ICON Public Limited Company (ICLR) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the ICON PLC Q3 2026 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, Kate Haven, Vice President of Investor relations. Please go ahead.

Hello, and thank you for joining us today. I'm joined on the call by our CEO, Barry Balfe; and our CFO, Nigel Clerkin. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements do not guarantee the future performance. Forward-looking statements are only as of the date they are made, and we do not undertake any obligation to update publicly any forward-looking statements, either as a result of new information, future events or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in the most recently filed annual report on Form 20-F. This presentation includes selected non-GAAP financial measures, which Barry and Nigel will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the section of the press release dated October 27, 2026, titled Consolidated Statements of Operations. While non-GAAP financial measures are not superior to or a substitute for comparable GAAP measures we believe certain non-GAAP information is more useful to investors for historical comparison purposes. Included in the press release and the earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share exclude amortization, stock-based compensation, foreign currency gains and losses, restructuring, transaction integration-related and other adjustments, transaction-related financing costs, fair value movement on investments in equity, goodwill impairment, loss on disposal of subsidiary undertakings impairment of nonfinancial assets and their related taxation effect. We'll be limiting the call today to 1 hour. And in the interest of time, we ask participants to keep their questions to 1 each I would now I'd like to hand the call over to our CEO, Barry Balfe.

Thank you, Kate. Our third quarter results mark another clear step forward, in line with the plan that we set out to deliver earlier this year. Strong commercial momentum, continued earnings growth and disciplined execution, continue to reinforce our confidence in the outlook for the business and the opportunities ahead as we move into 2027. Quarter 3 results were very much in line with our expectations, and I was particularly pleased that we saw progress in the areas that we had previously indicated. Gross margin improved by 90 basis points sequentially as our direct fee mix improved and new awards began to burn in line with expectations. Adjusted EBITDA grew sequentially to $337 million and adjusted EPS was $2.66, an increase of 4% compared to quarter 2. That follows from our commercial performance, which was, again, excellent. Gross business wins increased by 27% year-over-year and 3% sequentially. Consequently, net business wins were a record $3.15 billion, up 51% year-over-year, yielding a net book-to-bill of 1.56x. This was ICON's fourth consecutive quarter with a net book-to-bill greater than 1.3x. Notably, our trailing 12-month direct fee book-to-bill was also 1.3, an improvement of circa 30% on the preceding 12-month period. This strong execution translated into strong cash generation with $300 million of free cash flow generated in the quarter, supporting the repurchase of $400 million of shares and a cash balance of $800 million at quarter end. Combined with the $2.15 billion investment-grade bond issuance in August, this creates ample strategic flexibility for ICON to pursue our capital allocation priorities including organic investments, selective M&A and return of capital to shareholders. Looking at customer groups, large pharma remains a source of continued strength in the quarter. We saw strong contributions across both full service and FSP including the expansion of an existing alliance through the addition of large-scale pharmacovigilance portfolio. Multiyear FSP renewals were also noticeable, reflecting customers' continued preference for flexible partnership models and their confidence in ICON's ability to deliver at scale. Among midsized pharma, opportunity flow continued to strengthen with an encouraging pipeline of partnership activity. With new and expanded midsized partnerships in the quarter, we are increasingly seeing customers adopt a more strategic approach to partnering in this area, utilizing a broader mix of our clinical laboratory and functional capabilities. In biotech, overall demand remains constructive, supported by a healthy funding environment. We maintained our focus on expanding our universe of biotech targets and are now covering 30% more companies in this sector than was the case 1 year ago. The rollout of new intelligence tools to track molecules through the development cycle has enabled us to better calibrate early engagement with emerging sponsors. As these biotech customers advance their pipelines at a later stage development, programs naturally become larger, more complex and increasingly global in nature. This benefits ICON, as sponsors seek out partners with the necessary scale, breadth and expertise to execute on these challenging programs while preserving the agility that they continue to value. We saw evidence of this during the quarter with the addition of 3 preferred partnerships with enterprise customers in biotech, including a 4-year sole provider arrangement spanning all phases of development. As established biotech and midsized companies seek strategic partners to support their long-term development needs, the expertise, governance structures and alliance management capabilities that have served ICON so well in large pharma are proving increasingly valuable. Fundamental disruption of the clinical development paradigm remains the strategic priority for ICON. Across all market segments, sponsors engagement with our tech transformation agenda continues to accelerate. While elements of this transformation may take time customer decisions are increasingly driven by evidence of innovation that creates value and competitive advantage today. our excellent commercial performance has to a significant degree, and being driven by the suite of capabilities that our teams have already put in the field. In biometrics, programming agents and production since February have cut programming cycle times by 28% on in-scope studies. Study start-up throughput, key indicator of impending clinical activity grew about 30% year-to-date, enabled by a range of agentic capabilities. Smart Craft is just one example. Site contracting cycle time reduction of 10% over the year with near-term targets extending to an additional 20%. And our monitoring agent, Meridian continues to resonate with customers and is designed to deliver significant gains for both FSO and FSP customers. As we've spoken about before, these disruptive technologies are enabling our customers to meaningfully reduce time, cost and uncertainty in their ongoing programs and to redeploy surplus capital to portfolio expansion. This is fundamentally changing the nature of commercial discussions with customers, with sponsors increasingly focusing on expertise and outcomes rather than just on effort. Supporting that shift, we continue to make targeted investments in therapeutic and scientific expertise to support the increasing complexity of clinical development and depress ICON's advantage in some of the most attractive growth areas in the industry. This includes building on our long-standing strength in oncology, where we have expanded capabilities and patient advocacy, emerging modalities like radioligand therapies while also expanding capacity in high-growth areas such as endocrinology and neurology. Finally, we've narrowed our 2026 guidance range to reflect greater visibility and disciplined execution as current trends support positive momentum on revenue and earnings for quarter 4. While we will issue formal 2027 guidance with our quarter 4 results at this stage, the leading indicators are moving the right way. With 4 strong quarters of bookings, growing backlog and an improving business mix, creating a clearer view of the scope for revenue growth and meaningful earnings progression. Before I hand over to Nigel to take you through a more detailed look at the financials, I would like to thank all of my ICON colleagues for their continued commitment, energy and focus. Their work every day supports our customers in bringing forward new treatment options for millions of patients around the world. Nigel?

