter gestation periods, lead deals, depending upon how big they are, could be shorter gestation periods as well. So as we continue to build back the momentum and the strength of our pipeline under Steve's leadership and in collaboration with Rob, I feel good about where that's headed. And our product positioning is as strong as it's ever been. Scott Schoenhaus: Great. And as a follow-up, again, stripping out project business that falls down to the bottom line, what can you guys do as a company to drive secular margin expansion? We've always talked about the call centers. It sounds like that you're moving some things back in-house on the service side, which I imagine would be a little bit more expensive. But just can you help us -- ex the project business, can you help us walk through -- you previously outlined your longer-term margin opportunities or goals or targets. Just help us walk through where you see your ability to drive margin improvements in the near and longer term. David Guilmette: Scott, I'm going to have Jeremy talk through some of the elements of how that drops through. One thing I want to make sure we focus on as part of your first question is the opportunities that exist across our partner network. We highlighted that in the opening remarks. We're feeling really good about the level of activity and the interest that the partners are expressing in being part of our network, just given our size and scale and reach for the customers and the clients that we have. And that represents revenue growth opportunity as well. That will phase its way in. It takes a bit of time before you get a contract established and you get the run rate going as is indicative of what we talked about last quarter with Goldman Sachs. But the more of those that we put in place, the stronger our revenue opportunities for growth are going to be there. As it pertains to your question on margin expansion, we're deploying AI in a variety of different places. We've got to make investments in that. Those aren't trivial. And we expect to see some impact on the way we serve our customers with AI, right, either a reduction in the call volumes that we talked about in the opening remarks or a change in the kind of -- in the way that work gets done. And we've also pulled a number of resources back in-house, and that's a strategy that we'll continue to look at. Jeremy, anything you want to add on the drop-down? Jeremy Heaton: No. I mean I think it is in line with what we've talked about earlier this year, Scott. So you -- I think we feel very good in terms -- and I think we're probably ahead of where we thought we would be around the operating model in which our delivery teams. So if you think about delivery is the bulk of the teams that are sitting with our clients every day. So from a cost standpoint that's where we need to drive a better experience for our clients first, but we've standardized a lot of that work across the different groups and the solutions that we've got. We've got COEs in place now, bringing some of that work back from third parties. It's actually more cost effective, Scott, just given the way that the terms and conditions work and also the flexibility around where the productivity sits and the things that we can drive and the flexibility. So it gives us much more room to kind of drive the expansion in what we do and probably our largest cost base in the business on the delivery side. And then as Dave said, we have seen a big reduction in call center OpEx over the past couple of years and the work that we've been doing, but there are step functions in some of the new technologies that we've rolled out. And so really just want to get through this annual enrollment period to really see the impacts of that, helps us staff then going forward as we think about '26 and '27 of the elements that we can drive there. But we feel really good in terms of everything that we've got around the efficiencies within this business. And I would say we're ahead of what the timing would have been around those expectations. Some of that is to offset some of the top line that we've got. But certainly, as we get some of that operating leverage back, certainly drops through in a more significant way. Operator: The next question we have comes from Kevin McVeigh of UBS. Kevin McVeigh: Great. I guess I want to start with -- I've never seen an initiative on approval for declassification. Can you just help us understand what that is and what drove the decision to do that? Jeremy Heaton: Sure. I think, Kevin, it's Jeremy. I'll start. Just from a Board perspective, what that is, is, today, we have a staggered Board. So 4 directors are up for nomination every year. And Justin, through ongoing discussions with our Board and from a governance perspective and I think in discussions with investors, frankly, is to over time, destagger this Board, which would eventually have all directors up for nomination annually as we go through that process. So it's just a governance update for us as we transition out of going from private to public through the SPAC and just kind of more -- I'd call it more normal course governance of a public company. David Guilmette: And Kevin, I'd just add, as part of the process, we're letting the shareholders know that that's our intent, but this will be up for a vote of shareholders at our annual meeting next year. Kevin McVeigh: Got it. And then I guess, I mean, you had 2 consecutive meaningful impairments. You've guided down 2 consecutive quarters. Just help us understand just the modeling on the guidance relative to where you're coming in, particularly given we're 9 months into the year because it just continues to be an issue in terms of how you're guiding. Jeremy Heaton: Sure. I think the guide, and as I just walked through briefly, I think in the fourth quarter, the biggest piece is the project revenue, which I would say is we've never seen levels this low in terms of project revenue. We did expect and our teams going through with clients every day as we build through kind of the second half of the year in terms of where that pipeline is. It's well below our expectations in terms of project revenue. So absolutely, that's the biggest piece coming through here. There's also the impacts of what we've talked about in terms of the bookings element that we have and just the macro factors around the headlines around employee and participant counts. So those are the biggest pieces for us in the guide. As you can see in the transcript we talked about this morning, we are at $2.25 billion of revenue under contract coming into the quarter, and the range on the guide is $2.25 billion to $2.28 billion. So I think as you think about this, this is what we see today in terms of what's in front of us for execution in the -- at the end of the quarter. On the impairment side of it, that's a factor of, again, noncash impairment -- accounting adjustment, largest piece being just the valuation change of the company through the quarter. And that's -- there's a market valuation test, which is done every quarter. It's normal course controls that we have around the financials and need to go through the valuation process. That takes into account the trends that we do see in the business, but it's a much longer-term view taking in the market cap and market value of the company. So we recognized that charge here this quarter in line with where we closed out the quarter from a valuation of the company. Operator: The next question we have comes from Peter Heckmann of D.A. Davidson. Peter Heckmann: I wanted to see if you could give us an update just on the follow-on payments from the divestiture. I think there's $150 million contingent based on the performance of that business in 2025 and then a $50 million fixed payment. Can you give us an update on the first and then timing on the -- on both potential payments? Jeremy Heaton: Sure. So the timing on the payments themselves are a 7-year term from the close of the deal, $50 million, so there was $200 million of deferred payments, $50 million was, in effect, guaranteed and which will be paid out. There was $150 million, which was contingent on EBITDA performance of the divested business through 2025. So we have that really recognized at 0 value on the balance sheet today, contingent upon the performance of the Strada business and their EBITDA in 2025. So we'll go through a full annual look at that as we close out 2025 to see what the valuation is there. That will be recognized on the balance sheet and then will be paid out at that 7-year anniversary of the close of that deal. Peter Heckmann: Okay. Both payments would be on the 7-year anniversary. Potentially. Jeremy Heaton: Correct. Peter Heckmann: Okay. And then on the headwind, given stronger retention levels in 2024 and into 2025, do we still expect attrition to be a smaller drag on revenue growth in 2026, maybe something closer to 450 basis points versus something like 650 this year? David Guilmette: Pete, it's Dave. So let me take that one. Firstly, we had a considerable amount of volume that played through the renewal process in 2025. And as we said in our opening remarks, we're going to see a pretty material drop in that activity next year. And in addition, among our largest clients, which is where there's a pretty big concentration of revenue, the vast majority of those have gone through the renewal process in the last couple of years. So we've had a lot of renewal activity in 2024 and 2025. We feel good about our retention rates for those largest clients, and we're going to see a drop going into 2026. In addition, our expansion of the Renew Everyday program initiative and the collaboration between Rob and Steve is going to push that level of client management focus down through all of our clients. And the initial focus was on our largest ones. So as we continue to expand that initiative through the full client suite, we expect to see some positive returns on both retention and the upside and cross-sell opportunities that exist by bringing new services to those clients. Operator: The final question we have comes from Andrew Polkowitz of JPMorgan. Andrew Polkowitz: I wanted to ask, so last quarter, you spoke to changes within your go-to-market organization, including greater specialization, domain expertise in the sales force. Obviously, these things take time to ramp. But I was curious if you could just provide an update 3 months later about the progress here, how these things have resonated with your sales force. David Guilmette: Sure. So it's Dave. I'll take that one, Andrew. Firstly, bringing Steve Rush back to Alight has been a tremendous boost for us and for our sales team. This is somebody who knows our business really well, has tremendous credibility in the marketplace and is a great team player. So he's collaborating, working through, looking at every deal, et cetera. So that's helpful. We brought some industry expertise on board as well with specialty areas of focus in the leave space, in the navigation solutions and in Core Health admin. And it's Steve's intent to continue to build out that domain expertise across the sales force. To your point, those changes then have to play their way through on new business situations and opportunities. We're laser-focused on those deals that are deep in the pipeline right now, and we still have a material number of those that we're pursuing. And the key there is to improve our close ratio. And I feel confident that with Steve and the additions that he has already impacted and we've impacted, we should see some uptick on our success with closing on those deals. And then as we enter into 2026, we're going to have the right alignment of our go-to-market teams and our client teams, which I feel really confident is going to give us the opportunity both for upsell, cross-sell and for new logos coming into the company. Andrew Polkowitz: Great. That's good to hear. And just one follow-up for me, more of a macro question. I was curious if there's been any change in the hiring assumption or net hiring assumption you laid out last quarter and the outlook, understanding there's offsets like you called out, Dave, with kind of lagged impact. So maybe even just adding on to that question, how material is the hiring assumption within your model or within your outlook considering you have those offsets? Jeremy Heaton: I think from -- included in the guide for this year, Andrew, we've got -- and you'll see it in the deck that we posted online. So we've got about down 0.5 point to flat is what we've got in for 2025. And again, year-to-date, it's been really minimal in terms of any impact, I'd say slightly down. But again, you're talking basis points. And so certainly not seeing what we historically have had with the, call it, 1% to 2% of help on the growth side. So our expectations right now, and we would know typically in the fourth quarter right now as we stand if we had larger impacts that were happening already through our client base. And so that's the call on the guide and based on what we see so far this year. And then as we think about next year, I'd say, yes, it's hard with the headlines to think that it's certainly going to be anything that is additive to growth, but we'll manage that. Our teams stay close with clients on a daily basis. And so we're always getting a pre-read, if you will, around what might be happening within the client bases. Operator: There are no further questions at this time. I would like to turn the floor back over to Dave Guilmette for closing comments. Please go ahead, sir. David Guilmette: Thank you, operator. So in closing, our strategic execution is transforming our delivery services and is reenvisioning the client and participant experience. Our progress is making a real impact across our current clients and operations, and we're confident in how that translates to our competitiveness and our long-term growth. Thank you for joining us today. Operator: Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the PAA and PAGP's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Blake Fernandez, Vice President of Investor Relations. Please go ahead. Blake Fernandez: Thank you, Andrea. Good morning, and welcome to Plains All American's Third Quarter 2025 Earnings Call. Today's slide presentation is posted on the Investor Relations website under the News and Events section at ir.plains.com. An audio replay will also be available following the call today. Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on Slide 2. An overview of today's call is provided on Slide 3. A condensed consolidating balance sheet for PAGP and other reference materials are in the appendix. Today's call will be hosted by Willie Chiang, Chairman, CEO and President; and Al Swanson, Executive Vice President and CFO, along with other members of our management team. With that, I'll turn the call over to Willie. Willie Chiang: Thank you, Blake, and good morning, everyone. Thanks for joining us. Earlier this morning, we reported solid third quarter adjusted EBITDA attributable to Plains of $669 million, which Al will cover in more detail. It's an exciting time for Plains as we continue our multiyear strategy of building the premier North American pure-play crude midstream company. Over the past few years, our team has successfully executed on our strategy by meaningfully lowering our leverage profile, maximizing free cash flow and optimizing across our broad system, all while remaining capital disciplined and returning cash to our unitholders through meeting and beating our targeted annual distribution increases. With the pending sale of our NGL assets expected to close early next year, our portfolio will become even more crude-focused with a more stable and durable cash flow stream. As discussed on our previous calls, the NGL sale is a win-win transaction at an attractive valuation for Plains and our capital allocation priority has been to redeploy those proceeds to a strong return, DCF accretive bolt-ons while staying within our targeted leverage range over the long term. To that point, we're pleased to announce that we now own and operate 100% of the entity that owns the EPIC Crude pipeline. This past Friday, we closed on the previously announced acquisition of a 55% nonoperated interest in EPIC from Diamondback and Kinetik. And on Monday this week, we signed and closed the acquisition of the remaining 45% operating interest in EPIC Crude Holdings from a portfolio company of Ares private equity funds for approximately $1.3 billion inclusive of approximately $500 million of debt. As part of the 45% transaction, Plains has also agreed to a potential earn-out payment of up to $157 million tied to the sanctioning of potential expansions of the pipeline system by year-end 2028. The EPIC acquisitions are summarized on Slide 4. These transactions are highly synergistic and very strategic to Plains existing footprint and are expected to generate a mid-teens unlevered return. We anticipate a 2026 adjusted EBITDA multiple of approximately 10x which we expect to improve meaningfully over the next few years. Going forward, we intend to rename the pipeline system, Cactus III, which complements our integrated Cactus long-haul system that we have operated for years. The acquisition of the remaining 45% of EPIC gives us the opportunity to assume operatorship, which accelerates and increases the synergy capture of the full pipeline, including meaningful cost, capital and operational synergies while improving the takeaway flexibility of our crude system to meet customer needs. Near term, we're poised to benefit from contractual step-ups, reduced operating costs and overhead, quality optimization opportunities and utilizing the broader plans, Permian and Eagle Ford asset base to drive volumes to EPIC crudes downstream assets. Longer term, the potential expansion capacity of the system provide Plains and its customers with additional egress to the U.S. Gulf Coast and will generate strong returns as demand dictates further expansions. Regarding the divestiture of our NGL business, we're on schedule to complete the transaction by the end of the first quarter 2026. We have received 2 of the 3 required regulatory approvals, U.S. Hart-Scott-Rodino and the Canadian Transportation Act while the approval process for the Canadian Competition Bureau is ongoing. Importantly, the majority of the proceeds to be received upon closing of the divestiture have effectively been redeployed through our acquisition of EPIC, which will result in an accretive and more durable cash flow stream. Due to timing differences between the closing of the transactions, we do anticipate our leverage ratio will temporarily exceed the upper end of our target range until the NGL divestiture is finalized, at which point we expect our leverage ratio to trend towards the midpoint of our target range of 3.5. With that, I'll turn the call over to Al to cover our quarterly performance and financial matters. Al Swanson: Thank you, Willie. For the third quarter, we reported Crude Oil segment adjusted EBITDA of $593 million, which benefited from higher volumes and contributions from recently completed bolt-on acquisitions as well as the impact of annual tariff escalation. This was partially offset by certain Permian long-haul contract rates resetting to market in September. Please note that the fourth quarter should serve as a baseline, representing the full impact of lower contract rates out of the Permian. Moving to the NGL segment, we reported adjusted EBITDA of $70 million which was down sequentially due to lower sales volume tied to temporary downtime on a third-party transmission system as well as the start-up of LNG Canada. Slides 5 and 6 in today's presentation contain adjusted EBITDA walks that provide additional details on our performance. We are narrowing our full year 2025 adjusted EBITDA guidance range to $2.84 billion to $2.89 billion to reflect lower realized crude prices and contributions from our completed acquisition of EPIC. Please note the benefit from EPIC for the remainder of the year is forecast to be approximately $40 million. A summary of our 2025 guidance metrics and assumptions are located on Slide 7. Overall capital spending remains consistent with our prior forecast. Growth capital spending for the year is expected to be approximately $490 million. The $15 million increase is primarily associated with new lease connects and capital associated with acquisitions, while the 2025 maintenance capital is trending closer to $215 million, representing a $15 million decrease from our last forecast. In September, we issued $1.25 billion of senior unsecured notes consisting of a $700 million due in 2031 at a rate of 4.7% and $550 million due in 2036 at a rate of 5.6%. Proceeds were used to repay the senior notes that matured in October and to partially fund the EPIC acquisitions. With that, I'll turn the call back to Willie. Willie Chiang: Thanks, Al. We've made significant progress on our journey of becoming the premier crude midstream provider over the last several months, and we believe there are significant opportunities to continue to create value for unitholders through initiatives that are within our control. As seen on Slide 8, the combined benefits from bolt-on M&A, synergy capture and streamlining efforts across the broader organization will provide Plains self-help tailwinds through the near-term volatility. As part of our 2026 guidance in February, we intend to share additional details on these initiatives. Our strategy centers on the view that crude oil remain essential to global energy and society for decades as outlined on Slide 9. And despite near-term volatility, we remain confident in our ability to navigate current market dynamics and we expect improving fundamentals longer term, anchored by continued global energy demand growth, coupled with underinvestment in organic oil supply growth in diminishing OPEC+ spare capacity. I'll now turn over the call to Blake to help lead us into Q&A. Blake Fernandez: Thanks, Willie. [Operator Instructions] The IR team is also available after the call to address any additional questions. Andrea, we're ready to open up the call for questions, please. Operator: [Operator Instructions] Our first question comes from Michael Blum with Wells Fargo. Michael Blum: Wanted to ask on the EPIC deal. Can you give us a little more detail on the synergy capture? How much of that is going to be cost savings versus commercial synergies? And where do you see the time line? Will you capture those synergies and then reach that mid-teens return? Willie Chiang: Michael, this is Willie. First thing I want to do is I want to complement our team. If you think about these transactions, these are never perfect timing and they're hard to do. And we were able to do the 2 portions, and particularly with the 45% just announced, it gives us the ability to have more control over every question that you asked. I would also refer you to Slide 4. And if you look at the map and you see how integrated it is with the system, I think that helps illustrate the number of ways that we can win. There are a lot of ways we can do this. There's a lot of cost structure savings. There's overhead savings and a lot of this will be immediate, and we'll be able to capture it in 2026. And if you think about the expansion opportunities, it's not one step change function on expansion because we operate it, we'll be able to dictate partial expansions as we go and whatever market demands will be. So there's a lot of different ways to win, and it's not simply the expansion. And I would tell you, a good portion of it is the cost synergies, capital synergies and integration with our existing systems. Jeremy, do you have anything to add to that? Jeremy Goebel: No. Just from a timing standpoint, I think Willie hit a lot of it. But just the compression in multiple to next year is step-ups in contract and cost savings. So things that are almost immediate and contractual. Beyond that, that is all the things Willie talked about. So we're very confident in the ability to compress this over time and part synergies, but part expansions and just recognize we sell a substantial amount of barrels at Midland, and we can move those barrels. We have demand from customers to go to the docs, the docs are willing to expand and ready to expand. There's additional markets that we're not connected to in Corpus that we can move barrels from Midland today that we sell into that pipeline. So as Willie mentioned, we can expand the pipeline system, we can capture cost synergies, there's a lot we can do immediately, and that's contractual. That will compress to the 10x we announced and the compression beyond that, a lot of that's in our control as well. Willie Chiang: And remember, Michael, we operate in that quarter, right? Hence, the Cactus III. So it's not that we have to learn new ways of doing business. This really fits hand in glove with our existing system. Michael Blum: Great. Second question, just with your -- the sale of your Canadian NGL business and now this EPIC acquisition, can you just you refresh us on your expectations for capital return and whether this extends the runway now to deliver the outsized distribution growth you've been providing now for a while? Al Swanson: Michael, this is Al. Yes, our view is that we will continue to increase distributions by $0.15 until we hit our targeted coverage. The year where we're transacting here, part of it will depend on when does the NGL sales close. But we expect to continue to grow the company in 2026, 2027 and beyond. Again, once we hit covered -- our target coverage level, we will revert back to a DCF growth concept. But again, we expect to be able to grow again, if you think of the embedded growth in EPIC from today through next year, that's pretty significant. And again, as that multiple kind of compresses from 10% to 15% unlevered, we see significant growth on this asset. So really no change in our approach there. Willie Chiang: Michael, this is Willie again. We've got quite a bit to digest here. So I think what you can see is we'll be looking -- we continue to look at a lot of things. But if we were to transact on things, they'd likely be smaller bolt-ons that fit into the system as we've talked before. We've got plenty of things to get accomplished here over the next 6 months. Operator: Next question comes from Keith Stanley with Wolfe Research. Keith Stanley: I want to follow up on the distribution question first that Michael just asked. So Al, on your answer, you referenced how there's some noise potentially next year related to the Canadian NGL sales. So to the extent you weren't at the coverage threshold for a $0.15 increase next year because of timing factors related to that sale and redeployment of proceeds, would that impact how you look at the distribution? Or would you see through that and look more at kind of where the run rate DCF would be? Al Swanson: I'll take a shot and Willie jump in. Yes, clearly, we would look through noise to run rate as to how we would think about that. Clearly, if the NGL asset doesn't close early in the year and takes, we'll have more DCF. So some of that noise necessarily wouldn't be a limitation per se. But again, our view would be to look beyond the current year as we evaluate this. Clearly, management and the Board have robust discussions around distributions and what we're expecting to do. And clearly, the first call on that will be early January when we announce our distribution for February. Willie Chiang: And Keith, Willie here, you know our coverage target is 160% of DCF to coverage. So that gives us a little bit of flexibility. And as Al said, we always play for the long term. Our focus is return of cash to our unitholders. So I think a lot of that would play into it, and I would agree with everything that Al said. Keith Stanley: The second question, going back to EPIC. Can you give some color on the duration of the contracts and how you would characterize rates on that pipeline relative to market? It sounds like 2026, there's somewhat of a recontracting benefit already that gets you to the 10x? Jeremy Goebel: Sure, Keith. This is Jeremy. There's a substantial portion of the pipeline that's contracted for long term, and I believe that was announced in the restructuring last year that EPIC did. The balance of the pipe has medium duration contracts, we feel comfortable in our ability to work with those shippers to either extend those contracts or add new shippers to those contracts. We're just taking over this week, so it would be premature to talk about everything associated with it, but I'd say we like where we sit. The rates are at current market rates, they're not meaningfully above market rates, which means longer term, we expect this to be a stable and growing cash flow profile, which at least to Michael's question earlier about DCF accretion between the sale of the NGL in this business? We think that will be substantially DCF accretive over time the trade of those 2 assets. Al Swanson: And Keith, I might just help. I think publicly and previously, we said the portfolio had a weighted average duration through 2028 with EPIC, this should extend that out to October of '29 in case that's helpful. Operator: Our next question comes from A.J. O'Donnell with TPH. Andrew John O'Donnell: I just wanted to talk -- go back to EPIC. And now with 3 pipelines in the Permian, Corpus and Christi corridor under your control, how are you thinking about portfolio optimization and maybe like what kind of opportunities there are to move flows across your pipelines and/or reduce operating costs on the 3 assets? Jeremy Goebel: A.J., this is Jeremy. Great question. All of the above, and it all depends on market conditions, right? So as you -- as the pipes get tighter or looser, you're going to do different things. So you can obviously optimize operating costs, variable costs across the pipeline system. You can offer flexibility across the pipeline system between common shippers to access more markets and push barrels into different connections, you can optimize capital across the system, you're going to optimize tankage. There's a lot you can do with -- and Chris' team is going to do a great job and they've been actively involved in the diligence system of the system. So I think we're very excited with that. We're just scratching the surface. It extends beyond the long-haul business. This is optimizing flows through the POP JV to get to the origins at quality in all those locations as well as in the Eagle Ford. So this touches hundreds of miles across multiple assets for us. So we think there's a lot of ways even on the operating costs aside from the initial cost reductions we'll see to optimize our costs across the system, our quality optimization and connectivity across the system and flexibility for our customers. So the same thing that's allowed us to grow a strong position in the gathering business in the Permian. We can apply all those same things and extend the runway from the gathering business through the long-haul business to the docs, to the markets at Corpus and throughout the Eagle Ford as well. Andrew John O'Donnell: Okay. Great. Appreciate that detail. Maybe just one more on EPIC and thinking about potential capital requirements to achieve some of these synergies excluding larger projects such as powering the pipeline up to the full design capacity. What kind of additional capital requirements do you see for making these connections either in the Eagle Ford or downstream? Are they relatively small in nature? Or could we potentially see CapEx moving a little bit higher next year beyond the normal range? Chris Chandler: AJ, this is Chris Chandler. I'll take that. The short answer is the investments for the activities you talked about are expected to be on the modest side. Our near-term capital spending related to EPIC is certainly going to be directed towards that synergy capture. I think about connecting the systems throughout whether it's at the origin for supply optionality or throughout for our operating and quality optimization. So we see some good opportunities there, but it won't be significant from a capital standpoint. The update to the guidance we gave in for 2025, certainly incorporates what I just mentioned there and our guidance in '26 and beyond, we'll capture that as well, but we don't expect it to be significant. Operator: Our next question comes from Brandon Bingham with Scotiabank. Brandon Bingham: Just wanted to maybe look into 2026 a little bit, if we could. Operator commentary so far this earnings season seems a little mixed with some guys talking about flat crude and others still blown and going to a certain extent and everything in between. So just wondering what you guys are hearing currently you're seeing from your customer base and how that fits with this year's expected Permian growth. And it also looks like the Permian volumes guide is implying a decent step up in 4Q. So just anything that you guys can comment on as we set up for 2026? Willie Chiang: Brandon, let me start with that. For the reasons that you described, it's really hard to get a good gauge on 2026. My observations have been, you've got 2 of the large majors that are very, very steady and continuing to grow. There's others that have taken the stop light approach and maybe a little more hesitant. I think it's a very difficult call on where oil prices are near term. Longer term, we're very bullish. The Permian, we're very bullish. Canada, we're very bullish on North American oil growth. But I think there's a lot of signals that have to play out through that. We've been -- if you think about where our portfolio is, I made a comment in my -- in the prepared comments, you think about global demand continuing to grow, which I do believe that it will because it's going to be -- we need oil for all the different reasons that we all know to create quality of life. But the thing that I've been watching for quite some time is drill bit or organic investment. And if you look at the trends, these are not my numbers, but other people that study this, if you look at the last trend organically, we're not replacing reserves, right? It's below 100%. And you can't do that for an extended period of time. So that's why we're very, very bullish on North American oil sources. And I think the whole restructuring of the flows of trade from barrels going into the North America to leaving is going to continue. And I would say we're in mid-innings on the efficiency of being able to do that with oil. Certainly, we're doing it not Plains is doing it, but you've got NGLs, you've got gas, all that is an export story, but I think there's a lot of opportunities to win going forward. But calling 2026 is a really tough one, and that's why we have decided to go to February to be able to give you the best intelligence that we've got. So sorry for the long-winded answer, but hopefully, it lets you know how we feel about it and where we fit in the long-range outlook. Brandon Bingham: Yes. Very helpful. And then just a quick one. The sales proceeds are effectively utilized now for the most part. So could you just maybe discuss your thoughts on fresh retirement and how it fits into the capital allocation strategy moving forward and just kind of what the pecking order is? I think you discussed a little bit in your prepared remarks, but just any updates there? Al Swanson: Sure. This is Al. Yes, since we announced the sale in June, we've now deployed $3.1 billion via the acquisitions, the BridgeTex acquisition earlier in the year are now $2.9 billion here. So effectively, the proceeds will go to debt reduction. That will allow us to get to roughly the midpoint of our leverage range, shift ahead after closing and reducing debt and being at the midpoint, then we'll go back to our normal capital allocation, which we'll look at -- return cash to shareholders through distribution as well as bolt-on acquisitions, retirement of the [indiscernible] and/or opportunistic common repurchases. But quite honestly, when you're sitting at the midpoint of the leverage range and still seeing potential opportunities to deploy capital with good returns, we'll be more biased towards looking at the bolt-ons at that point. Operator: Our next question comes from Sunil Sibal with Seaport Global. Sunil Sibal: So just a quick one for me. Now that you transitioned to a pure-play crude. The DCF coverage ratio of 1.6x. Could you talk about that in terms of how you think about that in more medium to longer term with the new business mix? Willie Chiang: Yes, Sunil, this is Willie. The coverage that we said on 160, you'll recall, I think it was late '22 that we announced that. It's something our Board looks at regularly, clearly without the NGL assets and in the more durable cash flow stream that we have, that's something else we can look at, but we still expect to be conservative in our approach. No change to the 160. But as we go forward, the way I would characterize it is we've got a lot more levers that we can work with as we go forward and get a better triangulation of what the future brings. Sunil Sibal: Okay. And then when you look at your crude portfolio in Permian post the EPIC, could you talk a little bit about your operating leverage in the system vis-a-vis between your gathering and in-basin pipeline and the long haul. Where do you see the most operating leverage? Jeremy Goebel: Sure, Sunil, this is Jeremy. We've been working on contracting. You saw additional volumes on basin through the summer. We've done more contracting there. With the acquisition of BridgeTex with ONEOK, we've worked with them to put more barrels on that system. So we're executing with operating leverage now. So despite the falloff and contractual rates, we're backfilling that using operating leverage. We see a lot of opportunity to do that with EPIC. So that creates a new opportunity for us to use operating leverage in a substantial way, given that the rest of our system is heavily contracted. And then within the gathering system, there's a few underutilized laterals within the EPIC, we'll work with our POP JV partners to fill those up. So that creates capital avoidance opportunities and the ability to reduce operating expenses through it. So EPIC providing us additional operating leverage in the gathering, intrabasin and the long-haul system for us to then go fill through the long-term contracts we have on the gathering business. So we're excited about the pull-through benefits for the entire system. Willie Chiang: Sunil, this is Willie. You didn't asked about the Permian? I might make a broader comment on North America. When you think about the broader macro, there's been a lot of chatter in North America, particularly around Canadian crude, ability to get more Canadian crude to markets. And you're very aware of the expansion that has happened on or the new line of TMX going to the West. Canada has vast resources that could get produced if they are more export routes to markets. And when you think about our system and other systems across North America, one of the challenges are, if you can stitch all that together, there's a lot of ability to get to global markets, primarily by going south to the U.S. And as you know, we have a large pipeline called Capline that goes from Patoka down to the Gulf Coast that's got a lot of spare capacity to your point on leverage. So we haven't taken our eye off the ball of be able to solve a broader problem of oil that might be in the next inning or even the next inning to be able to get more energy and oil to global markets. And with the footprint we have, we've got a lot of flexibility around that also. Operator: [Operator Instructions] Our next question comes from Jeremy Tonet with JPMorgan Securities. Jeremy Tonet: Just wanted to pick up with thoughts you might be able to share in 2026 and granted, as you said, with the Permian, it's too early to really have much specificity there. But just wondering at a high level outside the Permian for other basins that you're in, if you could provide any kind of high-level thoughts as far as direction of travel in volumes there over time, that would be helpful. Willie Chiang: Jeremy, what we've seen this year is a slight decline in the Rockies and Mid-Continent regions across the gathering assets, some in the Eagle Ford as well, modest. We see activity levels being able to sustain that. Some of that was -- you had significant growth in the DJ and Bakken from blowing down drilled uncompleted wells, that's out the system. So we see more stable production in the next year in those regions. And in the Permian, we see maintenance level activity for the short term, but we see significant leverage to increasing that. You've seen it, everybody is reducing capital, but maintaining production. So you can see through this fourth quarter so far in the earnings that efficiencies are there and the ability to drive, we see resource expansion in New Mexico and other locations. So longer term, it's giving us more confidence in the ability to grow the Permian and maintain the other basins at a lower breakeven price. So that gives us some confidence, but that's the near-term look. Jeremy Tonet: Got it. That's helpful. And just a smaller question, if I could, on Keyera sale. How are you guys going about managing FX risk there given the volatility we're seeing in FX? Al Swanson: We fully hedged that basically at the time of the transaction. So we did a deal contingent structure that effectively locked down the rate. And if for some reason the transaction didn't happen, we're not exposed to the adverse movement that could have happened. Operator: Our next question comes from Manav Gupta with UBS. Manav Gupta: So a quick follow-up. I think you answered it in a way, but I just wanted to follow up. There are some good deals out there, and you have been very prudent and very smart about these bolt-on deals. So I'm just trying to understand, if there is a good deal out there, which meets all your these criteria, even if you're slightly above the midpoint of your leverage targets, would you hold back or you probably are okay with moving towards the top end and closing on a good opportunity, we think should not be just let go just because you're slightly over the midpoint of leverage. If you could talk a little bit about that. Willie Chiang: Yes, Manav, thanks for the question. Well, we always look for opportunities to grow the enterprise value. And I would like to think that our judgment would be good enough to be able to shift through what I would call short-term noise versus long-term noise. And if it was characterized as you did, it was something that met all of our thresholds was strategic with a high risk of being able to execute it, that's something we would absolutely consider. Manav Gupta: And a quick follow-up on Keyera, what is the gating item here, if you could -- which needs to be done before the deal can be closed. If you could help us understand that a little better? Willie Chiang: Well, I wish I could help you understand it better as I'm not an expert in this, but it's the Canadian Competition Bureau in the process that they go through similar to our FTC HSR process which is ongoing. Operator: Next question comes from Jean Ann Salisbury with Bank of America. Jean Ann Salisbury: Just one for me. As you're considering whether or not to expand EPIC? Can you give us an update of the relative attractiveness of Houston and to Corpus for export. It seems like over the next few years, there are roll-offs on pipelines to both destinations that would be competing for recontracting. I know Corpus has historically been more desirable, but is that narrowing at all with the Houston Ship Channel expansion? Jeremy Goebel: Jean Ann, this is Jeremy. I would say nothing has materially changed Certainly, both ports are competing. You've seen expansions of Corpus as well. The Ingleside dredging has been done. The channel has largely been dredged. It's way more efficient than it's ever been. So for me, Corpus is getting more and more efficient, even more so than Houston from a large ship standpoint. But the quality differential is a big one, just because it's only Permian barrels touching the docs first, touching a lot of barrels that come from the Mid-Continent. So there's a quality benefit and the logistical benefit and that continues to hold the advantage. That's why you see the premium of it on the water at Corpus versus Houston. And so pricing is also indicating the preference for Corpus over Houston. Operator: Our next question comes from John Mackay with Goldman Sachs. John Mackay: Willie, I wanted to pick up on your comments around potential involvement on some incremental Canadian crude egress. Could you maybe just talk to us about what some of the moving pieces are? I know you don't have a formal project yet, but would love to hear a little bit more color on maybe what you guys are thinking? Willie Chiang: Well, fundamentally, you've got resources that are trapped and you've got -- if you think about the Canadian down to the U.S. Gulf Coast, you've got refiners that want to run that heavy barrel, and you've got different players with different strengths and weaknesses. There are some large long-haul lines out of Canada that could have expansion capacities. Then you get to the border, and there's a number of different options you can get barrels from the border to key hubs, and Patoka is one of them, and you've got a large unutilized capacity at Capline that could ultimately be a solution. That's not to say it's the only solution. My point on this is really just to reinforce, when we talk about a midstream -- a crude-focused midstream business, this is exactly the things that we are looking at of how we might participate and being able to get low-cost, reliable solutions to additional markets without having to build a brand-new long-haul line from source to destination. Hopefully, that helps, John? John Mackay: No, that's clear. And the second one will be quick, I think, for Al. Just on the EPIC debt, -- is that -- would you guys just expect to kind of refinance that at some point? Or could that be a, I guess, net use of cash from the Plains side? Al Swanson: Yes. Our plan is -- the base plan was we assumed it. And so it's now ours. And our view was, depending on the timing of these closing and us being owning 100%, which happened obviously on the early track. Our view is to repay it with the proceeds from the NGL sale. So it will be going away. The question is how quickly -- our view will be now that we've closed and depending on how long we think if the NGL transaction doesn't close until maybe later in the first quarter, we might look to do a term loan up at the parent to -- and funnel the proceeds down to repay it earlier. The economics may support doing that. It's a function of how long -- how long the term loan needs to be out. So that's something we'll explore now that we can catch our breath a little bit after getting the thing signed up and closed. Operator: I'm showing no further questions at this time. I'd now like to turn it back to management for closing remarks. Willie Chiang: Well, listen, everyone, thanks for joining us this morning. We'll look forward to giving you further updates and seeing you on the road in the near term. Have a great day. Operator: Thank you for your participation in today's conference. This concludes the program. You may now disconnect.
Operator: Ladies and gentlemen, good day, and welcome to the Grasim Industries Limited Q2 FY '26 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Ankit Panchmatia, Head of Investor Relations at Grasim Industries. Thank you, and over to you, sir. Ankit Panchmatia: Yes. Hi. Thanks, everyone, and good evening, and thank you for joining everyone on Grasim's Second Quarter Financial Year 2026 Earnings Call. The financial statements, press release and presentation are already uploaded on the websites of stock exchanges and our website for your reference. For safe harbor, kindly refer to cautionary statement highlighted in the last slide of our presentation. Our management team is present on this call to discuss our results and business performance. We have with us Mr. Himanshu Kapania, Managing Director, Grasim Industries and Business Head, Birla Opus Paints; Mr. Hemant Kadel, Chief Financial Officer of Grasim Industries. Also from the business team, we have with us Mr. Jayant Dhobley, Business Head of Chemicals, Cellulosic Fashion Yarn and Insulators business; Mr. Vadiraj Kulkarni, Business Head of Cellulosic Fibers business; and Mr. Sandeep Komaravelly, CEO, Birla Pivot, our B2B e-commerce business. Let me now hand over the call to Himanshu sir for his opening remarks on macro and updates on key businesses. Over to you, sir. Himanshu Kapania: Thank you, Ankit, and good evening to everyone. We welcome you to Grasim Industries Earnings Call for the quarter ending 30th September 2025. Hope you had a good Diwali and New Year Vikram Samvad 2082. Also, as today's Guru Nanak Jayanti, may you be blessed with peace, happiness and love. Starting with macroeconomics, we have now entered the final lap of this calendar year 2025 with a global economy that is not in recession, but not in a synchronized expansion either. We are living in a world where trade is rewiring, capital is repricing and geopolitics has once again become a single order economic variable, not a background noise. On October 29, 2025, the Fed cut the target range for the federal fund rate by 25 basis points to 3.75% to 4%, the lowest in 3 years. This followed an earlier cut of 25 basis points in September. The rate cuts indicate balance of risks are now shifting towards risk of growth and employment. Add to that, the Trump administration's renewed emphasis on tariff-based negotiations, especially on Europe and key Asian blocks may amplify short-term noise. However, the structural drivers of demand, competitiveness and consumption momentum remains intact. China is the second spotlight. China's GDP growth slowed to 4.8% year-on-year in quarter 3 of this calendar year 2025, the weakest pace in a year. Data shows China is not in an acute crisis, but in a structurally lower growth orbit. Property demand is frozen, household confidence is weak and private entrepreneurs are holding back CapEx decisions. The upcoming 5-year plan will be closely watched as it will set national priorities through 2030. Just to summarize, the situation that global trade is seeing is more pressure points. It is not a collapse, but more friction and friction slows velocity. And then India. The country is the positive outlier in the sentimental spectrum, but even India cannot fully decouple from the global liquidity and global trade. In a landmark move in September 2025, the center rationalized GST slabs from 4 to 3, reducing taxes across essential and aspirational items. The reform simplifies GST rates, eases compliance, boost disposable income and supports long-term economic revival. India's GDP growth for FY '25, '26 was revised upwards, thanks to a strong domestic consumption, robust investment activity and resilient exports. Supportive government reforms and RBI's accommodative monetary policy has further boosted demand while moderate inflation provides room for sustained growth. So if I had to summarize the world in one line today, globally, this a low-speed economy with pockets of strength, intermittent confidence and policymakers for moving carefully, not boldly. The world is not constant. And in this environment, winners will not be those who bet on direction. Winners will be those who stay flexible on timings. It is an era where optionality has more value than certainty. We don't need to predict the future with 100% precision. What we need to do is stay prepared for multiple futures. Grasim's multi-segment presence create a synergistic engine of growth, combining resilience with opportunity. The growth continues to exhibit resilience with trailing 12-month revenues now nearing INR 1,60,000 crores, that is over USD 18 billion compared to approximately INR 95,000 crores, that is USD 11 billion in FY '22 when measured on equal currency rates, a remarkable growth of 14%. Moreover, the stand-alone business continues to gain share now at 24% in quarter 2 FY '26 in the overall consolidated revenues nearing its highest ever milestone of INR 10,000 crores per quarter. Our CFO, Mr. Hemant Kadel, will further touch upon these numbers in detail. However, as I said earlier, we do not live in a constant world, which is why 2 years back, we entered into 2 new high-growth businesses, and I'm very happy to say that both these businesses are on track to achieve their stated targets. I will start with our growth businesses, Paints and B2B e-commerce businesses. Birla Opus is now a distinctive force in India's decorative paints landscape, not as another brand in the shelf stack but a category pace setup. We are institutionalizing a, superior paint performance; b, quality assurance up front and in writing; c, tech-led contractor, painter and consumer engagement. This resetting expectations of what premium should actually mean in India. From application science to film durability testing to shade integrity to dealer enablement, we are building this new gold or should we say, platinum standard. This why Birla Opus is becoming integral in conversations across the value chain, whether it is with retailers, contractors, applicators, builders, institutions and homeowners because we have not just launched Decorative Paints, we are raising the reference benchmark for how paints should be engineered, sold and serviced in India. I'm happy to share that we have commenced production at our largest and sixth plant in Kharagpur, West Bengal on 15th October 2025. The plant has 236 million liters per annum capacity and is one of the largest paint plant in West Bengal and Eastern India. This plant can manufacture water-based paints, solvent-based paints, colorants and distemper paint. It will significantly improve our serviceability to Eastern and Central India markets and bringing network efficiency. With this plant's commercialization, the announced project phase of Decorative Paints concludes and the decorative paints installed capacity is now 1,332 million liters per annum across the 6 plants. This makes Birla Opus the second largest decorative paints company commanding 24% of the industry capacity, a feat unmatched around the globe for speed and cost. Now we focus all our energies to bridge the gap between our volume market share and capacity share. Coming to the performance of Decorative segment, Birla Opus continues to grow its market share and expand its position as #3 decorative brand with double-digit market share, including Birla Opus and Birla white putty revenues, similar to the revenue reporting by legacy companies of all paint majors. Despite the extended monsoon, Birla Opus hits its highest ever monthly sales in the month of September and saw an equally strong October month, indicating increasing brand salience across markets. Not only the primary sales at highest level, but also the secondary sales have been touching levels higher as a percentage of primary sales, indicating fast movements that is offtake from dealers to contractors or from dealers to customers from these counters. As per internal estimates, the organized decorative paint industry has grown in low single digits on Y-on-Y basis in quarter 2 FY '26, largely due to incumbents push for lower-end economy products. However, as per our estimates, excluding Birla Opus revenues, the organized decorative paint industry has degrown slightly on a year-on-year basis. Birla Opus continues to disrupt through innovation and launched 2 big consumer proposition in the second quarter. First one was the Birla Opus Assurance Campaign, the first ever written paint promise by any paint company to assure the customers of painting performance backed by superior product quality of Birla Opus products. This campaign was another disruptive and differentiated campaign in which we launched 4 films that you must have seen on print, television and digital media. The campaign has received overwhelming response from customers, contractors, painters, dealers and thousands of paint projects under Birla Opus Assurance program have been undertaken and continue to be executed. We expect the demand for Birla Opus Assurance to accelerate snowballing into basic consumer expectation doing painting beyond product warranty. The second one was expansion of Birla Opus painting services offered under PaintCraft brand through our dealer and franchise partners on a pan-India basis. This first of its kind differentiated painting services offering that leverages digital technology and integrates the platform for all stakeholders, including company, franchise, applicators, painters and consumers. PaintCraft is a win-win for all stakeholders as it offers, a, transparent consumer pricing; b, EMI financing on painting first time in India; c, end-to-end company oversight of dealer-led painting services through trained execution network; and d, a fully GST-compliant painting service. The network has appreciated these initiatives by Birla Opus to bring a standardized painting service in the market. We're happy to announce that PaintCraft has already scaled up across 170, 1-7-0 towns and expected to reach 300-plus towns by quarter 3 and through company's dealer-operated franchisees and high-performing dealers. We remain on track to build India's differentiated and largest painting service network serviced through the largest branded franchise network. Customers can simply log in to Birla Opus website and avail the benefit of these 2 unique programs. The success of these campaigns is reflecting in our brand scores as well. Our independent research shows the consumer love for Birla Opus brand continued to rise as Birla Opus has become the #2 brand in top of mind recall across India at the end of quarter 2 FY '26. Such brand recall within 18 months of our launch and 12 months of pan-India operation is quite unheard of in the marketing world. On the product front, the premium and luxury products revenue contribution was upwards at 65% of revenue, covering all categories across emulsion enamel, wood finish and waterproofing, including retail and institutional segment. The company has also launched an array of new products and crossed 190-plus products in this portfolio. Out of this, 13 new products were launched during this quarter, the company launched a new branded tools segment with a range of non-mechanized tools under the sub-brand known as Artist. Company is proud to launch in-house made in India, high-quality range of wallpapers, which has