Thanks, Barry. Revenue in quarter 3 was just over $2 billion, representing a year-on-year decrease of 2.9% or a decrease of 2.5% on a constant currency basis. Compared to the second quarter, revenue decreased 1.9%, primarily reflecting the divestiture of Symphony, while adjusted EBITDA increased 3% to $337 million expanding adjusted EBITDA margin by 70 basis points to 16.6%. As mentioned last quarter, based on year-to-date activity, we believe that pass-through activity levels will exceed our prior assumption of being approximately flat year-over-year. Our updated full year guidance reflects this higher pass-through activity supporting an increase in our revenue outlook to the high end of our prior range. Overall customer concentration in our top 25 customers was broadly aligned with quarter 2, 2026. Our top 5 customers represented 23.7% of revenue. Our top 10 represented 38.9% while our top 25 represented 63.1%. Adjusted gross margin for the quarter was 24.7%, an increase of 90 basis points over quarter 2, driven by improved business mix and operating cost management. Strong cost discipline also resulted in adjusted SG&A expense of $163 million in quarter 3 or 8.1% of revenue compared to $179 million in quarter 3, 2025 or 8.6% of revenue. Adjusted net interest expense was $43 million for quarter 3. In the comparable period last year, net interest expense was $47 million. The effective tax rate was 18.6% for the quarter. We continue to expect the full year 2026 adjusted effective tax rate to be approximately 17% due to some timing benefits in the fourth quarter. Looking ahead to next year, we'd expect our effective tax rate to be approximately 18% for the year. Adjusted net income for the quarter was $206 million, equating to adjusted earnings per share of $2.66, a sequential increase of 4%. U.S. GAAP income from operations amounted to $199 million or 10% of quarter 3 revenue. U.S. GAAP net income in quarter 3 was $122 million or $1.58 per diluted share. From a cash perspective, quarter 3 had cash from operating activities of $340 million. Capital expenditure was $38 million resulting in free cash flow in the quarter of $302 million. During the quarter, we successfully completed a $2.15 billion investment-grade bond issuance. The proceeds of which were used to repay our senior secured term loan, redeem our May 2027 notes and repay our bridge secured credit facility. As a consequence of this refinancing, our total debt of $3.4 billion has a blended annual fixed interest expense of approximately $200 million. At September 30, 2026, cash totaled $809 million, leaving a net debt position of $2.6 billion. This compares to net debt of $2.5 billion at June 30, 2026 and $2.9 billion at September 30, 2025. We ended the quarter with a leverage ratio of 2.0x net debt to adjusted trailing 12-month EBITDA. Our strong balance sheet and free cash flow generation continues to provide flexibility to execute a balanced capital allocation strategy, enabling us to invest in the business, pursue selective M&A opportunities and return capital to shareholders. Consistent with this approach, we repurchased $400 million of shares in the quarter at an average price of $170 per share. In addition, our Board approved a new $750 million share repurchase authorization, underscoring our confidence in the business and our ongoing commitment to shareholder returns. And with that, we'll now open it up for questions.

[Operator Instructions] And your first question today comes from the line of Eric Coldwell from Baird.

Congrats on the strong commercial development progress you're making here. I want to focus on direct fee revenue. It's encouraging to hear that it's recovering. It seemingly would still be down, though, based on results and the higher pass-throughs you're talking about. Correct me if I'm wrong on that. Just based on what you're seeing with these very strong direct fee awards over the last year, when would you expect to return to stable direct fee revenue growth? And then would you be willing to give us a ballpark of level of incremental margin might be expected on the early days of a direct fee recovery, if you will. .

Eric, it's Nigel. Thanks for the question. So yes, look, I think you can start to see the evidence of this in our Q3 results, Eric. You did see our gross margin increased nicely over the quarter before, as we talked about previously, we always did expect to see our H2 EBITDA increase and our margins improve in dollars as we see improvements in business mix and operating cost control, and that's exactly what we have seen. To your point, Barry touched on, we've had 4 quarters now of consistent really strong commercial performance. We've talked before about it does take some time for that to start to show up in the P&L. But we are seeing the first signs of that. Barry, I don't know if you want to comment in terms of perspective in terms of the outlook as we head into next year.

Look, I think while direct fees were up very modestly sequentially. The fact that the return to growth is an important milestone. I think the underlying business mix and the associated cost controls is what drives the margin expansion. 90 bps on gross margin, 70 on EBITDA margin, I think, is certainly encouraging. The question on the relationship between margin recovery and revenue obviously depends on the revenue profile, Eric. So it's -- I'm sure going to be the first of several questions nibbling in 2027. So maybe I'll get that out of the way. We're not guiding today. I think that's been made clear. But when talking about this morning, is it certainly viable for us to think about mid-single-digit revenue expansion next year and maybe higher single digit expansion on earnings, yes, certainly a decent jumping off point. But like I say, every quarter, when people ask me, are we going to replicate the book-to-bill. You look at the data, you say there's certainly feel in the time to make that a reasonable objective. And then it's about execution. So whether we finish above or below those numbers will ultimately be determined by how effective we lead the team keep doing what we do best, which is engaging with customers to understand their needs, deploying the platforms that resonate most strongly for them and leveraging the best delivery execution expertise in the industry to turn that into a fair return for shareholders. This is a quarter that looks a lot like we expected it to. And like we've been saying it was since May and certainly through June and July calls. And I think if we continue on this path, those sorts of options are certainly in play. And I would say, it's a little early for guidance, but we feel good about the trajectory, and we feel good about the underlying points that indicate an inflection that you've alluded to. So I hope that covers it.

Your next question today comes from the line of Ann Hynes from Mizuho Securities. Due to no response, I will move on to the next question. One moment, please. And your next question comes from the line of David Windley from Jefferies.

Great. I'll pivot off of Eric's question and ask around composition of bookings to try to understand a little bit, Barry, what is kind of driving the really strong commercial performance, but also to try to understand how we should expect that to convert. I mean you're talking about beginning to feel that but obviously, the high bookings are -- I mean, in under normal circumstances unless your burn rate plummets, you should see significant revenue acceleration. So I'm trying to understand what about these makes them be accompanied by so much pass-through what's the duration? What's the therapeutic area? Just any color that you can help us to understand how they are so strong and how we should expect them to roll out.