seen excellent network response. The other new products launched are pure elegant soft shine, aerosols, aluminum paints, clear varnish and few new bases in the existing product range. The Birla Opus products have been now applied by over 6 lakh painters and contractors, across lakhs of residential sites, making it one of the largest contractor painter network in India. On distribution front, the brand has crossed its earlier guidance and reached to over 10,000 towns on a pan-India basis, which is historic achievement in such a short time. The focus now shifts to depth of presence in each of these 10,000 towns. The company's branded franchise store network has crossed 500-plus towns presence and will soon cross 4-digit mark of branded exclusive store count, making it amongst the largest branded stores in the country. The total CapEx spend for Paints business stood at INR 9,727 crores as on 30th September 2025. Grasim applauds the Birla Opus team for flawlessly executing a large and global scale greenfield project, commissioning 6 state-of-art plants simultaneously, achieved without cost overruns with rapid scale-up and consistent first-time right quality across 190-plus products. This speed showcases exceptional physical -- financial discipline and manufacturing and supply chain excellence, a truly unparalleled achievement by a dynamic start-up. Finally, continuing on Birla Opus, our CEO, Mr. Rakshit Hargave has decided to pursue opportunities outside Grasim. Today, Grasim NRC has accepted his resignation and approved his request to exit the company effective 6th December 2025. Rakshit joined Grasim in November 2021 and has played significant role at the Birla Opus start-up stage and initial scaling of the Decorative Paints business. Today, the operations are stable, and we have built a high-performing team. In the last 4 years, this team has helped establish 6 integrated manufacturing facilities, scale distribution, build brand salience and supply chain network. I believe we have built a rock-solid foundation for next level growth in the Decorative Paints business, which has all the necessary ingredients to achieve #2 revenue market share and committed profitability in the 3 years of full-scale operations. The company appreciates Rakshit's contribution and wishes him the best for the future endeavor. Rakshit's successor will be announced in due course. In the interim, I as business head for the last 5 years of Paints business, and who helped conceptualize, strategize, plan and execute this large project will directly oversee the paints business until the new CEO is appointed. Moving on to other new business, Birla Pivot, which has been marching steadily and strongly. Birla Pivot has created -- was created to solve a pressing challenge in India's business landscape, simplifying building and other sectors raw material procurement for the companies that power the nation's growth. Today, it has evolved into a one-stop shop B2B platform covering the complete spectrum of procurement, fulfillment, assured quality and quantity with financing solutions of material needs from steel and cement to tiles and chemicals, all in one smart seamless ecosystem by enabling digital adoption across the B2B [Technical Difficulty] Operator: Participants, please stay connected. The line for the management has dropped. We're reconnecting them. [Technical Difficulty] Ladies and gentlemen, thank you for patiently holding your line. Line for the management is reconnected. Over to you, sir. Himanshu Kapania: Apologies to everybody. I'm going to start again on the new business. Moving on to other new business Birla Pivot, which has been marching steadily and strongly. Birla Pivot has created to solve a pressing challenge in India's business landscape, simplifying building and other sectors, raw material procurement for the companies that power the nation's growth. Today, it has evolved into a one-stop shop B2B platform, covering the complete spectrum of procurement, fulfillment, assured quality and quantity with financing solutions of material needs from cement -- and steel to tiles and chemicals, all in one smart seamless ecosystem. By enabling digital adoption across the B2B ecosystem, Birla Pivot is not just a procurement platform, it is a catalyst for efficiency, transparency and growth in India's industrial and construction sector. Post a successful foray into building materials, the business now expands its product portfolio to become full stacked raw material procurement platform. The platform has now added a diversified range of raw materials, including polymers, solvent, textile chemicals and nonferrous metals. For your reference, B2B e-commerce market is set to hit USD 200 billion by 2030, powered by strong demand from chemicals, metals, infrastructure and construction sector, et cetera. Birla Pivot's expansion is well timed to capture this momentum, enabling smarter tech-enabled procurement. As digital penetrations remain below 2%, India's B2B e-commerce trade is on the cusp of a major shift. What does such product additions give to us. First and foremost, growth momentum, which is what is -- it is visible in quarter 2 FY '26, where the revenues are sequentially higher by 15% in spite of monsoons. Secondly, it also gears up for new aspirations, which means newer targets to our businesses beyond its stated revenue guidance of achieving INR 8,500 crores or $1 billion mark by FY '27. To conclude, Grasim's diversified business model spans India's high-growth sectors from cement powering infrastructure, decorative paints, enabling urban aspiration, B2B commerce and financial services driving enterprise and inclusion to chemicals and sustainable fibers like cellulosic, linen, wool and cotton, addressing industrial and global demand. This multi-segment presence creates a synergistic engine of growth, combining resilience with opportunity, a true force for growth building India, enabling aspiration and driving sustainable progress. Let me now hand over the call to Hemant for discussing financial performance and highlight on our core business, which is cellulosic fibers and chemicals. Over to you, Hemant. Hemant Kadel: Thank you, Himanshu. Good afternoon and festive greetings to everyone. It is a privilege to address all of you on this earnings call in my capacity as CFO. I have been with the group for more than 30 years. And during this journey, I have been part of the core management team, leading several strategic initiatives and governance responsibilities. My experience spans across corporate finance, risk management, mergers and acquisitions and enterprise-level initiatives. As a CFO of a conglomerate like Grasim, my role is to ensure that our financial strategy and execution are fully aligned with the 5 pillars that has defined our organization's long-term growth journey, which is leadership, innovation, sustainability, capital allocation and cost leadership. Coming to our current quarter performance, Grasim has delivered consistent revenue growth for 21 consecutive quarters on a year-on-year basis with trailing 12 months consolidated revenues of INR 1,59,663 crores, up by 8% compared to FY '25 revenues. The stand-alone revenue grew at a faster pace, reaching a record high of INR 9,610 crores, up by 26% year-on-year. Let me now talk about business-wise performance. Firstly, cellulosic fiber business, the average quarter 2 FY '26 cellulosic stable fiber utilization rates in China have improved to 89%. And inventory days, though higher year-on-year, have sequentially reduced to 15 days. Total sales volume of CSF was lower by 5% year-on-year due to logistics-related issues that Vilayat, which is now normalized. Specialty fiber volume mix improved to 24%, led by higher exports of specialty fibers, improved product mix and currency depreciation supported blended realization of CSF. Cellulosic fashion yarn sales volume grew by 3% year-on-year, led by festive demand. However, the realizations continue to remain impacted by cheaper imports from China. The cellulosic fibers segment revenue were up 1% year-on-year to INR 4,149 crores. High input price of key raw materials impacted the EBITDA, which degrew by 29% to INR 350 crores. Coming to our Chemicals business, the business revenue stood at 2-year high levels driven by all-round performance across caustic soda, chlorine derivatives and specialty chemicals. While the global caustic prices have softened with CFR SEA down by 5%, domestic caustic prices stood higher due to stable demand and rupee depreciation. The improvement in caustic prices led to higher ECU, which was partially impacted by increasing negative chlorine realizations. Caustic sales volume for the quarter were flat due to constrained production on account of lower power availability. Specialty Chemicals revenue contribution improved to 30% versus 26% in quarter 2 FY '25 driven by volume growth of 34% year-on-year due to stabilization of newer capacity. Specialty chemical profitability remains impacted by elevated raw material prices. During the quarter, chlorine derivative capacity increased by 11 KTPA with addition of aluminum chloride capacities. Two key projects, CPVC in partnership with Lubrizol and ECH remains on track. The mechanical completion is expected by Q3 FY '26. Post completion of ongoing projects, chlorine integration is expected to reach 70% compared to current 64%. In our Cement business, UltraTech's capacity expansion continued to reinforce its position as the backbone of India's infrastructure build-out. With every incremental 1 million tonne added, the business is structurally strengthening supply to support the country's historic CapEx cycle across roads, ports, industrial corridors, logistics infrastructure and housing. The business has recently announced capacity expansion targeting total gray cement capacity of over 240 million metric tonne per annum by March 2028. Compared to its current capacity of 192.3 million metric tonne per annum for quarter 2 FY '26, the consolidated sales volume were up by 6.9% year-on-year to 33.85 million metric tonnes. Operating EBITDA per metric tonne grew by 32% year-on-year to 966 led by volume and realization growth, coupled with lower power, fuel and logistics cost. Coming on Financial Services business, Aditya Birla Capital's financial service portfolio continued to sharpen its focus on customer-first execution. While leveraging cross-business synergies to strengthen outcomes, revenue for Q2 FY '26 grew by 3% year-on-year, led by growth in NBFC, Housing Finance and Health Insurance segments. Total lending portfolio, that is NBFC and housing finance stood highest ever at nearly INR 1,78,000 crores, up 29% year-on-year. The NIMs have started to marginally improve quarter-on-quarter. Total assets under management of AMC, Life and Health insurance grew by 10% year-on-year at nearly INR 550,000 crores. Talking about Other businesses, firstly, textile revenue grew by 6% year-on-year to INR 586 crores. The business has demonstrated remarkable turnaround, returning to profitability with EBITDA of INR 24 crores due to normalization of input prices in linen segment. Just as a reference, this business historically demonstrated 8% to 10% EBITDA margins. Coming to renewable business, Aditya Birla renewables revenue nearly doubled on a year-on-year basis to INR 259 crores, led by newer capacities and onetime revenue of INR 50 crores on account of rate differential. The business current peak capacity stood at nearly 2 gigawatt and is laying the foundation for a greener, more resilient India. It is also playing its part in the group's collective transition to a sustainable energy future. Let me now briefly touch upon the CapEx. Grasim has outlined a CapEx outlay of INR 2,263 crores for FY '26, of which INR 941 crores was deployed in first half of financial year '26. The lyocell capacity expansion with the cellulosic fiber business is progressing as scheduled and remains on course for commissioning by mid-2027. On sustainability front, happy to share that Birla cellulosic -- Cellulosic Fiber division of Grasim has received the highest rating of dark green shirt in the Canopy's Hot Button Report for the sixth consecutive year, reflecting its focus on sustainability. We remain committed to continuously elevating our sustainability performance. A key thrust will be to improve the capacity share of renewable energy and increasing recycled water usage to structurally reduce our dependence on freshwater. These shifts are integral to embedding resources efficiency into our operating model and strengthening long-term environmental resilience. On the balance sheet side, net debt declined by INR 292 crores and stood at INR 6,861 crores as on 30th September 2025 as against INR 7,153 crores as on 30th June 2025. Stand-alone net debt to TTM EBITDA stood at 2.19x as against 2.41x. With this, we open the floor for question and answers. Operator: [Operator Instructions] First question is from Avi Mehta from Macquarie. Avi Mehta: Sir, my questions were on the paint business, especially wanted to better understand your thoughts post the resignation of Rakshit, in terms of the rough time line for the successor announcement, any change in growth strategy, aggression. I would love to hear your thoughts on that. And so the second question, if I can put it up front, is on the performance in the paint business in the quarter on a sequential basis. We did -- you did point towards market share gains, but the other peers have seen -- who have announced have seen almost a 10% decline given the weak monsoon -- weak environment, I would love to know how does the business stack up versus that? Those are the 2 questions. Himanshu Kapania: Thank you, Avi. In the life of a professional, individuals take their call on where they want to build their career. Rakshit has helped Birla Opus from the very start of the business to build the project and in the initial phase of launch. Now Birla Opus has a very strong, high-performing team and will continue to stay course on the vision that has been announced to the market. I'd like to remind you the vision that the company has announced to the market, we have committed to be #2 as well as profitable within 3 years of full-scale operation. We will stay course on that. As regards to the performance of quarter 2, this our first time that we have faced a full monsoon season. And the first time we saw that the overall industry on a quarter-on-quarter basis has had a double-digit decline. And it is our internal estimate on a year-on-year basis. If you were to eliminate the performance of Birla Opus, the industry is slightly negative in performance. Our Birla Opus on a year-on-year basis had a significant growth, but on a quarter-on-quarter basis, had a low single-digit decline, which was primarily during the periods of July and August. We turned back very strongly in the month of September as well as in the month of October, as I mentioned in my opening remarks. We are seeing very strong secondaries or movement of paint buckets from the dealer counter to the contractors and consumers and as well as return of the institutional business. We remain committed to growth, and we remain committed to the vision that has been articulated to the market. I forgot to tell that Rakshit be there with us until 5th of December. Operator: [Operator Instructions] We'll take the next question from Rahul Gupta from Morgan Stanley. Rahul Gupta: A couple of questions. First, just as a continuation on the Paints question earlier. Now that we are out of a pretty long and persistent monsoon season, how should one look at the industry demand for the second half? And to that extent, with Kharagpur now fully commercialized, how should we look at your ramp-up in second half from that perspective? So that's my first question. Himanshu Kapania: Thank you, Rahul. We are highly optimistic and results of September and October bear us out of a strong quarter 3, both on a year-on-year basis as well as a quarter-on-quarter basis. So our guidance is continued double-digit growth on a quarter-on-quarter basis and a significantly high growth on a year-on-year basis. As regards to our capacity, as we mentioned, we are at 1,332 million liters per annum, with Kharagpur arrival -- in the short term, it will help our -- managing our logistics costs and better servicing on the Eastern and Central India. But in the long term, our aim is to ensure that the volume market share and capacity market share converge and all efforts -- all investments and all efforts, whether it's advertising, manpower, distribution, servicing and any new initiatives will be directed towards to match the -- our volume market share closer to our capacity share. Rahul Gupta: Got it. Maybe we will revisit on the industry a quarter later. My second question is on B2B e-commerce. See, the business is growing at a very fast pace. And if I look at this quarter numbers, the revenues are annualizing more than INR 6,000 crores. Now you have guided for INR 8,500 crores for fiscal '27. Is there a case for this number getting revised up? Or will you be reaching this targeted number sooner than fiscal '27? So any color on this will be very helpful. Sandeep Komaravelly: Thanks, Rahul. This Sandeep here. I think your observation is right. Our growth has been compared to what our expectations, I think we've been doing very well compared to our plan. We are on track. And I think our earlier recommendation was that we will achieve $1 billion scale in FY '27. There is a likely chance that we will get there and hit that milestone sooner. But for now, we are not changing any of our direction as of now. Operator: Next question is from Amit Gupta from ICICI Securities. Navin Sahadeo: This Navin Sahadeo from ICICI Securities. So 2 questions. One on paints and the second on B2B commerce. On paints, if you could just give us more details about the number of dealers in this particular quarter versus the last quarter. And the reason I'm asking this because this time, Diwali was a little advanced. As you mentioned in your presentation, there is net addition to the number of accounts from 8,000 in the previous quarter to 10,000. The SKUs have gone up. The product portfolio has also expanded. But yet, sequentially, as you mentioned in your opening comments or to the previous question that there is a marginal lower single-digit kind of a drop in revenue. So how should one look at this in terms of the expanding network in the first place. Himanshu Kapania: Thank you, Navin. You're right. We have expanded our distribution network to beyond our original guidance of 8,500 towns to 10,000 towns. And we continue to be able to expand beyond urban into the rural and the small town category. As regards dealers, the way to look at it is either we measure dealers on a quarter-wise basis or we measure on a month-wise basis. Your concern has been how is it that we have been expanding our reach and it has not translated into revenue. To measure that, we should look at the number of dealers that have participated with us in September and October. And there have been -- we've had -- we've been growing dealer participation on a month-on-month basis. There was a lull in July and August, and it has returned back to a significant growth, almost a double-digit growth of dealer participation in September, and the same momentum has continued in the month of October. So the overall number of dealers have continued to grow, if I were to measure the total number of dealers who participated in quarter 2 over quarter 1. What is important is you will say the throughput may have fallen. The throughput may have fallen on a quarterly basis. But when we measure on a September basis, the throughput is back and both in September and in October, dealer throughput is at levels and slightly higher than what it was at quarter 1. So we are -- our focus is both expansion as well as depth of performance. And currently, if you -- while we are getting a lot of dealers to be able to sample our products and start using our products, there are dealers who have sustained with us now for more than 1 year. And almost 30% of the dealers are currently doing more than 40 to 80 products for us. And that number continues to grow. And the dealers, I'm very happy to report the dealers who have worked with us in the -- over 1 year, we've sustained a large percentage of them. So I hope that answers your question. Navin Sahadeo: Just to clarify, if you could give us the number of dealers? And second is the traction that you said or rather a spurt that you've seen in September and October, is it led by the consumer style financing or the EMI options that you introduced a couple of months back? Himanshu Kapania: So those are factors which help in secondary sales. So I'll not mix the 2 certain topics that we first focus on primary sales, that is sales from companies to dealers. The number of dealers participation has grown as well as number of products sold has grown, both in September and October. Now once this has grown, how has been the throughput from the -- different from our legacy companies, which have a track record and they are able to force dealers to stock. Most of our dealers prefer to buy and keep a very low stock. So for them, the most important is throughput or secondary sales. And what has been encouraging for us is, number one, we have a central monitoring system of our tinting. And we are finding that the secondary on our tinting for dealers in September and October has been almost 120% to 130% of the volume that they purchased in September and October, showing a very strong secondary or throughput from the dealers on towards -- on to customers as well as reducing their inventory significantly. That is part one. Second thing that has helped is assurance. So it is helping painters and contractors to be able to tell to customers of the assurance program. And we've had thousands of projects being registered are -- and in multiple stages of execution at this point of time, the Assurance plan. And the third is the new painting services. Both Assurance and painting services are secondary-based programs as well as dealer stocking and dealer purchase are the primary-based programs. So both are running strong. I hope that clarifies. Navin Sahadeo: My question second was on B2B e-commerce. So if you could just help us understand the private labels now are what percentage of our revenues. And in the same way then what's different from a technology or any other innovation that we are doing in this B2B e-commerce gives the confidence that we might be able to surpass the revenue target sooner. But that was my question. Sandeep Komaravelly: I'll answer your question on the innovation that we're doing and what gives us the confidence that we will grow and continue on this growth momentum. So look, as you're aware, we have built an integrated e-commerce platform, which fundamentally forms a digital backbone and connects pretty much every stakeholder in the entire ecosystem, starting from the brands, OEMs to our buyers who are consuming these products, logistics service providers who are actually moving the material to our lending partners who are providing financial solutions to all other network operators who plug into our -- into this backbone. And what this fundamentally helps us is in creating this end-to-end visibility, which is predominantly not there in most of the sectors or most of the materials that are fundamentally transacted today. And that, I think, is where our ability to provide bring in efficiency, ability to provide the best price, ability to provide the widest assortment, ability to provide a very reliable experience, all of that come into play. And this already showing up in the way our repeat transactions are happening in the way the buyers are coming back to our platform to keep buying. And just as an indication, all the buyers who we acquired last year, they've already purchased on an average more than twice the amount this year, giving us the confidence that whatever experience that we're delivering through both a combination of our assortment and our technology backbone is giving results. And I think that is one of the biggest reasons why we believe our growth momentum will continue. And to drive all of this, we've built -- these are custom-built tech modules that we've built from the ground up, and they are very specific in terms of addressing the use cases that are for B2B. There are a bunch of solutions that have come up in the past for B2C e-commerce, but B2B e-commerce is a lot more complex. There are a lot more stakeholders. To fulfill a single transaction, it requires more than 30, 40 touch points. and to orchestrate all of this in a system that is seamless is where our edge comes in. I hope that answers the question on innovation. On the second part or on the first part that you had asked about private labels, we are right now not breaking down our revenues into different product categories, and we will share that at the right moment. But I'll share this that our private label since the time of launch, they have seen very good acceptance. Most of the buyers who are coming to our platform to buy some of the bulk categories. As the project progresses, they have shown very good interest to continue that purchasing experience with us. They started buying behind the wall categories, and now they've also started buying the finishing categories. So we are currently operating in tiles, ply, bathware and faucetware, and we continue to increase our penetration there. What we've also seen is that we see great acceptance for these private labels in our retail channel. So we fundamentally have 2 channels. One is the projects channel where we are able to directly supply materials to the site locations. And the other channel is our retail channel wherein we work with retailers who further then sell a lot of these finishing products to individual homebuilders or smaller contractors or smaller retailers. We've seen great acceptance for these private labels in the retail channels because they are seeing a great way to diversify their portfolio without having to do higher investment or having to keep inventory at their location, and that is what is driving acceptance of these private labels. So overall, I'd say all indicators are towards good experience, reliable experience. [Technical Difficulty] Operator: We have the management reconnected. Over to you, sir. Himanshu Kapania: Yes. Sorry, Navin, I guess, apologies, the line got disconnected and -- but... Operator: Next question is from Percy Panthaki from IIFL Securities. Percy Panthaki: Can you just tell us the number of distributors, your target was 50,000. Have you achieved that target? Himanshu Kapania: Yes, we are there. Percy Panthaki: Okay. Okay. And how many of them would be monthly active distributors as in ordering at least once a month? Himanshu Kapania: We believe we are better than the industry standards. Percy Panthaki: In percentage terms? Himanshu Kapania: Yes, right. Percy Panthaki: Understood. Understood. And your guidance of INR 10,000 crores turnover by FY '28, does that remain valid? Himanshu Kapania: Yes. Percy Panthaki: Understood. Understood. Also, just wanted to understand what is the next push in terms -- see, when you started off, the first push was in terms of making the distribution available and increasing the number of distributors. Now more or less, that lever is sort of done. Of course, there will be some incremental growth there, but nothing major. So for the sales growth to continue double-digit on a Q-o-Q level, what is the next thing that you will focus on? What is the next lever which will drive this growth? Himanshu Kapania: I think this very typical of any business. Focus is on consumer. So you need a distributor or a dealer to be able to make sure the products are available at the right time at the right place. That activity, we have managed. So all our attention is moving to consumers. And those -- there are 2 types of consumers. One is a painter contractor and second is direct homeowners. That's the reason why we continue to be the most visible brand amongst the most visible brand. And we are really happy to report that within a period of 1 year, this the last World Cup, then we started to advertise. And this World Cup, this happens with Women's World Cup, and we won both the World Cup. And we have -- in the results, we saw that we have top of mind recall, we are #2 brand, which is the starting fact of consumers to be able to go and ask for Birla Opus at the dealer outlet. So that is the one step, and we believe 30% to 40% of the consumers make direct purchase of paints. Remaining 60% to 70% of the consumers do it with the help of the painters and contractors. So all our effort is be able to attract maximum number of painters and contractors, ensure these painter contractors are able to experience our high-performing products and superior products as well as able to offer to customers 2 very new services, number one, direct painting services from branded by us, which has transparent pricing, EMI as a GST bill and also Assurance where not only the customer gets product warranty, but he will get in the first year itself, if there is any problem, our commitment to not only replace product, but also cover his labor costs to be able to give assurance both to the painter and contractor as well as to consumers. So all the focus of the business is to be able to do consumer-related activities. And that will help us in what is happening is that is helping us dealers who first joined and took a small percentage of our 192 products. And now we are getting dealers who are increasing the number of products that they're buying and offering to consumers. Operator: Next question is from Manish Poddar from Invesco. Manish Poddar: So just wanted to get some sense, sir, let's say, because of this rainy season, has there been any sort of impact in this Q2 thing? And that is why you're calling out, let's say, the early part of the quarter was tapered. And despite you adding stores or adding distribution, you haven't seen performance to that extent. Because what is happening is the market always correlates individuals leaving at the top to the delivery of outcomes. And if that is, I'm just trying to get some sense on that. Himanshu Kapania: Understood, Manish. So let me first clarify. We believe that we have the best growth on a quarter-on-quarter basis. Obviously, when you measure on a year-on-year basis, we are a triple-digit growth. So that may not be so relevant. But on a quarter-on-quarter basis, we had a least decline when the industry had a double-digit decline. I had almost flat or slightly negative on decline basis. What is the reason for this decline? Broadly, whenever there is monsoons, the exterior products and institution business slows down. And that is our peak monsoons in July and August. So if a part of our business is not happening. That is the reason why the slowdown happens. And that is historic of industry. On a quarter-on-quarter basis, quarter 2 is amongst the slowest quarter for the industry, and we faced it for the first time. But having said that, we have to measure the overall industry on a year-on-year basis. If you were to remove Birla Opus performance, the industry has had a slightly negative growth is what our assessment is based on various feedback that we've got from the market. Not every company has yet reported their financial results. But whatever our study of the market is against -- but Birla Opus -- with Birla Opus, there has been a low single-digit growth that has happened and Birla Opus continues to help grow the market at this point of time. I hope that answers the question. Operator: Next question is from Nirav Jimudia from Anvil Wealth. Nirav Jimudia: I have 2 questions on chemicals. Sir, the first is when we see our EBITDA run rate for chemicals, like last year, we were at anywhere between INR 250 crores to INR 300 crores. And today, when we see we have inched up to anywhere between INR 350 crores to INR 400 crores. So just want to understand from you that when can we again start seeing the meaningful improvement in the EBITDA run rate for chemicals? And if you can explain this in context of, a, chlorine value-added products. So is there any scope for improvement in per kg margins here. B, newer capacities like ECH and CPVC and when it should start contributing meaningfully? And, c, whether the benefit of the power cost reduction with our shift to renewables is optimally achieved or there is a further scope of improvement? Himanshu Kapania: [Technical Difficulty] Renewable consumption rate of... Nirav Jimudia: Sir, your voice is not audible. Himanshu Kapania: Is this better? Nirav Jimudia: Yes. This better, sir. Himanshu Kapania: So I'll go in reverse order of your questions to the extent I remember all of them. So firstly, we are at about 24%, 25% renewable level as of now, right? If I look at all that we have and all the state-level regulations, we expect that in the next 3 years, we should be able to technically get to 40%. And I use the word technically because we have not yet envisaged those projects. We have not yet signed the PPAs, but that would be a kind of aspirational level for the next 3 years. I can't forecast because, as you know, every state has its own regulation on banking, billing, surcharges, et cetera. But we think that the current 25% has feasibility to reach the 40%. Then I think your second last question was ECL. Nirav Jimudia: Yes, when it should start meaningfully contributing in terms of the operating profits? Himanshu Kapania: So that ECH and CPVC would be meaningfully contributing from Q1 of next financial year. We will be mechanical complete by Q3, worst case situation in January, but the start-up times of these plants are long and complicated. And as you know that some of it are -- there are safety risks as well. So we expect that meaningful contribution will happen from first quarter of next financial year. Then I think you had a question on chlorine derivative profitability. Rather large basket of products, right? We have probably the largest basket of chlorine derivatives in India. And some of them are pretty seasonal because, for example, water treatment and monsoon has a higher season, right? Plastics has another high season. So I think these are mature products. It's not like you're going to see breakthrough profitability in any of these traditional chlorine derivatives, but it is necessary for us to do them so that we can get the caustic utilization rates that we want. And then your very first question was around what could be the catalyst for the next improvement -- step improvement, I think, in profitability. And Nirav, the honest answer to that is it essentially depends on [ chloride ], given our large exposure still to the chlor-alkali business. It's a combination of caustic prices and chlorine demand in India. That is the most meaningful factor that drives our results. And the business of predicting caustic prices for a long time is very tricky. So far, we can make our best estimates, but it's a tricky business. Operator: Next question is from Jai Doshi from Kotak. Jai Doshi: My question is generally on market share trends. Now last year, during the course of the year on a Q-o-Q basis, you were adding 100, 150 basis points of market share every quarter. It seems to have moderated to about 20 basis points starting this year. So is this entirely the difference between primary, secondary? That's my first question. Second is, is there a risk that it decelerates further? Or you think that you will be able to gain 20, 30 basis point market share Q-o-Q from here onwards over the next few quarters as well. And lastly, mathematically, for you to sort of INR 10,000 crores in FY '28 means 13%, 14% market share. So whereas if I understand correctly, you may be at 6.5% today, gaining 20, 30 basis points quarter-on-quarter. So what do you think from here can sort of drive acceleration in sequential market share trends for you? Himanshu Kapania: Thank you, Jai. I'm not sure how you're doing your calculations and how you're arriving at quarter 1, 20 basis point or quarter 2 at a slow market share growth. So first and foremost, I want to register the revenue reporting of paint companies has 3 broad components: decorative paints, putty business as well as industrial paints. Now we have a fair bit of idea of their industrial paints, some of them are also reporting a breakup between industrial and decorative paints. Now with decorative paints and putty business of the legacy players and decorative paints and putty business of Birla White, our assessment is we have grown very significantly. And last quarter, we had talked about reaching double digit, and we have grown more than 700 to 800 basis points in this quarter further. So we are there. And on a stand-alone basis, our assessment is we will be in quarter 4 to quarter 1 of next year, double digit. We are targeting -- we're trying to reach in this -- in the quarter 4. But we are between quarter 4 of this year or quarter 1 of next year, we should be in a double-digit number. And we are -- our degree of confidence remains solid around there. So you may have your own internal calculations and the number that you are giving us as the end market share is quite different from the numbers that we have on our internal calculation basis. Operator: Next question is from Prateek Kumar from Jefferies. Prateek Kumar: I have a couple of questions. Firstly, on PSF segment and caustic, the performance on a cumulative basis remains range bound like last few quarters. Do you see any figures which could provide any positive change in performance in this business. Some of it you have already alluded and like answered that. Unknown Executive: Yes. See, we expect a slightly better performance in Q3. But obviously, there are a lot of ifs and buts in terms of U.S. tariffs, in terms of global pulp prices. We expect stability and a slightly better performance for Q3. Prateek Kumar: Okay. Also, another question is on resignation of Rakshit, which comes as a big surprise to anyone who has been tracking Birla Opus closely. My question is, should investors view this -- should investor view this transition as a natural phase in generally difficult competitive business or as inflection point of any refreshed strategy? Himanshu Kapania: It's a natural phase of professionals growing in their career. This will have no impact on the business and business will be as usual. And there will be no change in the growth strategy. Operator: Next question is from Raashi from Citigroup. Raashi Chopra: I just had a clarification. When you're saying that the paints industry has grown at low single digits in the second quarter, and it's negative, excluding Birla Opus. This just decorative organized paints or adding putty as well? Himanshu Kapania: Yes, including putty. Operator: Thank you very much. Due to time constraints, we'll have to take that as the last question. On behalf of Grasim Industries Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.
Operator: Thank you for standing by, and welcome to Arvinas Third Quarter 2025 Earnings Call. I'd like to remind everyone that this call is being recorded. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Jeff Boyle. You may begin. Jeff Boyle: Good morning, everyone, and thank you for joining us. Earlier today, we issued a press release with our third quarter 2025 financial results, which is available in the Investor and Media section of our website at arvinas.com. Joining the call today are John Houston, Arvinas' Chief Executive Officer, President and Chairperson; Noah Berkowitz, our Chief Medical Officer; Angela Cacace, our Chief Scientific Officer; and Andrew Saik, our Chief Financial Officer. Before we begin the call, I'll remind you that today's discussions contain forward-looking statements that involve risks, uncertainties and assumptions, which are outlined in today's press release and in the company's recent filings with the U.S. Securities and Exchange Commission, which I urge you to read. Our actual results may differ materially from what is discussed on today's call. A replay of today's call as well as an updated corporate deck will be available on the Investor and Media section of our website. And now I'll turn the call over to John. John? John Houston: Thanks, Jeff. Good morning, everyone, and thank you for joining us today. As highlighted in our third quarter earnings release issued earlier this morning, this has been a dynamic and productive period for Arvinas marked by meaningful progress across both our corporate initiatives and clinical development programs. During the quarter, we announced significant developments, both in our pipeline and enhancing efficiency across our organization, all geared at driving value from our portfolio to deliver benefit to patients and value to shareholders. Our deep pipeline provides multiple opportunities for value creation, as we work to address the largest areas of significant unmet need in oncology and neurology. We have entered the beginning of a data-rich period with multiple readouts from our early-stage clinical programs, including recent clinical data from ARV-102, our LRRK2 degrader and preclinical data from ARV-806, our KRAS G12D degrader. We also presented the first preclinical data from ARV-027, our promising new clinical candidate that targets polyglutamine-expanded androgen receptor or polyQ-AR, the root cause of spinal bulbar muscular atrophy or SBMA. In addition, we also anticipate sharing preclinical data from our BCL6 degrader, ARV-393, at the ASH Conference in December and preclinical data from our new HPK1 degrader, ARV-6723 later this week at the SITC Conference. Noah will also share a promising update from our ongoing Phase I monotherapy trial with ARV-393 later in the call today. We have a strong track record of translating promising preclinical results into important successes in the clinic with a platform that has consistently shown its versatility and promise. We continue to build on that record with multiple ongoing and planned clinical trials in areas of high unmet need, a pipeline of high-value assets, a strong research engine and cash on hand into the second half of 2028 that gives us financial and strategic flexibility. In September, we announced that we and Pfizer will jointly select a third party for the commercialization and potential further development of vepdegestrant with the goal of rapidly bringing it to patients, if approved. Vepdeg's new drug application is currently under review by the FDA, and the agency has issued a PDUFA action date of June 5, 2026. Our goal is to have a partner in place before this date to make sure that Vepdeg, if approved, is launch-ready as a potentially best-in-class therapeutic option for ER-positive/HER2-negative advanced breast cancer in the second-line ESR1 mutant setting of ARV-393. Noah? Noah Berkowitz: Thanks, John, and good morning, everyone. I'll begin with ARV-102, our oral PROTAC LRRK2 degrader, specifically designed to be brain penetrant. Enthusiasm from key opinion leaders and investigators, most recently about the biomarker data we presented at MDS, has further strengthened our belief that this is a truly differentiated program. Let me begin with some background about ARV-102's target and what has come into focus as potential diseases of interest. LRRK2 is a multi-domain protein with 3 key functions of kinase, GTPase and scaffolding activities. These activities help it regulate endolysosomal trafficking. When LRRK2 expression or activity is elevated, it disrupts lysosomal function, impairing the clearance of aggregated pathologic proteins that would normally be degraded through the pathway. Degrading LRRK2 may restore endolysosomal homeostasis and provide therapeutic benefit in disorders characterized by lysosomal dysfunction. Unlike inhibitors that only inhibit LRRK2's kinase activity intermittently, ARV-102 eliminates the entire LRRK2 protein. This is important because the 3 key functions, not just kinase activity, may be linked to neuroinflammation and lysosome dysfunction. Increased activity, scaffolding and expression of LRRK2 have been implicated in the pathogenesis of neurological diseases, including idiopathic Parkinson's disease, a prevalent neurodegenerative disease, and progressive supranuclear palsy or PSP, a rapidly progressing neurodegenerative disease that is typically fatal within 5 to 7 years of diagnosis. We believe that eliminating all 3 functions of LRRK2 through PROTAC-mediated degradation offers the potential for deeper and more durable therapeutic benefit versus traditional inhibitors. At the MDS Conference last month, we were pleased to share data from 2 ongoing Phase I clinical trials with ARV-102: one in healthy volunteers and one in patients with Parkinson's disease. Both trials included single ascending and multiple dose portions. ARV-102 is generally well tolerated in both trials. In the healthy volunteer study, ARV-102 was well tolerated at single doses up to 200 milligrams and multiple daily doses up to 80 milligrams with no discontinuations due to adverse events or serious adverse events observed in the study population. In the Parkinson's disease study, single doses of ARV-102 at 50 milligrams or 200 milligrams, were well tolerated with only mild treatment-related adverse events, which were generally lumbar puncture procedure related and with no serious adverse events. Pharmacokinetic data were also excellent across both trials. ARV-102 demonstrated dose-dependent PK in both periphery and the CSF, the latter indicating brain penetration. In terms of pharmacodynamic effects in healthy volunteers, repeated daily dosing of ARV-102 led to LRRK2 reductions of up to 90% in peripheral blood mononuclear cells or PBMCs and more than 50% in the CSF. Repeated daily doses of ARV-102 resulted in reduced concentrations of phospho-Rab10T73 in PBMCs and urine concentrations of BMP. Both of these are important biomarkers for modulation of the lysosomal pathway downstream of LRRK2. In patients with Parkinson's, we showed that single doses of ARV-102 resulted in median PBMC LRRK2 protein reductions of 86% with the 50-milligram dose and 97% with the 200-milligram dose. Perhaps most interestingly of all, in healthy volunteers treated with 80 milligrams of ARV-102 once daily for 14 days, unbiased proteomic analysis of CSF showed decreases in many lysosomal pathway markers such as GPNMB and neuroinflammatory microglial markers like CD68. A recently published proteomics analysis showed the same panel of biomarkers was elevated in patients with LRRK2-related Parkinson's disease. We are aware of inhibitor data showing the movement of some of these biomarkers, but only in patients with Parkinson's disease and only after at least a month of treatment to engage the intended disease pathway even in healthy volunteers where the biomarkers would not be expected to be elevated and after only 14 days of treatment is direct evidence that our approach is working as designed. This rapid pathway biomarker response suggests that our total protein degradation approach may have best-in-class impact on underlying disease processes compared to kinase-only targeting inhibitors. We believe that in totality, our data to date set a very high bar and further strengthen our belief in the promise of ARV-102. The multiple dose cohort of our trial in Parkinson's patients is ongoing, and we look forward to sharing data, including CSF LRRK2 degradation data, at a medical conference in 2026. We also intend to initiate a Phase Ib trial in patients with PSP in the first half of 2026. I'll now turn to ARV-393, our investigational oral PROTAC designed to degrade B-cell lymphoma 6 protein or BCL6. BCL6 is a previously undrugged transcription factor, a master regulator of multiple cellular processes during B-cell development, including proliferation, survival and apoptosis. Altered BCL6 activity has been implicated as an oncogenic driver in several subtypes of non-Hodgkin lymphoma, making it an exciting therapeutic target with initial clinical validation emerging. With its iterative activity, ARV-393 potently and rapidly degrades the BCL6 protein, which is critical to overcoming its rapid resynthesis rate and sustaining antitumor activity. Preclinically, ARV-393 has shown robust in-vitro potency and in-vivo efficacy as a monotherapy. And earlier this year, we presented preclinical data showing enhanced antitumor activity with ARV-393 in combination with 5 classes of small molecule inhibitors in models of aggressive diffuse large B-cell lymphoma or DLBCL. Our development plan for ARV-393 includes combination strategies in DLBCL. And at next month's American Society of Hematology Annual Meeting, we will present new preclinical data showing the combinability of ARV-393 with glofitamab, a CD20xCD3 bispecific antibody, and an emerging standard of care for DLBCL. BCL6 degradation has the potential to increase CD20 expression, which provides rationale for the exploration of ARV-393 with CD20-targeted agents and in the context of low or loss of CD20 expression. We intend to initiate a combination trial with glofitamab next year and look forward to updating you on our progress. Turning to our clinical progress to date, enrollments in our Phase I monotherapy trial is ongoing. This is a first-in-human dose escalation trial, and we have not yet achieved the predicted efficacious exposure level. However, this morning, I'm pleased to report that even in exposure levels below those predicted to be efficacious, we have already seen responses in early cohorts in both B- and T-cell lymphomas. We also see evidence of robust BCL6 degradation and the safety profile of ARV-393 has supported continued dose escalation. We are very pleased with these early data, which we believe support an emerging and differentiated therapeutic benefit of ARV-393. We look forward to sharing additional data from the Phase I trial at a medical congress in 2026. With that, I'll now turn the call over to Angela. Angela? Angela Cacace: Thanks, Noah, and good morning, everyone. I'm pleased to share compelling preclinical data we recently presented that reinforces our confidence in our ability to deliver differentiated treatments across our oncology and neuroscience pipeline. I'll begin with ARV-806, our novel PROTAC degrader targeting KRAS G12D. KRAS G12D is a well-characterized oncogenic driver associated with poor prognosis and recalcitrant to standard treatments across several major tumor types, including pancreatic, colorectal and non-small cell lung cancers. There are currently no approved targeted therapies for KRAS G12D. At the Triple Meeting in October, we shared preclinical data highlighting the high potency of ARV-806 and its clear differentiation from both KRAS inhibitors and degraders currently in the clinic. These preclinical data showed dose-dependent robust antitumor activity with regressions across preclinical models of KRAS G12D mutant cancers. ARV-806 forms productive ternary complexes with the on and off states of KRAS G12D, demonstrated in vitro picomolar potency with near complete degradation and high selectivity. ARV-806 demonstrates antiproliferative activity approximately 25x greater than KRAS inhibitors and the leading clinical stage degrader. Importantly, ARV-806 induces durable degradation greater than 90% for 7 days after a single dose with efficacy across pancreatic, colorectal and lung cancer models. We also presented early and very promising preclinical data from our oral pan-KRAS degrader and look forward to sharing more as this program advances. We are rapidly enrolling a Phase I clinical trial of ARV-806, reflecting strong interest from clinical investigators and underscoring the high unmet need for effective KRAS-targeted therapies. We look forward to sharing initial clinical data from this trial next year. Finally, I'd like to briefly mention updates from 2 other promising programs that you'll hear more about in 2026. First, at World Muscle in October, we shared exciting preclinical data for ARV-027, a PROTAC degrader designed to target polyglutamine-expanded androgen receptor or polyQ-AR in skeletal muscle. This degrader will be developed for patients with spinal and bulbar muscular atrophy or SBMA, a rare genetically defined neuromuscular disease with no approved treatments and significant unmet need. Second, this week at SITC, we will introduce our first immuno-oncology focused PROTAC degrader, ARV-6723. ARV-6723 targets HPK1, which functions as a negative regulator of T-cell signaling causing tumor microenvironment immune suppression and could be relevant for numerous solid tumors. Our preclinical work to date suggests that degrading HPK1 leads to differentiated biology versus HPK1 inhibitors and anti-PD-1 therapies. We anticipate beginning first-in-human studies for ARV-027 and ARV-6723 in 2026. As we begin those studies, we look forward to providing full updates on the unmet need for each disease, the rationale for each high-impact target and why we believe that our PROTAC degraders will represent highly differentiated therapies for patients. With that, I'll turn the call over to Andrew to review our quarterly financial information. Andrew Saik: Thanks, Angela, and good morning, everyone. I'm pleased to provide financial highlights for the third quarter ended September 30, 2025, and expand on our approach to capital allocation, capital returns and development strategy. As a reminder, detailed financial results for the third quarter are included in the press release we shared this morning. I'll begin by briefly touching on some key financial highlights for the third quarter of 2025. At the end of the third quarter, we had approximately $787.6 million in cash, cash equivalents and marketable securities on the balance sheet compared with $1.04 billion as of December 31, 2024. Revenue for the 3 months ended September 30, 2025, totaled $41.9 million compared to $102.4 million for the 3 months ended September 30, 2024. The decrease of $60.5 million was driven by the Novartis License Agreement, which was entered into during the second quarter of 2024 with revenue recognized through the end of 2024, offset by the recognition of a milestone payment from Novartis of $20 million this quarter as part of the same agreement. General and administrative expenses were $21 million in the third quarter, compared to $75.8 million for the same period of 2024. The decrease of $54.8 million was primarily due to a decrease of $43.4 million from the termination of our lease of 101 College Street in August 2024, a decrease in personnel and infrastructure-related costs of $7.3 million and professional fees of $3.6 million. Total non-GAAP G&A for the quarter was $14.6 million, compared with $64.8 million in the prior year. Research and development expenses were $64.7 million in the third quarter compared to $86.9 million for the same period of 2024. The decrease of $22.2 million was primarily driven by a decrease in the vepdeg program of $5.4 million, a decrease in the luxdeg program of $4.7 million and a decrease in personnel expenses and non-program-specific expenses of $15.1 million, offset by an increase in the KRAS program of $4.3 million. Total non-GAAP R&D for the quarter was $56.9 million compared to $73.2 million in the prior quarter. Total non-GAAP expenses were $71.5 million in the quarter. We expect expenses to continue to decline as we work with Pfizer to ramp down our spend on vepdeg and as our cost reduction programs take full effect. Our goal is to continue with a quarterly run rate spend below $75 million, which will allow us to manage non-GAAP expenses below $300 million in fiscal year 2026. In September, we announced that our Board had authorized the repurchase of up to $100 million of our outstanding common stock. This authorization underscores the Board's confidence in our long-term strategy and its belief that our current share price is undervalued relative to our long-term opportunity. As of the end of September, we have bought back approximately 2.56 million shares at an average share price of $7.91 per share. Details of our stock repurchase program can be found in our 10-Q. At the same time, we announced further cost reductions that allowed us to maintain our prior cash runway guidance into the second half of 2028. We remain committed to investing in areas that will maximize shareholder value as we move towards important catalysts in the coming months. In addition, we will continue to look at ways to reduce costs and increase efficiency while continuing to focus on our goal of progressing our very promising early pipeline. With that, I'll turn the call over to John for closing remarks. John? John Houston: Thanks, Andrew. We are focused on continuing to deliver innovative and differentiated assets in areas of high unmet need. We are operating with scientific rigor and building on our proven track record of success from discovery to clinical to collaborations. We have a deep pipeline with multiple clinical candidates for near-, mid- and long-term value creation and the potential to be differentiated with critically important therapies for patients. Arvinas is entering a pivotal phase in its growth trajectory. Our clinical pipeline offers a rich set of catalysts throughout the balance of the year and into 2026 with multiple study initiations and data readouts anticipated across our neuroscience and oncology franchises. With our PDUFA date now confirmed for next year, we are approaching an historic moment with the potential for the first ever approval of our PROTAC therapy. We are well positioned to deliver significant value for our shareholders, our partners and for the patients we serve. With that, I'll turn the call over to Jeff to begin the Q&A portion of the call. Jeff? Jeff Boyle: Before I turn the call over to the operator, I'm going to ask that you limit yourself to one question per cycle to make sure we're able to give everyone the appropriate time. You can feel free to join the queue afterwards for a follow-up question. So with that, operator, can you please open up the queue? Operator: [Operator Instruction] Your first question comes from the line of Etzer Darout with Barclays. Etzer Darout: Just a quick question on the BCL6 degrader program. Just we're going to see some updated data from [indiscernible] at ASH. I just wanted to -- if you could comment on points of differentiation there that they're doing [indiscernible] and if you could just talk a little bit about the dosing profile that you envision for the molecule and any areas you could potentially differentiate longer term of that molecule? John Houston: Great. Thank you