I'll answer as many of those would like to remember, David. Let me do my best on it. I think your point is well made. I suppose the first thing to say is trailing 12-month direct fee book-to-bill of 1.3x, while it's outstanding, it's certainly industry-leading. I think it has been in each of those. It also comes on top of a preceding 12 months that were closer to 1.0. And if you think about the revenue build and you think about the sequential burn rates in the first, second, third, fourth and then 6, 7 to 8 quarters after those awards, it's clearly a combination of those 2 things, right? It's why I called it out in the prepared remarks. The preceding year obviously wasn't as good and has been a weight on that revenue path. So it is a blend of those 2 things. And I think that's certainly important. With the book-to-bill strength is driven primarily in any given quarter, just given the relative scale of business units and the bookings policy by full service. So I think it's relatively straightforward to model the kind of burn rates that we've seen on that and to have some confidence that the revenue recovery now is exactly what you would expect to see in the context of having come out of 12 months on a trailing 1.0 and move through 12 months on a trailing 1.3 and moving forward with some confidence next year, which is where I was going with the numbers. I was just riffing on with Eric there. I mean if this business translates these kind of book-to-bills into mid-single-digit revenue expansion next year, that would not be on a herd of given the kind of book-to-bill and also strength elsewhere in the portfolio. And does that give you the opportunity at least to say there's enough gas in the time to turn at $10.50 midpoint into something more like an $11.50, who knows? I mean there's no reason why not, right? But as I say, execution is out there. In terms of pass-throughs, I guess the only 2 things I would say is that, yes, there's a lot of awards coming a lot of pass-throughs here. I don't know if it's more or less than anyone else. I suspect nobody does because I think we're the only ones giving you that level of transparency. And we do that for a reason because I think it helps investors understand strength, the market share gains and the phasing of the book-to-bill. I would also say that these are high-class problems. It just so happens that some of the most sought-after opportunities in the market just now come with a very high pass-through coefficient. And while I don't care about the pass-throughs in and of themselves, the complexity around pass-through is a really small price to pay for the kind of execution that the team are delivering. And it's not just commercial, it's operational, it's medical, it's scientific, it's technological, and I'm really pleased with it. And to the extent that the world gets really deep into the analytics on this. I don't know how you can do any sort of comparative analytics on it when you think about the changes in bookings policy. I think you guys are aware, we're really conservative on FSP which doesn't carry any pass-throughs really. We put in only 1 year or some of the other very large CROs, but in 3, 4, 5 years of FSP into backlog or indeed into the words in the period. So you could get some pretty skewed analytics if you're trying to do it side-by-side. Hopefully, I've shared some light on the nature of your inquiry Dave. But I think these numbers are entirely consistent with what you would have hoped for a year ago with what you would expect now and entirely consistent with the kind of indications we're thinking about for 2027 and beyond.

Your next question today comes from the line of Justin Bowers from DB.

And just continuing with Dave's question, Barry, that $11.50. Is that consistent with your guidance philosophy of excluding buyback, and I know you're not talking about 2027 guidance, but just to clarify that. And then secondly, if I may, could you talk about the demand environment and what the funnel looks like? And any kind of indications around FSP, FSO mix. There's a lot of noise/questions from investors around that as it relates to large pharma.