so much for the question. And yes, we're very excited about our BCL6 program, and we do believe that we have a profile that will differentiate itself as the compound continues to be developed. Noah, do you want to add some comments? Noah Berkowitz: Sure. Thanks, John, and thanks for the question. Yes. So indeed, we -- and by the way, you broke up a little bit, but if it had to do with dosing -- yes and differentiation. So the drug is being dosed once daily in oral drug. Differentiation has to do there on a couple of different levels. Number one is that we've already demonstrated and will continue to demonstrate upcoming at ASH some kind of, I guess, a differentiated profile for combinations of a drug and even for monotherapy preclinically. So we noticed that we can achieve complete responses in various models versus tumor growth inhibitions that are seen with some competitor -- or yes, some competitor drugs. In terms of our program, we're focused in -- we've said pretty explicitly that we're focused in monotherapy for AITL, and we're interested in developing the combination with the bispecific for DLBCL. So there's, at this point, several competitors that have entered the market. One little -- one of them that has already reported data, the others seem to have just filed their IND. We believe that -- and we've shared data here that we have monotherapy activity in T-cell and B-cells. That has not been reported by the competitor that's already reported out some B-cell malignancy responses. And so that's a point of potential differentiation in the future. Operator: Your next question comes from the line of Yigal Nochomovitz with Citi. Unknown Analyst: This is Caroline on for Yigal. On your LRRK2 program, can you tell us about the first types of signals you'd be looking for in the Parkinson's disease MAD Phase I? And how long do you hypothesize you'll need to dose for the PK effects that you've already observed in healthy volunteers in Parkinson's patients to translate to clinical benefit? John Houston: Yes. No, thank you, Caroline. Great question, and I'll hand back to Noah. Noah Berkowitz: Thanks, John and Caroline. Thank you for the question. So yes, we're pretty excited about what we've seen so far with our LRRK2 degrader and the reception that we received at a recent conference at MDS. So as you state, we are currently moving pretty aggressively through a Parkinson's disease Phase I study that has 28 days of dosing. We expect that this will generate data that's principally biomarker related. And -- but we may also start to collect a little clinical efficacy data that's not expected with 28 days dosing. Now what we've shared is that we've already been able to demonstrate pathway engagement in ways that competitor LRRK2 inhibitors have been -- at least have not reported to date. So we know in healthy volunteers, we can impact endolysosomal trafficking and also neuroinflammation, at least through microglial pathways -- mediated pathways. And so now when we look at our Parkinson's disease patients, the idea would be we have patients at baseline who have more than 2, maybe even 3x the baseline level of LRRK2 in their CSF. There's much more activation of these pathways. And it will be important to see how much the degradation that we've already reported out in healthy volunteers, we can recapitulate now in this Parkinson's disease population and look at that pathway engagement. So we've guided to an update on those pathway markers next year, relatively early next year. And -- but I think that the next step for clinical data will be when we can have more than 28 days of treatment. So for that, we're working our way through the chronic tox study. And so you'll see as we file our IND next year that allows us to move into PSP that we're prepared to continue with chronic treatment of patients, and that will be an opportunity for us to demonstrate the clinical benefits in diseases like PSP and potentially Parkinson's. Operator: Your next question comes from the line of Michael Schmidt with Guggenheim. Unknown Analyst: This is Sarah on for Michael. I just wanted to ask on your KRAS G12D. So you've mentioned before and we've seen evidence for KRAS amplification as a mechanism of resistance to inhibitors. So -- and the fact that potentially with the iterative activity of a PROTAC might be able to overcome that. So I just wanted to ask if you have any plans to potentially test ARV-806 or maybe even eventually a pan-KRAS in the clinic in a KRAS amplified population. John Houston: Yes. Great questions, Sarah. I'm going to ask both Angela Cacace, our CSO, and Noah to give you 2 parts to that answer. Angela Cacace: Great. Thank you for the question. We have been studying certainly our G12D degrader ARV-806 in resistant setting. And we look after -- we see amplification of KRAS G12D, and we see that we durably repress KRAS in all conditions. And then for our pan-KRAS degrader, we've also been studying the amplified setting, the wild-type amplified setting. And in the wild-type amplified setting, we're gratified to see some early data that shows that we see very nice tumor growth inhibition. And in cases of PDX models, we've also seen regression. So we're advancing very quickly with our pan-KRAS degrader program, and I'll turn over to Noah for the clinical perspective. Noah Berkowitz: Thanks, Angela. And so Sarah, to your question about amplification and what we've seen. So we specifically, right, in the ongoing Phase I study, we exclude patients that have been treated previously with KRAS inhibitors. So that's not something we're going to see in the dose escalation portion of our study, and you would understand why we would want the cleanest signal. We've made that choice as really anyone would. But we have learned over the past year, and this is really data that's generated outside of our company, right, that as data -- we see many reports of amplification being a principal mechanism of resistance after patients have been exposed to KRAS inhibitors. So we've obviously -- as Angela has pointed to, we've done work in our models to show that this creates a great opportunity for us moving forward. [Audio Gap] expect some updates over the course of the next year in terms of if we want to expand our targeting or thinking in this regard. It certainly is compelling science. Operator: Your next question comes from the line of Derek Archila with Wells Fargo. Unknown Analyst: This is Hal calling in for Derek from Wells Fargo. So I guess we have a question on the ARV-102. For the SAD data, do you see any CSF degradation for LRRK2? And then for the MAD data next year in 2026, just wanted to see do you have any expectations? Is more than 50% in healthy volunteer you wanted to repeat or just some expectation for us to set up? John Houston: So thanks for the question. Absolutely. So Noah, do you want to take that? Noah Berkowitz: Sure. Yes. So -- but I think we've guided to this. Essentially, we will provide our LRRK2 degradation data when we've completed the MAD in the Parkinson's disease patients. And that's basically what we're going to guide to for next year. Operator: Your next question comes from the line of Jeet Mukherjee with BTIG. Jeet Mukherjee: Just coming back to ARV-806. Based on your learnings from other G12D inhibitors and degraders in development, are there any molecular features or attributes that may be correlated to or linked to the GI tolerability and elevated liver enzymes we've seen with some of these molecules? And if yes, does ARV-806 avoid those features? John Houston: Yes. Thanks for the question. I mean I think certainly, the -- our G12D compound has a very exciting profile. Obviously, the molecule is different from other G12D inhibitors. Maybe, Angela, do you want to talk to what you think might be some of the kind of the features that give the profile that we see? Angela Cacace: Sure. So as we described, our ARV-806 G12D PROTAC really does have some very nice features from a molecular perspective. It binds to both the on- and the off-state and is 25x more potent than all mechanisms that are currently in the clinic that we've tested to date. But given what we've seen with the clinical degrader, we're also several orders of magnitude more potent at engaging the target and degrading the target durably. So with that in mind, we expect to have greater potency which should translate clinically. And I'll let Noah go ahead and take the liver and other questions. Noah Berkowitz: Yes. So I think our strategy there right now based on the science that's available is to win on that potency issue, meaning we already know from a competitor's degrader that they were limited in their ability to escalate their dose because of transaminitis that was seen. So the fact that we can engage our target at much lower concentrations suggests that we have the potential not to run into those types of toxicities and still get the significant degradation we're shooting for. So we're looking for more than 80% degradation of our target. We could probably do significantly better than that. And we'll provide updates as we go through our dose escalation cohorts. Operator: Your next question comes from the line of Sudan Loganathan with Stephens Inc. Unknown Analyst: This is [ Keith Alve ] on behalf of Sudan. I got a quick one on ARV-806. Are you all evaluating how PROTAC medicated KRAS G12D degradation might complement or differ from combination strategies like the cetuximab pairing seen with Verastem's KRAS12 G12D inhibitor? Angela Cacace: Yes. So preclinically, we have evaluated combination with anti-EGFR inhibitors like cetuximab. And so we think this is a big advantage because we have a selective approach to degrading G12D KRAS. We combine very well in that case, and we'll be sharing the preclinical data that we've generated in those combinations within the year. Noah? Noah Berkowitz: And yes, I would just add that there certainly are accumulating evidence that combinations of inhibitors with chemotherapy, but also, as you mentioned, with an EGFR inhibitor can lead to cumulative tox which may be limiting for this drug, but creates the -- for this set of inhibitors, but that creates an opportunity for us, especially, right? Because going back to this potency argument, if we can get our drug on board, which right now requires weekly -- once-a-week dosing and may allow us eventually to also get to once every 2-week dosing, and we can do this with lower dosing -- lower doses, and we might not achieve the same type of cut tox from combinations, that opens up a whole set of opportunities to generate the better benefit risk profile. So, again, we have to get through our monotherapy dosing. It's moving very fast. And we're hoping that we can get into our combinations next year already, but more to follow on that. Angela Cacace: And just to briefly add that tackling the pan-KRAS mechanism is a challenge in that combination setting largely because they're also hitting and in HRAS. And that becomes a big challenge for adding on an EGFR-based mechanism. So our KRAS G12D degrader would avoid that. Operator: Your next question comes from the line of Tyler Van Buren with TD Securities. Unknown Analyst: This is Francis on for Tyler. So for the BCL6 asset, what combination partners do you believe are most exciting? And where do you think it's most likely to exist in the lymphoma treatment paradigm if successfully developed? John Houston: Thanks for the question. Yes, there's a lot of potentially exciting combinations that we can carry out with BCL6. I'll ask Noah to maybe give an overview of where we're thinking. Noah Berkowitz: Sure. So we've shared data about the ability to combine this drug, which uses an orthogonal approach to many of the agents that are currently approved in the B-cell malignancy setting. And we see just beautiful synergies and combinability with -- preclinically with EZH2 inhibitors, BTK inhibitors, BCL2 inhibitors, and also anti-CD20 agents. So those -- that's a whole set of opportunities for combination. We recognize that the way the field is evolving, there's going to be a significant outsized role for bispecifics targeting CD20 in the -- eventually the first-line setting, but in the second- and third-line setting as well for large B-cell lymphoma. We think that's our -- we want to be laser-focused as a company, and we recognize that's a significant opportunity where we can combine these therapies that have non-overlapping toxicities. Ours -- we first have to identify a toxicity. But obviously, there is CRS with the bispecifics, and we should be able to combine favorably with those. And that would be our plan. That's why we've announced that next year, we expect to be moving ahead in our Phase I study with combinations with bispecifics. Operator: Your next question comes from the line of Li Watsek with Cantor Fitzgerald. Li Wang Watsek: A strategy question for me. It looks like you're moving more programs into the preclinical clinical settings and then maybe deepening your footprint in neuromuscular space and expanding into I-O. So just curious, number one, your BD strategy here, given that you got 5 programs. And then two, your approach to resource allocation. John Houston: Yes. So thanks for the question. Clearly, the last several months, the company has done a significant reset, obviously, with the decision along with Pfizer to find a new partner or out-license vepdegestrant allowed us to focus on the rest of our pipeline. And obviously, KRAS G12D, LRRK2, BCL6 are next in line assets that are in Phase I heading fairly rapidly to Phase II. And then we have 2 programs behind that that should be in the clinic relatively soon: one in SDMA, which we can talk to and the other HPK1, which is an I-O. And we believe that gives us an array of different programs across oncology and neuro. And yes, HPK1 has a huge amount of potential in immuno-oncology. So we're excited about that. It gives us a lot of flexibility. It gives us a lot of choices. And as ever in the history of -- the whole history of Arvinas, those choices have also included appropriate and well-placed BD opportunities. So we'll always be open for that. We think that some of our targets that really lend themselves to BD opportunities. And right now, as we stand today, all of our portfolio is fully owned by our vepdegestrant, and we did do a great deal with Novartis on luxdegalutamide. So yes, we move forward with a lot of confidence, and we have some really great exciting data that should be coming out over the next several months and year, and we'll be able to position our portfolio the best way we can. And that could include selective partnering. Operator: Your next question comes from the line of Srikripa Devarakonda with Truist. Srikripa Devarakonda: Maybe a follow-up question to the previous one. With nearly $800 million in cash and runway to second half of '28, not just in terms of the time line -- the run rate time line, but in terms of what studies you can get through with this cash would be helpful. And also, as you are advancing your pipeline, do you continue to -- do you expect to continue PROTACs in both oncology and CNS? Or at this point of time, do you think there is a need to prioritize from a therapeutic area perspective? John Houston: Thanks for the question. I'll certainly hand over to our CFO, Andrew, to talk about the first half of that question. But in terms of the balance, yes, the company right from its beginning has been an oncology company and the very -- I think it was the third target we worked on was a neuroscience target. So we've been in neuroscience right from the beginning of the company's inception. And we think PROTACs and the ability to get brain penetrant PROTACs gives us a huge potential advantage in neurodegenerative diseases. So we want to explore that as we go forward with our programs like LRRK2. We'll also be -- now we're very excited to be looking at neuromuscular target like SBMA. And we do still think we've got a lot of differentiation in the oncology space. So although it may sound like 2 very radically different therapeutic areas, the insights and the ability to use PROTACs in those areas really does allow us to, I think, unlock a lot of differentiated opportunity. So we're going to continue with that for now. We are open and always looking for other opportunities as well. But right now, and I'll hand over to Andrew, we're well placed to fund the programs that we have, certainly after we did the reset that we did. Andrew? Andrew Saik: Yes. Thanks, John. So the way I think about capital allocation for at least the next year or 2, the company has had significant spend on the vepdegestrant Phase IIIs the last several years. You're going to see those costs start to ramp down. And what's going to happen is that those costs are going to be replaced by a series of Phase I early phase studies, right? So we're making a bet on the early-stage programs. We love them. We can't obviously right now tell you which ones we're going to take through on our own and which ones we're going to license. We're going to push on all of them. We think that many of them are highly, highly promising. And we'll be making decisions on those as we go through the development pipeline. So we look at these programs all the way out. Obviously, we've known our programs for a long time. So they've been incorporated into our spend even before we announced that they were coming into the clinic. So this is not a surprise to us. And we're just delighted. So we're going to continue pushing on our Phase I programs, and we'll make decisions as we go through based on which ones we think make the most sense for us to keep and which ones make the most sense for us to partner potentially. Operator: Your next question comes from the line of Tazeen Ahmad with Bank of America. Tazeen Ahmad: Just as it relates to 102, just given the current data that you have in biomarkers, how do we think about the translatability of those into clinical endpoints as it relates to PD? And then I just wanted to know about once you show the PD data in 2026, what do you think is going to be your area of focus that will allow you to support the advancement into a Phase Ib study into PSP? John Houston: Thank you. Great question. Noah? Noah Berkowitz: Sure. Thanks, John, and good to hear from you, Tazeen. So yes, 102, it's just such an exciting story for us because just to review and build off of what John and Andrew just said, if you think back, we've been working in oncology, but also developing neuroscience. And here, we are on the heels of a positive registration study for [ VEP-2 ], out-licensing of luxdegalutamide, an AR degrader to Novartis, and we're advancing 2 oncology drugs. And here now, we have ARV-102 that -- where we've shared some incredible results recently that drive us in this direction for PSP and possibly for Parkinson's disease. So for years -- over the past many years, there's been tremendous investment in the Parkinson's disease community and the PSP community to understand what are the pathways that drive this neurodegenerative disease. And so there's a large biomarker study called PPMI, and this looks at the natural progression of Parkinson's disease. And it has demonstrated that there are markers such as GPNMB, IAB1 -- IBA1 and also CD68, a series of cathepsin. So markers that are predictive of progression of disease because they are driving neuroinflammation and also driving neurodegeneration because of mistrafficking of proteins. And so that's because of endolysosomal function. So these markers are all elevated in the disease. And we just reported out a study at MDS that drew tremendous excitement from investigators or scientists more broadly because we showed that in healthy volunteers, we were able to reduce these biomarkers, right? And now we're running the Parkinson's disease study that is looking at all of these biomarkers and we expect that if we degrade LRRK2 as much as we saw in healthy volunteers where we achieved 75% reduction, more than enough to advance this into PSP and PD studies that we should be able to drive down these biomarkers that cause the neuroinflammation and the mistrafficking of proteins such as tau. So building on that, we have the healthy volunteer data. We're going to report out our Parkinson's disease, LRRK2 degradation and biomarker data. And then next year, things go right, start a PSP study. PSP is a neurodegenerative disease that relies also on this mistrafficking of tau and we know that our drug can correct this mistrafficking. It can improve the -- decrease the neuroinflammation that is also at a root cause of PSP. And we'll be treating patients for continuously, meaning no longer just limited to 28 days, continue to accumulate biomarker data and correlate that with clinical measures like PSPRS and others. And we will hope to report out in short order the results of that Phase Ib study. And if things go right, we may be able to start a Phase II study even before we have the Phase Ib study has completed. So a registration quality Phase II study. But exactly guiding on when that can start that we have to await clearing our IND and starting the Phase Ib study. Angela Cacace: And just to add to that, we do know that human genetics point to LRRK2 and LRRK2 is elevated in the brain of patients in idiopathic Parkinson's disease in microglia as Noah stated. And then also in progressive supranuclear palsy, these same SNPs that elevate LRRK2 also drive increased progression in a clinically meaningful way and time to death. And so by going in with a clear way to modulate the LRRK2 pathway, we feel that we stand the best chance of proving the LRRK2 hypothesis in disease in both progressive supranuclear palsy and potentially Parkinson's disease. Operator: Your next question comes from the line of Paul Choi with Goldman Sachs. Kyuwon Choi: I wanted to check if you might have any additional dosing cohorts for ARV-393 at the upcoming ASH Meeting, including ones that might potentially be in the target therapeutic range where that you're aiming for. And then on ARV-027, I'm just curious if you thought of other CAG repeat related diseases as being potential areas to explore, including Huntington's or other neuromuscular diseases beyond spinal cerebellar that you focused on initially. John Houston: Yes. Thank you. Noah and Angela can probably cover those. Noah Berkowitz: Sure. So to the first question of ARV-393, we've given particular guidance here. I think we would have liked to be able to give a full update at ASH this year on our dose escalation in ARV-393. But in fact, we are not yet in what we had anticipated to be the -- or predicted to be the efficacious range, although fascinatingly to us and very promisingly in our data, we are seeing responses, significant responses, CRs even in T-cell and B-cell malignancies. So we don't think it's prudent just to report what we're seeing at low dose levels. Usually, studies would want to report out when you know that you're hitting your target fully and you could see the full robustness of the drug. That would be an appropriate time. But certainly, we didn't want to leave you -- people hanging. So we wanted to share that we're making progress, and we're seeing efficacy and tolerability of the drug. Regarding the 027 question, I'll turn it back to Angela. Angela Cacace: Sure. Great. 027, we selected based on its unique profile for degrading the polyglutamine repeat androgen receptor in the nucleus and the cytoplasm, which is really important for a disease driver for spinal and bulbar muscular atrophy. And we reported out some very exciting data showing that we rescue muscle function, including grip strength and endurance to end of phenotypes that are really important for patients with that disease. So that's a very exciting opportunity. With respect to polyglutamine repeat expansion disorders, we have a robust approach. We're taking to those repeat disorders. We're taking a two-pronged approach also for Huntington's disease. For Huntington's disease, we have identified selective ligands for mutant Huntington and sparing wild type. So we're continuing our efforts. We're early, but we're making good progress there. And then also the idea of tackling repeat expansion disorders is something we're taking very seriously, and we have a very unique opportunity there as well. So that's early, but very exciting space for Arvinas. Noah Berkowitz: Just one more comment, if I could build on that. So look, when we go into the SBMA, we're starting in healthy volunteers. That's the appropriate thing to do. The great opportunity here is this disease is -- it's basically a monogenic disease. We know exactly what the target is, the polyQ-AR. And we know from -- we know that we can degrade it. So in healthy volunteers, we're going to be able to also do muscle biopsies if permitted, and it's going to be very validating very quickly for this technology. So it's the perfect setup for us to enter a rare disease space because we can get to results and have conviction about our pathway engagement in healthy volunteer studies, which is an unusual opportunity. Operator: Your next question comes from the line of Jonathan Miller with Evercore ISI. Jonathan Miller: Congrats on all the progress in the early pipeline. I'd like to start with KRAS combos, if I might. You mentioned a couple of interesting potential combo partners for the KRAS program, things that other players in the space maybe had trouble combining with given tolerability profile. How early could we get into combo cohorts? Is this the sort of thing that we could expect to see even in expansion cohorts starting next year? Or should we think about rituximab combos and beyond maybe being a little bit more delayed from that? And then secondly, just on the HPK1 program, that seems like it's obviously very early still, but potentially pretty interesting. I noticed not much on the deck. When would you expect to show us more of that preclinical data and give us a sense for what indications maybe are the most fruitful for early looking there? John Houston: Great questions, and I'll use my usual double act here of Noah and Angela to answer that. Noah Berkowitz: Thanks, John, and thanks for the question. Yes, so to field the 806 question, we're not guiding yet to the timing of combination. So it'd be speculative on my part, but I love speculating. So the bottom line is we're really tearing through our dose escalation right now because there's tremendous interest in this and tolerability, it seems for patients. And so the idea is we are planning to go into that combination immediately after we do some -- we don't even have to wait until we have our expansions read out completely. We could start that earlier. So we're hopeful if things go very fast, it might be something we could start next year, but I can't offer guidance. It's all going to be clinical data dependent on, right? That's certainly possible. Angela Cacace: Great. And then your next question was about ARV-6723, our HPK1 degrader. And so we're very excited about the opportunity for that degrader. It has a very differential profile with respect to both PD-1, and also the kinase inhibitor, the HPK kinase inhibitor that's in the clinic. So what we've been able to show and what you'll hear about at SITC is the impact to T-cell exhaustion and importantly, the impact to the T-cell microenvironment. We are seeing dramatic changes there and outperforming anti-PD-1 and HPK1 inhibitors in both low and high immunogenic tumor models preclinically. So stay tuned. You'll hear a lot more about our oral immunotherapy that we think will outperform, and also be very useful in the setting that is resistant to checkpoint blockade. So we have a lot of enthusiasm around that asset. Operator: And your final question comes from the line of Andrew Berens with Leerink Partners. Unknown Analyst: This is Amanda on for Andy. We wanted to know what you've learned about drug-drug interactions with vepdeg that gives you confidence you won't be seeing similar interactions with the new degraders. I mean, there's something [indiscernible] holds or how they're metabolized in different or similar ways. John Houston: Yes. Thanks for the questions. I mean, in general, PROTACs are no different from small molecules in terms of how you'd analyze them for DDIs. Every single molecule is different. They get metabolized differently. They interact with other molecules differently. So there's not a generic answer on PROTACs because every single PROTAC is going to be unique and different. So yes, some compounds like many drugs, you look at to see how they're metabolized to see if they have a drug-drug interaction, you might see some of that, you might not. That's exactly what we're seeing with PROTAC. So there's no difference between a PROTAC and its DDI potential versus any small molecule. Operator: There are no further questions. I will now turn the call back over to Mr. John Houston for closing remarks. John Houston: Well, thank you very much, and thanks for everybody's great questions. As you can tell, we're very excited about this next wave of programs coming through our early development pipeline, and we're going to be excited to tell you more about them in the coming months. We've got a lot of interesting data coming out. So again, thank you for your time. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello. Good day, and welcome to Diebold Nixdorf's Third Quarter 2025 Earnings Call. My name is Eric, and I'll be coordinating your call today. [Operator Instructions] I'd now like to turn the call over to our host, Maynard Um, Vice President of Investor Relations. Maynard, please go ahead. Maynard Um: Hello, everyone, and welcome to our third quarter 2025 earnings call. To accompany our prepared remarks, we posted our slide presentation to the Investor Relations section of our website. Before we start, I will remind all participants that you will hear forward-looking statements during this call. These statements reflect the expectations and beliefs of our management team at the time of the call, but they are subject to risks that could cause actual results to differ materially from these statements. You can find additional information on these factors in the company's periodic and annual filings with the SEC. Participants should be mindful that subsequent events may render this information to be out of date. We will also discuss certain non-GAAP financial measures on today's call. As noted on Slide 3, a reconciliation between GAAP and non-GAAP measures can be found in the supplemental schedules of the presentation. With that, I'll turn the call over to Octavio. Octavio Marquez: Thank you, Maynard. Good morning, everyone, and thank you for joining us. Starting on Slide 4. Q3 was another solid quarter for Diebold Nixdorf. I'm proud of our team's execution as we grew revenue, profit and earnings per share. This morning, we also announced a new $200 million share repurchase program, reflecting our continued confidence in the strength and cash generation of our business. In Q3, we continue to see healthy demand across our business segments, giving us the confidence to reaffirm our full year outlook. We continue to trend toward the higher end of our guidance ranges across total company revenue, adjusted EBITDA and free cash flow. Product orders grew 25% year-over-year, driven by strength in both banking and retail, with backlog now standing at approximately $920 million. Total revenue grew 2% year-over-year and was up 3% sequentially, fueled by acceleration in our retail business and continued steady contributions from bank. Operating profit grew 4% year-over-year and 19% sequentially, while adjusted earnings per share grew to $1.39, up over $1 per share year-over-year and up about 50% sequentially. Retail delivered particularly strong results in the quarter as the second half recovery gained momentum. Revenue was up 8% year-over-year and order entry grew 40%, reflecting solid demand and execution. I'm very optimistic about our retail growth trajectory going into Q4. We also achieved an important milestone this quarter, positive free cash flow for the fourth consecutive quarter, another new record for Diebold Nixdorf. In addition, we received a credit rating upgrade from Standard & Poor's. As I mentioned, we announced a new $200 million share repurchase program. This underscores the strength of our business, our fortress balance sheet, robust cash flow generation and continued commitment to returning capital to shareholders, a top priority for us and a clear reflection of our confidence in the long-term value of Diebold Nixdorf. Let's move on to Slide 5. Three quarters into our 3-year plan, we are firmly on track to deliver the key objectives we outlined at our Investor Day. In 2024, we stabilized the business and built strong operational teams. In 2025, we strengthened our foundation, both operationally and financially with tangible improvements in manufacturing, service and profitability. These gains have translated into sustainable, profitable growth and continued positive cash flow. We have multiple levers to achieve our targets from operational and manufacturing efficiencies to product and service innovation to disciplined capital allocation. As we already demonstrated, we have multiple ways to win across a dynamic market environment. We remain committed to our long-term goals, generating $800 million in cumulative free cash flow by 2027, achieving 60% plus conversion and approximately 15% adjusted EBITDA margins, all while maintaining a fortress balance sheet and returning capital to shareholders. With a clear strategy and a strong execution track record, Diebold Nixdorf is well positioned to deliver sustainable value for all stakeholders. Now let's turn to Slide 6. Year-to-date, we've made significant progress across the 4 pillars of our growth strategy. In banking, our annual Intersect event in Nashville brought together hundreds of customers and marked the formal launch of our branch automation solutions. This is not just a single product. It's a comprehensive approach across hardware, software and services that redefines how banks operate by seamlessly integrating and automating digital and physical channels. As the banking landscape evolves, automation will be the defining factor for a bank's success. Roughly 70% of global bank operating expenses are tied to branches. Our solutions help banks reduce those costs, enhance efficiency and improve the customer experience. We continue to see steady refresh activity in ATM cash recyclers and have successfully rolled out teller cash recycling solutions to our first customers, reinforcing our confidence in the broader branch automation strategy. On the service side, leveraging common components between DN Series ATMs and teller cash recyclers is driving greater efficiency, scale and flexibility in how we support our customers. At the same time, our software enables seamless end-to-end cash management and integration into digital channels, helping banks modernize their operations. Together, these capabilities strengthen customer relationships and position us to capture the growing opportunity in branch automation. In retail, while the broader industry continues to face headwinds, our retail product business is bucking that trend. We anticipated an inflection in the second half, and that's exactly what we're seeing. We have important new wins with key customers in the point-of-sale and self-checkout spaces as retailers maintain focus on optimizing and improving the customer experience. Feedback on our AI-powered dynamic SmartVision deployment has been overwhelmingly positive, helping us differentiate from competitors and expand our pipeline. Our ability to rapidly develop, pilot and most importantly, scale this technology is positioning us as an industry leader. Dynamic SmartVision is now live in over 50 stores, and we're expanding the use cases to address shrinkage and point of sale in manned lanes with future opportunities to extend and tackle shrink across the store aisles. Our service organization continues to deliver. SLA performance has improved meaningfully versus last year. We accelerated investments in technology and people to deliver a premier service experience because great service drives customer loyalty and market share gains. As we've refined our branch automation solution strategy, customers are increasingly asking for a single provider to manage all their service needs. In line with our disciplined capital allocation strategy, we've completed a targeted tuck-in acquisition in the service area to enhance our multi-vendor capabilities. As we look at our operations, we have multiple ways to win. I'm proud to report that we saw strong progress in working capital with year-over-year improvements in both DSO and DIO. This highlights the strong cross-functional collaboration across the company. In our manufacturing operations, our lead times are down, quality is up and our supply chain execution remains a strength. North American operations are benefiting from higher throughput at our Ohio facility and increased sourcing of parts in the U.S. We are also on track to achieve at least $50 million in SG&A run rate reductions next year. Overall, the pillars of our company are strong and provide us with multiple ways to achieve our goals. Now on to Slide 7. We continue to advance in our lean and continuous improvement journey. This approach now extends well beyond manufacturing, empowering teams across the organization to identify and act on new opportunities for efficiency and effectiveness. In Q3, our European operations held a Kaizen week in France, resulting in safety improvements and an optimized invoicing process that accelerated collections. Our field and logistics teams also uncovered process improvements, including a redesign of our logistics network in France that is expected to generate meaningful cost savings and serve as a blueprint for other regions. In Paderborn, our teams focused on eliminating energy waste, implementing daily energy management programs and new LED lighting initiatives that will deliver immediate and growing savings over time. The facility also achieved ISO 50001 certification, underscoring our commitment to sustainability. I am pleased to share that Diebold Nixdorf was recently named one of the world's best companies by Time Inc. After a comprehensive analysis of employee satisfaction, revenue growth and sustainability that included participants from thousands of global companies, Diebold Nixdorf earned a place in this prestigious annual list. My thanks goes out to the talented global Nixdorf team. With one quarter left in 2025, we are well positioned to finish another strong year, delivering on our commitments and continuing to create value for all stakeholders. With that, I'll turn it over to Tom to walk through our financial results. Thomas Timko: Thank you, Octavio. First, I want to express my sincere appreciation to all Diebold Nixdorf employees for their dedication and hard work. Q3 was yet another quarter where we demonstrated our commitment to doing what we say. Turning to Slide 8. Diebold Nixdorf posted solid Q3 revenue growth, which rose 2% year-over-year and was up 3% sequentially. We finished Q3 with very solid product backlog of $920 million, down from $980 million at the end of the second quarter on planned deliveries, partially offset by strong new order entry, which was up 25% year-over-year, led by retail. As we previously shared, we expected revenue to be weighted toward Q4. Given the momentum we're seeing and our backlog, we have line of sight to deliver one of the strongest Q4s in recent history for the company and achieve our full year guidance. Gross margin improved 10 basis points year-over-year and declined 30 basis points sequentially. Product gross margin improved significantly year-over-year, rising by 140 basis points. There are a number of puts and takes, but the strong performance was primarily driven by favorable geographic mix as well as improved pricing. On a sequential basis, product gross margin declined by 60 basis points, which was expected and primarily due to the normalization in mix and continued strength in point-of-sale units, which generally realized lower margins. Importantly, we remain well ahead of our initial expectations with product gross margins on track to exceed the 50 basis point year-over-year improvement we projected earlier this year at Investor Day. On the service side, gross margins declined by 10 basis points sequentially and 80 basis points year-over-year. In prior quarters, we discussed how vital delivering the best service in the industry is to our customers and to us. To that end, we accelerated and increased investments in the rollout of our enhanced field services software, new field technicians and the consolidation of our spare parts and distribution facilities in Europe. Strength on the product side of the business gives us the conviction to make and accelerate investments we believe will generate profitable growth for products and services going forward. By continually raising the bar, we'd strengthen our relationships and create a positive cycle. Outstanding service leads to greater customer loyalty and over time, more opportunities for product sales. As a result of these investments, we now expect margins for services to be comparable to last year at approximately 26%. These service headwinds are offset by product margins and OpEx improvements, demonstrating that DN has multiple ways to win. Turning to operating expense. We continue to take disciplined cost actions through focusing on facilities and indirect procurement. Operating expense was down sequentially, reflecting these efforts. This is part of our ongoing actions to improve our cost structure. 2025 is about strengthening our foundation for accelerated profitable growth in 2026. As part of this effort, we've conducted a comprehensive review of SG&A spend across the organization, identifying over 200 actions, which are expected to deliver up to $50 million in net run rate savings next year. We're confident in our ability to sustain cost discipline while reinvesting in areas that support long-term growth. Continuing to Slide 9. We continue to see strong trends across our profitability and cash flow metrics. In Q3, adjusted EBITDA reached $122 million with margin expansion of 70 basis points. sequentially and 20 basis points year-over-year, underscoring our commitment to driving higher quality earnings growth. Operating expense controls contributed to 4% year-over-year and 19% sequential increase in operating profit, reaching $87 million for the quarter and a very solid 9.2% operating margin. We're also making significant progress on non-GAAP EPS, which increased about 50% sequentially to $1.39 and increased by over $1 a share year-over-year. In Q3, our effective non-GAAP tax rate came in at approximately 19%. This improvement was primarily driven by the recent announcement of lower tax rates in Germany. As a result, we now expect our non-GAAP effective tax rate for the full year of 2025 to be in the 35% to 40% range, down from 45%. Free cash flow nearly doubled sequentially to approximately $25 million. Q3 marks the first time the company has generated positive free cash flow for 4 consecutive quarters, a clear demonstration of our ability to build and sustain a consistent quarterly cash flow generating business. We're very proud of the continuous progress we've made in working capital management. As of the third quarter, we have realized year-over-year improvements of days inventory outstanding, or DIO, by 11 days and days sales outstanding or DSO by 9 days. Looking ahead, we see continued opportunities. Moving to Slide 10. Banking continued to deliver solid results. We achieved sequential growth across key global markets. Revenue was roughly flat year-over-year and up $11 million sequentially. Gross margin in our Banking segment increased by 20 basis points year-over-year and was down 70 basis points sequentially. Last quarter, we benefited from a favorable geographic mix, while this quarter was more balanced. Looking ahead, we expect to continue driving steady ATM refresh activity in all geographies, and we're encouraged by the first orders of our teller cash recyclers in our branch automation solutions strategy. Turning to Slide 11. Our Retail segment delivered strong results for the second consecutive quarter with sequential growth in order entry, revenue and backlog. Gross margin was up 100 basis points sequentially with improvement in service margins and continued point-of-sale strength. As we committed to last quarter, retail revenue and gross margin grew sequentially. We expect to continue driving sequential growth in this segment through year-end. Moving ahead, let's review our guidance on Slide 12. We're maintaining the guidance we shared last quarter and continue to trend toward the higher end of the ranges across total revenue, adjusted EBITDA and free cash flow. The strong performance we posted so far, along with what we see shaping up to be one of the strongest Q4s in recent history, gives us a high level of confidence we can close the year well positioned to achieve further growth in 2026. And as we've shown, we have multiple ways to win. Turning to Slide 13. We remain committed to maintaining our fortress balance sheet, which underpins our disciplined capital allocation strategy. During the quarter, we received a credit rating upgrade from S&P Global from B to B+, validating our efforts to strengthen financial performance and focus on maintaining our strong balance sheet. Also today, we announced our new $200 million share repurchase program. Our goal is to maintain the momentum established with our prior program. This action reflects our disciplined approach to capital allocation and our confidence in the long-term value of the company. We will continue to prioritize actions that drive profitable growth, maintain our fortress balance sheet and deliver value to our shareholders. At the end of the quarter, we had approximately $590 million of liquidity, including $280 million in cash and short-term investments and $310 million of our revolving credit facility, which remains untapped. Our net leverage ratio remains comfortably within our targeted range of 1.25x to 1.75x. With that, I'll turn it back to Octavio for closing remarks. Octavio Marquez: Thanks, Tom. To wrap things up on Slide 14, our banking business continues posting solid performance, and we're executing well. We're seeing strong growth in APAC and the Middle East, which is expanding our installed base and driving recurring service revenue. In North America, we expect to build further momentum with our branch automation solutions. In retail, we're back to year-over-year and sequential growth, and our solutions continue to resonate well with the market, driving efficiency and enhancing customer experience. Across the organization, we're streamlining our structure, aligning functional expertise with strategic objectives and leveraging AI and standardizing processes. These actions are expected to further reduce SG&A and enable faster, more scalable growth. Finally, we strongly believe in the long-term value of Diebold Nixdorf and remain laser-focused on delivering shareholder value. We appreciate your support as we advance on our journey building a stronger Diebold Nixdorf for many years to come. And with that, operator, please open up the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Matt Summerville with D.A. Davidson. Matt Summerville: Maybe first, can you talk about the magnitude of impact on service profitability associated with the accelerated investments you referenced and if this changes kind of the margin cadence into '26 and '27 as it relates to your targets? And then I have a follow-up. Thomas Timko: Yes. Sure, Matt. So service margins this quarter and what we're looking at for the year, we expect now to be flat to slightly up, really driven by -- you heard Octavio on the call mention our product margins and some of the OpEx resilience that we're seeing, and this is the best thing about sort of the new Diebold, right? We have multiple ways to win. So although service margins are going to be flat, what we decided to do because of the product margins and some of the OpEx upside that we saw earlier was to accelerate some of the investments that we need to make into that service business to get to a world-class service level for our customers. That included the consolidation of repair and spare parts depots across Europe, and we're looking at other opportunities in labs and where we have commercial offices as well, but also the field technician software rollout, the acceleration of that in North America, and then lastly, as our C-base has expanded, we've added more field technicians to the mix as well to really help improve our SLAs. So that investment was about $10 million, and that will be spread between Q3 and Q4. So that's really what drives the service margins down. But again, we're still able to do what we said we were going to do and meet total EBITDA expectations because of the multiple ways to win on product margins and OpEx. Matt Summerville: And then maybe spend a minute focused on the retail business, specifically in North America. Some of the KPIs you've been disclosing around proof of concepts, pilots, no mention of that this quarter. Maybe just a refresh on where things stand. And obviously, no logos mentioned per se. So maybe talk about how that effort is tracking versus your expectations. Octavio Marquez: Yes, Matt, and again, sorry for not talking to more in this call about proof of concept. But again, we keep increasing the number of proof of concepts globally, particularly in North America. We're happy that we're now in several dark stores at some large grocers where they're testing our solutions. So we remain optimistic that we've created a differentiated product for the market. It keeps resonating. And as you know, we're trying to unseat some very long-standing incumbents in those markets, but we remain very optimistic that through the strength of our technology, the strength of our service team and the focus that our new sales team is putting on things, we should be seeing results. And we remain very, very optimistic about the retail business. As you saw, order growth was very substantial. Revenue growth was substantial as well. And we're very well positioned to do that again in Q4. So we remain very optimistic about the retail business. Operator: Your next question comes from the line of Antoine Legault with Wedbush Securities. Antoine Legault: Just on the banking front, Octavio, I think you had mentioned expecting a pace of about 60 to 70 annual refresh orders on your installed base. Is that still the right way to think about cadence? And are those typically simple refresh orders of existing machines? Or are those -- can those be orders that are upgrades to recyclers? Can you just help us think about that? Octavio Marquez: So Antoine, I think that, that pace of around 60,000 machines every year is the right way to think about it, and all these will be new placements. We are not upgrading old machines into recyclers. It's more cost effective and it's a much better machine, the BS Series, every customer I talk to keeps reminding me that we have the best product in the industry there and that we should just accelerate the deployment of those because of the reliability, the functionality that it provides to customers. So yes, keep thinking about it that way, 60-plus thousand machines every year for the foreseeable future. Antoine Legault: Noted. And on the gross margin front, you are looking at Q4, I think last year, gross margins dipped a bit sequentially due to geographic mix in the ATM business. How should we think about it this year? I know you mentioned you're expecting continued sequential improvement in retail in the fourth quarter, but how should we think about it from both on a segment basis and on a consolidated basis? Thomas Timko: Yes. So margins for Q4 we expect a pretty -- in total, I would say, pretty similar run rate to what we saw in Q3 as we finish out the year, and the split between banking and retail, I would say, is compared to last year, banking coming in closer at 20 -- where do we end the year at 24% last year, probably closer to 26.5-ish, which is very consistent with what we did last quarter, and then retail coming in at 2024. So a little -- that was last year and then this year, it would be closer to 25%. So again, you'll see sequential improvement quarter-over-quarter and year-over-year. So think mid-25s on retail. Operator: Our next question comes from the line of Justin Ages with CJS Securities. Justin Ages: Can you give us a bit more detail on that small acquisition you mentioned? What capabilities are you getting out of it and how it better serves your customers or what your customers are looking to do? Octavio Marquez: Yes. So yes, Justin. So it's a fairly small acquisition, but it gives us a very important capability that we didn't have in the U.S., which is to serve different brands of equipment in the branch. When you think of our branch automation solutions, we're clearly very focused on having our own teller cash recyclers in the branch. But this is a process for most banks that are already using teller cash recyclers or teller cash dispensers, replacing those machines. So there has to be a transition period where they're asking us to maintain their old fleet from different vendors. So with this small acquisition, we've acquired the skill set to repair third-party parts. And this company had also a fairly robust process on how to serve third-party products. So that's the capabilities that we're acquiring, something that will expand our addressable market going into this multi-vendor space, particularly around branch products. Justin Ages: Okay. That's helpful. And then now that BAS has formally launched, can you give us some insight into the response versus the big national banks and the smaller regional banks? Are you seeing more demand on one side than the other? Octavio Marquez: So Justin, as with everything in banking, kind of the leading banks of the world set the pace for the rest of the market. So we had the opportunity a couple of weeks ago to -- or a couple of months ago to have some of our largest customers present our customer event. Some of our large customers were up on stage with us touting the benefits of this closed-end cash ecosystem where you have the ATM recycler, the teller cash recycler, the interchangeability of the cassettes inside the devices, the overall management software that not only controls the cash at the branch level, but that helps integrate the branches more to the digital world of banking. So big banks are very excited about that. And the response is that as we presented this to literally hundreds of our smaller customers, there's now increased interest on them on how can they actually deploy similar solutions. So I think that the thing that would happen with recycling, we started with the larger banks and it's trickled down to the regionals, now to the smaller credit unions, community banks, I think that we will see that same trend with our branch automation solutions. Operator: Our next question comes from the line of Matt Summerville with D.A. Davidson. Matt Summerville: Just a couple of quick follow-ups. Obviously, you accelerated pretty materially the cadence of your share repurchase wrapping up that $100 million. How should we be thinking about how that $200 million just announced, how that unfolds heading into 2026? Thomas Timko: Yes. Look, our goal is to really maintain the momentum that we established under the prior program and maintain as much flexibility as we can for the company as we go forward. But look, Matt, as we're looking at 2026 as a year where we end up converting more cash, our EBITDA conversion, our cash conversion number increases by over 10% year-over-year. We're going to have more cash during the year to deploy. And right now, we think given the stock price, and we just feel very confident in our company's ability to generate cash. And we feel the stock is the best return on investment that we can make at this point in time. So again, we're dealing with stock that we feel is undervalued and underappreciated. And we're going to continue to be in the market, I would think, at a similar pace that you saw, but we reserve the right to be flexible as opportunities like HTx come up or other type of bolt-on acquisitions as well. So -- but right now, our plan is to sort of maintain that same level of buyback that you saw over the last 2 quarters. Matt Summerville: Got it. And then, Octavio, I always find it useful if you take a minute and just kind of talk through the ATM side of the business in terms of what you're seeing with respect to geographic demand trends? Octavio Marquez: Yes. So thank you, Matt. So I'll -- let's walk around the world. So North America, I would say we see a very steady business. The refresh cycle in large banks continues to evolve at the same pace that it's been over the past couple of quarters. Recyclers are now, I would say, basically the only product that we sell in North America with a few exceptions that customers that still require cash dispensers, particularly like in the casino space or customers that have a large presence in convenience stores. But North America remains at a very steady pace. I'm happy with the progress that we're making. I think that's a big opportunity in North America is as we mature branch automation solutions, teller cash recyclers will start becoming a bigger part of the mix. So I'm happy that we're manufacturing them here in Ohio because that clearly creates a competitive advantage for us. As far as Europe, Europe, to be honest, is having a blockbuster year. I'm super proud of the team there. The -- as Tom likes to say, they found multiple ways to win in a market that is not really growing that much. We continue to gain share, gain customers, significantly improve our service capabilities there. So I'm very happy with Europe. We had strong orders from all major markets in Europe. So again, I think Europe will end the year in a very strong note. So Europe continues to be very healthy. Asia Pacific, we made that big decision to reenter, as you know, India create fit-for-purpose devices for multiple markets. The Middle East with the high capacity cash recycler, the highest capacity device in the world, India with a more energy-efficient, smaller footprint device, and we've been winning business, which is very important because, as you know, we have been -- had a shrinking installed base in that part of the world, which we are now starting to reverse the trend. So that provides significant upside for us in future years around the service and software opportunity. Lastly, let me talk about Latin America. As you know, it's always been dear to my heart. This year hasn't been as strong in Latin America overall. It hasn't been a bad year, but it hasn't been as strong as we had hoped for. There's a little bit of political turmoil in most markets in Latin America. So banks are a little bit more cautious. But -- as we look at our opportunity there, continues to be the most heavy cash usage society in most places. So we're optimistic that as we enter Q4 and go into next year, Latin America will once again pick up the pace. And again, I always separate Brazil from Latin America because it's such a unique market. But now that Brazil is manufacturing devices for all of Latin America, we're gaining also a lot of efficiency in our Brazilian manufacturing. And we're still waiting for some of these big government RFPs that keep being postponed, but we know that we will get them. We're just hoping that they can materialize faster. But again, Latin America, still very optimistic about the market, even if this year wasn't as strong as we had hoped for. But once again, that's the importance of having the geographic diversity that we have that when one market is suffering, then a couple of others can pick up. So North America picked up some of the slack, Europe picked up some of it, Asia Pac. So we're very confident that the model that we have, the distributed manufacturing footprint, the local to local clearly is a strength for the company. Operator: Thank you. At this time, we have no further questions. I'll now turn the call over to Maynard Um for his closing remarks. Maynard Um: Thanks, everyone, for participating in today's call and your interest in Diebold Nixdorf. If you have any follow-up questions, feel free to reach out to the Investor Relations team. So thanks again, and have a great rest of the day. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Hello, everyone, and welcome to the Johnson Controls Q4 2025 Earnings Conference Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand the call over to Jim Lucas, Vice President, Investor Relations, to begin. Jim, please go ahead. James Lucas: Good morning, and thank you for joining our conference call to discuss Johnson Controls' Fiscal Fourth Quarter 2025 results. Joining me on the call today are Johnson Controls' Chief Executive Officer, Joakim Weidemanis and Marc Vandiepenbeeck, our Chief Financial Officer. Before we begin, let me remind you that during our presentation today, we will make forward-looking statements that reflect our current views about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Please refer to our SEC filings for a list of these important risk factors that could cause actual results to differ from our predictions. We will also reference certain non-GAAP measures throughout today's presentation. Reconciliations of these non-GAAP measures are contained in the schedules attached to our press release and in the appendix to this presentation, both of which can be found on the Investor Relations section of Johnson Controls' website. I will now turn the call over to Joakim. Joakim Weidemanis: Thanks, Jim, and good morning, everyone. Thank you for joining us on today's call. As we close out our 140th year as a company, I want to begin by recognizing the extraordinary efforts of our 90,000 colleagues around the world. Their dedication to our customers and their commitment to our mission have been the driving force behind our progress and the results. Since joining Johnson Controls, I made it a priority to spend time where value is created, in the field with customers and our teams, at our innovation centers and on the factory floors around the world. It's important to be right alongside our team, as they do the work to deliver for our customers. These experiences have given me a firsthand appreciation for the passion and expertise that define our culture. Our customers and my colleagues on the front lines give me valuable insights on how we work and where we can improve processes and uncover new opportunities together. Learning about our capabilities and seeing our teams drive our company forward by problem solving, to better serve our customers, has reinforced my belief in the strength of our foundation and the significant opportunities we're beginning to capture. Before I dive into the specifics, I want to summarize where we stand today and our path forward. First, we delivered strong results this quarter and for the full year, exceeding our free cash flow target and continuing to build a record backlog. Second, our proprietary business system is taking shape as our growth engine, combining 80/20 and lean principles with digital and AI approaches to create a more customer-centric and continuous improvement-oriented organization. Third, we are updating our long-term growth algorithm to reflect improved mid-single-digit top line growth, enhanced operating leverage, double-digit adjusted EPS growth and continuing to target 100% free cash flow conversion, demonstrating that the opportunity in front of us is clear, significant and achievable. Turning to our results. Fiscal 2025 was a year of strong execution and momentum. Sales grew 6%, segment margins expanded by 100 basis points and adjusted EPS increased 17%. Notably, we offset the dilution from the residential and light commercial divestiture in 1 year, ahead of our original expectations. Free cash flow conversion reached 102%, reflecting our disciplined execution and financial strength. Orders grew 7% for the year, and our backlog expanded 13%, ending at a record $15 billion. This sustained demand highlights the value our customers place in our solutions and the strength of our portfolio. This quarter's performance reflects our disciplined execution and operational focus. While our evolving business system is still in its early stages, we're already seeing encouraging signs of progress. Let's turn to Slide 6. Last quarter, we introduced our proprietary business system, a proven approach to building a stronger, more disciplined company. It is rooted in winning and retaining customers through differentiated products, services and exceptional experiences. It's about enabling frontline colleagues, engaging all teams in building a better Johnson Controls and being a magnet for talent. Our system is built on 3 pillars: simplify, apply 80/20 principles to focus on what matters the most; accelerate, use lean methodologies to remove waste and accelerate execution and scale, leverage digital and AI approaches to amplify impact across the enterprise. And it's anchored in a global cross-functional language and methodology for how we communicate and collaborate to win. The approach is practical, identify barriers to growth and remove them quickly. We start narrow and go deep, get the root causes, pilot countermeasures, adjust and secure frontline buy-in before scaling broadly. While it's still early days and business systems take time to mature in large organizations, I'm energized by our progress. More than 700 colleagues are actively engaged across several priority areas and have conducted over 50 kaizens to date with many more to come. We have already trained 200 leaders worldwide through activation boot camps. Leadership plays a pivotal role in the progress of our business system and our opportunity to build an even stronger company that is more capable, more focused and more disciplined, a company that executes with consistency and delivers for customers where it matters most. To further strengthen our leadership capabilities and align talent with strategic priorities, we recently announced a new leader of our Americas segment, Todd Grabowski. He brings over 30 years of experience in the commercial part of our business and product management within our largest franchise, our global applied business. His industry knowledge and customer orientation will be instrumental, as we accelerate growth and sharpen our customer focus in this important region. Earlier this week, we announced to our colleagues the hire of a global leader of manufacturing, a key role accountable for performance across our factory footprint, driving improvements in safety, quality, delivery and cost, SQDC, using our business system to build competitive advantage and winning performance for our customers as well as drive overall productivity, creating more funding for reinvestments. As we continue to strengthen our talent development, it will enable us to accelerate our progress. Last quarter, we highlighted 2 areas with clear potential, sales capacity and productivity and factory on-time delivery. Today, I want to show you how our proprietary business system is already delivering measurable progress. By working together across teams and leveraging 80/20 and lean tools, our conventional HVAC sellers in one of our local markets increased the time they're able to spend engaging with customers by over 60%, and our team manufacturing key chillers in North America improved on-time delivery to over 95%. These examples reflect our commitment to going narrow and deep, focusing on specific areas to uncover the true sources of waste and avoid surface level fixes. This approach enables faster piloting, stronger frontline engagement and eases broader deployment later across the organization. As is typical in continuous improvement, we see even more opportunities as we dig deeper. In the example of selling time with a customer, the team streamlined the sales process by eliminating non-value-added process steps and upgrading tools to accelerate the sales cycle. These improvements simplified workflows and led to more than a 60% increase in time spent engaging directly with customers. We're now applying AI to the overall sales process of estimation and selection to codify, scale and amplify several process steps that will yield even more time with customers on top of that. We've also been focused on improving the on-time delivery in one of our key chiller plants that serves the rapidly growing data center vertical. While we have a leading position in advanced thermal solutions for data centers, historically, our on-time delivery was inconsistent and our lead times were longer than what customers demand. Leveraging 80/20 and lean approaches, we have dramatically improved on-time delivery and are now over 95% and lead times are on the way of being cut in half. I'm confident we can maintain this standard, which only strengthens our competitive advantage and our ability to win in this fast-growing vertical. This isn't about putting a playbook on a shelf, it's about fundamentally changing how we work. These improvements come from going narrow and deep, countermeasuring root causes and engaging the teams impacted, ensuring sustainable change and easier scaling across the enterprise. Simplify, accelerate, scale. That's how we win together. As we move to Slide 7, you'll see how our focus on technology innovation and sustainability is powering our future growth and reinforcing our leadership in mission-critical verticals. Johnson Controls continues to strengthen its leadership in advanced thermal management. With AI-driven demand for high-density data centers, pushing cooling technology to new limits, we are well positioned across the thermal management or cooling chain as well as with our integrated offering of digital monitoring and controls. During the quarter, we successfully launched our coolant distribution unit offering, a major milestone in our differentiated data cooling center strategy. CDUs are critical enablers of liquid cooling, which is rapidly becoming essential, as AI chips are becoming more powerful and generating more heat. Traditional air cooled systems are reaching physical limits, driving a transition toward liquid and hybrid cooling architectures that improve thermal management performance in addition to energy and water efficiency. This launch, combined with our award-winning YVAM magnetic-bearing chillers, absorption chillers and now our strategic investment in Accelsius positions Johnson Controls to deliver a comprehensive and integrated portfolio that addresses the full thermal management spectrum from chip to ambient, covering the entire heat capture, removal and regen journey. We are receiving strong early interest from hyperscale customers, who are prioritizing energy efficiency and sustainability, core pillars of our innovation strategy. Our data center solutions are aligned with global trends in AI and increasing compute density, where thermal performance is now a strategic differentiator. With our cooling technologies reducing non-IT energy consumption by more than 50% in most North American hubs, we are delivering substantial energy savings. This reinforces our role as a strategic partner to the world's leading data center professionals at a time when the vertical is poised for significant growth over the next decade. In Europe, we recently made a major announcement that underscores our leadership in decarbonization. Johnson Controls will provide green heat to the city of Zurich through a landmark waste incineration project. While we've delivered similar solutions across the region, this deployment more than doubles the heat capacity of our previous largest project and ranks amongst the largest heat pump installations globally to utilize the zero GWP refrigerant ammonia. Our advanced heat pump technology will recover energy from flue gases and feed it into the district heating network, supplying heat to approximately 15,000 homes, about 15% of the city's total district heating demand. This project is another powerful example of how Johnson Controls is enabling critical industries, institutions and now cities to transition to sustainable heating solutions, while maintaining reliability and performance, and it highlights the tremendous opportunity to harness excess heat, reduce operating costs and accelerate decarbonization. In 2024 alone, our heat pumps enable customers to cut energy costs by 50% and emissions by 60%. The partnership we have with Zurich and other cities as well as with hundreds of others from global manufacturers in pharmaceuticals, chemicals, food and beverage and more solidifies our leadership position in the European energy and heat transition where we can capture our share of these opportunities amid regulatory tailwinds and accelerating customer demand. These initiatives reinforce our leadership in thermal management, decarbonization, digital solutions and mission-critical environments, supported by our commercially advantaged embedded service capabilities and relationships. The strength of our service model lies in the combination of customer intimacy, technical depth and global reach. With direct service operations across the globe, Johnson Controls delivers consistent high-quality support to customers over the life cycle in mission-critical verticals such as data centers, advanced manufacturing, life science manufacturing and large hospital and university research centers. Our ability to deliver consistent service across the global footprints of hyperscalers is a unique differentiator. As data centers multiply, our service model is helping maintain the pace, positioned to deliver reliability wherever our customers build. Our view is that customers will always demand high-touch, high availability service, and that is an unparalleled differentiator for Johnson Controls. Now as we look ahead, our guidance for fiscal 2026 builds directly on the momentum we've established this year. I already previewed our updated long-term growth algorithm, and Marc will discuss the details shortly, but I want to highlight how excited we are about the opportunity in front of us. In short, our strategy to leverage our strengths, particularly in HVAC, Controls and Digital to deliver differentiated value and long-term growth underpins our success. Our ability to meet global demand for mission-critical systems, whether in data centers or decarbonization projects is backed by an exceptional service organization and positions us to capture significant opportunities ahead. With that, I will now turn it over to Marc. Marc Vandiepenbeeck: Thanks, Joakim, and good morning, everyone. We closed fiscal 2025 on a strong note, delivering another quarter of solid financial performance. This consistent execution throughout the year has strengthened our foundation and position us well, as we enter the new fiscal year. Our ongoing focus on stronger operational discipline, customer satisfaction and continuous improvement is driving results, and we remain committed to generating sustainable long-term value for our shareholders. Now let's take a closer look at fourth quarter results on Slide 8. In the quarter, organic revenue grew 4% and segment margin expanded 20 basis points to 18.8%, driven by our ongoing focus on cost discipline, favorable mix and the tangible benefit of our productivity programs. Adjusted EPS of $1.26 increased 14% year-over-year and exceeded the high end of our guidance range. On the balance sheet, we ended the quarter with approximately $400 million in available cash. The net debt remained within our long-term target range of 2 to 2.5x, declining to 2.4x compared to the prior year. For the year, adjusted free cash flow improved by approximately $700 million to $2.5 billion. Our strong earnings performance and rigorous approach to working capital management enabled us to achieve 102% free cash flow conversion for the year. This reinforces the strength of our execution and the quality of our earnings. Let's now discuss our segment results in more detail on Slide 9 and 10. We are seeing strong customer engagement and healthy demand for our solution across key verticals. Orders grew 6% in the quarter, highlighted by 9% growth in the Americas, supported by strength in data centers. In EMEA, orders increased 3% despite a challenging comparison to 14% growth in the prior year with double-digit growth in service. In APAC, orders saw a small decline of 1% as decrease in system more than offset mid-single-digit growth in service. At the enterprise level, organic sales growth was led by mid-single-digit growth in service. In the Americas, sales were up 3% organically on a tough compare, supported by continued strength in both HVAC and Controls. EMEA delivered 9% organic growth with strong double-digit growth in system and high single-digit growth in service. In APAC, sales declined 3% organically due primarily to lower volumes in China. This result reflects strong execution, particularly in the Americas and EMEA against a backdrop of challenging year-on-year comparisons. Margin performance improved steadily throughout the year, as we capture greater operating leverage and continue to optimize our cost structure. Our resilient operating model enabled us to align pricing, productivity and mix to support consistent profitability even as market conditions evolved. This translated into notable fourth quarter performance. By region, adjusted segment EBITDA margins in the Americas improved 50 basis points to almost 20%, supported by productivity gains and operational efficiency. In EMEA, margin expanded by 30 basis points to 15.6%, reflecting positive operating leverage from top line growth. In APAC, margins declined 190 basis points to 17.8% as lower volumes in China created pressure on factory absorption. Our backlog remains at a record level, growing 13% to $15 billion. System backlog grew 14% and service backlog grew 9%. With this momentum in mind, let's discuss our long-term outlook and capital allocation priorities on Slide 11 and 12. We are updating our long-term growth algorithm to incorporate the principles of our value creation framework and the momentum we have built this year. As we look ahead, we expect to deliver mid-single-digit organic revenue growth, operating leverage of 30% or better, double-digit adjusted EPS growth and approximately 100% free cash flow conversion. This algorithm is supported by 3 key factors: first, the sustained demand for decarbonization and mission-critical solutions. Second, the continued evolution of our proprietary business system to drive operational efficiency and third, the ongoing technological innovation through new product launch and a disciplined approach to portfolio management by channeling resources into our most attractive growth areas. On capital allocation, our priorities remain unchanged. We are investing in organic growth. We are focusing on returning capital to shareholders through dividend and share repurchases. And finally, we are pursuing selective acquisition to strengthen our portfolio. Our strong balance sheet and consistent cash flow generation gives us ample flexibility to execute on these priorities with confidence. Let's now discuss our fiscal first quarter and full year guidance on Slide 13. Momentum remains strong as we begin the first quarter, supported by operational efficiencies and a record backlog. We anticipate organic sales growth of approximately 3%, operating leverage of approximately 55% and adjusted EPS of approximately $0.83. For the full year, we are confident in our ability to deliver our long-term growth and profitability commitments. We expect organic sales growth of mid-single digits and adjusted EPS of approximately $4.55 per share, which is over 20% growth. We anticipate operating leverage to be approximately 50%, which is above our long-term algorithm, as our efforts to remove stranded costs are recognized faster in the new fiscal year. Our guidance reflects continued operational discipline, strong customer demand and the visibility provided by our record backlog. Our ability to navigate evolving market conditions reflect the strength of our enterprise capabilities and the resilience of our operating model. We expect approximately 100% free cash flow conversion for the year, consistent with our long-term financial framework. This reflects our focus on earnings quality, working capital discipline and efficient capital deployment, all of which support our ability to invest in growth, while returning value to shareholders. We have built a strong foundation for the years ahead. As we enter fiscal 2026, our focus remains on advancing sustainable growth, expanding margins and creating lasting value for our shareholders. We look forward to keeping you updated on our journey. Operator, we are now ready for questions. Operator: [Operator Instructions] The first question goes to Amit Mehrotra of UBS. Amit Mehrotra: Marc, the 50% operating leverage target for 2026, can you just walk that the segment EBITDA margins? There's some moving parts on corporate expense amortization, but it looks like it implies about 90 basis points of expansion from the 17.1%. Correct me if I'm wrong, but if you can just kind of double-click on that, that would be helpful. Marc Vandiepenbeeck: Yes, sure. Thanks, Amit. Yes, you're pretty close on margin. I would say by segment, EMEA and APAC will be the main driver of margin improvement this year. Not that Americas will not contribute, but if you look at that incremental, they've shown a decent improvement this year and the level of ramp year-on-year will be probably a little bit more muted than the other segment. But overall, we feel very comfortable that our operating leverage will be in the 50s or above. Amit Mehrotra: And then, Joakim, just on the opportunity going forward. I mean, there's a lot of stuff here. There's a cost opportunity. There's maybe a portfolio opportunity. You talked about M&A, maybe rank those. It just seems like there's maybe a huge G&A opportunity, but then also there's a lot of questions about maybe slimming down the portfolio further. But can you -- obviously, you're 237 days into the job now. So maybe just offer a little bit more color on prioritizing all those buckets of opportunity. Joakim Weidemanis: Amit, thanks for keeping count on the number of days I've been with the company. Well, let's start with where you left off with Marc. So the operating leverage. There's a reason there's a plus behind the guidance and how we're thinking about operating leverage. And that really comes back to what we're doing with the business system, where we are going after driving productivity in our field operations and our factory footprint and then -- field operations and service. And then in SG&A, we see leverage opportunities, i.e., getting more out of the SG&A investment that we have, more the S of the SG&A with the help of the business system, and I gave you an example here in the prepared remarks. So I'm very excited about the continued progress that we're going to be able to make there and hence, the plus behind the leverage in the guidance. And then as we've talked about before, we have and we're working away at reducing the G&A cost and our corporate costs. So we continue to do that. There's no change in our ambition level there at all. And then on the M&A side, we continue to work away at the portfolio that we have together with the Board, and we have evolved a little bit more clarity on our future strategies here. But as I said last time, that's a multi-quarter effort together with the Board, and that effort is really guided by creating shareholder value. That's the #1 principle, right? And then in terms of acquisitions, we have started to apply some of the discipline that I have learned in prior roles, prior to joining Johnson Controls. So I can tell you that our acquisition pipeline is vibrant. And we are engaged in multiple situations. And we are being very, very disciplined about doing the proper strategy work, the proper target work and not falling in love with anything in particular and being just very, very disciplined about capital allocation. Operator: The next question goes to Nigel Coe of Wolfe Research. Nigel Coe: I just want to go back to the 50% incremental margin -- sorry, 50% plus incremental margin for FY '26. And if I take 30% as your baseline operating leverage, it suggests there's about $250 million of benefits over and above that 30%. Number one, is my math okay on that? And maybe just talk about that $250 million, and you suggested delayering and a number of other initiatives. Is there anything in there for process improvements, et cetera? Just want to get a bit more details on that. And should we think about this as confined to FY '26? Or could there be benefits beyond this year? Joakim Weidemanis: Marc can help you on the exact math here. I'm sure we'll be talking about that in follow-up calls as well, but we are just getting started with our business system. And so some of the examples that I shared with you today, my objective was to share an SG&A example and an above gross margin example. And we are just getting started. And as you saw from the examples I gave, the opportunities are significant here. So that operating leverage is going to continue to improve over time. And the main reason we're actually shifting the guidance to include that, and have a strong element of that, is it's really reflecting what we're trying to do here. We're trying to build a higher-performing company that's more focused on profitable growth and -- but both driving top line by pointing at higher growth opportunities, verticals, applications, but also doing the solid productivity work that I talked a little bit about as well as the responsible cost reductions that we've discussed in other quarters. Marc Vandiepenbeeck: Nigel, directionally, your numbers are there or thereabout, yes. Operator: The next question goes to Steve Tusa of JPMorgan. Patrick Baumann: Hello? Joakim Weidemanis: Yes, can you hear us? Patrick Baumann: So just on this -- yes, I can hear you now. Just this amort coming down this year, can you just talk about the drivers? And is that related to this $400 million restructuring charge you guys took in the quarter? Also kind of like what -- if it wasn't the amort, what was -- what's kind of like in that charge? What does that relate to? Marc Vandiepenbeeck: Yes. It's not around the restructuring. It's more on the impairments we took in the quarter, Steve. It reflects the different portfolio actions also we've taken over the year, obviously, but there's further reduction possible, if we do act on some of the divestiture we've been contemplating for a while on the fringe of the portfolio. The vast majority came from those onetime actions you saw in the quarter. Patrick Baumann: Okay. Got it. So that decline in amort is sustainable is what you're saying. And is that part of like your stranded cost takeout? Or is that something outside? Marc Vandiepenbeeck: No, completely outside. The stranded cost takeout is incremental today. Patrick Baumann: Okay. And then just one last one on orders. I know you had a really tough comp in the first quarter of last year, but you beat this quarter. Is there -- what would you expect for the first quarter? Will you be up despite the tough comp? Or will that be down on the tough comp in 1Q order-wise? Marc Vandiepenbeeck: Yes. As you know, we generally don't guide around orders. I can tell you that the health of our pipeline continues to improve, and we see opportunity to continuously see growth on our order this quarter and the upcoming quarter as well. Patrick Baumann: Wow, so you can grow off that comp in orders? Marc Vandiepenbeeck: That's right. Patrick Baumann: With your pipeline? Marc Vandiepenbeeck: Correct. Joakim Weidemanis: Yes. And maybe just to reinforce that, we're, as part of, building a faster-growing, more profitable company here. It's not just about the productivity work and the business system work that I talked about. It's also about pointing our efforts from verticals, applications and so on at parts of the market that are growing at a faster rate. Operator: The next question goes to Jeff Sprague of Vertical Research. Jeffrey Sprague: Maybe just a couple of modeling nits for me, too. Interesting on the amortization, obviously, lifting the earnings, but I was maybe actually a little bit more surprised that with lower amort, you've got this comfort level on 100% cash conversion going forward. And I guess that cash flows from everything you're talking about from productivity. But maybe you could just give us a little bit more color on maybe what the target-rich environment might be on free cash flow and how that might unfold over the next year or 2. Marc Vandiepenbeeck: Yes. So you're right. Amort is not -- reduction in amort is not going to help, but we see opportunities to continue to outperform on our working capital management overall, but free cash flow conversion, particularly. This year, fiscal year '25, we've seen strong improvement in our receivable management, just the way we build the customer when we do and how we collect and the quality of that process. There's obviously continuous improvement we can bring there, and there's a lot more we can do there. But I don't think moving forward, it will be the core pocket of opportunities. Where we think we're going to drive a lot of value moving forward from a free cash flow conversion comes a lot from our inventory management and the amount of inventory we need to continue to grow the company. And that's where the business system will bring tremendous clarity and visibility into where we can continuously improve and reduce that reliance and therefore, improve our cash flow conversion. Joakim Weidemanis: Yes. That just hasn't been a focus in the past, Jeff. That's an opportunity for us. Jeffrey Sprague: Yes. And then, Joakim, could you just address a little bit more color? Marc alluded to the upside in EMEA and APAC margins for 2026. Are there some -- and I get the comps easier in Europe, especially, but are there some clearly targeted actions that support that? Or are you counting on sort of a stronger revenue recovery in those businesses? Maybe just a little bit more color on what's going on there. Joakim Weidemanis: Yes. I think the short answer is we're not counting on one single big thing. So it's a combination of things that we have largely proof of already that we're able to execute on. So it includes some elements of our pricing discipline that has become much better here over the recent couple of quarters, but it also includes a better discipline around where we point our efforts. But then also, again, the -- some of the examples that I gave here around how we're deploying the business system, that work is ongoing in EMEA and Asia as well. So we see opportunities on multiple parts of the P&L here. Operator: The next question goes to Chris Snyder of Morgan Stanley. Christopher Snyder: I wanted to ask about the content opportunity into data center. So maybe moving aside the CDU that you guys announced, if we look at the legacy business, just kind of wondering how content changes on the move from air cooling to liquid cooling. I imagine the chiller opportunity is still as strong as ever. Could we lose some content in air handling? I'm just trying to figure out how that nets out as we look towards the future. Joakim Weidemanis: I think the simple answer to that is because newer chips require more power and therefore, generate more heat so in general, more cooling is needed. So the scope of our offering and the performance required from the chillers only increases over time here. And the -- you heard me talk in the past about how -- when I first joined the company, how I thought our technological capabilities, in particular, in HVAC are impressive. And some of the needs here of the data center market here going forward for higher precision, higher capacity cooling actually plays to our strengths when it comes to the chillers. Marc Vandiepenbeeck: But if you think about the different offering we have between airside solution and chiller, we see continued demand for both. And regardless of the -- how the chip themselves are cooled, you have solution liquid to air and liquid to liquid, and liquid to air continues to see very strong momentum and matches well our offering. And obviously, we have a very strong developing solution on liquid to liquid. Christopher Snyder: I really appreciate that. I wanted to then follow up on some of the investments that the company is making in the aftermarket. It seems like the investments in technology are both lowering the cost to serve the aftermarket for JCI, while also providing efficiency savings to the customer. So I guess my question is, is this more of a driver of share gain through the value add you're bringing to the customer? Or is it more of an opportunity to improve the incremental margin profile of services by lowering that cost to serve by using more technology and less labor, I would presume? Joakim Weidemanis: It's both -- it's really both. You could say it's share gain because we're able to, with the technology investments, serve customers at a price point, which allows them to -- so we become more competitive in certain mission-critical applications so that they will actually give us that business versus having to maintain some of their own service staff. But -- and then it's also share gain against various third parties that service our equipment as well as every other OEM in this industry. But as we deploy the technology, we also reduce our cost to serve. So it's both a share gain and a margin improvement effort here. And I'd say we're in the early innings of that, in general, as an industry, when it comes to deploying more sophisticated technology-based approaches and life cycle services. So that's an exciting area for us, both from a growth and a margin improvement outcome. So we'll be talking more about that over the next couple of quarters. Operator: The next question goes to Nicole DeBlase of Deutsche Bank. Nicole DeBlase: Yes. Maybe just starting with the nice acceleration you guys saw in order growth this quarter. Can you talk a little bit more about maybe what you saw from a vertical perspective within Applied in particular? And any color on the magnitude of data center order growth that you'd be willing to give? Joakim Weidemanis: Yes, so we typically don't comment on order numbers by vertical, but I can talk -- I can say that in general, we have a shorter list of vertical that's driving outsized growth of our backlog. Backlog is up 13%. We have an ingoing backlog of almost $15 billion going into this year, record backlog. We never had that kind of backlog in this company, which is phenomenal. So data centers, as you mentioned, is a vertical we're very excited about. Our pipelines remain very healthy. Those orders are variable. We get a couple of very big ones in one quarter and -- but maybe not every quarter, but overall, over a couple of quarters, you can see the results here, so 13% up in backlog. So data center is very healthy. And then you have verticals such as pharmaceutical -- or biologics, rather, manufacturing where new campuses are being built since the pharmaceutical campuses of the past cannot manufacture the drugs of the future here that are biologics based. So that's a vertical that's very healthy for us. And then in general, large campuses where a significant amount of research is conducted. So I think both universities, general research institutions but also hospitals that, of course, are places of significant research, those kinds of verticals are very, very healthy for us. And then finally, what we typically would call advanced manufacturing, so semicon and other types of manufacturing where very precise indoor climates need to be created because they're mission-critical for the manufacturing. So those are generally the areas where we see the healthiest growth. Nicole DeBlase: Okay. Got it. That makes sense. And then just maybe a little nitpickier one around the quarterly cadence of organic growth. I think you guys have embedded a little bit of decel in the first quarter. If you could maybe speak to what's driving that? And then the way you see organic growth kind of progressing throughout the year to get back to mid-singles? Joakim Weidemanis: Yes. It's really a compares issue, Nicole. So think of the first half being lower than the second half. And like I said, it's mostly a compares issue. The backlog that we have gives us good visibility to what we can do in the individual quarters. And then, of course, we -- our service business, there's such a heavy recurring element there. So we have pretty good predictability there as well. And -- so we're excited about the outlook for the year here, and we'll keep you updated as we make progress here. But it's a tale of compares first half and second half. Operator: The next question goes to Scott Davis of Melius Research. Scott Davis: So, look, you're doing a lot of stuff here, 80/20, lean, you've changed a bunch of leaders and stuff, and it's a lot of change. And none of that works if there isn't accountability and -- to the right KPIs. Have you changed compensation structures meaningfully down into the organization, Joakim? Or do you need to based on what you've seen so far? Joakim Weidemanis: I would say, in terms of accountability, first, you have to define what you're going to measure to hold people accountable for. So we're in the process of establishing and rolling out, what we call, our enterprise KPIs. There are 9 of them, which we could probably come back and talk about at some other point in time. And how we do that and drive them through the organization is as important as the compensation part to drive a higher level of accountability for holistic results. And as we're deploying that throughout the organization, we are looking at the different compensation approaches and models that we have. And I would largely say there are some tweaks here and there, Scott, but not fundamentally any big changes that are necessary. Scott Davis: Okay. And, Joakim, have you pretty much unwound any remaining matrix within the management, within the structure of the organization? I mean, I haven't heard you talk about running a certain number of P&Ls, but maybe you can address that and just talk about how you changed that part of the organization. Joakim Weidemanis: So that's work in progress, Scott, together with the team. And we made a couple of changes like you pointed out here. So trying to put in place a championship team that can help us build a champion of a company here. And as we staff up here, of course, we have more capabilities, higher caliber in our senior mods teams, we are reflecting and looking at structures and so on. We made a couple of tweaks since I joined, but no major moves, not at this point. Operator: The next question goes to Joe Ritchie of Goldman Sachs. Joseph Ritchie: Joakim, so I want to focus on the strategic investment in Accelsius. And ultimately, with the launch of your CDU, just can you maybe just like double-click on like how complementary the investment is, like whether you'll be going to market together? I just want to try to understand what the opportunity is as I think about this over the course of the next 12 to 24 months. Joakim Weidemanis: Yes. Yes, good question. So we continue to invest beyond the chillers and the various HVAC solutions that we have, right? So -- and the way we think about it is what's the end-to-end thermal solution that is needed for data centers. And the CDU investment or launch, rather, is to capture a market that's significant and there right now. And that product was really a result of a very close collaboration with a number of our existing hyperscaler customers. And it's actually a platform with several different products available in all the regions of the world already. So we're super excited about that. Accelsius is about -- really about looking ahead. And this is a 2-phase cold plate technology platform. And so here, we're looking ahead. What are the chip launches that NVIDIA and others will be making over the next 4 to 5 years, and therefore, what kind of cooling solutions, end-to-end thermal solutions will be needed. And so Accelsius is about anticipating what will be needed in 4 to 5 years from now. But of course, applications for this technology are available already today, and we are going to be working on both commercial collaboration as well as technology and product integration, 1 plus 1 equals more than 2 here over time. So we're excited about both. One is short term, drive revenue now. And the second one is more strategic, anticipating where the puck is going and what will be needed over the next 4 to 5 years. Joseph Ritchie: Very helpful. And then just a follow-on there. Just around the portfolio, you've mentioned a little bit on the fringes, on the divestitures. Just how has your thinking evolved just in terms of addition by subtraction across the portfolio? Joakim Weidemanis: Yes. So there's no change. We had mentioned already well before I joined actually that about 10% of the portfolio, we're looking at alternatives for and better ownerships. And the driver here is to create shareholder value. And then there are some other parts of the portfolio that I've mentioned before that we've been looking into strategically, how we're positioned, what one could do with the businesses operationally, how much do we think we can improve them. And this is a dialogue we're having with the Board. And over the next couple of quarters, we'll draw some conclusions and decisions. And they will all be guided by driving shareholder value is goal #1, and we'll keep you posted. Operator: The next question goes to Julian Mitchell of Barclays. Julian Mitchell: Maybe I just wanted to circle back to the discussions on commercial HVAC. Because I guess in the Americas, for example, I think the last few quarters, you've grown at a sort of high single-digit rate in Applied. I think some of your competitors are growing at a much faster pace in revenues right now. And I suppose when I look at your guidance for '26, it doesn't suggest an acceleration in the Applied business. I just wondered if that was correct on '26 and how we should think about that Applied HVAC growth in revenue vis-a-vis the market growth rate? Joakim Weidemanis: I have read those scripts as well. We are not losing share on Applied and the part of Applied that we are playing in. I'm very confident of that. And so -- and I also -- I know what we have in the backlog, what's coming in, in orders and in the pipeline. So for the verticals where we are pointing our company, we are -- we can always do better, but we're doing pretty well. Julian Mitchell: Understood. And then just my follow-up, I suppose, would be just circling back to clarify on that incremental margin -- or operating leverage, sorry, guide for fiscal '26. Is the right way to think about it that you've got a sort of traditional segment EBITA operating leverage of sort of high 20s percent, let's say, similar to that 30% long-term algorithm. And then the augmentation to get to 50% for the year is the amortization reduction largely and some stranded cost takeout. Is that the sort of framework for margin expansion this year ahead? Marc Vandiepenbeeck: No, I would say the traditional operating leverage you'll get out of the segment is solidly in the 30s, excluding some of the benefit from amortization. And then the effect of our restructuring and transformation will come on that number, and that's how we think we're going to get well beyond that 30-plus percent algorithm we shared. So for '26, more than 30%. And then over time, obviously, this will naturally go back to a 30-plus kind of average as you go beyond '27. Operator: The next question goes to Joe O'Dea of Wells Fargo. Joseph O'Dea: Can you unpack the mid-single-digit organic for fiscal '26 a little bit? Talk about the price, if that price is already in place? Any color on kind of volume by regions, HVAC versus Fire & Security? Just give us a little bit of a sense of how it all comes together and sort of what is already there with respect to price and kind of backlog and what you would still need to go get to achieve it? Joakim Weidemanis: Yes. So I'll start, and then Marc will fill in with some additional detail. Our backlog grew by 13%. We have a record backlog going into the -- our fiscal year that we're in right now, $15 billion. Of course, not all of that is shippable in this year, but the vast majority is. On top of that, we have a very large part of our service business, that is not in the backlog, is recurring. So we actually have pretty good predictability for the year already. And as I alluded to here, our growth guidance here is not counting on anything that we haven't been proven to be able to execute on already, such as price, but also in terms of what growth we're able to drive in the different regions or the different businesses that we are in. So I'd say that's sort of the headline here, and that's why we have such great confidence in the guide here. And then, Marc, I'm still so new, so I don't know exactly how -- what detail of guide we provide here to the colleagues on the call. Marc Vandiepenbeeck: Joe, overall, if you think first regionally, I would say across the board, everybody is going to be within that mid-single digit with EMEA might be just slightly above the average, but Americas and APAC just at the enterprise level. So each segment, think about it overall wherever the company guide overall lands. And then by domain, yes, our traditional Applied and HVAC business will grow probably a little faster than the mid-single digits, supported by the strength in some of the core vertical we talked about, including data center. And then Fire & Security will be probably on the lower end of that enterprise guide and probably bring some contribution, obviously, to growth, but not as much as the domain that are highly supported by those high-growth verticals. Joseph O'Dea: That's helpful color. And then on the restructuring side of things and coming back to the $500 million over a multiyear period of time, can you just update us on what you achieved in 2025? What's baked into the '26 guide with respect to that $500 million? Marc Vandiepenbeeck: Yes. So if you look at that $500 million benefit, and we had mentioned when we launched the program, kind of 2- to 3-year program, $400 million on restructuring expenses, we probably spent about $200 million in fiscal year '25, a little bit ahead of where we anticipated when we started the program. But the run rate benefit of that $200 million is reflected both in our guide here for '26, but also in the upside of results we saw in '25. As you know, we came into the year with expecting segment margin up 50% plus, and we then moved that to 90% and now have achieved up 100%. So you can see that benefit probably close to the $350 million to $450 million run rate, as we exit '25 and printed into our guide for '26. As we look at further opportunity that the business system will provide that our Monaco focus on reducing our footprint, there may be some incremental restructuring that's going to be needed above and beyond the original program, but I don't think we are there yet. And as we look at opportunity, obviously, we expect the return on any incremental restructuring beyond that program we've announced to actually translate into the operating leverage kind of profile we laid out as part of our new algorithm. Operator: The next question goes to Andrew Obin of Bank of America. Andrew Obin: Yes, just to dig in a little bit more on the data center market. Generally, you guys -- I believe you invented the mag-bearing chiller. A lot of your competitors are adding capacity to go after this market. Do you think over the next 3 years -- given your capacity additions, given sort of the efforts to improve the throughput on-time delivery, do you think you can keep your market share? Or do you think it's just naturally as incremental capacity comes in from other players? You're a natural market share donor just given what everybody else is doing? Joakim Weidemanis: That's a great question, Andrew. We are going to take share. We made a significant investment in capacity before I got here. But now with the example that I gave you, leveraging our business system, where we had one of our high sellers and data centers, was not running at a variable on-time delivery and too long lead times. So with the focus work that we've done here over the last couple of months, we brought on-time delivery up to 95%, and we're on track to cut the lead time in half. And that lead time will be market leading, and we know that already because we've taken orders as a result of having capacity earlier and faster than some others in some cases. And of course, you shouldn't generalize all the time, right? But our goal is to build a capability here -- an innovation capability to stay on the forefront of what's needed by the data centers, not just on the chillers, but as we talked about here, the end-to-end thermal solution or the cold chain, including CDUs and anticipating what will be needed in the future, like Accelsius and other investments and then to be -- and have a manufacturing position that is very agile and fast with market-leading lead times and then augmented finally with our proprietary and differentiated 40-plus thousand people in the field around the world. And because field service -- life cycle services is such an important part for -- of -- in the data center market because downtime or unexpected downtime is just so incredibly more valuable to avoid, if you can, in data centers than in most other verticals. So we are definitely building -- continuing to build off of the capabilities that we already have, but strengthen those to make sure that we stay on the forefront here. We are not going to donate market share. Operator: Thank you. This concludes our Q&A session. I will hand the call back to Joakim Weidemanis for any closing comments. Joakim Weidemanis: Thank you. We have an exciting future ahead of us here at Johnson Controls and the important work we have underway will position us to capitalize on compelling opportunities ahead, not just in data centers, as I was just commenting on, but more broadly. With a culture focused on customers and centered around our proprietary business system, I'm confident we'll continue winning with our customers and delivering value to our shareholders. I'd like to take another moment to thank our 90,000 colleagues around the world. You are the foundation of our company, and I'm energized by the prospect of what the future has in store for us. I look forward to continuing my conversations with all of our stakeholders. Thank you all for joining today and see you on the follow-up calls. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Good morning, and thank you all for attending the Northwest Natural Holdings Company's Third Quarter 2025 Earnings Call. My name is [ Brika ] and I will be your moderator for today. [Operator Instructions]. I would now like to pass the conference over to your host, Nikki Sparley, Head of Investor Relations. Thank you. You may proceed, Nikki. Nikki Sparley: Thank you. Good morning, and welcome to our third quarter 2025 earnings call. A presentation for today's call is available on our Investor Relations website at ir.northwestnaturalholdings.com. And following this call, a recording will also be available on our website. Turning to Slide 2. As a reminder, some things that will be said this morning contain forward-looking statements. They are based on management's assumptions, which may or may not occur. For a complete list of cautionary statements, refer to the language at the end of our press release. Additionally, our risk factors are provided in our 10-Q and 10-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany today's call, which are available on the Investor Relations page of our website. Please note, our guidance assumes continued customer growth, average weather conditions and no significant changes in prevailing regulatory policies, mechanisms or assumed outcomes or significant changes in local, state or federal laws, legislation or regulations. We expect to file our 10-Q later today. Please note, these calls are designed for the financial community. If you are an investor and have additional questions after the call, please contact me directly at (503) 721-2530. News media may contact David Roy at (503) 610-7157. Moving to Slide 3. With us today are Justin Palfreyman, President and Chief Executive Officer; and Ray Kaszuba, Senior Vice President and Chief Financial Officer. Justin will provide an update on each of our businesses, and Ray will walk through our financial results, liquidity and financing and guidance. After Justin and Ray's prepared remarks, they will be available along with other members of our executive team to answer your questions. With that, I will turn it over to Justin on Slide 4. Justin Palfreyman: Thanks, Nikki. Good morning, and welcome, everyone. I am very proud of the effort and dedication from our team so far this year, resulting in significant progress toward our strategic goals while fulfilling our mission of delivering safe, reliable and affordable service to our nearly 1 million customers. We continue to expand our customer base, invest in our systems, drive operational excellence through cost efficiency and discipline and achieve constructive regulatory outcomes. We are well positioned to deliver on our commitments to shareholders and create value in the future. Starting this morning with financial results. Northwest Natural Holdings continued its momentum from the first half of the year and delivered a strong third quarter. Our results reinforce my confidence in executing against our 2025 plan. That's why we are expecting full year 2025 results to be above the midpoint of our adjusted earnings range of $2.75 per share to $2.95 per share. Through September 30, we invested over $330 million in our gas and water systems to support customer growth, system reliability and long-term infrastructure resilience. Our combined utility customer growth rate was 10.9% for the 12 months ended September 30. This substantial growth was largely driven by our gas utility acquisitions in Texas. Northwest Natural Water also contributed incremental meter growth, posting a 4.1% increase. With our robust long-term capital plan and customer growth, we are reaffirming our long-term earnings growth rate of 4% to 6%. We remain highly confident in our ability to execute. I am pleased to report that in the fourth quarter, the Board approved a dividend increase, making this the 70th consecutive year of annual dividend increases. Northwest Natural Holdings is 1 of only 3 companies on the New York Stock Exchange with this outstanding record. While our growth and financial results are strong, we are executing on our strategic priorities for 2025, laying the foundation for success in the coming years. Moving to Slide 5. Turning first to our Northwest Natural Gas utility and a few updates on the regulatory front. I'm happy to report Northwest Natural and parties worked collaboratively and received a constructive order from the Oregon Public Utility Commission approving our all-party settlements. Under the order, Northwest Natural's revenue requirement increased $20.7 million. That consisted of a 50-50 capital structure, an ROE of 9.5% and a cost of capital of approximately 7.12%. In addition, rate base increased $180 million since the last case for a total of $2.3 billion. New rates went into effect on October 31. At the end of August, we filed our first Washington general rate case since 2021. As context, about 10% of our Northwest Natural Gas utility revenue comes from our Washington customer base. The 3-year rate case request has new rates beginning August 1, 2026. The request to be spread over 3 years included a total revenue requirement increase of $42.4 million over current rates. The increase is based on a capital structure of 51% equity, 48% long-term debt and 1% short-term debt, a return on equity of 10.2% by year 2 of the filing and a cost of capital of approximately 7.6% by year 2. This request includes an increase in average rate base of $175 million since the last rate case. We carefully considered this rate case filing and the effect on customers' bills. In parallel, our team continues to identify operational efficiencies and cost-saving opportunities while remaining focused on delivering safe, reliable service. In October, we received approval for our annual purchase gas adjustments in both Oregon and Washington. Taking into account the Oregon general rate case increase and gas costs. On average, Northwest Natural residential customers are paying about the same today for their natural gas service as they did 20 years ago. While a customer's monthly bill has not changed much over the last 2 decades, the value of the gas system in the Pacific Northwest has increased exponentially. Let me give you an example. During our last peak event on the coldest winter hour, Northwest Natural's system delivered 2.5x more energy than the largest electric utility in the region. Said another way, our gas system provided the equivalent of 12 gigawatt hours of electricity, which is comparable to about 11 nuclear power units operating at full capacity. At the same time, natural gas use in our customers' homes and businesses accounts for just 6% of Oregon's annual greenhouse gas emissions. Now that's an efficient system. During that event, our system performed well. Our Mist gas storage facility delivered a new record volume and provided essential support for the entire region's energy system. These facts underscore the unmatched reliability, scalability and efficiency of our gas system, especially during critical peak events. As demand continues to grow, our investments in long-duration assets like our Mist storage facility position us to meet regional energy needs. Turning to our SiEnergy gas utility in Texas. SiEnergy continues to provide strong customer growth and is hitting its financial targets. Perhaps most importantly, SiEnergy posted a sizable increase to its customer backlog and now has signed contracts representing over 240,000 future meters. Including the Pines backlog, that's nearly a 35% increase in a year, a strong signal that developers increasingly want to work with SiEnergy and expect to build Texas housing for years to come. Turning to regulatory updates. We are pleased with Texas House Bill 4384, which became law in June of 2025. This is a highly constructive piece of legislation for SiEnergy, and we expect it to be particularly beneficial after our first rate case. The bill enables real-time recovery of distribution investments, essentially eliminating lag, further streamlining the regulatory process and enhancing earned ROEs. This mechanism strengthens our ability to invest efficiently in the infrastructure build-out needed in Texas. SiEnergy currently accounts for approximately 10% of our business. We anticipate it will be an increasing portion of our business mix moving forward and are very supportive of further investment in Texas. Turning now to Northwest Natural Water. Our objective from the very beginning of our water strategy was to purchase anchor utilities in high-growth regions and then tuck-in smaller utilities and grow organically around that central utility. We continue to see the benefit of this strategy playing out. Over the last 12 months, our water and wastewater utility customer base grew quite rapidly at a 4.1% clip, including 3 small acquisitions and organic customer growth on its own was 2.4%. Our water CapEx plan for 2025 continues to be robust as our utilities replace end-of-life infrastructure, improve our wastewater treatment facilities and support clean water and continued growth in our communities. To recover our water investments, in 2025, we completed 7 rate cases at utilities in Idaho, Washington and Oregon. On average, we received about 67% of our requested revenue increases, a constructive outcome that reflects the value of upgrades to these systems and our regulatory approach. Looking ahead to 2026, we will continue to execute on rate cases to support essential investments in these utilities. Another recent success was the approval by the Texas Public Utility Commission of our purchase of in-line utilities in Houston, Texas. This is our second fair market value acquisition under the Texas rules, and I'm pleased with how our team worked with regulators to get this across the finish line. We expect to close on the 1,500 connection water and wastewater utility by year-end. Beyond the regulatory progress, we're expanding our water playbook to further develop our footprint organically in Texas. To do that, we're leveraging SiEnergy's approach and relationships, partnering with developers and homebuilders in the region and establishing a strong reputation for building out new infrastructure reliably and on time. Our Texas business development team is now offering developers in Houston water and wastewater services. We are already seeing strong momentum here. So far, we have signed multiple contracts for 3,200 future water and wastewater connections and the pipeline of opportunities is growing. We are just in the opening innings of this opportunity, and we'll continue to leverage strong existing relationships with developers and homebuilders to increase the scale of our operations at both SiEnergy and our water utilities in Texas. Our renewables business also continues to deliver steady operational performance and consistent financial results, supported by disciplined execution and long-term contracts. While we are taking a cautious approach to future project investments in this space, we are pleased with the projects we have operating today and the steady earnings and cash flows those assets are generating. In conclusion, I am happy to report that all of our businesses are in a strong financial position and poised for future growth. With that, let me turn it over to Ray to cover the financials in more detail. Raymond Kaszuba: Thank you, Justin, and good morning, everyone. Turning to Slide 6. As Justin mentioned, third quarter results continued our momentum from the strong first half of the year. This performance keeps us firmly on track with our expectation to be above the midpoint of our guidance range for 2025. As a reminder, our gas utility earnings are seasonal with the majority of revenues and earnings generated in the first and fourth quarters during the winter heating months. We reported a loss of $0.73 per share for the third quarter of 2025, relatively unchanged from the loss of $0.71 per share for the same period in 2024. For our Northwest Natural Gas segment, earnings per share improved slightly, largely in line with last year. SiEnergy provided an incremental $0.04 of earnings per share for the third quarter of 2025 compared to the same period last year. In our first year after the acquisition, margin and net income are trending well and are aligned with our expectations. Our Water segment earnings per share increased $0.04. The key drivers were new rates at our largest water and wastewater utility in Arizona and additional revenues from the ICH utilities after the acquisition in September 2024. Finally, the adjusted net loss of our other segment increased $0.14 per share compared to the same period last year, primarily due to higher interest expense at the holding company. On Slide 7, we have outlined our year-to-date results. Adjusted earnings per share were $1.52 to date in 2025 compared to $0.88 for the same period of 2024. The year-to-date increase in earnings per share reflected strong earnings across all business segments, including new rates for our gas utility in Oregon, contributions from SiEnergy, higher net income from our water utilities and earnings contribution from renewables, which is in other. These items are partially offset by higher O&M costs, depreciation and interest expense. Turning to our growth outlook and guidance on Slide 8. We reaffirmed annual 2025 adjusted earnings guidance today in the range of $2.75 per share to $2.95 per share. Given the strong results from the first 9 months of 2025, we expect to be above the midpoint for the full year. We continue to expect SiEnergy and Northwest Natural Water to each provide approximately $0.25 to $0.30 of adjusted earnings per share this year. For 2025, we continue to project 2% to 2.5% consolidated organic customer growth across our utilities. Turning to our capital expenditures. For the year, consolidated capital expenditures are still expected to be in the range of $450 million to $500 million, anchored by the significant projects at our Northwest Natural Gas utility related to modernizing end-of-life meters, system reinforcement and gas storage upgrades. Longer term, we continue to expect an earnings per share growth rate of 4% to 6% compounded annually from the midpoint of our 2025 adjusted EPS guidance range. Moving to Slide 9. Regarding capital structure, our objective remains to keep our balance sheet strong with ample liquidity. On September 30, 2025, we had liquidity of approximately $437 million with significant availability on our gas utility line of credit and cash on hand. Year-to-date, we have issued $48 million of equity through our ATM program. At this point, we have satisfied our 2025 ATM issuance needs and issued less than we originally expected. Related to debt, we have no material debt maturities in 2025. In August, we successfully issued $185 million of inaugural investment-grade bond at SiEnergy, refinancing the existing debt of approximately $150 million. In summary, we are pleased with our performance so far in 2025 and remain confident in achieving our financial targets for the full year and beyond. Thanks for joining us this morning. With that, we will open it up for questions. Operator: [Operator Instructions] The first question we have comes from Alex Kania with BTIG. Alexis Kania: Maybe the first question would just be on -- a little bit more color just on the lower equity requirement for '25. Is this a function of just performance year-to-date, kind of better cash flow generation? And is there any potential read-through kind of on an ongoing basis to fund CapEx? Raymond Kaszuba: Alex, I appreciate the question. I think you've got it. We start the year off. We look at our plans from an overall capital structure perspective, debt issuance, earnings, cash flow. As the year goes, we reassess that. That's what you're seeing here where we are now over or complete with our ATM program for the full year, and we wanted to communicate that. Alexis Kania: Great. And maybe just a kind of some additional follow-up just on where the company is seeing additional tuck-in opportunities, I guess, particularly in Texas around the water and gas lines of business here. Is there -- on top of the organic growth that you're seeing as well? It's just -- is there a fairly wide kind of a wide range of other kind of opportunities to tuck in relative maybe -- and kind of how would you compare that relative to the organic growth pattern? Justin Palfreyman: Yes. Thanks for that question, Alex. This is Justin. So the tuck-in opportunities for us across our water business -- they constantly exist, but we have built up a platform now that gives us the opportunity to continue to build and expand through organic growth, and we are prioritizing that. We will continue to look at opportunities on an opportunistic basis as they arise. And as you probably know, the water segment is very, very fragmented. There's a lot of small systems out there. But where we're seeing most of our growth right now is organically, and it's in areas like Texas, Arizona and Idaho, where there's strong housing growth. Operator: [Operator Instructions] And your next question comes from Selman Akyol with Stifel. Tyler Rakers: Tyler on for Selman. With the change in the rate case timing with sort of one behind you now in Oregon, does it seem as though the commission has been more or less receptive to certain items in the request versus the multiyear rate cases? Justin Palfreyman: Yes. Thanks for your question, Tyler. So we are -- the commission has just opened up a docket on multiyear planning in Oregon. As you know, that's something that's been in place for a while now in Washington. And as part of legislation that passed earlier this year, the commission is looking at implementing multiyear plans. We'll be engaged with them throughout that process, which will be a rule-making process that occurs next year. But right now, with new rates in effect here in Oregon, we think we're well positioned. Tyler Rakers: And then is there any change in the status of the -- like the hydrogen pilot projects given attitude with the administration? Has anything been kind of sidelined for the time being on blending or otherwise? Justin Palfreyman: Yes. So we have -- as you know, we've done hydrogen blending tests over the last few years at our facilities in Sherwood and are very comfortable with the technical capabilities there. We also had a hydrogen pilot at one of our facilities where we're testing new methane pyrolysis technology, and that pilot is largely complete as well. There are broader hydrogen production projects that you probably heard of the hydrogen hub projects across the country that were supported under the Biden administration. The latest news there, and we are not directly involved in those projects, but the latest news there is that funding has been reallocated away from those projects. So I think those are up in the air. But at some point in the future, if there is a clean hydrogen available that's affordable and can compete with other forms of renewable fuels on an affordability basis, we would be in a position to blend that in, in our systems. Operator: I would like to conclude the question-and-answer session here and hand it back to Justin Palfreyman for some final closing comments. Justin Palfreyman: Great. Thank you. Appreciate everybody's interest in participating in this call this morning and appreciate the questions and wishing everyone a safe rest of the week. Thank you. Operator: Thank you all for joining. I can confirm that does conclude the Northwest Natural Holdings Company's Third Quarter 202 Earnings Call. Thank you all for your participation. You may now disconnect, and please enjoy the rest of your day.
Operator: Good morning, ladies and gentlemen. Welcome to CGI's Fourth Quarter Fiscal 2026 (sic) [ 2025 ] Conference Call. I would now like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder. Kevin Linder: Thank you, Joelle, and good morning. With me to discuss CGI's fourth quarter and fiscal 2025 results are Francois Boulanger, our President and CEO; and Steve Perron, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. Eastern Time on Wednesday, November 5, 2025. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our fiscal 2025 MD&A, audited financial statements and accompanying notes, all of which have been filed with both SEDAR+ and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A complete safe harbor statement is available in both our MD&A and press release as well as on cgi.com. We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. Now I'll turn the call over to Steve to review our Q4 financials, and then Francois will comment on our full year performance and business and market outlook. Steve? Steve Perron: Thank you, Kevin, and good day, everyone. In our fourth quarter of fiscal 2025, we continue to demonstrate discipline in the management of our operation while effectively executing on our strategy of deploying capital to generate superior long-term return on investment for our shareholders. This starts with our profitable SI&C offering that we grow organically and/or with M&A. Second, to bring our managed services and IP offering to existing or new clients to help them be more efficient. This offering resonates strongly during this more challenging economic period. Finally, our strategy focused on investing in CGI with our share buyback program to increase our EPS while returning cash to our shareholders. In the quarter, we delivered $4 billion of revenue, up 9.7% year-over-year or up 5.5% when excluding the impact of foreign exchange. Growth was driven by our recent business acquisition and continued demand for our APAC delivery centers with this segment reporting growth of 6.4%. There was also some planned runoff of lower margin work from recent acquisitions. In our U.K. and Australia segment, with our acquisition of BJSS, growth was 28%. This acquisition adds further scale to our U.K. operations, and we can now showcase the breadth of CGI's end-to-end services to new clients. Across our U.S. segments, combined growth was 5.7%, primarily driven by our Aeyon and Daugherty merger investments, and our pipeline of opportunities continues to increase as we bring our managed services, IP and offshore delivery capabilities to our new client relationships. IP remained steady sequentially at 20.5% of our total revenue, even as we add a larger proportion of non-IP revenue from recent business acquisitions. The vast majority of our IP continues to be delivered through recurring revenue streams. Bookings in the quarter were close to $4.8 billion for a book-to-bill ratio of 119%, led by U.S. Federal at 185%. U.S. commercial and state government at 136% and Western and Southern Europe at 117%. Of the total booking in the period, 45% were for new business. On a trailing 12-month basis, book-to-bill was 110% with North America at 120% and Europe at 102%. On the same basis, managed services had a book-to-bill ratio of 120% and the SI&C book-to-bill ratio was 99%. IP book-to-bill was 107%. Our contracted backlog reached $31.5 billion or 2x revenue. Turning to profitability. Adjusted EBIT in the quarter was $667 million, up 11.2% year-over-year for an industry-leading margin of 16.6%, up 20 basis points. Including restructuring acquisition-related costs of $122 million, earnings before income taxes were $516 million for a margin of 12.2% (sic) [ 12.9% ]. Our effective tax rate in the quarter was 26.1%, 30 basis points less than last year, and we expect our tax rate for future quarters to be in the range of 26% to 27%. Adjusted net earnings were $472 million, up $33 million year-over-year for a margin of 11.8%. On the same basis, diluted EPS was $2.13, an accretion of 11% when compared to Q4 last year. Net earnings were $381 million for a margin of 9.5% and diluted EPS was $1.72, impacted by restructuring and acquisition-related costs in the quarter. We finalized our restructuring program and related expenses in the quarter. Turning to cash. We generated $663 million in our cash from operations, representing 16.5% of total revenue, even when incorporating $43 million in restructuring, acquisition and related integration payments. DSO was 45 days in the quarter compared to 41 days in the prior year, impacted by recent business acquisitions. In Q4, we continued to allocate our capital and invested $81 million back into our business, which includes strategic investments in Agentic and Gen AI, $250 million on business acquisitions, $491 million to buy back our stock. And in addition, we returned $33 million to our shareholders under our dividend program. Yesterday, our Board of Directors approved a quarterly cash dividend of $0.17 per share, representing a 13% increase. This dividend is payable on December 19, 2025, to shareholder of record as of the close of business on November 21, 2025. With $2.4 billion in capital resources readily available and a net debt leverage ratio of 1, CGI has the balance sheet strength and capacity to deliver on our profitable growth strategy. CGI's capital allocation priorities have remained consistent, focused on investing back in the business and pursuing accretive acquisitions. Additionally, we expect to remain very active in our repurchase program. Now I will turn the call over to Francois to further discuss insights on the year and the outlook for our business and markets. Francois? François Boulanger: Thank you, Steve, and good morning, everyone. CGI's strong performance in the quarter and in the year demonstrated our team's ability to execute with discipline in an environment that remained largely unchanged given the market dynamics. On a year-over-year basis, fiscal 2025 performance highlights where revenue increased 4.6% on a constant currency basis, with managed services up 6% in constant currency, in line with client demand given the challenging macroeconomic environment. EPS expanded 8.9% on an adjusted basis to a higher recurring revenue mix as well as proactive operational excellence actions. EPS accretion and share price growth are typically highly correlated. So we believe CGI stock is currently undervalued. Bookings were $17.6 billion, up $1.5 billion with full year book-to-bill ratios above 100% in both North America and in Europe on the strength of managed services, which were up 12% compared to last year. And cash from operations remained robust at $2.2 billion as a result of sustained quality delivery for clients. In fiscal 2025, we deployed over $3.7 billion, and we plan to continue our aggressive use of capital in 2026. Specifically, in fiscal 2025, we invested $368 million back into our business, which includes strategic investments in Agentic and Gen AI. $1.8 billion on business acquisitions, $1.3 billion to buy back our stock, and we returned $135 million to shareholders through dividend payments. As Steve indicated, our Board of Directors approved a 13% dividend increase for Q1 2026. Our investments in the buy strategy remain pivotal to our revenue growth as we closed 5 acquisitions in fiscal 2025, all accretive within the first year. We expect these mergers to drive future growth as we bring our full offering value proposition to new clients. These mergers expanded our geographic footprint and our end-to-end offerings, including in key areas such as AI, data, cloud and engineering. Subsequent to the end of the fiscal year, we announced an agreement to acquire Comarch, a leading IT company in Poland. Upon successful completion of the merger, which we will more than double our presence in Poland, we will incorporate new ERP IP solutions and digital transformation services. I would like to warmly welcome all new consultants who have or will join CGI from these mergers. Today, I will highlight how CGI is positioned to lead in the next phase of digital transformation, particularly for the majority of our clients who are large enterprise, commercial and government organizations. We are partnering with them to simplify and orchestrate digital complexity in order to advance towards AI-driven business transformation. For CGI, AI-driven transformation amplifies what we do best, delivering trusted client outcomes faster at scale. In short, we refer to our positioning as being the AI to ROI partner for clients. To bring this positioning to life every day, our 94,000 CGI partners are using AI tooling to develop and manage systems jointly with clients. These clients partnerships are based on our operational experience and perspectives on the digital complexity that is a reality for clients. Every organization, every government and every industry runs on an invisible digital infrastructure underpinned by billions of lines of code. This digital ecosystem powers everyday life, and it continues to grow in complexity with each business process, regulation and cybersecurity threat. With this context in mind, CGI's AI strategy is structured around 4 key pillars: First, embedding AI into our end-to-end services of consulting, systems integration and managed services to drive continuous innovation that achieves industry-tailored business results; second, leading with AI integrated platforms across CGI IP and alliance partner technologies to accelerate industrialization and transformation at enterprise scale. Third, uniting talent and AI technologies to amplify and augment human creativity, productivity and potential for both clients and CGI partners. And finally, accelerating CGI's internal AI adoption to evolve our processes, systems and delivery to be an organization that is designed by and for humans powered by AI. These 4-pillar strategy creates new opportunities to drive revenue growth and margin improvement on existing and future engagements. I will now talk through each of these pillars, starting with embedding AI into our end-to-end services. In consulting, our AI advisory framework applies CGI's expertise in change management and process engineering to simplify and rethink how work happens in the future. Offerings like AI LaunchPad and AI Maturity Assessments help clients identify, prioritize and validate use cases with clear ROI. Then our behavioral science-based methodologies for AI adoption and workforce readiness helps clients implement their strategies and build future-ready organizations. From a software development and systems integration perspective, CGI is accelerating delivery by incorporating AI across every phase of system development from requirements to deployment. We continue to train CGI partners on our integrated methodology and on tools such as Google Gemini Code Assist, Microsoft GitHub Copilot and OpenAI ChatGPT Enterprise. We are applying these capabilities along with CGI's AI native platforms of PulseAI, Digishore and NAVI to accelerate solution delivery and support legacy systems modernization. These tools, when applied with our AI-driven software development methodologies are now major productivity drivers. For example, just in cogeneration, which typically represents 25% of the system development life cycle, we see efficiency gains of 30%. Through CGI's managed services, we operate within our clients' most complex mission-critical environments, giving us a unique opportunity to embed AI responsibly, practically and profitably. CGI's managed services engagements have, for decades, included commitments to deliver ongoing productivity improvements. We have always evolved in line with innovation cycles and delivery models and technology from offshore to cloud. Our default managed services pricing models are outcome-based, meaning we commit to cost predictability and delivering results, not just inputs. This is an approach we are very experienced with and has contributed to improving profit and reinvesting in capability building. Now advanced AI, which we consider to be generative and Agentic AI, provides us additional levers to do this while continuing to create compelling client offers. For example, CGI's DigiOps suite helps clients industrialize AI within their managed services to drive efficiency and innovation at scale without disrupting core operations. Our modular approach works with any technology stack, including CGI's IP solutions as well as any technology platform our clients use. Today, DigiOps is in production for many clients with over 165 AI agents and over 2,000 automation workflows across industries such as retail, banking, communication and energy and utilities. DigiOps is becoming a growth driver and margin levers for our managed services engagements. As an example, for the run of applications, depending on the maturity of the business processes, we saw results such as up to 30% productivity gains and up to 40% faster resolution of operational IT requests. Across each of our end-to-end services, we are integrating AI by design into enterprise workflows and processes instead of using it as an accessory. With this holistic value chain approach, AI is tightly aligned and tailored to an industry which helps drive continuous innovation for clients. The second pillar focuses on leading with AI integrated platforms across both CGI IP solutions and alliance partner technologies. CGI's IP business solutions remain one of our competitive differentiators. In line with our multiyear strategy, we continue to invest in embedding advanced AI into our IP solutions with 65% of the strategic IP portfolio incorporating intelligent automation. We currently have a robust ecosystem of operational agentic solutions with over 200 AI agents across a wide range of CGI IP solutions, digital enablers and delivery accelerators. A key component of this ecosystem is PulseAI, which is CGI enterprise platform for building and scaling AI and applied intelligence. PulseAI currently has over 20 industry-specific agents that combine complex business reasoning with tools, data and multi-agent orchestration to take action, not just generate text. Turning to CGI alliance strategy. Our approach is intentionally to be highly inclusive with over 150 relationships with technology companies. This breadth of partnerships ensures CGI remains agile in selecting the best solutions to meet each client's unique needs in terms of technology stack and other business requirements such as addressing digital sovereignty. We collaborate through joint go-to-market relationships with all major hyperscalers, Google, AWS and Microsoft as well as leading software platform providers such as SAP, Salesforce and ServiceNow. We are also expanding our partnerships and client delivery with AI native firms such as OpenAI, Snowflake, NVIDIA, Databricks and Mistral AI. Our global alliance partnerships continue to drive new wins and client relationships with our fiscal 2025 alliance-related bookings up more than 120%. Well over half of these wins were new business. CGI's strength in AI delivery is also earning recognition from industry analysts who influence procurement decisions across industries. Earlier this week, we announced that IDC named CGI a leader in worldwide AI services for state and local governments. As a professional services firm, our third strategy pillar of uniting talent and AI technologies is among our most important investments. Through the use of Gen AI platforms, our teams have created more than 8,000 personal productivity agents to learn faster, unlock creativity and drive better results for clients and CGI. Naturally, our delivery of advanced AI services to clients relies on our culture of continuous learning, and it requires different skills and new ways of working. We continue to invest in the development of our consultants and experts for both today's needs and as technology innovation evolves. Our approach marries deep industry expertise with tool adoption, structure learning, project rotation and real-world experimentation. This hands-on access, coupled with our AI-infused offering is driving tangible productivity gains and accelerating our ability to embed AI within complex client systems. For CGI, it's also driving higher revenue per CGI partner as we saw this increase by 5% year-over-year. This is a trend we expect to continue. Our award-winning AI learning and certification programs provide multi-tiered role-based learning path from AI literacy to advanced vendor certified technical expertise. Currently, approximately 20% of our consultants have expertise in advanced AI and data, bringing this expertise to their work every day with clients. Continuing to develop and hire talent with these skills remains a top priority for fiscal 2026. Through our holistic talent strategy, CGI has continued to build an organization where advanced AI proficiency is not a specialty but a core capability. The final pillar of our strategy is accelerating CGI's internal AI adoption to evolve our processes, systems and delivery. Each of our enterprise teams are embedding AI to drive process efficiencies, enable faster decision-making and increase productivity. We are currently implementing or improving more than 50 AI solutions. Our most recent internal solutions launch is underway now. The CGI AI exchange enables our experts around the world to find, share and leverage reusable assets, innovation and best practices. This new hub will enable increased productivity, more predictable cost and lower risk through proven and repeatable solutions and promote entrepreneurship, one of our core values. For fiscal 2026, we are progressing the use of Agentic AI within our business processes to drive operational efficiencies, decision intelligence and service innovation. In summary, our positioning and what makes CGI unique for the AI wave is not rooted in height, but instead in the confidence we have in our proven ability to anticipate trends, embrace change and grow through nearly 50 years of technology innovation. In fact, our pipeline of opportunities that integrate AI in our offerings increased by nearly $5 billion compared to this time last year. Turning to the outlook. The high degree of market uncertainty continues to contribute to some caution among clients and their discretionary IT spending, notably for SI&C projects. However, the need for clients to simplify, modernize and secure complex systems and business processes will continue to increase. This means we do not expect to see a long-term trend of IT budget declines. We see most clients rebalancing their spend as managed services and AI integrated services help them reduce operational costs. In most cases, clients are planning to reinvest those savings to fund their backlog of monetization initiatives, all of which require technology partners to realize ROI. Demand for managed services remains robust, given the challenging economic environment in many of the industries where our clients operate. We see this demand reflected in our pipeline where managed services opportunities are up by more than $11 billion compared to this time last year. Before I conclude, I would like to give an update on our U.S. operations. We continue to work with our clients to help achieve their outcomes. While we are pleased with the Q4 bookings across our U.S. operations, government procurement cycles remain challenging, given the length of the federal shutdown and its related impacts, including some indirect ones for our state and local government clients. Given this and our current assumption of a mid-November reopening, we expect a revenue impact across our U.S. operations in the next quarter of approximately $60 million to $75 million and $15 million to $22 million in margin impact. Lastly, specific to the U.S. administration's changes to the H-1B visa program, CGI does not have a material number of new applications. Therefore, any potential impact would be manageable. In closing, we remain confident in our profitable growth strategy, which is designed to optimize total return on investment for our shareholders through new and expanded engagements to deliver AI outcomes, sustained demand for managed services given economic dynamics, continued M&A given the favorable environment and active deployment of capital through our share buyback and dividend programs. Thank you for your continued interest and support. Let's go to the question now, Kevin. Kevin Linder: Thanks, Francois. Joelle. We can now poll for questions. Operator: [Operator Instructions] Your first question comes from Thanos Moschopoulos with BMO Capital Markets. Thanos Moschopoulos: Maybe starting off on the federal side, I guess, putting aside the shutdown, based on the bookings you saw in the September quarter and based on revenue trends heading into the shutdown, does that change your level of optimism or pessimism with respect to how the federal business should do over the next year once the government reopens? François Boulanger: Well, I think you saw the booking at the last quarter, 185%. So it was a very good booking, very happy to see that. I think at a certain point, the federal government needs to spend in IT. And that's what we were seeing. We were seeing a lot of momentum on the procurement side. But naturally, with this shutdown, that stopped for -- in October. So -- but when this will reopen, we think that growth will be there because they need to spend, and that's what we were seeing in the summer time frame. Thanos Moschopoulos: Great. And with respect to the AI discussion, is there any way for us to think about the potential margin uplift you may already be capturing or that you might be able to capture over the next year or 2 as you adopt AI and to what extent you'll be able to get that benefit internally versus having to pass it on to customers? François Boulanger: Yes. So two things. For sure, like we were saying in -- we're using a lot of AI in our managed services today. So that's helping us to give the benefit to our clients and win new business on that side and improving at the same time our margin because we are outcome-based basis most of the time with these clients. The second thing also when I'm talking about what are we doing internally with client zero to some point. So we will invest and we invest and we continue to invest, for example, in Agentic AI to optimize some processes. So expectation is that we would see even the SG&A -- CGI SG&A improving in the future with these automations. Operator: Your next question comes from Robert Young with Canaccord Canada. Robert Young: First question, you noted that the default for CGI is outcome-based pricing. If you could just narrow down in on that. Is that like as it relates to managed services? Or is it the consulting business? I noted some of your peers are highlighting pricing pressure. And so is this something that is a protection for CGI as it relates to pricing pressure? Can you just expand on that and how it compares to some of the peers in the IT services industry, that would be very helpful. François Boulanger: Yes. Thanks, Robert, for the question. So for sure, on the consulting side, that's mostly time and material. And so that will continue in the future. And again, the fact that we have the expertise and especially on the AI side, the right expertise, people are looking for that expertise. So while pressure, you'll always have pressure on pricing, when you have the right people and the right value to bring to the clients, the price is the second lever and not the first. As for SI&C, we have what, perhaps 40%, 50% of our SI&C business or SI, sorry, business where it's fixed price. So using, again, some of these AI tools is helping us to increase the profit or the margin on our projects while hitting the right price tag or the price point for the client. So that's what we see in the SI side. And actually, on managed services, our majority of managed services contracts are outcome-based. And so again, it's a negotiation of having it at the right price point for the client. And after that -- and the percentage of savings that they want. And after that is to work on producing that saving and producing our margin needed. So we -- while like I'm saying, we're seeing the pressure every day, the fact that we're outcome-based is an easier way of producing the value for the client and having the right level of profitability for us. Robert Young: Okay. My second question would be around the comment around higher revenue per employee. I think you said it was 5% and that it would improve or that, that trend would continue. If you could expand on that, is that being driven by AI? Or is it maybe better the growth in APAC and the addition of Poland? Maybe you just talk about where that revenue per employee growth is expected to come from and how it flows down to the operating margins. François Boulanger: For sure, with the use of AI, we would expect that this revenue per employee will continue to go up because, again, these tools are helping our clients to deliver more with their same time. So that will help us to deliver more opportunities to our clients. So that's how we were looking at it. for sure, the fact of using India, an example, Poland will also contribute to this. But I would say that AI will be also a big factor in this. Operator: Your next question comes from Jerome Dubreuil with Desjardins. Jerome Dubreuil: The first one is on the forecasting power that bookings bring. Historically, it has been a bit uneven and obviously, 119% book-to-bill is very strong. So I'm wondering if M&A has an impact on the book-to-bill or if there's some sort of organic book-to-bill that you can share? I appreciate that your strongest booking deal is U.S. Federal and no M&A there, but if you can comment, please? François Boulanger: Yes. But M&A by itself won't touch the booking because, again, when we're actually doing the acquisition or the merger, we are looking at their backlog, and that backlog is included in our backlog, and it's not going through the book-to-bill ratio. So we are starting to include the wins of these acquisitions at the date that we actually closed the deal. So the before is actually put in the booking -- in the backlog and not in the bookings. But on the other hand, the fact that we have these acquisitions, example, BJSS, it's helping to accelerate some of our discussion, example, on the managed services side. And we have a lot of clients of BJSS that we were capable of bringing them to India, for example, and we did the same thing with Daugherty, and to see our capabilities in the managed services side, and that's triggering some bookings on that side. But that's, again, after the acquisition and not before the acquisition, Jerome. Jerome Dubreuil: Awesome. That's great color. Second one, I think it was excellent. The prepared remarks were very good in terms of what you're doing to -- in AI. If you can please maybe communicate because the market apparently thinks that there's going to be an impact from AI that it's going to be automating a lot of the implementation processes that you're exposed to. So I'm wondering if you -- what you're telling investors that are concerned by that or if you have data on whether implementation processes can or can't be automated with AI? François Boulanger: Yes. Jerome, like I said in the text, we are seeing some savings. We are seeing some automation. And again, we are applying them in our day-to-day operations and to help our clients to achieve the savings. At the same time, we are dealing with very complex clients, banks with -- where they have thousands and thousands of applications, interfaces, and that needs to be managed, and that still need to have people working on that. And so AI will bring some savings, but you'll still need to have people to manage all that. And we are living in a complex world, and you need people to manage that complexity. That said, it will bring some savings. And naturally, by bringing these savings to clients, it will create new demand. And you'll see more, I think, more people will look at managed services and looking at specialists and people like us to help them in managing their infrastructure, managing their IT solutions, IT applications and bringing savings to them. So we're seeing that demand will go up for that reason. And all the savings that they can have also on the running of the application, we are seeing that they'll reinvest it back in their -- in systems and new systems. We don't see IT budget going down from clients. They will do more with the same amount or the same budget, but they won't go down. And they'll still need help from specialists like us who is investing a lot in AI, in our people, in our processes to help them succeed. Operator: Your next question comes from Stephanie Price with CIBC. Stephanie Price: Thanks for the color on CGI's AI strategy. I was hoping you could maybe dig a little bit deeper into the partnership strategy and talk a little bit about who your largest and fastest-growing partners are and how you kind of see that partnership strategy evolving over time? François Boulanger: Yes. Well, again, like I said, we have partnership with all of them. And the reason is, is that depending on the region, depending of the industry, some partners are better than others to work with. And also, sometimes it's a choice of a client. So that's why we are talking to all of them. You saw also the announcement that we did this week with Snowflake and ServiceNow and UiPath, where we move up in their evaluation. So we are working with all of them, and we will continue. So we don't have any preference for 1 or 2 of them. Stephanie Price: Okay. And then you mentioned some planned runoff of lower-margin work from recent acquisitions in the prepared remarks. Just hoping you could quantify that or -- and then talk a little bit about if you expect it to continue into future quarters. Steve Perron: Look, it's Steve here, Stephanie. Thank you for the question. in each M&A, as you well know, CGI, we are working for profitable revenue. We want to make sure that when we are taking a risk in the revenue, we are getting rewards and we are getting the profit out of it. So obviously, when we are looking at M&A and integration of company, we are looking at all the projects that they have. And some projects are not to our expectation in terms of return in order to be rewarded for all the good work we're doing. And because of that, sometimes we are reducing the activity that we do for some projects. In terms of the volume, it won't be a material one. And usually, you will see that in the first year after the acquisition. François Boulanger: But that said, I just want to reiterate, we are seeing a lot of synergy by putting these acquisitions together. Like I was saying, a lot of visits to our Asia Pac from these clients. And we will see some longer-term contracts signed with these clients. I'm convinced. We see a very good momentum on that. Operator: Your next question comes from Surinder Thind with Jefferies. Surinder Thind: Francois, can you maybe talk about just the demand trends within SI&C? It seems that, that part of the business continues to struggle at this point. François Boulanger: Yes. It depends of the area. For sure, on the AI side, a lot of demand, a lot of consulting on that side and more and more implementation. I think the pure business consulting, that's still some struggle and especially in places like in France. But I would say that on everything that's related to AI, yes, it continues to be pretty in demand. So it's really depending on the demand, but I would agree that the business consulting is still pretty flat, if I can say. Surinder Thind: Just a clarification, I guess, is the idea that we should expect the current growth rates organically to kind of continue? Do you see improvement here? It just seems like it's hard to get a picture of where exactly things are, I guess, and how they're trending on an organic basis. François Boulanger: Yes. As you know, we're not splitting organic versus inorganic, and it's very tough to do it because, again, when we are integrating these companies, it's tough to understand what's coming from the old -- from the acquisition versus the legacy CGI, if I can say. And like I was saying, we are seeing good momentum on having both together and winning new services. As for example, for sure, I talked about the federal side. And again, we have a temporary headwind this or next quarter related to this. And so that's one thing that -- yes, it will be tougher in the federal side the first quarter. But if everything is going well and we can see end of the shutdown, we're expecting to bounce back in the second quarter. Surinder Thind: That's helpful. And then just on the M&A side, just any color or commentary on just the pipeline of deals, whether you might be closer on more deals? Or how do we think about what you've done in the past 1.5 years versus maybe how you're thinking about what's coming in the next 12, 18 months? François Boulanger: Thanks. That's a good question. For sure, we're seeing a lot of momentum on that side. We just -- like I said, we closed Comarch. We're still waiting for some approvals, but we're expecting really the formal close to happen in the next couple of weeks. And we are talking with a lot of other potential acquisitions. The evaluation went down. And so we need to take advantage of this environment, and we will continue to be aggressive on that level. We had a good 2025. And for sure, we need to dance. But like I'm saying, we have a lot of opportunities, and we think we'll be able to close some of them in 2026. Surinder Thind: Got it. So it sounds like just on -- just to clarify the last comment, it sounds like with valuations down, you're willing to be a bit more aggressive on the M&A front? François Boulanger: For sure, because the demand are -- when before we were talking about, I don't know, people wanted to have 2 and 2x and more on the revenue. This evaluation went down a lot lower. I mean now we're talking 1 to 1.5x revenue. So it's in our sweet spot. So that's why we think that we will be very aggressive on that. Like I was saying, the environment, it's a fantastic environment for that level. It's good also for managed services, like I'm saying, we are in an environment where people want to have savings. So managed services is the way. And I'm saying on the evaluation side for acquisition, they went down. So it's a good -- very good opportunity time for us. Operator: Your next question comes from Paul Treiber with RBC Capital Markets. Paul Treiber: Just a follow-up question on the M&A environment. The question is, how are you evaluating AI readiness and risks with M&A targets? Is it something that you're proactively looking at in your due diligence? Or is it less at the forefront? François Boulanger: Again, we -- our strategy on M&A, like I always said in the past, we're really focused on buying relationship, client relationship. And that's a focus we will continue, especially in places like in the U.S. Like I said in the past, several places, metro markets or region in the U.S. were still underrepresented. So we want to have more -- so Chicago and the West Coast, for example, are good places where we're looking for potential acquisition for -- like I'm saying, to build a new relationship and client relationship. But for sure, expertise like AI expertise is also very important, and we are looking at it. And I'll give you the example. BJSS was one that you had a lot of AI expertise. And so that's one thing that we will also look in the potential merger, what kind of AI expertise that they have because, again, that's what is in demand today. Paul Treiber: And secondly, the Canadian federal budget came out last night and the government is making or plans to make a number of large investments. Can you elaborate on CGI's footprint with the Canadian federal government and what you see as opportunities for CGI's growth with the federal government going forward? François Boulanger: For sure. That's a great question, Paul. And yes, when you're reading the budget and the initiatives that they want to do, we see a lot of potential where we can help them, right? The first one is sovereign cloud. So they want to create a sovereign cloud. So that will have a lot of work to bring activities from public cloud and data from public cloud and solution from public cloud to their sovereign cloud. So a lot of exercise, a lot of work that will need to be done there. They want to do -- they want to have a more efficient government. So -- and they talked about implementing AI and automation. So again, they'll need partners like us to help them to create these AI solutions and the automation to achieve their goal of reducing expenses. And the other one is defense. And they talked about investing a lot on the defense side and on the digital and all the IT that needs to be supporting these defense initiatives. And again, that's a big portion of our business in other countries like in U.S., in Germany. We are a NATO partner for IT. So we see a lot of potential there and see how we can help them to bring what we have across the world and what we can bring to them. So it's very important. The fact also that they want to bring back some work in Canada. I think for a company like ours where we have a very good presence in Canada will be beneficial. And I think we can bring a lot of solutions to the federal government. Operator: Your next question comes from Richard Tse with National Bank. Richard Tse: Francois, about a year ago, I think you talked about elevating CGI's brand. And my guess is it was sort of to help you grow the U.S. commercial footprint. Where are you in that? And what sort of metrics are you monitoring to assess whether those investments are working? François Boulanger: Thanks, Richard, for the question. Yes, it's still a focus of mine and the company. And one of the KPIs that we're following the most for that is new business. And this quarter, we had 45% of our booking that was new business, not necessarily new clients, but new business and a lot of them were new clients also. So that's how we are managing this. And also the alliances is helping us on that side and having -- working closer with them is bringing also new kind of business. You see also what we're doing with the industries, analysts like IDC that name us on the state and local for AI services. So that's the kind of work that we're doing with the marketing team, with the operations to be more visible with these analysts to be more visible with these partners. And again, the ultimate goal is to sign new deal with existing clients, but also more importantly, to bring new clients in -- and by the way, the pipeline is up by 30% for that -- for these new business, new clients. Richard Tse: Okay. My second question has to do with some of your prepared comments on the increased demand in your APAC delivery centers. How does offshore play in terms of the increasing shift to AI? Does it sort of increase or decrease in importance there? François Boulanger: I would think, yes, two things. First of all, we have the GCC thing, right? So as you know, a lot of companies are looking at opening their own GCC or captive in India. So that's demand. We see a lot of demand to help them to create that for them with a transfer optionality at the end of the contract. So that's still creating a lot of demand in this business. And so we see that continue in the future. As for AI, for sure, we balance the number of hiring in India because a lot of activities or some of the activities can be done now with AI. So for example, when we're doing our development of our IP, that's mostly all done in India, but with some of these tools, AI tools, it's helping us to do some automation on the coding side or the development of the code of these new IP. So that's helping to not having the same number of employees to do the work that it was done like 2 years or 3 years ago. And finally, in the managed services, they have the expertise to manage -- to do these managed services. So they have also the expertise of implementing these tools to help us. So like I was saying DigiOps, who's applying DigiOps, it's mostly our Indian colleagues who's doing it. We're doing it elsewhere, but a lot of it is also done in India. So I'm seeing still India as an important tool and way of generating revenue for the future. Operator: [Operator Instructions] Your next question comes from Suthan Sukumar with Stifel. Suthan Sukumar: For my first question, I wanted to touch on AI spending priorities here. What are you seeing with respect to how clients are thinking about their spending priorities when they start to realize some of the initial ROI from early AI projects. Just wondering, are you seeing savings being reinvested elsewhere with respect to other buckets of IT spend? Or are they doubling down on AI and more of the underlying modernization work needed? François Boulanger: I think it's both. Right? Some of them are doing some investment in AI. And if they are seeing the ROI, for sure, they'll continue to invest on that side. But also, they had a backlog on the modernization side. For the last several years, they didn't do a lot of that modernization. So the fact that if they can find savings by the use of AI, at least that's what the clients are telling me when I'm meeting with these CEOs and also what the voice of our client is saying to us is that they need to find savings to tackle that backlog of transformation that they didn't do. So we are seeing that demand will continue on that side. The other thing also is on the data itself. it's nice to apply AI. It's nice to having your AI tool looking at your data, but still so much to do on the cleaning of that data and what's making sense, what's not making sense. So that -- and the security around the data, who can see what. And so again, a lot of work on that side that needs to be done. So again, I'm seeing data -- AI as a way of companies to resolve their backlog of transformation, and they'll need help. They'll need help from companies like ours. Same thing for business processes, same thing for security, cybersecurity with AI, naturally, it's bringing some risk on the cybersecurity. And again, they need people like us to help them to manage these risks. Suthan Sukumar: Great. My second question, I just wanted to touch on recent M&A. Can you provide a brief update on sort of how integration is going and how that's tracking to your expectations? And with respect to potential synergies, what sort of early traction or potential are you seeing that might be better than what you expected initially with these acquisitions? François Boulanger: Yes. I can start on the, say, opportunity side with clients and perhaps, Steve, you can give some color on the synergy side. Again, like I was saying a bit with the ones that we did, example, on Daugherty in the U.S. in the St. Louis and Chicago area, again, a place where we were not that well implemented. We have a lot of new clients and new relationships that we created. And again, we are showing to them. Daugherty was a great SI&C company, but without any managed services offering. And we came in and present to these clients, hey, we still have the opportunity to work with Daugherty great team. But more and above that, you are able now to tap on the overall CGI on the managed services, for example, and any other capabilities that we have. And it's working. We have several clients where we were able to sign new deals. And so it brought not just the revenue from Daugherty, but when I'm saying sometimes 1 plus 1 equal 3, that's what's happening in some of these acquisitions. So it's going well on that side, on the revenue, on the top line, on the savings side. Steve Perron: The savings side, look, if you look at all the acquisitions we did, the ones that we did in the U.S. earlier in the year, obviously, that's now all integrated. BJSS and the German one also Novatec that we did in the spring time. It was more integrated during the summer. So now it's integrated. So obviously, the savings are coming a lot faster when we are using our system, when we are using our processes. And you can see the benefit of the synergies. Apside was done recently. So not yet all integrated into our processes and system. It's going to be done over the next couple of months. And with that, obviously, margin will improve. It's part of the plan. And -- but still, we are quite proud with the situation that we had in Q4 with the margin of 16.6% that we were capable of delivering even during this integration period for a couple of acquisitions. Operator: There are no further questions at this time. I will now turn the call over to management for closing remarks. Kevin Linder: Thanks, Joelle, and thanks, everyone, for participating. As a reminder, a replay of the call will be available either via our website or by dialing 1 (888) 660-6264 and using the passcode 14123. As well, a podcast of this call will be available for download within a few hours. Follow-up questions can be directed to me at 1 (905) 973-8363. Thanks again, everyone, and look forward to speaking soon. François Boulanger: Thank you. Operator: Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's Third Quarter 2025 Earnings Call. [Operator Instructions] I will now turn the call over to Allie Summers, Senior Director of Investor Relations. Please go ahead. Allie Summers: Good morning, and thank you for joining us. Before we begin, please note that today's discussion includes forward-looking statements as defined under U.S. securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For more information, please refer to our filings with the SEC, including our most recent Forms 10-K and 10-Q. These statements speak only as of today, and we undertake no obligation to update them. A reconciliation of any non-GAAP financial measures referenced in today's remarks is included in our earnings press release available on the Investor Relations section of choicehotels.com. Today's remarks also include projected non-GAAP adjusted EBITDA contributions from our international operations. We are unable to provide a reconciliation to comparable net income projections without unreasonable effort as the necessary adjustments cannot be reasonably estimated for the period. The impact of this unavailable information could be significant relative to our expectations due to the inherent difficulty in forecasting certain items. Joining me this morning are Pat Pacious, our President and Chief Executive Officer; and Scott Oaksmith, our Chief Financial Officer. Pat will discuss our business performance and strategic progress and Scott will review our financial results and outlook. And with that, I will turn the call over to Pat. Patrick Pacious: Thank you, Allie, and good morning, everyone. We appreciate you joining us today. In the third quarter, we drove adjusted EBITDA 7% higher to $190 million, reflecting the strength of our higher revenue brand mix, a surge in our small and medium business traveler and group's business revenue, continued momentum across our partnership revenue streams and the accelerating earnings contribution now coming from our expanding international business. The strength of these earnings drivers allows us to raise the midpoint of our full year earnings outlook and tighten the range reinforcing our confidence in the growth of our global business going forward. During the quarter, we increased our net global rooms by nearly 2.5% year-over-year and growth was led by continued expansion in higher revenue segments, where we grew by nearly 3.5%, along with higher revenues per hotel across all segments. Today, 90% of our global portfolio consists of those higher revenue-generating rooms, further strengthening the value we deliver to guests, franchisees and shareholders. The future growth of our portfolio is compelling, fueled by robust developer interest with global franchise agreements awarded up 54% year-over-year. And today, 98% of rooms in our global pipeline are in higher revenue brands. As shown in our investor supplementary materials, these hotels are expected to be 1.7x more accretive than our current portfolio, driven by their RevPAR premium, higher effective royalty rates and larger average room counts. This pipeline strength underscores our ability to continue to elevate our earnings per unit by adding accretive hotels to our platform. Our pipeline is important not only for its size but also for the quality of the hotels within it and the velocity at which we are able to convert signings into openings. In fact, the number of hotels that opened over the past year without ever appearing in our global pipeline, accounted for approximately 1% of the system-wide unit growth. As we look ahead, we're optimistic about the next phase of the U.S. lodging cycle and its impact on new construction openings. In the U.S., we expect last week's lowering of interest rates, continued investments in the build-out of AI infrastructure and a constructive regulatory environment will drive stronger demand especially for our travelers. Combined with low industry supply growth, continued favorable demographic trends and significant demand catalysts such as the 2026 World Cup, the U.S. 250th anniversary and the Route 66 Centennial, these tailwinds are expected to generate incremental travel across our markets and set the stage for stronger RevPAR growth in the years ahead. Backed by the strength of our core travel base, retirees, road trippers and America's blue and gray collar workforce, our purpose-built hotel portfolio is well positioned for sustained growth. As we look for signs as to when the cycle in the U.S. may turn positive for our business, 2 indicators are moving in the right direction. First, our economy transient segment occupancy performance has begun to improve year-to-date and has shown year-over-year growth in each of the last 2 quarters excluding the impact of the third quarter 2024 hurricane. This segment was also the first to recover after the last period of demand softening, followed by the midscale segment. Second, occupancy index across our entire U.S. portfolio is up slightly year-to-date, a constructive early indicator that in prior cycles, has preceded broader U.S. RevPAR growth. Turning to our business outside the U.S. 2025 has been the year that we put the final pieces of our growth foundation in place, and we're very excited about the future. Our international business which represents $3 billion in gross rooms revenue is now our highest growth opportunity. As highlighted in our supplemental investor materials, our teams have made incredible progress in improving the value proposition of our brands. They've delivered higher earnings per hotel, higher royalties and higher operating margins for our business internationally. We've built a scalable global platform and successfully repositioned the business towards a higher-value direct franchising business model, which has grown by 22 percentage points over the past 3 years, and now represents 40% of our international rooms portfolio. Over that same period, our international EBITDA margins have expanded to 70% and per unit EBITDA has tripled. The foundation we've built gives us high confidence in our ability to capture rising demand across markets where our brands have a meaningful runway for growth and a significant opportunity for continued royalty rate expansion. With this momentum, we expect to generate more than $50 million in international adjusted EBITDA by 2027, doubling from our 2024 baseline. In the third quarter alone, we achieved 35% growth in adjusted international EBITDA, and we expanded our international portfolio by over 8% year-over-year surpassing 150,000 rooms outside the U.S. That growth was fueled by a 66% year-over-year increase in hotel openings. In EMEA, our portfolio grew to nearly 64,000 rooms, up 7% year-over-year. We're especially encouraged by the progress in France, where we expect to onboard over 4,800 mid-scale rooms under direct franchise agreements by year-end, nearly doubling our presence. This milestone highlights our ability to continue to scale our direct franchising markets. We also recently entered Africa with our first development agreement, including a flagship property in Kenya's Maasai Mara, game reserve, marking the start of broader expansion across Central and Southern Africa. In the Caribbean and Latin America, we expanded our footprint by nearly 50% over the past 3 years to more than 25,000 rooms across more than 20 countries. Just 2 weeks ago, we hosted our first Choice Hotels CALA convention in Mexico, where we saw tremendous enthusiasm for our upscale and mid-scale brands. Our targeted business travel strategy is reshaping the guest mix. With about 60% of stays in the region, now business related, driving weekday demand, higher spend and long-term loyalty. We also entered a new direct market, Argentina, with the opening of the Radisson Blu in Patagonia and recently signed an agreement for a new upscale Radisson RED. This follows the successful opening of the Radisson RED Sao Paulo a couple of months ago, further strengthening our upscale and upper upscale presence in the region. Elsewhere in the Americas, following the full consolidation of Choice Hotels Canada, we've transitioned to a direct franchising model and are already seeing impressive results from the 355 Canadian hotels with third quarter Canadian RevPAR up 7% year-over-year and growing franchisee interest across our brands. In Asia Pacific, since launching our Ascend Collection in China, just 5 months ago, we've already onboarded nearly 80% of the more than 9,500 anticipated upscale rooms with the remainder expected by year-end. We are on track to add roughly 10,000 mid-scale rooms over the next 5 years, significantly expanding our reach among Chinese travelers and driving valuable outbound traffic to our hotels in the rest of Asia and beyond. We also successfully launched our mid-scale extended stay brand, MainStay Suites in Australia, marking the first expansion outside North America. This direct franchise agreement adds nearly 600 rooms and marks the first step in extended stay growth across the region. All of this exciting progress around the world has positioned our international business as our fastest-growing segment. Our second fastest earnings growth segment is extended stay in the U.S. Over the past 5 years, we've expanded our U.S. extended stay portfolio by more than 20%, now exceeding 55,000 rooms. We've delivered 9 consecutive quarters of double-digit system size growth outpacing the industry. Today, this cycle-resilient segment represents nearly half of our U.S. pipeline offering longer average days, higher margin and stable revenue streams. Despite a challenging new construction environment for the industry, our Everhome Suites brand continues to gain traction. We now have 23 hotels open, 16 of which opened this year and 40 more U.S. projects in the pipeline, including 12 under construction. In the third quarter, we more than doubled Everhome openings year-over-year, expanding into fast-growing markets like San Antonio, Texas, a key emerging data center hub. Nationwide, the manufacturing and data center build-out is fueling strong long-term demand for extended stay. And with 40% of all economy and mid-scale extended stay rooms under construction belonging to Choice brands, we're exceptionally well positioned to maintain segment leadership. Our strategic expansion into higher revenue-generating segment is also strengthening our economy transient brands. Through deliberate portfolio optimization, we've been replacing lower-performing assets with higher quality, more profitable hotels, lifting guest satisfaction and brand equity. As a result, our economy transient hotels are outperforming comparable hotels within their chain scale in RevPAR growth and gaining RevPAR index share. This strong performance is attracting developer interest, driving a 35% year-over-year increase in our U.S. economy transient rooms pipeline and a 27% year-over-year rise in U.S. franchise agreements awarded in the third quarter. Importantly, the new hotels entering our system are expected to generate, on average, higher royalty revenue than those we strategically exited. In our mid-scale segment, developer interest remained strong with our global pipeline up 5% year-over-year. The redesigned country and in suites by Radisson prototype engineered for cost efficiency and ease of conversion has reinvigorated the brand. In the third quarter, we doubled the U.S. franchise agreements awarded and grew the U.S. pipeline by 15% year-over-year, reflecting renewed developer confidence and we remain on track to deliver year-over-year growth in brand openings in 2026. In our upscale category, we continue to expand rapidly increasing our global system size by 21% year-over-year to 118,000 rooms and driving a 33% increase in U.S. franchise agreements executed during the quarter. As I mentioned earlier, the velocity with which we move hotels through our pipeline remains a key differentiator. On average, our conversion hotels open within 3 to 6 months about 80% faster than new construction, allowing both Choice and our franchisees to capture revenue earlier. Choice remains the leader in the share of conversion hotels in its segments. In the third quarter, our U.S. conversion franchise agreements increased 7% year-over-year, and we expect conversions to remain a core growth driver through year-end and to account for approximately 80% of total U.S. openings in 2025. Now let's turn to the exciting investments we are making in our franchisee success system. Choice continues to have the best technology team in the business. We're especially proud that Forbes recently recognized Choice as one of America's best employers for tech workers, a testament to our culture of innovation and talented teams shaping the future of travel through technology. Today, we're building on our leadership in cloud computing and data to evolve Choice's technology stack into an intelligent, always-on ecosystem one where autonomous agents continuously help franchisees optimize rate and revenue management, streamline operations and free franchisees to focus on delivering exceptional guest experiences. Our systems are advancing from a tool to a true teammate, reflecting Choice's long-standing commitment to helping owners succeed from day one. Backed by our $60 million technology investment program now nearing completion and on track to conclude next year, this transformation will mark a pivotal step forward in how our platforms empower franchisees to achieve more. These next-generation systems will understand intent, reason across data sources and take action autonomously, equipping our owners with predictive insights, automated workflows and real-time decision support to unlock new levels of efficiency, profitability and growth. As part of our technology investment program, we're also expanding our reach in business travel and deepening guest loyalty, driving higher customer lifetime value and further strengthening our competitive edge. The transformation is designed to deliver durable RevPAR growth, expand RevPAR index share and support long-term rooms expansion. We're already seeing measurable impact with year-to-date occupancy share gains versus competitors through September. In business travel, we strengthened our position by expanding and elevating our global sales capabilities. Business travelers now represent roughly 40% of stays, creating a balanced mix that supports rate stability across economic cycles. In the third quarter, group revenue rose 35% year-over-year while small and medium business revenue grew 18%. Importantly, Choice's U.S. business traveler base continues to provide steady demand made up of guests whose jobs require travel, representing industries such as construction, utilities, health care staffing, logistics and manufacturing. Today, we manage more than 1,600 global business accounts and serve a strong SMB and SMERF base, underscoring our role as a trusted partner for business, group and event travel. Next year, we'll launch a dedicated digital platform for small and medium businesses tapping into a $13 billion opportunity to grow midweek occupancy and extend our corporate reach. In addition, we're developing new AI-enabled RFP management and sales tools designed to streamline group sales, accelerate responsiveness and drive more high-value bookings. Let me now turn to the exciting progress we're making in the types of guests we serve. Across our portfolio, the quality of our guests continues to rise. Half of our U.S. guests now have household incomes above $100,000 and 1 in 5 exceed $200,000, representing an increasingly attractive customer base for both our franchisees and partners. Recent enhancements in 2025 are delivering results. Loyal members stay nearly twice as many nights, spend more per se than nonmembers, and are 7x more likely to book direct, driving greater customer lifetime value for Choice and our franchisees. Just yesterday, we announced new benefits launching in January. This meaningful transformation of our program is designed to accelerate member growth, increase co-brand card revenue and strengthen direct bookings, further deepening engagement and fueling demand. The last time we revamped the program, we achieved a 700 basis point increase in loyalty contribution, giving us strong confidence in this next evolution. The enhancements in our rewards program are designed to further activate the expanding core demographic that we expect will drive demand well into the future, retirees and near retirees. This growing demographic now represents nearly 30% of our revenue and continues to be among the most valuable and active travelers on the road. They spend more at our hotels and are twice as likely to be members of our rewards program. This year alone, more than 4 million Americans are reaching retirement age, the largest cohort in U.S. history, entering their peak leisure travel years with record levels of disposable income. By 2030, 1 in 5 Americans will be 65 or older, representing an expanding base of affluent travel-ready consumers who spend more on travel than younger generations. Studies show that spending by this golden generation is expected to increase by 70%, reaching nearly $15 billion over this time period. With gas prices at multiyear lows and expected to go lower next year, Choice is uniquely positioned to serve these travelers, supported by our extensive portfolio of convenient drive-to locations that appeal to the millions of road trippers hitting the open road for new experiences. Our next-generation loyalty program is built to capture this growing demand giving these high-value guests even more reasons to stay with Choice. And in an AI-driven world, travelers will gravitate towards brands they know and trust and those they have real relationships with. That's why our loyalty evolution is focused on deepening those connections, positioning Choice to capture this next wave of demand. Together, these initiatives are driving greater demand and creating higher customer lifetime value for our franchisees. We're confident these investments and those still to come will expand our growth opportunities and create meaningful long-term shareholder value. Importantly, we're positioning Choice for enhanced performance and sustained growth. Our technology forward strategy and disciplined execution, combined with an asset-light fee-based model, have meaningfully strengthened our growth trajectory even in the dynamic macroeconomic environment. We continue to generate substantial free cash flow, enabling us to reinvest in high-return initiatives that fuel growth while delivering sustainable value to our shareholders. We are confident that our strategy will continue to unlock scalable growth opportunities, expand market share and drive long-term returns. With that, I will now turn the call over to our CFO. Scott? Scott Oaksmith: Thanks, Pat, and good morning, everyone. Today, I will cover 3 key areas: our third quarter financial results, our balance sheet and capital allocation and our outlook for the remainder of 2025. . We delivered record third quarter adjusted EBITDA of $190 million, up 7% year-over-year despite a softer U.S. RevPAR environment. This performance underscores the strength of our diversified revenue streams and the early returns from our strategic investments. Our record quarterly performance was driven by system-wide rooms growth and our higher revenue extended-stay and upscale segments, a higher average royalty rate, the continued expansion of our international business, including the introduction of our brands in new markets and strong partnership revenue. Let's turn to the 3 drivers of royalty fee growth, unit growth, RevPAR performance and royalty rate. In the third quarter, we grew our global rooms 2.3% year-over-year, led by a 3.3% growth across our higher revenue segments, upscale, extended-stay and mid-scale. Each segment delivered strong results in the third quarter, reflecting the benefits of our deliberate investments and disciplined portfolio focus. Our U.S. extended stay room system size grew 12% year-over-year, highlighted by a 14% increase in openings. At the same time, we awarded 30% more franchise agreements in the U.S. year-over-year. We strengthened our position in the mid-scale segment, our global pipeline increasing 5% year-over-year. Specifically, our flagship Comfort brand saw U.S. new construction franchise agreements doubled year-over-year with the new construction U.S. pipeline accelerating quarter-over-quarter. In the upscale segment, we expanded our global rooms portfolio by 7% quarter-over-quarter and attracted strong developer demand. Our SEM collection now exceeding 72,000 rooms worldwide saw a sixfold increase in global openings and twice as many franchise agreements awarded in the U.S. versus last year. Even in a challenging construction environment, we awarded more U.S. new construction franchise agreements than last year and opened 15% more U.S. new construction hotels in the third quarter year-over-year. Our focus remains on elevating the quality of our portfolio. We continue to strategically exit select assets that under-index our portfolio and fail to meet our requirements while maintaining system-wide growth, clear evidence that our portfolio optimization strategy is working. Turning to our RevPAR performance. Our global RevPAR for the third quarter was flat compared to the prior year, led by strong performance from our international markets. We achieved third quarter RevPAR growth across every region outside the U.S. with overall international RevPAR up 9.5% year-over-year. On a constant currency basis, international RevPAR growth was led by the EMEA region, which delivered 11% year-over-year increase. The Americas and Asia Pacific regions each posted 5% year-over-year RevPAR growth. We were particularly pleased with the performance of our Canadian operations, where RevPAR increased 7% in the third quarter. Our U.S. third quarter RevPAR declined 3.2% year-over-year, primarily reflecting softer government and international inbound demand. Even so, we achieved year-to-date occupancy share index gains versus our competitors, driven by strategic investments that enhance customer lifetime value for our franchisees. Our extended stay segment of the United States outperformed the industry RevPAR by 20 basis points in the quarter and delivered a 1.4% year-to-date growth through September. At the same time, our U.S. transient economy segment outperformed its chain scale RevPAR by 310 basis points and gained RevPAR index share versus competitors year-to-date through September. Looking ahead, we remain confident in our ability to deliver sustained RevPAR growth and expand our RevPAR index share. This confidence is grounded in our disciplined high-return investments that broaden our business travel base, deepen loyalty engagement and position us to capture long-term demand supported by favorable demographic trends, particularly the expanding retiree leisure segment and America's blue and gray collar workforce. Moving to royalty rate. Our third lever of royalty fee growth. In the third quarter, the average U.S. royalty rate increased by 10 basis points year-over-year, reflecting our continued strategic focus towards higher revenue brands and a stronger franchisee value proposition. We remain confident in the future growth trajectory of our system-wide royalty rates, supported by ongoing investments that improve reservation delivery to our franchisees and a robust development pipeline. This pipeline reflects contracts with higher royalty rates, larger average room counts and a RevPAR premium, all of which provide a clear path for long-term revenue growth. Turning to our partnership business. Our focus remains on strengthening relationships with our strategic partners and suppliers, which was evidenced in a 19% year-over-year increase in revenues this quarter. Growth was driven by strong co-brand credit card fees as well as increased suppliers and strategic partnership fees. As we've enhanced our franchisees facing service offerings, adoption has continued to rise, driving steady growth in our non-RevPAR-related franchise fees across the broad range of services we provide. Expanding our partnership revenue streams and non-RevPAR franchise fees remains one of our key priorities and represents a meaningful opportunity for continued earnings diversification and growth. We continue to focus on driving our top line growth while enhancing associate productivity and operational efficiency. We see meaningful opportunities to deploy labor-saving technologies that will deliver significant productivity gains across the enterprise and help mitigate SG&A growth. As a result, we continue to expect adjusted SG&A to increase at a low single-digit rate from our 2024 base of $276 million. Finally, our adjusted earnings per share were $2.10 for third quarter 2025 compared to $2.23 in the prior year quarter. The year-over-year comparison reflects the impact of our acquisition of the remaining 50% interest in the Choice Hotels Canada joint venture, which resulted in higher amortization expense related to the acquired intangible assets, a temporary increase in income tax expense expected to reverse in the fourth quarter, the reevaluation of our previously held ownership interest in the joint venture and unrealized foreign currency adjustments across our broader operations. Excluding these items, third quarter adjusted EPS would have been $2.27 representing a 2% year-over-year increase. Now let's move to the balance sheet and capital allocation. As of September 30, we generated $185 million in operating cash flow through September including $69 million in the third quarter. This strong cash generation and the healthy balance sheet underpin our capital allocation priorities, investing in growth initiatives and accretive acquisitions while returning capital to shareholders. Year-to-date through September, we returned $150 million to shareholders in dividends and share repurchases. We continue to deploy capital selectively to scale Cambria Hotels and Everhome Suites, while maintaining a disciplined approach to recycling that capital at the right time. In the third quarter, we generated $25 million in net proceeds from recycling activities and year-to-date, our hotel development-related net outlays and lending declined by $53 million. We expect 2025 to be the final year of developing new company-owned Cambria hotels, followed by Everhome Suites in 2026, with investments expected to be completed in 2027. As the interest rate environment continues to improve and the hotel transaction market recovers, we also expect our capital recycling activity to accelerate. We ended the quarter with a net debt to trailing 12-month EBITDA of 3x and a liquidity of $564 million. Finally, I'd like to discuss our outlook for the remainder of the year. For the full year, we now expect U.S. RevPAR to range between minus 3% and minus 2%. As a reminder, fourth quarter comparisons will be impacted by elevated hurricane-related demand in the prior year and we continue to monitor potential impacts related to the government shutdown. We are tightening our full year adjusted EBITDA with the midpoint up by $1 million. We now expect adjusted EBITDA to range between $620 million and $632 million. We are adjusting our full year adjusted EPS guidance to range from $6.82 to $7.05 primarily reflecting additional amortization expense related to the intangible assets from the Choice Hotels Canada acquisition, which was not included in prior guidance as well as lower equity earnings from joint ventures due to the timing of hotel openings. Our fourth quarter recurring effective income tax rate is expected to be approximately 21%, reflecting the timing of tax recognition between the third and fourth quarters, as previously discussed. Our full year effective recurring rate guidance remains at approximately 25%. We now expect full year 2025 franchise agreement acquisition costs to be lower than in 2024. Our outlook excludes any additional M&A, share repurchases after September 30 or other capital markets activity. Our third quarter results demonstrate the success of our strategy and highlight the benefits of our expanded scale and diversified business model, even in a softer U.S. RevPAR environment. We'll continue to invest in high-return areas that enhance our long-term trajectory and drive meaningful shareholder value. Looking ahead, we remain confident in the durability and strength of our fee-based business model. We expect growth to be driven by higher revenue hotels, average royalty rate growth expanding partnership revenues, sustained international momentum and strategic initiatives designed to enhance customer lifetime value for our franchisees. Pat and I are now happy to take your questions. Operator? Operator: [Operator Instructions] Your first question comes from Michael Bellisario with Baird. Michael Bellisario: First on this Everhome joint venture that you guys announced in July, I think just in the past, you had mentioned that you were going to recycle owned assets. I know, Scott, you provided some comments there, too. I think we all assume that means those assets get sold to a third party and you get cash. But in this joint venture deal, you still own 80% and you're sort of committing to owning and developing hotels for longer or at least more of a medium-term holding period? I guess, help us understand the motivation, thought process here and how the economics of this deal are maybe better or different than previously owning and developing assets on your own balance sheet? Scott Oaksmith: Yes. Our preferred vehicle has been to develop hotels through the joint ventures that we have. So what you saw in this transaction was really more of a timing of the transaction. So we had started a few hotels on our own balance sheet, owning them, that we're always intended to go into the joint venture, just it had not been fully set up at the time. So when you take a look at the overall transaction, there were some sales from an accounting perspective that were treated as proceeds from sales. But ultimately, the way that transaction worked that netted us about a $25 million recycling. This doesn't change in terms of our long-term viewpoint on holding assets. As I've always said, we're in the moving business, not the storage business. And we have developed ever homes really to launch that brand to get it to scale so that it's 100% franchised brand. So even in this joint venture, we either expect our JV partner to buy out our interest at some point in time or to go to market and sell those to additional third parties encumbered with long-term franchise agreements. As we talked about in the remarks, we're towards the tail end of our capital investment in both Cambria and Everhome. We expect to wrap up with no new development in Cambria after this year and then finishing the Everhome development in 2026, where our net capital outlays will be significantly lower. In fact, if you look at our Q3 results this year, we're actually about $50 million less in capital being used on our development of hotels. So we're at the tail end of that. And as the transaction environment and interest rate environment improves, we do expect to be sellers of those hotels, whether they're on our owned assets or in these JVs. Michael Bellisario: Okay. That's helpful. And then just similarly, on capital allocation, what was the rationale for not buying back stock during the quarter, especially when it was down so much versus levels where you had previously been repurchasing stock? And that's all for me. Patrick Pacious: Yes, Michael, I mean we look at our capital allocation hierarchy to invest in the business to do accretive M&A and then return to capital to shareholders through dividends and share repurchases. We bought the other half of Canada we did not own in the third quarter. So that capital outlay was sort of the kind of -- it rises higher from that standpoint as to what creates more long-term value for shareholders. I would say if you look at our pace of sort of how we've been deploying capital we're effectively on pace through the third quarter with the acquisition and the share repurchases we did in the prior part of the year. But yes, absolutely, it's a very attractive price at this point, but that was the way we deployed our capital in the third quarter. Operator: The next question comes from Lizzie Dove with Goldman Sachs. Elizabeth Dove: I just wanted to ask about the longer-term outlook for rooms growth, particularly in the U.S. It's been tracking down year-over-year, at least when you kind of strip out Westgate from there. And so as we move forward over the next year or 2, what's the kind of base case expectation? And what are you kind of seeing in the development environment or the conversion environment really in the U.S. to drive that? Patrick Pacious: Sure. So if you look at our pipeline and where we've been focused really for the last 5 years is on bringing higher-quality product into the pipeline and therefore, moving that into the system. And that is going to continue. If you look at the makeup that we talked about in our remarks about 98% of what's in the pipeline today is in those higher-value segments. What we've been opening, and as we've mentioned in the remarks, there's actually because we're doing a lot more conversions they open anywhere between 3 and 6 months on average. But that also means we're opening hotels in less than 3 months. And so many of those show up as openings, but never even show up in the pipeline. And that's really, as we mentioned in the remarks, about 1% of our unit growth came from the hotels that opened that quickly. So when you look at the pipeline, it's not only the size of it, but it's also the quality of the hotels that are in there. But as importantly as the velocity with which because we've been doing conversions as a company for so many years, we're able to get these hotels open quickly for owners, and that allows them to capture revenue early and us as well. And so as I think as we look into next year, just given the limited supply growth that's been going on in the U.S. from a new construction perspective. I would expect that trend to continue well into 2026. So that's sort of probably how we would think about the setup for the conversions coming out of the pipeline and the net rooms growth in the U.S. Elizabeth Dove: Got it. That's helpful. And then on to the RevPAR environment, I appreciate the comments you made with some of the green shoots and also World Cup and whatnot next year. I'm curious how you would think about just how much of what's going on at the lower end is structural or cyclical, especially in terms of competition from conversion brands like Spark, premium economy, things like that, the K-shaped recovery. Anything you can share there or then how you think about the long-term trajectory to be able to potentially grow domestic RevPAR again longer-term. Patrick Pacious: Yes. Sure, Lizzie, from our perspective, this is a cyclical business. I mean I've been at Choice for 20 years, and this is probably the third one of these we've been through. The green shoots you do look for is when does occupancy stop dropping. That then gives owners confidence when they set price. And so that's the kind of early indicators that we've seen where the cycle starts to turn, and that's -- in fact, what we're starting to see in our chain scales in our segments and our brands. And we're pretty excited with what we're actually seeing in the economy segment, which, again, is the segment that usually leads you out of one of these cyclical downturns. So we feel pretty good about sort of what we're seeing on that front. I'd say on the consumer front, this is -- that sort of question around this K-shaped recovery. I think it's missing the fact that you've got a ton of -- I mean, 75% of the people who work in this country work for a small and medium-sized business. And when we're seeing that surge in the SMB business in our hotels, it's because of the types of travelers that are -- the labor force is effectively shifting towards the types of travels that stay in our hotels, construction, utilities, medical staffing, which is traveling nurses and the like, there's a pretty significant tailwind that we see from a business travelers perspective. The other is what we talked about, which is our retirees and road trippers. And about 30% of our business today are those folks who are 60 years old and older. They're sitting on tremendous wealth in their homes. They're sitting on very attractive stock portfolios, and they've got discretionary income and the time to travel. So we are seeing that traveler on the road, and we expect to see more of them. The investments we're making in our loyalty programs that are going to kick off here on the first of January are really designed to drive more of that business. And we know that those are the folks who spend more in our hotels, they stay more often and they book direct, which is all a real positive from a unit economics within the hotels themselves. So we feel pretty good about how the setup is coming for 2026 and those core demographics, the road trippers and retirees and then those blue and gray collar workers, those are expected to be demand drivers, and those are the folks who are in our hotels today, and we would expect we'll get more of that share as we move forward. Operator: The next question comes from David Katz with Jefferies. David Katz: Yes. Two things, if I may. I just wanted to get whatever early perspectives you can share with us regarding 2026. I know I understand your business, obviously, and the booking window is short. But any thoughts on how we might use 2025 as a platform off of which to measure 2026? And then I have one quick follow-up, please. Patrick Pacious: Yes, David, I would look at the 2 things I just spoke about. I mean, I think when you look at our share, and we talked about that in the remarks, of those 60-year-old travelers and above. The research shows they call them the golden travelers because they've got all this time and they've got all this wealth and they are traveling more this year. And that number that cohort is going to grow. We've talked about by 2030, 1 in 5 Americans is going to be at retirement age. And so over the next 5 years, that cohort only continues to grow. And we overindex for that type of traveler in our portfolio today, and we intend to bring in on that. And then I think on the business travel side, when you look at our business traveler mix, I know you've been around the stock a long time, we used to be 70-30 leisure business. We're now 60-40. And that small business traveler is a much more resilient traveler because they have to travel for their jobs. And what we're seeing, particularly with what AI is doing to the workforce, we're going to see more people who are in that sort of blue and gray travel segment when you look at the job gains and you look at the small business formation that's occurring, they're in the segments that travel in our hotels. And so when we look at that overall total available market for small and medium business, it's about $13 billion of travel on an annual basis. And I think our ability to capture more and more of that share is another positive that we're looking forward to. So on top of that, I would just add our group's business revenue, which again is up 35% this year. That's a function of the fact that we have put more sellers out there. We have about 20% more sellers who are selling into our business category and our group's business. And so those are the things that I would point to as opportunities that Choice is leaning into where the TAM is getting larger. Scott Oaksmith: And David, what I'd add to that is when you step back and look at the broader business for 2026, obviously, we're still working through our planning process. But as we talked about in our remarks, our international business, we feel really strong about continued growth there and believe we're on pace to double that EBITDA contribution with the base year of 2024. So we do expect strong growth from international next year. In addition from both our partnerships and services business and our platform and ancillary revenues, as we've talked in the past, we do think we have a very good base to grow off in that mid- to high single-digit growth on those. And we also believe that we can continue to keep our cost relatively contained, especially with all the new tools and AI tools that are really driving cost efficiency throughout the business. So we're very optimistic on 2026. David Katz: Understood. And if I can just ask 1 follow-up. So much of the industry has evolved in terms of growth on ancillary fees, non-RevPAR fees, particularly around cards. And I know that you have some. Can you just elaborate on what the strategy or the vision for that is over time? Patrick Pacious: Yes. I mean when you look at the scale of our business, David, so you look at 7,500 hotels. We probably have somewhere 36 million room nights every year, and you've got multiple people staying in those room nights. So we have a significant opportunity to provide more services to our customers, to our guests in our hotels. And that is everything from co-brand to what we do on the timeshare side and the gaming side as well. And so that's a real opportunity for us. We do see those trends growing and that's reflected in our numbers. I would say on the franchisee side of the house, we are offering more services to our franchisees and the adoption rate of those services is increasing. So those are the drivers that are impacting the owner side of the house, the franchisee side of the house. So both of those trends, the consumer growth and the franchisee growth and our ability to sell more services into both of those customer bases are what we -- from a strategy perspective, those are things that we're leaning into and have been pretty earnings accretive over the last several years, and we would expect them to be so in the future. Operator: The next question comes from Stephen Grambling with Morgan Stanley. Stephen Grambling: I know it's early to be putting 10 to paper for 2026 expectations. But with all the moving parts on expenses, and I know you talked about AI opportunities. How should we be thinking about the run rate or baseline for SG&A this year and then what the growth rate might look like next year, particularly if RevPAR does start recovering? Scott Oaksmith: Yes. We -- as I mentioned, we continue to believe we can maintain SG&A at a low single-digit growth rate. If you look at our results so far through this year, year-to-date, SG&A is up about 3%. And when you take out the acquisition of our Canadian joint venture, it's about 2.5%. As we mentioned, we're finding a lot of labor saving tools and efficiencies with the AI tools that we've already brought into the system. And so I would say going forward, we would be able to model something around that low to mid-single-digit SG&A going forward. Patrick Pacious: Yes, Stephen, it's pretty exciting that the tools we've already deployed across our workforce and the things that we are working on today, we implemented a new ERP system that went live a couple of months ago. But the intelligence in that system is reducing a huge amount of manual processes and helping our folks in the finance group, for instance, they don't have to do as much exception reporting that type of stuff because the system is providing that information to them. We're seeing it in our software development group. We're seeing significant productivity gains for our folks who build these tools that we deploy to our franchisees. And so it's a pretty exciting time for workforce productivity. And you're going to see that number reflected in lower SG&A growth, I would expect as we move forward in the coming years. Stephen Grambling: That's helpful. And maybe 1 follow-up on AI. Are you currently providing any inventory to AI partners or large language models such as Gemini, ChatGPT or others. And maybe how do you think about the opportunity to partner from some of these channels and what maybe the cost of that channel looks like versus things like Google Ads or OTA or other? Patrick Pacious: Yes, Stephen, it's a great question. And I think at this point, when we look at the distribution landscape and AI's impact on it, the players are still taking the field right now. And so there's a lot of testing and learning, and we are doing some of that with some of these partners behind the scenes really to kind of say, is this going to work for us? To be successful in this new world, you've got to have 2 things, and we have both of them. The first is all your systems need to be in the cloud. And the second is you need to have control of and a high-quality level of your data. And most companies don't have that. Choice Hotels does. It's an area that we've invested in significantly. All of our systems are in the cloud now. We don't have any data centers anymore that are company-owned. And all of our data is accessible through the cloud as well. And so those are the 2 things that these LLMs are looking for. If you build the right scaffolding around your data, which we have done, you then have the ability to communicate with these LLMs and work through the ways that consumers who are starting their search for hotels if that's where they're going to start, we want to be able to provide our inventory rates and availability through those models as well. And so I would say at this point, the answer is we are exploring, as I'm sure many others are. But I feel like it's a pretty exciting opportunity for us because of the investments we've made over the last 3 or 4 years, in particular, to make ourselves AI ready. And we've actually been using AI in our tools for our franchisees for about 10 years. It used to be called robotic process automation and that was called machine learning. We're using it in a number of our franchisee-facing tools already. But this next step function change that we're working on, I think, is going to be really exciting because the tools that they have today effectively help them record what they're doing. Where we're moving to is a world where the tools that they will be using are going to help them understand what's the recommended next best action I should take with regard to my rate, with regard to my channel management, whatever it might be, and we're really excited about the future for that because that Choice, we've always kept the sort of franchisee-facing systems in-house. So we're able to sort of take the benefits of AI, the productivity gains and the tools that are available and really bring them to our owners in a meaningful way. And so we've got some interesting things we're going to be launching with them in the coming months. And so from an excitement perspective, we really feel like the AI boom is going to help our owners make more money, and it's going to help our shareholders do so as well. Operator: The next question comes from Dan Politzer with JPMorgan. Daniel Politzer: Pat, Scott, I was wondering if you could talk about the key money environment. It sounds like you're taking the expectations there for 2025 to be a little bit lower year-over-year. But maybe puts and takes into 2026, as it seems like other competitors are still looking to increasingly grow their presence in that mid-scale segment in particular? Scott Oaksmith: Yes. As we mentioned on the call, we do expect our key money to be lower than where we were in 2024. Really, I think that's a reflection of just the quality of our brands in terms of the competition. So we believe that we're driving top line revenue to our franchisees and our brands are very valuable. So when people are looking to convert, we're seeing that we don't need to use as much key money as some of our competitors to win those contracts. In fact, average key money per deal was down about 11% for the first 9 months of the year. So yes, it is a competitive environment, but we do believe that our brands, especially in that mid-scale and upper mid-scale space where really Choice has been a leader for many years. We do understand what our franchisees need, what it takes to run a very successful business and capture those customers that Pat talked about a little bit earlier. So -- we're optimistic that the key money environment should be kind of hitting a peak here as interest rates come down, and hopefully, we'll see a turnaround on the RevPAR front where that will be needed less to win deals. Patrick Pacious: Yes. And I would just add, since Labor Day, I've been out at 5 franchisee events that's collectively probably about represent about 1,500 hotels. So these are all owner meetings that we do for a couple of days. And without fail, our owners are telling us that they value our brands and some of them who moved to try these other brands have come back and said. We made a mistake, our performance is down. When you look at the value of a brand that has the awareness of a quality in or comfort in, those things are driving guests and we own those guests. We own those mid-scale travelers. So the need for key money in the ability to win these contracts is not as necessary when you have strong powerful brands, particularly in the mid-scale segment. Daniel Politzer: Got it. And then in terms of the free cash flow conversion, was there anything kind of nuanced in the quarter as it relates to that? And then can we think about -- what's the best way to think about full year '25 at that level that you might be able to convert. Scott Oaksmith: Yes, there was some temporary timing differences in the quarter that drove the free cash flow a little bit lower, particularly as you'll see in our 10-Q, we did purchase some investment tax credits during the quarter that will have a reduction of our federal tax rates going forward. But the timing of the payment of those versus the realization of the taxes will be between the third and the fourth quarter. So as I mentioned in my remarks, our third quarter rate was a little bit higher than where it will be for the full year, but that caused a little volatility. So we would generally believe that we'll be in a free cash flow conversion more similar to where our percentages were last year in that 60% to 65% range. Operator: The next question comes from Dany Asad with Bank of America. . Dany Asad: Pat and Scott. I -- look, your international growth strategy seems to be picking up steam. So my question is just can you give us a sense for how much rooms growth we could expect in the coming year on the international front? And then any color you can give us on key regions that would be driving that growth would be super helpful. Patrick Pacious: Yes. So let me just start with -- I mean, when you look at our current business as we sit here today, it's about $3 billion in annual gross room revenue outside of the U.S. And so we have a real significant opportunity to capture more of the fees from that from improving our value proposition. And so that's really the upside that we've been experiencing. And if you look at the supplemental materials, that we put in the -- on the website, we've really transformed that business over the last couple of years, moving to now a 40% direct franchising business, which is up 20%, moving about 1,400 hotels, which is about up 200 hotels from 2022 and then getting our EBITDA margin up over 70%. So those are all really positive healthy metrics. And we now have the talent and the brands and the business model to be successful in all 3 regions of the world. So just looking to your question, looking at the Americas, bringing the other half of Canada onto our platform and being owned by us now is a real huge opportunity for us. We have 355 hotels up there. And we now have the opportunity to unlock more value there. And it's important to recognize that the quality of the product up there and this is true throughout the world. But when you look at Clarion and Quality Inn, for instance, you're talking about 3- and 4-star hotels outside of the U.S. So the RevPAR that those hotels are able to generate is significantly higher. I was just down in Mexico a couple of weeks ago with our Caribbean and Latin American teams. We had about 110 franchisees down there who came to the event. And we've grown our rooms portfolio down there by 60% over the last 4 years. We're now in 21 countries. And the excitement around our brands, particularly the Radisson brand that we have down in that part of the world is pretty significant. When you shift over to EMEA, we've really got to focus on 2 key markets, it's France and Spain, and the teams out there have done a really remarkable job in bringing more new direct franchise agreements in. We doubled our presence in France this year, which is a really healthy market, and we're continuing to grow in Spain as well. And we've mentioned a few of the new markets that we've entered into in EMEA as well. And then when you shift to Asia Pac, we've always had a strong business in Australia, direct franchising, and we just introduced the Mainstay Suites brand there with 7 hotels opening an additional pipeline for more with the developers of the largest extended stay brand in Australia. So we've got a really strong partnership there, but a good opportunity to bring extended stay to Australia and New Zealand. And then as we mentioned in China, we now have a really significant growth partner, upscale hotel company. I think they're probably the fifth largest in China. But we've already onboarded about 80% of the 9,800 rooms there with a long-term agreement to grow some of our mid-scale brands in China. So we really feel good about this sort of across the world. We've laid the foundation. All we need to do now is execute. And I feel like with the talent we have, the new business model that we have in some of these markets, and the brand strength that we have, that's a very achievable goal for us going forward. Operator: The next question comes from Robin Farley with UBS. Robin Farley: My question is on the growth in international units. And how should -- what should we expect for fee revenue in 2026, so you have a full year of them? I know China's master franchise, a lot of the other countries are direct franchise. So are the franchise fee percentages the same. And when you give the royalty rate increase, I think that's only for your domestic properties. So will you start including international or giving us international separately just so we can think about the franchise fees program from the international and whether that will look different in kind of fee per room than U.S. Patrick Pacious: Yes, Rob, we will, going forward, probably we get to February, we'll be giving you more of a kind of a global RevPAR number to look at. The growth we've seen this year is not like an anomaly. The growth is something that has been present in our business. And so what we're seeing with the kind of lack of international inbound is a lot of those travelers are staying home and traveling in their domestic markets. And our presence in a lot of those markets has always been focused on the domestic traveler, whether it be Canada or Mexico or France or Spain. So we feel like the -- we're well set up for the trends that we would expect to see on a go-forward basis. I think when you look at the royalty fee, that's the opportunity for us as the value proposition gets better. In the U.S., we have that sort of effective royalty rate north of 5%. We have in our direct franchise markets, something less than that. And then in the MFA market, it's even smaller. So as we shifted from MFA to direct, we're picking up that effective royalty rate gain. And we would expect that to grow as we invest more in the value proposition. I talked in our remarks, about this $60 million investment that we have, we're almost through the end of it, a lot of that capability is global in nature. So whether it's rate management or revenue management tools or these platforms we have for capturing small and medium business travelers. These are tools not just for the U.S. market. They were built to be global in nature. And we do expect, as we deploy those in these regions, we're going to improve the value prop, which will then be constructive towards moving the franchise fees higher. Scott Oaksmith: And just to add to that, Robin, I look at our direct franchising business internationally, the effective royalty rates there are around 2.7% for direct franchising. And that's really where we've been focused, as we talked about, we've seen a 21 percentage point increase in the percentage of our business that's direct versus master franchise agreements. So certainly an area that we're focused on. And really what I look at, as Pat mentioned, really focusing on continue to improve our value proposition in Canada, which we recently acquired, it's probably where we're the most advanced in terms of our capabilities in terms of delivering business and that royalty rate is closer to 4%. So we have a lot of opportunity across the other markets as we continue to increase our business delivery to be able to raise the effective royalty rates on those contracts. Robin Farley: Okay. Great. That's super helpful. Maybe just as a follow-up, you gave some pretty big increases for U.S. economy pipeline. And it doesn't seem like broadly, there's a lot of new construction going on in the U.S. economy segment. Is there something -- is it just that it's a small base is making a large percent change? Or what is it that you're seeing with new construction for U.S. economy rooms that we're kind of not seeing broadly? Patrick Pacious: Yes. The economy segment has been a conversion market for a number of years. And so what you're seeing there is the value prop as it has gotten better for the entire system. The value prop within the economy segment has benefited as well. And so I think a lot of people have interpreted our revenue intent strategy means we're not focused on the economy segment far from -- that's very far from the truth. What we've been doing in the economy segment is improving the product quality. And so as owners see that we are exiting hotels that no longer stick up or stick to the brand standards or unable to, they're seeing that we're not letting our economy brands deteriorate that we're actually improving the likelihood to recommend scores, the product quality. And that's important for the types of guests that we serve, that we keep that product quality moving in the right direction. And that's what's increasing the owner interest, and that's what's increasing the franchise agreements being awarded and the pipeline being higher. Scott Oaksmith: And that's really illustrated by the RevPAR performance we saw both in the quarter for the economy segment as well as the full year. We outpaced the STR economy segment by 180 basis points in the quarter and were up 310 basis points year-to-date. It really speaks to the quality of that segment for us. Operator: The next question comes from Brandt Montour with Barclays. Brandt Montour: So just a quick question on some of the accounting and on the revenue side. You guys talked about ancillary and credit card being helpful. And I was just hoping you could help us with some of the geography because the partnership line grew 20%. I think that I thought that was with credit card, but the other revenue line sort of doubled year-over-year on a restated basis. And I just wanted to understand what was in that, if there's anything onetime that we need to think about on that other line. Patrick Pacious: Brandt, to your point, our co-branded credit card as well as our procurement businesses and other -- our timeshare business, those are all on the partnership line item on our financial statement. So that's where you're seeing the significant growth in those revenues. Our other revenues include more kind of event-driven onetime items at times. So there was some timing of recognition during the quarter. In addition, there were some items that really were gross up pass-through type expenses and revenue. So you'll see about $3.5 million of that other revenue line item was offset by the increase in SG&A in the quarter. If you took a look at our SG&A in the quarter, it was a little more elevated mainly due to those pass-through items. So I'd say the other revenue is up due to some pass-through items and some onetime event-driven revenues. But overall, we're still on track to hit the full year forecast. Brandt Montour: Okay. That's really helpful. And then another question on business travel, you guys gave some helpful stats, business travel 40%. I think that's a global basis of mix. And SMB grew 18%, which is obviously a huge number for revenue. Could you just square that -- those data points with RevPAR overall in the U.S. being down 2-plus percent. The only way I can really do it is if SMB is a really small piece of business travel overall. But maybe you can just sort of help us square that. Patrick Pacious: Yes. I think part of this is the business or the product mix that we are shifting towards. So we are shifting towards more products that is appealing to business travelers. So it's not just we're attracting more of them, but the product mix has shifted, particularly with this extended stay segment growth that we have here in the U.S., it's -- there's a lot of business travelers that are in those hotels for weeks. And so that's a key driver of that. Overall, our business travel was up about 2.5%. And within SMB, that, in particular, has grown pretty significantly by 18%. So we're really leaning in on those types of travelers because of the product that we now have and the locations we now have, and that's where they're going. They're going to the secondary and tertiary markets where they have to travel. So when I look at the mix of that and if the significantly higher total available market being $13 billion, we are not yet at our fair share of that, and we expect that to grow as we get better in our sales tools and we get better in our RFP responses that our owners are doing. And so I would expect to see that percentage growth continue into the future. Brandt Montour: And the other thing I would just add to that is when you think about the headwinds, the 2 areas that are offsetting that are really government travel which was down about 20% for us during the quarter. And then inbound travel from the Canadian travel continued to be down since the first quarter. So that was down about 30%. So those 2 things have brought down RevPAR even though we've seen tremendous success in growing our business travel. Operator: The next question comes from Meredith Jensen with HSBC. Meredith Prichard Jensen: I was hoping you might speak a little bit more on the international growth side. I know you've spoken a lot about it. But in terms of building sort of the support infrastructure for this really strong growth that we expect. Could you help us walk through some of the associated investments that might be necessary or how to view that expense ramp? And relatedly, as you weigh those kind of investment that needs to be made in certain complex regions. Again, I know you've discussed direct versus master franchise metrics before. But given the investments you may need to make, just sort of how that may evolve over time. Patrick Pacious: Yes, Meredith, I think what's -- what we want to emphasize here is most of those investments are things we've done in the last 4 years. If you look at the exhibit we put on our investor website today, you can see the margin growth that we've had over that time frame. So the investments are not in adding people or in adding systems. A lot of the systems that we have put in place are already there and the investment I talked about that's going to effectively start deploying in early '26 and throughout next year. Those investments are in the rearview mirror for the most part. So what we have to do international is execute. And so there is a real opportunity here to do that, bringing the other half of Canada into the full company was really an opportunity for us to bring all that we do here in the U.S. to our hotels that are in Canada. And so it's not a new market for us. We've been in Canada for 70 years. We operated as part of those 70 years with a very good joint venture partner for 30 of those years. So we know these markets very well. And whether it's Canada or Australia, New Zealand, Mexico, Korea and Latin America, EMEA, we've got people who've been in those markets for a significant period of time. Our development teams are based in those markets. We run the markets effectively as domestic markets, so they're not relying on U.S. inbound for their growth. And so the autonomy that, that has allowed them to have has given them the opportunity to build the talent and really protect the brands. I think the other thing that's really important for shareholders to understand is outside of the U.S., the business traveler mix is 60% and 40% leisure in many of our markets. So we have a much more resilient and higher-paying customer base. And our brands, the Quality Inn brand, and the Clarion brand, in particular, are of higher quality. They are usually 3 and 4-star hotels. So it's a very different business outside of the U.S. And so the opportunity for us to continue to grow there is significant, but we just have to execute. It's an opportunity for us to grow our value prop and therefore, grow the effective royalty rate, we're able to drive in those markets. Meredith Prichard Jensen: That's super helpful. And one other quick addition to sort of follow on to what Lizzie asked about. We've been following the cost pressures on the franchisees. And I have noticed that some of the brands, notably Hyatt, I think, are working to sort of evolve brand standards so that they have more flexibility to take on limited service brands with sort of less ability to invest at this point. Are you seeing any of that in the market raising the competitive environment, especially as you up-level your franchisee base? Or if you're seeing any of that dynamic or if it's different in terms of PIPs than in the past? Patrick Pacious: Yes. No, it's a great question. And I think when we talk about the Country and the Suites brand, in particular, we redid that prototype with that franchisee margin compression in mind to make sure that the hallmarks of the brand are being preserved. But as you think about the types of changes that we would need an owner who's converting or a new build to build one of our brands, we are constantly looking at that. It's the reason why Choice has always been the leader in conversion hotels. The flexibility to make sure that a PIP is affordable for the owner makes sense for the market and preserves the brand hallmarks. Those are the 3 things that we look to do. That's something that we always do as a matter of course. It's not new for Choice. So I think when you look at our ability to continue to grow our business in good times and bad, that's a key factor in driving all of that. Operator: There are no further questions at this time. I will now turn the call over to Pat Pacious for closing remarks. Please go ahead, sir. Patrick Pacious: Well, thank you, operator, and thanks, everyone, for joining us this morning. We look forward to speaking with you again in February when we report our fourth quarter results. Have a great day. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Daniel Jenkins, Director of Investor Relations. Please go ahead. Daniel Jenkins: Thank you. I'm glad you could join us today for Western Midstream's Third Quarter 2025 Conference Call. I'd like to remind you that today's call, the accompanying slide deck and yesterday's earnings release contain important disclosures regarding forward-looking statements and non-GAAP reconciliations. Please reference Western Midstream's most recent Form 10-K and 10-Q and other public filings for a description of risk factors that could cause actual results to differ materially from any forward-looking statements we discuss today. Relevant reference materials are posted on our website. With me today are Oscar Brown, our Chief Executive Officer; Danny Holderman, our Chief Operating Officer; and Kristen Shults, our Chief Financial Officer. I will now turn the call over to Oscar. Oscar Brown: Thank you, Daniel, and good morning, everyone. The third quarter was a strong financial and operational quarter for WES as lower operational costs and our cost reduction initiatives resulted in our second consecutive quarter of record adjusted EBITDA. While adjusted gross margin was relatively flat on a sequential quarter basis, we achieved the highest total natural gas throughput in our partnership's history that was partially driven by another quarter of record natural gas throughput in the Delaware Basin, strong sequential natural gas, crude oil and NGLs throughput in the DJ Basin and strong sequential throughput growth from our other assets, specifically at our Chipeta plant in Utah primarily due to Kinder Morgan's Altamont pipeline connection to our natural gas processing plant in early September. Kristen and Danny will provide additional operational and financial details shortly. As previously announced, on October 15, we completed the acquisition of Aris Water Solutions, solidifying WES' position as a leading 3-stream midstream flow assurance provider in the Delaware Basin. We are excited to welcome the Aris employees to the WES team, specifically as we expand our commercial capabilities and build upon Aris' legacy recycling and beneficial reuse assets and solutions. Teams from both organizations have been working diligently together to ensure a smooth integration process and we are confident in our ability to capture the targeted $40 million of annual run rate synergies. WES leadership has increased its engagement with federal and state regulators to discuss produced water challenges in the Delaware Basin and articulate how WES is well positioned to address these issues. Combined with the newly acquired Aris assets and team, WES is now a midstream leader in Texas and New Mexico for produced water gathering, transportation, disposal, recycling and beneficial reuse. Additionally and subsequent to quarter end, we executed an agreement for incremental disposal capacity to support the Pathfinder pipeline project in the Delaware Basin. This agreement expands WES' access to highly sought after pore space, optimizes the pipeline's planned route and enhances the overall returns of the project. With that, I will turn the call over to our Chief Operating Officer, Danny Holderman, to discuss our operational performance during the third quarter. Danny? Daniel Holderman: Thank you, Oscar, and good morning, everyone. Our third quarter natural gas throughput increased by 2% on a sequential quarter basis. This was primarily due to increased throughput from our other assets, specifically at our Chipeta plant in Utah and from higher South Texas volumes after second quarter plant turnaround activity subsided in the third quarter. We also experienced increased throughput from the DJ Basin due to a higher number of wells that came online early in the third quarter. Our throughput in the Delaware Basin increased slightly on a sequential quarter basis and resulted in another quarterly record even though fewer wells came to market than initially anticipated during the quarter. All of this was partially offset by decreased throughput in the Powder River Basin as previously unloaded volumes subsided at the end of the second quarter. Our crude oil and NGLs throughput decreased by 4% on a sequential quarter basis, primarily due to decreased throughput from the Delaware Basin, which was partially offset by increased throughput in the DJ Basin. We also experienced decreased throughput from our equity investments. Additionally, our produced water throughput was flat on a sequential quarter basis. Our third quarter per Mcf adjusted gross margin for natural gas decreased by $0.05 on a sequential quarter basis, primarily due to lower excess natural gas liquids volumes in conjunction with lower overall pricing in the Delaware Basin. This decrease was partially offset by higher throughput in the DJ Basin, which has a higher than average per Mcf margin as compared to our other natural gas assets. Going forward, we expect our fourth quarter per Mcf adjusted gross margin to be slightly lower relative to the third quarter. Our third quarter per barrel adjusted gross margin for crude oil and NGLs increased by $0.08 on a sequential quarter basis primarily due to increased efficiency fees on certain contracts in the Delaware Basin. We expect our fourth quarter per barrel adjusted gross margin to be in line with our third quarter results. Our third quarter per barrel adjusted gross margin for produced water was unchanged and in line with our prior expectations coming into the quarter. Our fourth quarter results will contain approximately 2.5 months of contribution from Aris, and we now expect our combined fourth quarter per barrel adjusted gross margin to range between $0.85 and $0.90. Focusing on the remainder of the year, we continue to expect our portfolio-wide average year-over-year throughput to increase by mid-single digits percentage growth for natural gas and low single digits percentage growth for crude oil and NGLs. For year-over-year comparative purposes, these expectations exclude the volumes associated with the noncore asset sales that closed in early 2024. Regarding produced water and taking into account 2.5 months of contribution from Aris in the fourth quarter, we now expect our average year-over-year throughput to increase by approximately 40% compared to 2024 levels, which would imply average fourth quarter produced water throughput of approximately 2.6 million to 2.7 million barrels per day. In the Delaware Basin, we now expect low double-digit average year-over-year throughput growth for natural gas and low to mid-single-digit throughput growth for crude oil and NGLs. During the third quarter, Delaware Basin throughput was relatively in line with our expectations coming into quarter. For fourth quarter, even though we expect natural gas throughput to increase, the rate of growth will be impacted slightly by intermittent volume curtailments due to downstream maintenance at times throughout October. Even though these curtailments will impact the rate of natural gas throughput growth, we expect them to have a minimal impact on our financial performance in the fourth quarter. And finally, we are forecasting crude oil and NGLs throughput rebounding sequentially due to the timing of wells coming to market. In the DJ Basin, we continue to expect average year-over-year throughput growth to be flat for natural gas, driven by steady onload activity, and we now expect low to mid-single digits throughput growth for crude oil and NGLs mostly due to the timing of wells that came to market in the third quarter. In the Powder River Basin, we expect average year-over-year throughput growth to be flat for both natural gas and crude oil and NGLs. During the first half of the year, we benefited from intermittent onloads as other processors in the basin experienced downtime due to asset maintenance or repairs. And as those facilities came back online in June, our throughput declined during the third quarter. Also due to commodity price weakness throughout 2025, we have seen slightly lower customer activity levels resulting in an expected continued decline of natural gas throughput in the fourth quarter. With that said, we are in close communication with our producing customers, and we are deferring certain expansion projects until incremental activity is seen on the acreage that we service. We also expect increased natural gas throughput from our other assets, specifically in the Uinta Basin during the fourth quarter, primarily driven by the previously referenced tie-in of Kinder Morgan's Altamont pipeline to our Chipeta plant that was completed in early September. Turning our attention to 2026, we estimate that the Delaware Basin will continue to be the primary engine of throughput growth next year, especially when considering the produced water volumes associated with the Aris acquisition. Additionally, continued throughput growth in the northern portion of the acreage that we service in the Delaware Basin was one of the main drivers behind our decision to sanction North Loving II. Our continued focus on organic growth and the Aris acquisition are the main reasons why we still expect to grow average year-over-year throughput for all 3 product lines again in 2026. However, in the Powder River Basin, if commodity price weakness continues throughout the rest of 2025, we expect select rig drops or temporary rig relocations to continue into 2026. As such, this will likely result in slightly lower average year-over-year throughput in the PRB for 2026. Based on lower activity levels in the DJ Basin in 2025 relative to 2024, we anticipate that overall throughput will decline modestly in 2026. However, we currently expect Oxy to start developing the Bronco CAP area in Weld County, Colorado at the beginning of 2026 with volumes flowing into the WES system starting in the first half of the year. Once we have results from the initial production of the Bronco CAP, we will be in a better position to provide a clear view of year-over-year trends in the basin in 2026 relative to 2025. With that, I will turn the call over to Kristen to discuss our financial performance during the third quarter. Kristen Shults: Thank you, Danny, and good morning, everyone. During the third quarter, we generated net income attributable to limited partners of $332 million and adjusted EBITDA of $634 million. Relative to the second quarter, our adjusted gross margin was relatively flat. This was driven by decreased throughput in the Powder River Basin and less gross margin contribution from excess natural gas liquid volumes in combination with lower overall pricing in the Delaware Basin, which was partially offset by increased throughput and gross margin contribution in the DJ Basin. Our operation and maintenance expense decreased by 5% or $12 million quarter-over-quarter. This was primarily due to less asset maintenance and repair expense and chemical expense quarter-over-quarter. This year, our employees have been keenly focused on company-wide cost reduction initiatives from which we are starting to see incredible results. Even with the increased throughput and higher utility costs in 2025 relative to last year, we expect our operation and maintenance expense and G&A to be relatively flat in 2025 relative to 2024 before considering additional costs resulting from the Aris acquisition. In fact, our operations teams achieved the highest level of asset operability in our partnership's history during the third quarter while still reducing operation and maintenance expense, which is an incredible feat. For the fourth quarter, while we are expecting to see continued benefits from the cost reduction efforts, we expect operation and maintenance expense and G&A to increase by 20% to 25% relative to the third quarter as we include 2.5 months of Aris activity. While we expect limited synergy capture to impact 2025 adjusted EBITDA, we are confident that we are well on our way towards capturing our target of $40 million of annual run rate cost synergies. Turning to cash flow. Our third quarter cash flow from operating activities totaled $570 million, generating free cash flow of $397 million. Free cash flow after our second quarter 2025 distribution payment in August was $42 million. In October, we declared a quarterly distribution of $0.91 per unit, which is in line with the prior quarter's distribution and will be paid on November 14 to unitholders of record on October 31. With the closing of the Aris acquisition in mid-October, we now expect approximately 2.5 months of contribution from Aris to our fourth quarter results, which slightly impacts our 2025 guidance ranges. We now expect WES to be towards the high end of our previously announced 2025 adjusted EBITDA guidance range of $2.35 billion to $2.55 billion, which we estimate will include approximately $45 million to $50 million of adjusted EBITDA from 2.5 months of contribution from the legacy Aris assets. Additionally, we now expect to be above the high end of our 2025 free cash flow guidance range of $1.275 billion to $1.475 billion with incremental free cash flow contribution from the legacy Aris assets. With regard to capital spending, as we mentioned on the second quarter call, we still expect to be towards the high end of our 2025 guidance range of $625 million to $775 million, which includes initial spending on North Loving II, approximately $20 million attributable to the legacy Aris assets, offset by select deferrals of expansion projects, specifically in the Powder River Basin. Looking ahead to 2026, we still expect capital expenditures to be at least $1.1 billion. Budgeting process for next year started in earnest in September, and we will continue to evaluate the appropriate amount of expansion capital needed based on producer forecast for both legacy WES assets and for the new Aris assets to support average year-over-year throughput growth across all 3 product lines again in 2026. With that, I will now turn the call over to Oscar for closing remarks. Oscar Brown: Thanks, Kristen. Before we open it up to Q&A, I would like to emphasize that WES continues to be extremely well positioned to capitalize on our compelling growth opportunities and create long-term value for our unitholders. The acquisition of Aris positions WES as one of the leaders of produced water midstream solutions in the Delaware Basin and creates a strong platform for future growth and expansion. Based on recent headlines and general industry commentary, the challenges associated with produced water tied to crude oil and natural gas development in the Delaware Basin have become clear. In fact, as we have collaborated with federal and state regulators, the challenges regarding produced water continue to dominate much of the conversations with them. We believe that it will take an all-of-the-above approach to address the growing volume of produced water on a daily basis from Texas and Mexico. The combination with Aris better positions WES to provide produced water gathering, long-haul transport, disposal, recycling and reuse solutions to address these growing challenges, and we look forward to growing the recycling and various reuse opportunities that the Aris team has started. Furthermore, we are also excited to see the successful execution on the market assigning significant value to the produced water midstream services public offering in September. The strong market reaction certainly validates the inherent value of WES' sizable legacy produced water asset base and the value captured by our Aris acquisition and positions the combined entity for meaningful value creation considering our partnership is now one of the leading 3-stream midstream service providers in the Delaware Basin. Finally, WES' strong balance sheet and investment-grade credit ratings provide the support and financial flexibility necessary to execute on our extensive growth plans. We are well positioned in the Delaware and DJ Basins, and even in a lower commodity price environment continue to see solid rig activity levels and benefit from strong long-term contracts. Even after taking the Aris acquisition into account and our strong 2026 organic growth plan, which includes capital for both the Pathfinder pipeline and the North Loving II natural gas processing plant, we still expect leverage to remain at or near 3x throughout 2026, which positions WES for continued growth and to potentially take advantage of market-driven opportunities. By maintaining low net leverage and generating steady amounts of cash flow, our partnership will be able to maintain our disciplined capital allocation framework, gradually increase distribution coverage and steadily generate incremental value for our unitholders over time. In closing, thank you to all our employees for their hard work and continued dedication to our partnership. The year is not quite over yet, and we have already accomplished a lot. From the sanctioning of the Pathfinder pipeline in North Loving II to the acquisition of Aris, we have successfully set up WES to capitalize on future growth in the Delaware Basin. Additionally, by pairing our disciplined growth initiatives with our successful cost reduction efforts, we have simultaneously accomplished 2 opposing tasks, leading to increased stakeholder value and making this one of WES' most noteworthy years. I also want to extend a warm welcome to all of our new formerly Aris employees. We are excited about the opportunities that lie ahead and are confident that our combined team will accomplish a great deal with the expanded produced water business. Finally, our strong third quarter results put us on track to achieve many of our 2025 goals, and I look forward to updating the market on our progress during our fourth quarter earnings call in late February. With that, we'll open the call up for questions. Operator: [Operator Instructions] The first question comes from the line of Keith Stanley at Wolfe Research. Keith Stanley: I wanted to start on the O&M expense, it's down quite a bit year-over-year. So WES, the prior few years has seen pretty big increases in O&M costs. Can you talk to where you are on implementation of the cost management initiative, if you think Q3 O&M is pretty sustainable ignoring Aris? And how much more you think you could achieve from here? Oscar Brown: It's Oscar. Thanks for the question. We started this effort in March of this year to really focus in on sort of updating our processes, streamlining our efforts and looking for ways to zero base kind of everything we do and think through how we can be more cost competitive so we can support our organic growth and sort of win new business. So the teams have gone through everything at this point. And we still see there's more to do. So what you see in the third quarter here should be sustainable, and we do expect there's more to come. I'll turn it over to Danny just to give some examples of some of the work that's been done and what we've been able to achieve so far. But we do think this is a new level that we can operate at, and we do think we'll see improvements throughout 2026. Daniel Holderman: Yes, Keith. This is Danny. Just feeding on what Oscar said. I don't want to represent what I'm going to say as everything because the entire company has been engaged in this. But the key things that you're seeing in Q3 are a lot of efforts by our teams to rationalize our maintenance programs and schedules to look at and rationalize our rental fleets that we may have gotten a bit too bulky when we were focused on bringing our operability up and looking at our contract workforce head count and rationalizing the work processes that they're doing and seeing what we can bring in-house. We also did a fair amount of work debottlenecking facilities, so we could reduce offload costs associated with that, particularly in West Texas. And then our supply chain team has done a tremendous job updating our sourcing strategies and renegotiating contracts to get savings there. So like Oscar said, I think all of what you're seeing now is sustainable, and certainly more to come in those areas and some others to be named as they show up in future quarters. Oscar Brown: And I'd just add that all this occurred with, again, record operability. So really been able to run the business aggressively while achieving these cost savings. So we're pretty excited about that. And like I said, I think there's still more work to do, but we've got a great start. Keith Stanley: That's great. I appreciate all the color there. My second question, it's a bit of a random one. But in the slides, this is language you've had in there, but I noticed it says low to mid-single-digit distribution growth before potential increases from major projects or M&A. So I just want to confirm, especially with the yield already pretty high. When you complete Pathfinder, which will be a major project or if you do more M&A, are discrete kind of distribution step-ups still on the table with those events? Oscar Brown: Yes. It's Oscar. I think they are -- really, our goal was to give long-term guidance on what we think we can achieve through the years, and that sort of mid-single-digit number seems about right given our size and our footprint right now. We'll just take things as they come. If we've got some opportunities to step up the distribution, we will. It's really the purpose of an MLP at the end of the day, but we are cognizant of the yield, and we talked about it a bit before on sort of balancing out where, at some point, if the yield creeps up even higher from here that we'd have to think about buybacks and items like that. It's always going to be comparing against the opportunities we have to deploy capital in a way that's accretive to distributable cash flow. So nothing's really changed in any of that. We do have to be cognizant, too, of sort of the outlook and the environment. So if we're looking at a flatter year going forward or a slowdown, we'll probably stick with our mid-single-digit growth rate, even if we have some good projects come online, if we see an uptick where we think it's sustainable and we bring on some of these projects or make an accretive acquisition, maybe we bump up a little bit from there. It's really at the discretion of the Board, of course. But that's our philosophy on that. Operator: Your next question comes from the line of Gabe Moreen at Mizuho. Gabriel Moreen: Maybe if I can start on the Pathfinder project and some of the assets you made on the additional pore space. Can you just talk about what that does for the projects from an efficiency standpoint relative to the, I think, $400 million to $450 million cost you originally laid out? And then maybe if there's also an update on how third-party contracting may or may not be progressing? Oscar Brown: Sure. Thanks, Gabe. So I'll start at the end. On the contracting side, we are progressing well. I think with the Aris acquisition, it did allow us -- took a little bit of pause because we couldn't work in coordination with the Aris' commercial team until we closed. That started now. They've had conversations about growing their system. Of course, we've been working with other producers on Pathfinder itself. So this pore space deal did a couple of things, obviously added some more capacity. I think that will just benefit the entire system. Now that we have both New Mexico and Texas, ultimately, those will connect up over time and we'll have more flexibility and frankly, probably a bit greater ability to grow New Mexico faster than Aris could have done on its own when you combine Pathfinder access and then sort of everything we're doing to expand some of our capacity. In terms of -- that's why we really brought up this transaction, even though it's sort of not material for the details to be disclosed. It did give us extra pore space and it also allowed us to reroute a small portion of the pipeline to save us some capital. So not ready yet to give the specific numbers, but we do believe with this transaction, we've improved the returns on Pathfinder for the SEC that we already have in place. And then for future growth on that pipeline. So with that, I think the only other comment I'd make is just on contracting further on Pathfinder. Now that we've got again this combined company, more services and solutions, bigger footprint that I think it will sort of accelerate the dynamic that we'll have with other producers. And finally, we still got about a year, by the way, to get this online. And finally, I'd just say the environment itself has shifted in our favor even though over just the last 6 months. So in addition to some of the market activity that we commented on in the script, we've seen higher regulatory activity. We've certainly engaged more with regulators. There's probably more regulation coming. But it reminds me of sort of the gas business 20 or 30 years ago, whereas the regulations increased, it really pushed out smaller players, noninvestment-grade players that didn't have sort of the capability to deliver large projects and complete solutions that also comply with increasing regulatory pressure. So those things have moved in our direction. We've also witnessed now, not just seismicity but communication with producing wells and all kinds of other issues. So it's a real focus of the industry now. And we're also gratified that from a contracting perspective, the contracts you see at Aris in terms of very long-term dedications and then what we've been able to achieve so far, Pathfinder with minimum volume commitments, really it looks, again a lot like the gas business. So we're pretty happy with the trend, and I think we'll see continued strength in pricing as this becomes a bigger and bigger issue in the Delaware Basin. Gabriel Moreen: Maybe I could follow up. You referenced kind of growing in New Mexico, and I know it's really early days. But as far as ambitions to bring more gas and oil infrastructure, with Aris footprint in New Mexico and kind of get 3 streams going, can you just talk about kind of how you plan to tackle that? Effort's going to be organic, inorganic, both. Just curious to hear your thoughts there. Oscar Brown: Yes, we're definitely going to go after both. I think both organic, and if there's opportunities where we can do something accretive inorganically, we'll look at those, too. That massive footprint that Aris has, that helps a lot, right? So we've already had some strong gas lines going up and gathering pipelines going up into New Mexico, crossing the State line, but not in a huge way and not in a big footprint. And so this gives us sort of a big presence in people. And certainly, in water lines where we think we can build off of it. We've got some confidence because we've been successful on 2 and 3 streams in the Texas Delaware. We think something like 10 contracts in the last 18 months that were at least 2 streams, including water in Texas. So we don't see any reason why we shouldn't be able to achieve that in New Mexico. I do think it will take some time to work through that and sort of win on the organic side. So again, we'll keep the options open, but it's a key piece of the puzzle. And frankly, just about anybody can probably build gas lines since in New Mexico, if you've got sort of the footprint and the capabilities, but solving the water piece is becoming sort of a critical issue and a threshold issue for development. So we feel like that gives us some leverage in the marketplace and sort of the organic growth to New Mexico. Operator: Your next question comes from the line of Jeremy Tonet at JPMorgan. Jeremy Tonet: Just wanted to pick up with some of the points you brought up before as far as opportunistic inorganic deals that you might pursue. Is there any kind of holes in the portfolio you're looking to kind of solve for at this point? Or what are the parameters there is what WES might be interested? Oscar Brown: Yes. So the financial parameters are unchanged. So I won't go through those. Those are very consistent over the years and certainly we've kind of validated this year. In terms of opportunities, I think always where we've got some angle footprint customer with something to build off of and generate some synergies will be our preference. As we talked about, just with the last question, New Mexico is an obvious one where there could be opportunities. We're probably biased a bit towards gas opportunities from this point, given we've really just put together the best position we possibly could in the Delaware Basin on the water side. In terms of stepping out in other basins, it's a little bit harder for us if we don't have something to bring, but not impossible with the right sort of significant or stand-alone type business that we think we could leverage into additional growth. But we're staying disciplined. It's been an interesting market from our perspective. There's been a lot of assets out there. We've seen a lot of failed processes. So we'll be helpful as we move through all that. But Jeremy, really not too much has changed in our strategy and where we would go from here. Jeremy Tonet: Got it. That's helpful. And just want to turn towards 2026 a little bit at this point. Outside of the Aris acquisition. Just wondering if you could help us think through how the business is trending for 2026 at this point from what you see. Kristen Shults: Yes. So I think from a volumetric standpoint, we touched on this a little bit in the prepared remarks that expecting overall product growth across all 3 products. There has been obviously a little bit of commodity price weakness in 2025. And so if we see that continuing through the rest of this year and really into 2026, that will impact some of those basins that are a little bit more commodity price sensitive like the PRB and the DJ. So going back to our prepared remarks around that, too, just expecting at this point at least some decline there unless we see some commodity price improvement. But Delaware Basin, obviously, still doing really well. The acreage we're serving is a highly sought-after acreage with a lot of activity on it. The Aris acquisition will be huge. We're doubling the amount of water that we transport and dispose of today. So a lot of growth in that area, too. And then going back to the comments around cost cutting and the initiatives that we've got there, expect there to be savings that we can continue into 2026 and more that we'll continue to find. Operator: Your next question comes from the line of Spiro Dounis at Citi. Spiro Dounis: I want to start with New Mexico. Just in terms of expanding more there on the gas side, how are you thinking about the AGI component? A lot of your peers have bolstered their AGI capabilities. So just curious if that's a barrier to entry or do you think something you could overcome? Oscar Brown: Yes. I think it's a real issue, right? There's a lot of sour gas in New Mexico. We certainly have the skill set to evaluate those and operate those as well as handle sour gas. So it's an understood challenge, I guess, operating in New Mexico. It's not -- New Mexico is not alone in that area. But in any case, there are a challenge. They take time to permit and they are assets that I think provide value. So I think if there's an opportunity for us inorganically there that is heavy on sour gas, of course, we would imagine that would probably come with some of those permits or wells. But if not, we certainly got the skills internally to work through that. Spiro Dounis: Got it. That's great. Second question, maybe just going to synergies. Oscar, it sounds like you feel pretty confident in that $40 million. But maybe just looking beyond that, you continue to talk about being a 3-stream operator. And I guess I just wonder commercially, when do you think we start to see some of that benefit play out on the commercial side? Oscar Brown: Yes, we're certainly having those conversations already. So it's really hard to control. It's kind of like M&A. You've got a counterparty there and a customer that has their own timetables and things that they are focused on. So we'll continue to work those. I don't have sort of a specific time frame. I do think it will take a little time. I mean for us on the organic side, we would have to find opportunities where we would -- it's a new area for us. It would be a new build-out sort of situation. So they would just have to mesh with whether it's expiring dedications or new development area or somewhere where our timing could match customers. So that could take a little time. But we certainly are going to leverage the Aris systems and relationships. We've got some overlap in those relationships to see what we can do on that side. So we haven't, in sort of the 3-stream area, we certainly haven't projected or promised sort of specifics on sort of amount or timetable that we think we're going to be successful there. There's also some likely synergies and opportunities to accelerate growth with the combined Aris and WES team. We've kept all their commercial team to add to ours and really work together to -- just to accelerate the growth on the water side. And again, having something that resembles like a giant gas header system with a beautiful pipeline right in the middle is pretty powerful. So it shouldn't take an incredibly long time for -- on the water side, the revenue synergies to show up, again, probably not ready to quantify them, but we imagine we see something going next year. And really the last piece, so the $40 million we are extremely confident, and the Aris team has been wonderful. We kind of hit the ground sprinting, not just running with the integration. So that's gone really, really well. But really, those -- that $40 million was really all overhead. We also think there's going to be some great opportunities on the operating side for synergies that we can realize probably starting around the first or second quarter. Right now, both teams are sort of operating side by side. And we're just sharing and reviewing how we do business and how we execute every day and pulling best practices for both sides. We are definitely going to take some of the things that Aris has been doing really well and apply that to the rest of our business. We've got some opportunities as well to share practices with them. But the time line on that side, and again, we haven't quantified that, it's not part of the $40 million. But we hope to have a reasonable update in February on some of the ideas and opportunities there. So pretty confident we're going to exceed the $40 million. So sort of stay tuned as we get our arms around the business. Operator: There are no further questions at this time. Mr. Oscar Brown, I turn the call back over to you. Oscar Brown: Thank you so much for your interest in Western Midstream and your participation on this earnings call. We're really gratified that we've really already begun to see the results of our prudent growth strategy by doing 2 things that are very hard to do at the same time, and that's to improve our overall cost structure and process efficiency executing on growth opportunities. In fact, the former enables success in the latter, and we now have great momentum towards improving our competitiveness in the midstream marketplace. We're quite proud of delivering record operating and financial quarterly results once again, and when combined with the successful closing and integration of Aris as well as our major Pathfinder pipeline and North Loving II gas plant projects set Western Midstream up for delivering predictable growth over the next few years. I also want to express my gratitude to all our employees for their hard work so far this year in delivering these results while operating safely and sustainably. We look forward to seeing everybody, analysts and investors, on the road at upcoming conferences through the end of the year. And with that, we'll close the call. Thanks again. Operator: Thank you. This concludes today's conference call. You may now disconnect.
Operator: Welcome to Palmer Square Capital BDC's Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I'd like to turn the call over to Jeremy Goff, Managing Director. Jeremy, you may begin. Jeremy Goff: Welcome to Palmer Square Capital BDC's Third Quarter 2025 Earnings Call. Joining me this afternoon are Chris Long, Chairman and Chief Executive Officer; Angie Long, Chief Investment Officer; Matt Bloomfield, President; and Jeff Fox, Chief Financial Officer and Director. Palmer Square Capital BDC's Third Quarter 2025 financial results were released earlier today and can also be accessed on Palmer Square's Investor Relations website at palmersquarebdc.com. We have also arranged for a replay of today's event that can be accessed on our website. During this call, I want to remind you that the forward-looking statements we make are based on current expectations. The statements on this call that are not purely historical are forward-looking statements. These forward-looking statements are not a guarantee of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including and without limitation, market conditions, caused by uncertainty surrounding interest rates, changing economic conditions and other factors we identified in our filings with the SEC. Although we believe the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements made during this call are made as of the date hereof, and Palmer Square Capital BDC assumes no obligation to update the forward-looking statements unless required by law. To obtain copies of SEC related filings, please visit our website at palmersquarebdc.com. With that, I will now turn the call over to Chris Long. Christopher Long: Good afternoon, everyone. Thank you for joining us today for Palmer Square Capital BDC's Third Quarter 2025 Conference Call. On today's call, I will provide an overview of our third quarter highlights, background on our broader credit platform and touch on the benefits of our differentiated investment strategy, then turn the call to the team to discuss our market outlook and financial performance. During the third quarter, our team deployed $138.7 million of capital and generated total and net investment income of $31.7 million and $13.6 million, respectively. We delivered net investment income of $0.43 per share, well covering our $0.36 per share third quarter base dividend and covering our $0.42 per share total dividend, which includes a $0.06 supplemental distribution. Given interest rate expectations, we appreciate the recent market focus on dividend coverage by the BDC investor community. Unlike many peers, we decided from the outset to create a distribution strategy that maximizes cash returns to our investors sooner rather than later. In that spirit, we continue to pay out nearly all of our excess earnings in the form of a supplemental dividend, which we believe is the right thing to do for our investors. Additionally, we recently announced our September NAV per share of $15.39. As the only publicly traded BDC to disclose NAV on a monthly basis, we believe we provide a unique level of transparency and accountability, giving shareholders regular insight into our performance. Angie will provide additional commentary on our market outlook, but I want to spend a moment addressing recent industry events. There has been much debate around whether there are cracks in the payment of private credit and leveraged lending at large. We believe it is important for investors to understand that these idiosyncratic situations arrive in credit markets year in and year out and that does not indicate that there is any new systemic risk in private credit or liquid credit portfolios. Default rates in private and public credit have been running at consistent levels for the past couple of years, non-accrual rates in BDCs remain below historical levels on average and underlying portfolio company performance continues to show strength. As a concrete example, through EBITDA growth and lower base rates, PSBD's interest coverage ratio increased sequentially to 2.5x from 2.1x last quarter, a meaningful improvement that demonstrates companies can better service their debt. When you couple these patterns with PSBD's current yields and the discount to NAV, we continue to believe that the opportunity set is compelling for investors and PSBD common stock is undervalued. To that end, our board recently approved an additional $5 million of open market share repurchases, which Matt and Jeff will discuss in further detail. We have confidence in our strategy and believe that our emphasis on senior secured liquid credit and the optionality to deploy into private credit position us to remain agile and adjust to various market environments. This agility is further enhanced by our specialized and seasoned investment team and strong alignment with our shareholders. To put a finer point on this, our investment team is incentivized in a way that promotes a clear focus on investor outcomes and experience, which by definition, creates strong alignment through the investment process to make decisions that maximize risk-adjusted performance. At the heart of our investment philosophy is the conviction that active management and credit when executed properly, can generate attractive total returns in excess yield. We believe our focus on higher-quality assets, minimizing interest rate duration and maintaining liquidity where possible, combined with our core competency of locating relative value has helped drive strong outcomes for our portfolio. Looking ahead, we continue to lean into our strengths and prioritize synergies across our platform strategies, which we believe will ultimately benefit the BDC. For instance, our CLO issuance volume informs our BDC by enabling us to see nearly all the deal flow in the bank loan space and act on it when appropriate. We believe this quality is often underappreciated by equity investors, particularly given that our presence and recognition in the global CLO space exceeds many other well-known alternative asset managers. Since our last earnings call, we've had the opportunity to connect with both existing and new investors, reiterating our position as a deeply experienced corporate and structured credit manager. We believe our differentiated story is resonating, but it's still in the early innings for the public life of PSBD, with our listing taking place less than 2 years ago. We look forward to continuing these conversations in 2026 and as we remain steadfast in our commitment to shareholder alignment and transparency. With that, I will hand the call over to Angie. Angie Long: Thank you, Chris. We are pleased with PSBD's third quarter results despite shipping rate expectations, uneven economic data and a more recent rebound in tariff concerns. Our portfolio is constructed to perform consistently through periods of uncertainty, and we're proud of the efforts we've made to deliver both attractive risk-adjusted returns and transparency to PSBD shareholders. Taking a step back, while capital market conditions this quarter felt similar to recent quarters in some respects, we are beginning to see signs of gradual improvement in deal activity. Although overall M&A volumes remain relatively subdued, there has been encouraging progress over the past few months, which has continued through October. We've seen a healthier mix of opportunities filtering through both the broadly syndicated and private credit markets and deal flow appears to be building momentum each month. Overall, sponsor engagement is rising. The recently announced $55 billion take-private of Electronic Arts, which represents the largest LBO on record will require approximately $20 billion in debt financing. Even more recently, the approximately $18 billion take-private of Hologic will include over $12 billion of financing. These announcements underscore the market's appetite for high-quality transactions, and we believe there could be more announcements to come. We also continue to see elevated refinancing activity during the third quarter, helping to provide incremental income generation. This is in line with the syndicated loan market, which saw record levels of activity driven largely by refinancings and repricings. While we can't forecast the pace of refinancing activity going forward, we expect at least some continuation of that trend. Turning to private credit. Competition remains elevated and spreads have compressed meaningfully over the past year. Even so, we continue to find relative value in certain instances versus new broadly syndicated loans, and we expect private transactions to remain an important source of incremental spread and diversification for PSBD. Notably, in our private credit book, tuck-in activity is accelerating. We view private credit as a complementary lever to our BSL strategy, particularly in today's environment where deals are moving between the 2 markets. Spread compression has been a recurring theme over the past several quarters and has remained near all-time types across credit markets. Despite this, we're committed to our disciplined approach in deploying capital and playing a long game. As we've stated on previous earnings calls, we will not chase growth when risk-adjusted returns do not meet our standards. We think this is very important for investors to understand, especially later in credit cycles. As expected, the Fed cut base rates by 25 basis points in September and another 25 basis points in October, and the market is anticipating additional easing in 2026, given the softening labor market. While declining base rates will be beneficial to borrowers' cash flows and should spur M&A activity, we believe pressure from inflation and tariffs may continue to test the Fed as they balance their dual mandate. That said, we are not macro forecasters, and our forecast remains squarely on the credit side of the equation, where we believe our expertise and disciplined approach to underwriting continue to differentiate both PSBD and our platform at large. Looking ahead, we're cautiously optimistic about the environment. Early signs of improving deal flow, both in our pipeline and the market more broadly suggests that a more active M&A environment could take hold in coming quarters. However, PSBD's flexibility across both liquid and private markets means we are not dependent on the pace of that recovery, and it allows us to adapt quickly and position the portfolio for attractive opportunities as they arise. As of October 31, PSBD was yielding 13.6%, an attractive yield in any market, but particularly compelling given today's tight spreads and the conservative positioning of our portfolio. We believe we've been able to achieve this in large part due to the power of our platform. With that, I'd like to hand the call over to Matt, who will discuss our portfolio and investment activity. Matthew Bloomfield: Thank you, Angie. Turning to our portfolio and investment activity for the third quarter. Our total investment portfolio as of September 30, 2025, had a fair value of approximately $1.26 billion across 42 industries that demonstrate strong credit quality, industry and company-specific tailwinds and a diverse mix of end markets. This compares to a fair value of $1.28 billion at the end of the second quarter of 2025, reflecting a decrease of approximately 1.6%. In the third quarter, we invested $138.7 million of capital, which included 28 new investment commitments at an average value of approximately $4.8 million. During the same period, we realized approximately $156.0 million through repayments and sales. As you will notice, we continue to think about diversification as we allocate new capital in the portfolio. As Angie mentioned, third quarter activity demonstrates early signs of improvement with M&A gradually picking up after a subdued period. That said, we maintain a cautious approach for the balance of the year as the BDC sector at large absorbed the impact of rate cuts and a potentially cooling economy. To recap key portfolio highlights, at the end of the third quarter, our weighted average total yield to maturity of debt and income-producing securities at fair value was 10.07% and our weighted average total yield to maturity of debt and income producing securities at amortized cost was 8.00%. We believe our focus on first lien loans and diversification by industry and size contribute to a strong credit profile with 42 different industries represented in our investment mix. Further, our 10 largest investments account for just 10.6% of the overall portfolio, and our portfolio is 95% senior secured with an average hold size of approximately $5.0 million. Again, we believe this position in sizing is an important risk management tool for PSBD. On a fair valuated basis, our first lien borrowers have a weighted average EBITDA of $421 million, senior secured leverage of 5.5x and interest coverage of 2.5x. Additionally, new private credit loans comprised 20.9% of overall new investments and were funded at a weighted average spread of 536 basis points over the reference rate. While credit quality is a top concern across the sector, non-accruals continue to be low at PSBD. On a fair value basis, it is only 40 basis points and on an at-cost basis, only 101 basis points. Our PIK income as a percentage of total investment income remains well below our largest peers and below the industry at approximately 1.14%. We take pride in knowing our shareholders do not have to wonder about the quality of our disclosed investment income. We've maintained an average internal rating of 3.6 on a fair valuated basis for all loan investments. Our rating is derived from a unique relative value-based scoring system. Generally speaking, we believe that the credit performance within the portfolio remains strong. Our non-accruals remain very low by industry standards and the underlying credit metrics of our borrowers are encouraging. We continue to see stability in both leverage levels and loan-to-value ratios across our portfolio companies. While we did add Klöckner Pentaplast and first brands to non-accrual, to echo Chris, we view these as isolated events rather than indicative of broader stress in the portfolio. LifeScan, a previous nonaccrual loan for the past several quarters, was removed from non-accrual status and is currently trading back into the high 90s, and we believe will likely result in a full par recovery. This is a testament to our ability to work through individual credit issues and maximize recoveries for the portfolio. Subsequent to quarter end, we took further strides in optimizing the right side of our balance sheet by refinancing the Wells Fargo credit facility, tightening the spread by 55 basis points. Additionally, we extended the maturity of the facility to November 2030 and increased the facility amount to $200 million from $175 million. We believe this exemplifies our focus on driving earnings power to the BDC even in a falling rate environment through active balance sheet management in addition to active portfolio management. To add to Chris' point earlier on shareholder alignment, I'd like to reiterate that we charge a management fee based on net asset value instead of gross assets. The reason being, we don't want to get paid simply for taking on leverage. Further, our incentive fee of 12.5% is below the 15% to 20% of other peers in the sector, and we incorporate a net realized loss look back on a 1- to 3-year basis. So if we underperform on the credit side, we should earn lower fees. Additionally, for further alignment with our shareholders, the board has approved an additional $5 million of open market share repurchases at PSBD. This is in addition to the ongoing 10b5-1 share buyback plan that PSBD currently has in place. Given the market level discounts to NAV in the BDC space, we believe this could be an accretive tool to further shareholder return. As we navigate current market dynamics, we are in lockstep with the priorities of our shareholders, and we'll continue to provide transparent visibility into our performance, which includes monthly NAV disclosure. Now I'd like to turn the call over to Jeff, who will review our third quarter 2025 financial results. Jeffrey Fox: Thank you, Matt. Switching to the financial results. Total investment income was $31.7 million for the third quarter of 2025, down 15.1% from $37.3 million for the comparable prior year period. Total net expenses for the third quarter were $18 million compared to $21.6 million in the prior year period. Net investment income for the third quarter of 2025 was $13.6 million or $0.43 per share compared to $15.7 million or $0.48 per share for the comparable period last year. During the third quarter of 2025, the company had total net realized and unrealized losses of $10.3 million compared to total net realized and unrealized losses of $8.2 million in the third quarter of 2024. This consisted of net unrealized depreciation of $7.9 million related to existing portfolio investments and net unrealized depreciation of $1.1 million related to exited portfolio investments. At the end of the third quarter, NAV per share was $15.39 compared to $15.68 at the end of the second quarter of 2025. Moving to our balance sheet. Total assets were $1.3 billion and total net assets were $490.4 million as of September 30, 2025. At the end of the third quarter, our debt-to-equity ratio was 1.53x, slightly up from the 1.51x at the end of the second quarter of 2025. Available liquidity consisting of cash and undrawn capacity on our credit facilities was approximately $252.8 million. This compares to approximately $253.5 million at the end of the second quarter of 2025. As part of our existing stock repurchase plan, which commenced on January 22, 2025, and expires on January 22 2026, during the third quarter, we purchased 343,064 shares at an average price of $13.75 for a total purchase cost of $4.72 million. As Matt previously mentioned, the Board also approved an additional $5 million of open market share repurchases, which is in addition to the existing stock repurchase plan mentioned. On November 5, the Board of Directors declared a fourth quarter 2025 base dividend of $0.36 per share, in line with our formalized dividend policy. Given the liquid nature of the portfolio, we plan to announce the supplemental dividend in December, which allows for repayments to settle. The supplemental distribution will be paid out of the excess of PSBD's quarterly undistributed net investment income above the base quarterly distribution. With that, I'd now like to open the call up for questions. Operator: [Operator Instructions] It looks like our first question today comes from the line of Kenneth Lee with RBC Capital Markets. Kenneth Lee: Just the investments associated with First Brands. Wonder if you could just talk a little bit more about what's the current outlook for the path to recovery there. And perhaps if you could just talk about why was there a decision made to hold on versus sell the investments in the quarter there? Matthew Bloomfield: Ken, it's Matt. Thanks for the question. Yes, so I'd say it's obviously an incredibly complex situation, which I think, quite frankly, is going to take quite some time to work through the bankruptcy courts. So from our perspective, we're essentially taking it on a day-by-day basis as we work with legal counsel and advisers on really trying to understand the ins and outs of what's taking place. Our view on staying involved, we're obviously part of the group that put together a pretty sizable debtor in possession financing for the company, which came with a lot of benefits to our existing position, including kind of the 3:1 roll up to kind of put us at the top of the capital structure. Obviously, some pretty outsized economics as part of that. And our view is that there's still pretty good tangible brand value across that portfolio. So that is kind of the rationale for staying involved to date. On a go-forward basis, we'll continue to evaluate what we think makes the most sense to ultimately improving recoveries. And I think as we alluded to with the LifeScan situation coming off, that was a tough situation for many, many quarters, and you're kind of working through that process, it is ultimately going to result in most likely a par recovery for us. So I think we want to be patient. We want to kind of see the process through. But it's obviously an incredibly complex situation that is going to take quite a long time to work through. Kenneth Lee: Got you. And just one follow-up, if I may. One of the advantages of the private credit side is that potentially there's more documentation, more ability to due diligence. For the liquid credit side, do you anticipate any changes in the investment process in terms of evaluating the adequateness of collateral go forward just based on the experiences you had with First Brands there. Matthew Bloomfield: I think we continue to do everything we can from a documentation standpoint, whether it's on the liquid side or on the private credit side. Obviously, in the First Brands situation, everything that's kind of being reported that was done kind of on an off-balance sheet basis kind of hidden from most lenders vantage points. So I'd say that is a much different situation than a typical restructuring where like whether it's LifeScan or Klöckner that we've talked about, given kind of what transpired kind of behind the scenes and if you will on First Brands. But yes, I think documentation certainly is a very, very important thing that we always look at and try to push as hard as we can to make sure as tight as can be, and there's lots of situations where we ultimately will not invest in a transaction if there are certain provisions within the credit agreement that we aren't able to get. Operator: And our next question comes from the line of Melissa Wedel with JPMorgan. Melissa Wedel: First thing, I wanted to clarify the total repurchase capacity in light of the $5 million that was just approved. It seems like you're running at a little bit below that on a quarterly basis right now. And so I'm wondering how many -- assuming a sort of steady repurchase level, where is that capacity right now on a total basis? Matthew Bloomfield: Yes. So we've still got several million of existing capacity from the existing 10b5-1 that was kind of reinstituted earlier this year. So there's no changes to that. This is just an additional 5 in the form of an open market purchase plan. So kind of just gives us additional firepower. I think if there are certain days when the markets are more volatile for us to be able to continue to be active at what we think are pretty attractive levels for buybacks. So it's just an additional plan, and then we'll continue -- the board will continue to reevaluate on a go-forward basis, the existing 10b5-1 and that's also in addition to the plan that's still in place at the management company level. And all that's in the 10-Q in more detail. Melissa Wedel: Okay. Following up on one of the slides in your slide deck, it looks like interest coverage picked up a little bit more than normal quarter-over-quarter jumping to 2.5x from 2.2x last quarter. I'm curious if that's just a function of lower borrowing costs or if that's also reflective of general top line or EBITDA growth within the portfolio. Matthew Bloomfield: Yes, we agree. It was a nice move quarter-over-quarter. I think it was a mix of continued EBITDA growth within the portfolio, which again, we think shows a lot of strength in the underlying borrowers across the portfolio. And then also, to your point, as spreads have compressed some of these borrowers have had the ability to kind of refinance and reprice their facilities. So their all-in cash interest costs have come down as well. So the combination of both of those, the EBITDA growth and the lower interest burden has caused that to increase, which again, we're very pleased with, but it certainly seems to be accelerating, which is good. Operator: And our next question comes from the line of Douglas Harter with UBS. Cory Johnson: This is Cory Johnson on for Doug. Just a question, can you help me to understand the internal rating system? And I guess, just the decision of why First Brands will not be considered really one because I guess there were no one ratings during this quarter. Matthew Bloomfield: Yes. So our rating system is more relative value focused versus kind of pure credit metrics that a lot of private credit lenders use. So for us, it's really about when we look across the name, whether we think it's kind of fair value at a level 2 would be on3 that we would obviously be worried about and looking to reduce. So First Brands kind of falls in that category. But a 4 for us, right, is more, we think it's attractive, whether it's on a dollar price, on a spread basis where on the liquid side of the portfolio, we would be looking to buy that loan in the secondary market if you will. So it's more relative value based versus just pure underlying credit metrics on how we score it. And so those ratings move around intra-quarter based on company performance, industry dynamics and kind of secondary trading levels. Operator: And that appears to be all the questions we have. So I will now turn the call back to Jeremy Goff for closing remarks. Jeremy? Jeremy Goff: Thank you, operator. We wish everyone a happy and healthy holiday season, and we look forward to updating you on our fourth quarter 2025 financial results in the new year. Thank you, everybody, for joining. Operator: Thanks, Jeremy, and this concludes today's conference call. You may now disconnect. Have a great day, everyone.
Operator: Good morning, and welcome to The Mosaic Company's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] And now I'll turn the call over to Jason Tremblay. Please go ahead. Jason Tremblay: Thank you, and welcome to our third quarter 2025 earnings call. Opening comments will be provided by Bruce Bodine, President and Chief Executive Officer; Jenny Wang, Executive Vice President, Commercial, will then cover the market update; and Luciano Siani Pires, Executive Vice President and Chief Financial Officer, will review financial results and capital allocation progress. We will then open the floor for questions. We will be making forward-looking statements during this conference call. The statements include, but are not limited to statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties. Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release published yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our press release and performance data also contain important information on these non-GAAP measures. Now I'd like to turn the call over to Bruce. Bruce Bodine: Good morning. Thank you for joining our call. Mosaic's third quarter results reflect the resilience and strength of our global business as well as the extraordinary work our teams are delivering to help us operate effectively in a highly dynamic market and geopolitical environment. We've demonstrated the ability to shift tonnes to regions with the strongest demand and capture value across agricultural and industrial markets, and we are navigating near-term fertilizer affordability issues while looking ahead to positive structural market trends. We remain focused on achieving reliable and consistent production from our assets, leveraging our market access advantage and executing our capital reallocation strategy, all in the service of creating shareholder value. Let me begin with our key messages for the quarter. First, we've made major investments in asset health, and we are seeing improving reliability. U.S. phosphate production has improved sequentially throughout the year and we remain focused on driving consistent performance across our phosphate assets. Second, our business in Brazil continues to deliver excellent performance. Adjusted EBITDA increased year-over-year, and we are managing well despite a challenging credit environment. Third, global potash demand remains very strong, especially in the Eastern Hemisphere, and we are running near record operating rates to meet that demand and capture value. Fourth, cost discipline remains a priority. We've achieved $150 million in initial cost savings and are on track to achieve our revised $250 million cost savings target by the end of 2026, driven by automation, supply chain optimization and improved fixed cost absorption as production increases. And finally, we remain committed to disciplined capital allocation. Recent divestments, including the Taquari potash mine and the Patos de Minas asset reflect our commitment to streamlining the portfolio and redeploying capital toward higher return opportunities. To cover our third quarter results, net income for the third quarter increased to $411 million versus $122 million in the prior year. While adjusted EBITDA in the third quarter rose to $806 million from $448 million a year ago, driven by higher prices across all segments and very strong performance in Mosaic Fertilizantes. Let's look briefly at market dynamics. I'll leave the details to Jenny. Phosphate markets remain tight as global supply constraints persist. Key long-term drivers remain intact, including continued growth in LFP battery demand, rising domestic fertilizer demand in China which is likely to further erode exports and limited new capacity additions over the next few years. Despite coming off recent highs, phosphate prices remain elevated and affordability pressure remains a concern. We've seen growers in the U.S. and Brazil cautiously approach seasonal buying, which has moderated prices and impacted the timing of sales volumes. The challenging farm credit situation in Brazil continues to exacerbate this trend. In India, strong shipments in 2025 have largely recovered back closer to historical norms, but we still see a need for substantial replenishment after multiple years of tight supply and under application. Potash markets are balanced as good affordability drives demand around the world, particularly in China and Southeast Asia. Potash and phosphate demand should benefit from the strong yields U.S. and Brazilian farmers have generated this year. We expect big crops in North America and Brazil to remove an additional 1.5 million tonnes of potash and similar amount of phosphate from the soil compared to last year. Growers will need to replenish these nutrients to avoid lower yields next year. For Mosaic, the focus on U.S. phosphate asset health is allowing us to run more reliably and at increased rates. We have experienced 3 consecutive quarters of production volumes improvement, and volumes for the trailing 3-month period ending October have reached approximately 1.8 million tonnes, which is further improved from the third quarter. We remain committed to return to previously achieved normalized production rates. Our focus now is on consistent and sustainable performance. In potash, we completed the Esterhazy turnaround in the second quarter, and the new HydroFloat system is delivering incremental tonnes. The resilience of our Brazil business demonstrates our effective commercial strategy and disciplined risk management, including a focus on sales to customers with strong credit profiles. Our team's deep local expertise and long-standing presence in Brazil have been instrumental in navigating market complexities and maintaining profitable growth. While we expect the usual seasonally slower fourth quarter, we expect earnings in this year's fourth quarter to be higher than a year ago. Cost initiatives are progressing across the company. Mosaic Fertilizantes continues to generate cost reductions and selling, general and administrative expenses declined year-over-year in the third quarter without the impact of the bad debt expense. We continue to leverage our market access, which is a key strategic advantage for Mosaic to accelerate growth in Mosaic Biosciences. Revenues for the first 9 months more than doubled year-over-year. We anticipate Mosaic Biosciences will contribute positively to consolidated adjusted EBITDA beginning in the fourth quarter. In addition to strong growth in the Americas, the market for biologicals is growing quickly in China, and we expect India to follow. All in all, we are well positioned for a strong finish to 2025 and a promising 2026 and beyond. Now I'll turn the call over to Jenny for more detail on agriculture and fertilizer markets. Jenny Wang: Thank you, Bruce. We continue to navigate a very dynamic global agriculture environment. Commodity values and trade uncertainty have impacted near-term sentiment in North America, but the recent recovery of corn soybean prices should encourage more fertilizer activity, particularly with China now looking to purchase U.S. soybeans and wheat. Any additional direct government help to farmers could provide further support to the market. In Brazil, growers have had to navigate tighter credit availability and higher interest rate, but have benefited from expanded trade opportunities, particularly with China. Brazilian fertilizer demand is still growing this year and will likely expand again next year as growers replenish soils and expand acreage for upcoming seasons. Our customers remain engaged and are actively buying fertilizers for the upcoming safrinha core and the 2026 Safra soybean. Ag economics remain more constructive in other parts of the world, and Mosaic has pivoted to active markets. Longer term, we continue to see ag fundamentals as supportive to fertilizer demand, driven by growing demand on food, feed and fuel, which we have seen supportive biofuel legislation around globe. Moving to the fertilizer market. On phosphate, markets have been very constructive for March of 2025, given robust demand for nutrients, which in turn has supported prices. Prices of phosphate have moderated from recent peaks, but remain elevated, driven by tight global supplies and strong demand. Stripping margins also remain above historical norms. Chinese export of DAP, MAP and TSP are expected to decrease more than 1.5 million tonnes this year, and China has recently pulled back phosphate export approvals. Like Bruce mentioned, LFP battery demand has continued its growth. In the first 3 quarters, Chinese LFP production has already surpassed the full year production in 2024 and representing over 40% year-over-year growth. While Chinese demand for fertilizer and the industrial phosphate continues to grow, we see limited new capacity expansion in other regions over the medium term. In the case of potash, markets are balanced after a first half supply deficit. Global demand has been steady and expected to approach another record as affordability has encouraged strong Chinese consumption, healthy Brazilian import and the growing Southeast Asian demand, which is tracking up to 50% higher input in some of the key countries. Given this persistent global appetite, we expect record Canpotex shipments this year and the further strength heading into 2026. North American potash demand has held relatively consistent this year on healthy affordability and fall application tonnes are moving to the ground as we speak. However, given potash is often applied with phosphate, we may see some modest fall deferral into Q1. In summary, we are optimistic heading into 2026 as growers look to replenish soils and fulfill any pent-up demand. Long-term food security and the industrial use continue to support a constructive outlook for phosphate markets, particularly absent any significant capacity additions. Potash markets are stable on balanced fundamentals, and we expect demand growth to reach to a new record. Bruce Bodine: Thank you, Jenny. Let us take a deeper dive into our performance. You will remember that Q2 EBITDA came below expectations due to a number of larger than usual provisions, inventory adjustments, environmental reserves, legal reserves, and also due to a sharp increase in turnaround expenses. We said these effects were going to reverse in Q3, and they did. Q3 was more of a clean quarter, minimal onetime items and a reversal of turnaround expenses from USD 144 million in Q2 to $85 million in Q3. You should expect idle and turnaround expenses to remain at normal levels in Q4. Despite being a clean quarter, Q3 EBITDA was impacted by lower sales volumes, which reflect a shortfall in phosphate production and an intentional slowdown of sales from Fertilizantes given the credit challenges in Brazil. Let's address phosphates. On the revenue side, for Q4, we expect phosphate sales to be between 1.7 million to 1.9 million tonnes with risk to the downside due to demand referral. On the cost side, you saw the significant decline in idle and turnaround expenses from $84 million in Q2 to $42 million in Q3 as expected. But we still had a lot of repair work mostly in July, recording into cash conversion costs, which were at $131 per tonne, which is about the same level of $126 per tonne in the second quarter. The next step is to have a meaningful decline of cash conversion costs in the fourth quarter, given that the asset health and repair work will be normalized and also due to our expectation of higher production and fixed cost absorption. So for phosphates in Q4, higher sales volumes, historically elevated stripping margins and anticipated lower conversion costs should support results. In Potash, cash production cost per tonne of $71 was down from $75 from Q2 as production volume increased. We expect the fourth quarter unit costs to be similar to Q3 and finish the year at low to mid-70s. If you recall, we guided 2025 unit production costs in the $64 to $69 range on Investor Day earlier this year. Since then, we kept operating at higher cost Colonsay mine for longer than expected and the Canadian dollar has strengthened against the U.S. dollar. If we adjust the Investor Day targets to reflect the current exchange rate, our full year forecast would be on track to hit the targets. Potash continues to be a very stable business in terms of production volumes, costs and capital intensity. Fertilizantes, our results were driven by 2 opposing forces. On one hand, strong underlying business performance, but on the other hand, a softening market in the near term. EBITDA came in at USD 241 million, above the $200 million that we have guided even after we strip out the $27 million recovery of the bad debt recorded in Q2. That performance was achieved despite distribution margins at about $20 per tonne, which is, again, below our targeted $30 to $40 range as we had to make margin concessions because of the weakening market. The new level of EBITDA generation of Fertilizantes is a testament to the strong cost performance of the business in 2025 despite the strengthening of the Brazilian real. What do you expect for Q4? Well, we expect an important drop in EBITDA due to a number of factors. Lower prices, still compressed distribution margins, normal for the season, but still compressed, higher raw materials costs, seasonally lower overall sales volumes and product mix. These uncertainties in volumes, prices and margins are very high in the quarter. So EBITDA could be in a wide range. But in any scenario, we still expect it to be above the same quarter prior year. Thanks to the sustained cost improvements. A few words on cash flows. Cash flow from operations was only USD 229 million for the third quarter because of over $400 million increase in working capital driven by several factors: higher physical inventories of the end products in North America and Brazil due to the slowdown in sales at the end of the quarter, higher prices for such inventories and for raw materials, and the buildup of inventory of phosphate rock to support future production plans. We expect these effects to partially reverse in Q4, supporting cash flows. But even with that reversal in Q4, if you look at the full year, and we have a slide in the deck for that, working capital will continue to post a large increase. And therefore, 2025 cash flows will be well below what is intrinsic to the business. In 2026, with raw materials prices stabilizing, phosphate rock inventories being consumed by higher production and the adjustment in inventories in Brazil and North America, cash flow from operations and free cash flow is expected to improve significantly. Therefore, we're prudently deferring any extraordinary dividends or buybacks to 2026. Finally, a note on noncore asset sales and capital reallocation. You saw Mosaic announcing the completion of the Taquari transaction yesterday. We sold this potash mine in Brazil for USD 27 million. But the transaction is also expected to eliminate capital investments exceeding USD 20 million in the short term. We will avoid significant capital investments to extend life of mine beyond 2030 in the medium term, and we will transfer asset retirement obligations of USD 22 million. So a lot of capital that is not going to be deployed anymore in this asset. Mosaic also announced the closing of the sales of Patos de Minas idle phosphate mine early October with proceeds of $111 million with $51 million already received. The rest will be collected over 4 years. We have many assets under review and several strategic talks ongoing, and we expect 2026 to be a year when capital reallocation will gather steam. So in conclusion, we are highly confident in our ability to finish the year on a high note, and we encourage you shareholders to focus on the strong momentum we expect to enter in 2026. With that, operator, please open the line for questions. Operator: [Operator Instructions] And the first question will come from Chris Parkinson with Wolfe Research. Christopher Parkinson: Just given, obviously, you've been on a pretty long-term fixing of the turnaround schedule across the 4 primary facilities. Can we just get an update on after the issues in late September, how you performed in October versus expectations, how you're thinking about initial November? And just what's your degree of confidence that you should be within that 4Q production guide? And how we should think about the cadence of such given the outlines that you projected at the CMD back in March, how we should be thinking about the confidence level as it relates to 2026? Bruce Bodine: Chris, thanks for your question. First off, we're committed to achieving our normalized production rates that we've been talking about. We did have those issues that we had a press release out in September, those are behind us. But I think as I've reflected on this, things are taking a little longer than anticipated. As we did, as you pointed out, get to our normalized turnaround schedule, which was the big issue for us was to do that first. And as we remove that macro asset health issue, it shined a light on some other issues, mostly that for me, and this is my terminology, that we kind of lost some muscle memory, and I'll give you some examples. Since we haven't run at these rates for 5-ish years, we've kind of stumbled on just starting back up out of normal repair days, stumbled on making product shifts. So now that asset health on the big unit operations are not the issue anymore, it's really with high turnover in our workforce over the last 5 years that institutional knowledge is a place that we've got to focus. The good news is that we are seeing full rates a lot of the time. And in fact, at times even over full rates. We just need to lock in on more consistency and then sustain that for longer periods of time. But as I reflect for me in the past 18 months, to your point, we've made significant progress and sulfuric acid plant turnarounds were accelerated to kind of eliminate that really macro asset health issue. But during that time, we advanced several improvement projects in potash and granulation and more importantly, some of our critical support facilities around water and electrical infrastructure. All in all, we've invested an additional $100 million in CapEx and an additional $100 million this year in maintenance expense that are above and beyond just kind of normal for these operational enhancements and asset health improvements. In addition to that, to leave no stone unturned, we have brought on board some external consultants to make sure that we are leveraging everything we can do to get back to those rates. So as you pointed out, all the work has led to 3 consecutive quarters of sequential improvements. And with those consistent gains, as we reported in the earnings presentation, the trailing 3-month period ending in October is at that 1.8 million tonnes, which is in the middle of our guidance range. So we are changing our guidance philosophy a little bit, and I think that's important is that we're going to base guidance on the forward quarter based on kind of how we have proven in the past months. And so that trailing 3-month was critical for us to set kind of that guidance range of 1.7 million tonnes to 1.9 million tonnes phosphate because we were actually at that 1.8 million tonnes rate right now. But looking ahead, we're going to continue to focus, Chris, on our processes and instilling operational discipline across the organization. We've got work ongoing and a lot of emphasis on strengthening our institutional knowledge at the front line. And then we've got a lot of work also on further leveraging technology across our ops and maintenance teams to put better data and decision-making at their fingertips. So we're optimistic and very excited about what the future is bringing. It's just a little unfortunate, it's taking longer to get there. But where we are right now, we feel very comfortable and confident achieving the guidance range that we've set forward. Operator: Next question will come from Joel Jackson with BMO Capital Markets. Joel Jackson: If I could follow up on your answer to Chris' question. Can you maybe Bruce dive into what is the difference between a good day and a bad day? So good days says you're at full rates or better; a bad day, you're not there. Is it a certain asset? Is it a certain thing going on? Can you elaborate good day and a bad day versus your targets? Bruce Bodine: Yes. Thanks, Joel. A good day, bad day is very nuanced, as you can well imagine. And it depends on the facility in the suite. But right now, bad days are not where something is catastrophically failing prematurely or that we're holding it together until we can get to a turnaround. Those are not the structural issues. Today, the difference between good and bad is did we actually run without an upset more from operational decision-making at the front line in phos acid, particularly ore granulation. So again, a perfect example would be, hey, we have to switch from map to MicroEssentials product at -- it doesn't matter what facility, facility X. The quality wasn't immediate at that start-up as quickly as it should be. We lost product from that standpoint or we had to actually shut down kind of [ reseat ] granulator as an example. So it's more of those institutional operating practices that really right now are separating good from bad. It's not structural asset health. It's more on operational practice and just -- and then delivering on that consistency. So every time we switch or start up from a repair day, which happened frequently within the month, that's just normal ops and maintenance practices is that getting up to that full rate quickly, add quality performance and then sustaining it until the next cycle for repair or product switch. Hopefully, that provides some color that it's no longer structural asset health as the big issue. It's more operational knowledge, institutional knowledge and consistency of delivering on that day in and day out at these high rates. Operator: The next question will come from Andrew Wong with RBC Capital Markets. Andrew Wong: So maybe can I just clarify on the expected phosphate run rate? Is that now 1.8 million tonnes? Or is that just for the very near-term upcoming quarter and then there's longer-term upside to that, like more on a normalized basis as some of that institutional knowledge comes back and you're able to work on those processes? And then just on phosphate margins, can you just think -- help us think about all the different moving pieces as we kind of get into Q4 versus Q3? Because obviously, there's lot of changes on prices and input costs and asset health. But as production goes up, that should also help with fixed cost per tonne. So can you just help us understand that? Bruce Bodine: Yes. As I said, Andrew, our guidance philosophy has switched to more proven. But at the end of the day, we're committed to get back to full rates. There's no question about that. So there's no wavering on that. It's just rather than guide to the promise we're going to guide to actually what's delivered and then the upside is there as we achieve all those gaps that you just mentioned that we talked about in the last 2 questions as well. So yes, to your point on cost, fixed cost absorption is the biggest thing. And we're not seeing any more unusual expenses in the script. Luciano talked about the higher cost of putting in these new gyp handling systems at New Wales. Those things are behind us from an expense standpoint. So normalized turnaround costs, normalized maintenance costs, labor and all those things being fixed with the higher cost of production as we go from what we've demonstrated now 1.8 million tonnes towards that 2 million tonnes, all are going to go to the bottom line, fixed cost absorption. Luciano, you got more to say? Luciano Pires: Yes. Andrew, we posted $131 per tonne of conversion cash costs. But if you look August and September, the number was actually a little under $120. And the rule of thumb is for every 100,000 tonnes additional in the quarter, you should see about $7 per tonne reduction. So if we were to post 2 million tonnes in a single quarter, which is our long-term aspiration, that sub-$120 would be somehow between $100 and $105, which is still kind of $5 above our Investor Day targets. So we still have maybe $5 of extraordinary small repair work that we need to shave, but that gives you kind of a ballpark thinking about how the costs should progress. In addition, I would like to call attention to the operational leverage in phosphates. So because most of the costs are fixed, the marginal tonne earns way more than the average tonne, which means that, for example, if you were to increase production by 25%, so for example, coming from 6.4 million tonnes to an 8 million tonnes rate, theoretically, EBITDA could improve by more than 50%, and the impact on cash flows would even be even more magnified. So that is something to bear in mind that the results of phosphates are very, very leveraged to volumes. Operator: Your next question will come from Lucas Beaumont with UBS. Lucas Beaumont: I just wanted to touch on the cash flow again. So I mean the operating cash flow to EBITDA conversion this year has been about 45%. Typically, your long-run range is in sort of the 80s. So I just wanted to kind of -- you talked about it improving next year, but I just wanted to get your thoughts on where you think that conversion should go? And then just secondly, sort of you guys have also sort of talked about trying to get OpEx down after fixing the production issues. But I mean, this year is kind of tracking towards sort of that $1.3 billion, which is pretty much in line with where it's been in the past kind of 7 years. So just how much scope do you think there is to kind of help free cash flow into next year on that side as well. Bruce Bodine: Yes, Lucas, thanks. I'll just start and then turn it over to Luciano, he's got a lot to say about this issue particularly. But yes, cash flow is a little weaker than we wanted or anticipated for the quarter, mostly because of the kind of slowdown in sales in the Americas, which caused a little bit of a build in inventory and then the higher pricing in inventory and our buildup of rock inventory, particularly in North America for phosphates anticipated higher production kind of added some of that cash into inventory, but that will revert as production starts to materialize and sales start to move into spring season. So feel good about that, and they will improve on the cash conversion. But go ahead, Luciano, maybe you want to talk about that. Luciano Pires: Yes. So Lucas, you're probably referring to an annual cash conversion rate. And I understand you're referring to the conversion between EBITDA and operating cash flow, which, yes, this year should be in the year at around 50%. You referenced 45%, like maybe a little more than that with the recovery in the fourth quarter. But that's because inventories and working capital are kind of taking up about 20% of that EBITDA in the year. So if you were to adjust for working capital/inventory changes, it would be at a level of around 70%, which we believe is kind of the industry norm, like we see some competitors around that level as well. And which means that looking forward to '26, we actually have an expectation of a wind down and a positive contribution of working capital. So we may be in '26 above the 70%, maybe who knows close to 80%. But that's before CapEx, as you pointed out. It happens that capital expenditures this year are also close to 50% of EBITDA. So your net cash conversion of 50% with CapEx running at 50%, you're basically at a free cash flow for '25, which is very close to zero. But again, in 2026, with the -- an improvement in EBITDA with higher volumes and the cash conversion going more above 70% towards 80%, it is possible that you're going to have like a free cash flow to conversion rate of 25% to 30%. So that's the situation in the short term. Over the long term, we see already a positive trend in reduction of ARO and legal and environmental reserves. This is one line that we've been spending around $400 million this year, and we expect next year to be the first of a long-term trend of decline. So this is a tailwind to cash flows. But in terms of CapEx, we have this long-term view of reducing capital expenditures. We're exactly now in our budgeting process. We're seeing what's going to be the rate for next year, and we will inform you appropriately once we make our decisions. But the good remark would be like asset retirement obligations, environmental reserves, or the reclamation work is already showing declines in cash outflows. Operator: Next question will come from Matthew DeYoe with Bank of America. Matthew DeYoe: If I'm just looking at ore grades at the mine site, particularly in Florida and the degradation, is it like realistic to hit 2 million tonnes per quarter for phosphate? And I say because I assume with like higher throughput, it means you're probably driving up asset where you're probably burning out pumps more quickly, and that probably plays into just uptime in general. So can you manage these issues? Has that already been handled and that's really not the issue anymore? Is that a nonfactor? How does that just in general play into this? Bruce Bodine: Yes. Thanks, Matthew. Ore -- the chemistry of the ore is not really a concern for us. Yes, on the margins, you're right. Where that played out this year was particularly at New Wales when we needed to upgrade the gypsum handling system because we did have more waste generated per tonne of feed and hadn't tested those systems in the last, say, 5, 6 years at these higher rates. But P2O5 quality, the chemistry of the ore, definitely not a concern about hitting those rates. It does limit catch-up capacity. So it forces us to be that much more precise on operating discipline to your point. But from a rock quality standpoint, it's more the geology drives some of the issues on cost for mined rock, particularly in Florida. And those things come down to stripping ratio, how much overburden do you have to remove, what's your pumping distance, things like that, that may affect cost that goes into total profitability on finished product. But those are pretty stable as well. So ore grade, the chemistry of it is not the biggest concern. Even though it does create challenges, we just have to be very consistent and more disciplined on being better operators as we were processing that. Luciano Pires: Maybe, Bruce, to your point, in order to reduce the risks, we actually are building up rock inventories this year as well. So there's ample buffer to absorb any variations. And indeed, back to the cash flow conversation, about $160 million of increase in working capital this year comes from rock inventory that we are preparing to fire in all cylinders when we can in the concentration plants. Operator: Your next question will come from Jordan Lee with Goldman Sachs. Suk Lee: Regarding the fourth quarter phosphate sales volume guide, I wanted to clarify whether the potential demand deferral that you called out is reflected in that range? Or would it be lower if that occurs? And could you maybe try to size that potential impact? Bruce Bodine: Yes. Let me start, Jordan. Appreciate that. Our guidance is really based on production at this point. We did mention in the commentary that any deferral could be risk. And let me just turn it over to Jenny to kind of talk about what that is, it looks like. Jenny Wang: Sure. So I'd like to start to talk about overall of North America phosphate shipment this year. I know there have been a lot of discussions on demand change. I want to remind ourselves that the import to the U.S. market to North America market year-to-date October has reduced by 1.1 million tonnes, which is 36% of reduction. And if there's no more import into this country by end of the year, the total import reduction will be 1.3 million tonnes. So meaning the shipment or demand in North America, likely going to be impacted by supply. So that's a fact. And I also want to remind ourselves, spring application were very normal in terms of the shipment and the summer field subscription that we have seen very strong. And at this moment, the fall applications are very well underway. Now understand the customers' cautiousness in getting into the winter fill period, given the farmers' economic situation and uncertainties related to the government payment, we've been cautious on potential deferral of phosphate application into -- from Q4, from December, basically into Q1. That deferral possibility could be depending on several factors. We would say if the government payment, which is likely going to come out, we just don't know when, and we don't know how much, that will impact the customer's decision on when they want to step in for winter fill. The second factor is weather condition. In the normal November, December, if the weather is dry and warm and farmers tend to get out to get fertilizers on the ground before the winter weather really impacts them. So these 2 major factors we're watching very closely, so as our customers. And they are going to say whether the tonnes are going to go -- going to get purchased in November, December or pushed back into Q1 next year. So in summary, for phosphate, I want to call out, the potential deferral is depending on these 2 factors. The demand impact has been driven by supply, meaning import, reduced import. Potash is a very different story. The affordability itself isn't really an issue. We are cautious on the potential deferral just because of some of the customers and farmers when they apply potash in North America, they go together with phosphate. So if there was a deferral, some part of the potash application could be deferred into Q1 as well. I would end to say with a very big harvest that we are seeing in North America and also for a fact in Brazil as well, there are significant removal of nutrients for phosphate and potash. This additional removal of phosphate and potash from soil need to be replenished into the soil in order to not impact productivity and yield for next year. The farmers in the U.S., in Canada and in Brazil, they know that. So I'll end with that. Operator: Your next question will come from Ben Theurer with Barclays. Benjamin Theurer: I wanted to come back to Fertilizantes. I mean I remember about a year ago at the Investor Day, you've talked about it how you want to bring this business into a level of somewhere north of $100 million, like $120 million, $130 million, I think, was target on a quarterly basis. And you've been on a nice track as it relates to the delivery in Q1, Q2 and then significantly surpassed Q3. So maybe explain us a little bit more what drives your expectation for the fourth quarter so much down, particularly considering that this is actually a relatively important quarter in Brazil. So help us understand what is taking it back to square one so to speak? And then how should we think about it as we look into 2026? Bruce Bodine: Yes. Thanks, Ben. I think we may disagree that it's not going back to square one, as I think we put in our earnings material kind of a comparison to last year. But we do believe that fourth quarter this year will be significantly better than last year. But the credit situation in Brazil is definitely driving some risks in buying in Brazil, particularly for small farmers. So that is maybe more of it. And then quarter 4, historically, and that's why you see is a lower distribution margin quarter based on product mix, the products that we sell, more nitrogen products, less phosphate products for the growing season. So that is an impact as well. But north of $100 million and we said approximately $100 million is actually -- we feel not a bad quarter given the backdrop of what's going on in that business. And when you average all that out quarter by quarter, I think we would expect north of $100 million, would you say, $120 million of EBITDA on a quarterly basis. But you're going to see seasonality in first quarter and fourth quarter as they are always our lowest quarters based on mostly product mix in Brazil. But Jenny, do you want to add anything? Luciano, go ahead. Luciano Pires: Most of the decline is going to be driven by the production business in Brazil because of product mix that was mentioned. And so because the Brazilian market these days have been purchasing way more low analysis products, SSP, for example, even through imports. And because part of our production in Brazil is of higher value products, we're kind of baking in the forecast lower sales, especially of these higher-margin products. So that's affecting a lot. So we're making around $70 million of decline in the results of the production side of it. The other thing, which is seasonal, just to remind, is the co-products. So we -- third quarter is kind of a peak season for sales of co-products. They should about decline by another like USD 20-something million, just the co-products sales. And again, we won't have the tailwind of the bad debt recovery. So when you bake all of this and admittedly with a little bit of a hedge to see how the sale of the higher-margin products are going to behave, that's why we're being a little more cautious on the guidance. Operator: Your next question will come from Edlain Rodriguez with Mizuho. Edlain Rodriguez: This is for Bruce or even Jenny. So given all the puts and takes in the ag market right now, crop prices, inventory levels, supply/demand and so forth, in your view, like what drives fertilizer prices higher in the near term? Bruce Bodine: Yes, Edlain, thanks. I'm going to actually -- let me just start and then turn it over to Jenny because she's got some data points on what's happening in various geographies. But I think it comes down to the macros, Edlain. And I know you're focused on, maybe part of your question is, how do you separate that from ag fundamentals and maybe ag farmer affordability, but on the 2 commodities that we make, the S&Ds for fertilizer, as Jenny did say in phosphate, supply is constrained. They just -- the prices have to come up in order to make demand meet the supply, right? And until something fundamentally changes there, and in phosphate, particularly, as I said in the opening script, with China's demand continuing to grow, not only for ag inputs, but also on LFP industrial, less Chinese phosphate is going to actually be exported. And I know Jenny is going to talk a little bit maybe about what is coming out on further restrictions potentially, but without new supply of significance coming on, fundamentally changing the fertilizer supply and demand, it's just not happening on the supply side. So we actually see demand continuing to be constrained in the near term because of lack of supply. And that likely is not going to change in our forecast anyways of significance for quite some time. And the first time, you might start to see a little bit more supply coming, 2028, I think, Jenny, as OCP starts to ramp up some of their announced increases as well as Ma'aden. So that's phosphate. And on potash, it's not a heck of a lot different. It's a very constructive supply and demand. And it's that S&D that we see driving fertilizer prices on each of those 2 sides, the potash and the phosphate. So with the first half of this year and the former FSU kind of down, supply was tight. Prices picked up. We didn't see as much come out of Laos this year. So FSU was down. China, Chile were down this year from a supply standpoint. But China's appetite continues to grow on potash as well. So again, you get down to the puts and takes. And Southeast Asia was a huge consumer this year of potash, keeping things tight. So the S&D is very constructive. Again, don't see that dramatically changing in 2026. In fact, continuing more of the same as BHP has pushed out their start-up. We do see a little bit of tonnes coming out of Laos additional, a little bit out of EuroChem and maybe BPC with Nezhinsky project near the tail end of this year. But demand, we can see continuing to grow to suck up that supply. So things stay very constructive on the S&D for fertilizer. Jenny, I turn it over to you as I've maybe covered some of your stuff, but go ahead. Jenny Wang: I probably want to add some data points. Firstly, when we talk about ag economics and farm economics, we tend to only focus in U.S. and Brazil. I would say the ag economics are very variable across the globe. Well, it is pressured in Americas. We have seen much more favorable conditions in the rest of the world. And if you look into the major ag market, China and India are very supportive from the government policies. So ag economics are not really a challenge. Therefore, we have seen very big growth -- significant growth on the consumptions of potash in both markets and also phosphate. So that's a reminder and let alone some of the other markets in Asia due to different crop dynamics, right? The other data -- very quick data point on phosphate. Chinese exports of phosphate is likely going to continuously to be restricted. This year, year-to-date, already we've seen reduced -- reduction of 18% over 1 million tonnes. For the rest of the year, we are going to see very little exports out of China. So the full year, we are going to see over 1.5 million tonnes reduction. So that hold, there's nobody this year on phosphate supply is able to put in. So the market for phosphate is really demand is constrained by supply. Looking into 2026, the economics are really supportive for further demand growth. But again, that is going to be depending on how much supply is going to be improved and partially it's coming from Mosaic ourselves. For potash, I think Bruce, you covered very well, very stable market. And the nutrient itself, affordability is very good. And that's the reason we see the growth across the board, and this is going to continue in 2026. Operator: The next question will come from David Symonds with BNP Paribas. David Symonds: Yes. Just one on sulfur, please. So -- or sort of phosphate inputs more generally. So Russia sulfur export ban seems to be pushing sulfur prices higher. There's some outages in ammonia, which are also pushing ammonia prices higher some. Just curious, obviously, the spot stripping margin that you showed in your presentation has come down to, I guess, more normalized levels. Is there a risk that, that goes further with very weak farmer economics, making it harder to pass through some of these prices in DAP? Do you see that sort of risk in the short term on stripping margins? Bruce Bodine: Thanks, David. Good question, something we talk about a lot. We definitely do see stripping margins coming down because of exactly what you said on raw materials. Sulfur is -- we see some of these higher costs sticking into early next year, for sure. Ammonia, we do see that trending down in time as new capacity comes on. But in the short term, as you mentioned, certain restrictions have caused prices to increase. But stripping margins right now and particularly realized for Mosaic are still above historical norms. They have come down, but they're coming down from a 5-handle number to maybe low 4s or upper 3s potentially, but that is still very healthy stripping margins for phosphate based on history. So Jenny, maybe you want to comment a little bit more on what you're hearing on the raw material side. Jenny Wang: Yes, sure. Some data point. Sulfur export out of Russia post the war has significantly reduced. So the recent attack of Ukrainian to refineries in Russia has, for sure, contributed to the tightness of the export of sulfur out of Russia. I would also say the overall sulfur being used on fertilizer production is over 50%. So if the price of phosphate is under pressure and that will have impact to the sulfur price as well. So I would say not only the sulfur price is not only driven by supply/demand itself, it will also be impacted by the demand from phosphate. If any pressure on the prices of phosphate that will eventually impact the sulfur prices as well. So that happened many times in history. It will just take a bit of time to work through the S&D dynamics between phosphate S&D and also sulfur S&D. Operator: The next question will come from Kristen Owen with Oppenheimer. Kristen Owen: Just wanted to revisit the critical minerals. I think the comment period for that ends this month. So just remind us, puts and takes on whether phosphate has any implication for you? What -- how we should think about the puts and takes on that being added to the list? Bruce Bodine: Yes, Kristen, great question. We're active in Washington, not only ourselves, but through industry associations to advocating for that. And it seems that there is momentum to add it. I know even at some of the Senate hearings recently talking about that seems to indicate more momentum than not. What does it do for us? I think what we're hoping for is that it brings a spotlight to the criticality of that, obviously, being a critical mineral. But it keeps that education within government that we need streamlined regulatory frameworks, maybe less burden, quicker permitting times to bring things to market. That is probably where the biggest advantage is for us to make sure that at the end of the day, we keep good supply within North America for good pre-trade and competitiveness for farmers to maximize the food that they grow. And that's what we're interested in by adding phosphate to the critical minerals list. Operator: Your next question will come from Vincent Andrews with Morgan Stanley. Vincent Andrews: I just wanted to ask on the finished goods inventory. I think it's about 1.7 billion. How much of that is at the mine or one of your facilities versus perhaps on consignment with the customer? Bruce Bodine: Yes, Vincent, thanks. Luciano, I'm just going to turn it over to him as he's got that handy here. Luciano Pires: So I would say the inventories are mostly spread around the entire supply chain, right? So we have our warehouses in the Midwest. We have barges on the river. We have our finished good yards in our Florida facility. So there's -- it's ready to be moved and it's well positioned as soon as demand comes back to be sold. Bruce Bodine: I think with that, we're going to close the call as we're at time. So thank you for your questions, everyone. To conclude our call, I'd like to reiterate a few of our key points. First, our work to improve phosphate asset reliability is definitely paying off, and we're seeing that day in and day out with phosphate production climbing as the year moves along. We intend to reach our targeted rates, and we intend to sustain our production at high levels once we get there. Our business in Brazil is performing very well despite the difficult credit environment. And Mosaic's potash business continues to deliver very strong results. We are producing at high rates to meet robust global demand. And we remain focused on our financial foundation. We're reducing costs and remaining committed to disciplined capital allocation. In all, Mosaic is in excellent position to deliver compelling returns through 2026 and beyond. So thank you for joining the call, and have a great and safe day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.