So Justin, thanks for the questions. Look, we're not guiding that. So the intricacies of how people build models and what they want to do is really not something I want to be drawn on as really more just trying to build a bridge intuitively around what's the relationship between backlog, bookings, revenue inflection and earnings potential, right? So take that as of, for instance, I really want -- I did mean it when I said we're not guiding today. So maybe I'll give that and leave it there. I think in terms of the demand environment, it remains really robust, at least for us, in large pharma FSO, which I'm not sure everybody expected 18, 24 months ago. I think it's been really robust, and we're really pleased with where that's been but it's never just selling 1 service, right? So people tend to think about Phase II/III clinical when I talk about large pharma. But if you look at -- you look at the labs, which have been posted in some great numbers. You look at evidence generation, where its book-to-bill is very strong. You look at a number of partnerships where we've added in new streams to that partnership both like the pharmacovigilance program I mentioned being layered on to an existing alliance. These are the things we said we wanted to do. We're already working at significant levels with, I think, 28 at the top 30. I can't print new pharma companies. What I can do is open up the number of distribution channels and sell more services along those channels. I think that's been pretty positive. And in midsize, I think we talked about the demand environment there and the biotech very to my earlier comments. But across the board, I mean, opportunity flow is up high single digits on a trailing 12-month basis, and that's sort of mid- to high across different ends of the range or different parts of the business. So I think we're pretty satisfied probably in line with everybody else, frankly. On the demand environment, we're probably seeing the same demand as well there. I just think we happen to be converting it at a slightly better clip, which is a good thing. And on FFO I mean, obviously, the numbers are a little bit different just because of the bookings of backlog policy. We said for some time, we've been very pleased with the development in our FSP business as we have in areas like labs and some of the ancillary carryclinical services that go with that. The area we needed to throw some real fuel on the fire was in FSO. And I think that's being borne out by these bookings, which, as I always say, those book-to-bills are disproportionately impacted by sales in FSO. So that's very, very encouraging. And to add one new midsize to expand another and renew it in the quarter to take 3 biotech customers for more transactional relationships to these preferred partnership statutes that much more closely resemble alliances Obviously, we're talking to more established biotechs now. That's good. I also think the fact that we're engaging with 30% more biotech targets than we were a year ago, speaks to our strategic intent that we've been talking about some time, not just about how much demand out there, it's about how much of it you're meaningfully engaged with and at what rate you can convert us from opportunity to award or revenue and revenue to earnings. So it was a pretty broad question. I hope I've addressed the general just a bit, but I'm sure [indiscernible] might jump in for a clarification, if I have .

Your next question today comes from the line of Charles Rhyee from TD Cowen.

Barry, just from what you just said there, when talking about having these -- getting preferred relationships now into biotech as well you kind of talked, I think, in your opening comments about companies now focusing more on expertise and outcomes versus effort. Just curious if that kind of focus may be on outcomes, perhaps or expertise. Is that changing maybe how contracts are pricing and being structured? Like do you foresee, particularly as you also start deploying more, let's say, AI tools as well into the process. Can you talk about maybe how you maybe envision pricing in the CR industry or at least for you could change over time.

It's a great question, Charles, and it's a really sort of broad church of potential answers. So let me drill down to what I think the key points are: One, of course, there's always discussions about rates. They're never going to go away. And we have a very savvy customer base who employ lots and lots of people to make sure they're getting value for money in terms of the rate per hour or rate per unit effort or whatever it's going to be. I think the point is that there's a much greater potential for saving time for saving money and reducing uncertainty by changing the way we work together and committing ourselves to results and to transformation than there is to arguing over the rate per hour of a monitor manager or anybody else. . Now I'm not suggesting that pricing isn't incredibly competitive on the rate side, it is, but I think people understand that just because we give our teams much superior tools, simplified workflows, greater data insights, it doesn't reduce the cost of employing those people. It means those people can do more, better research faster. So I regularly start with these negotiations and saying, "I'm happy to sit in the rate discussion where it needs to be but I'd want rather have a conversation where we look at a business and say, we think we can make you x percent more efficient, more productive, more faster we're willing to underwrite the first y percent. But after that, I want that percent gain share because I've got investors too. I think these are more productive conversations. And I think when you get above the cut and thrust of individual study or project sourcing, into alliances, into preferred partnerships, into the executive tier where really we're talking about developing a portfolio and recycling surplus capital back into broadening the portfolio, running more studies better rather than running the same number of studies cheaper. Then I think that's the kind of language that tends to resonate. And candidly, the customers are making the most progress in the most rapid transformation are the ones that are coming around to that way of thinking fast. In our experience, I can't speak to everybody.

Your next question today comes from the line of Elizabeth Anderson from Evercore.

Maybe sort of a 2-parter. One, just to confirm, it seems like what you're saying sort of based on your prior commentary is that on sort of like a like-for-like basis, you are getting sort of similar economics, given some of the increase in services, et cetera, that you're adding on as you were sort of maybe a year or so ago. So there's no sort of fundamental change or if there is a slightly on a positive side. And then two, cancellations, as you pointed out, last quarter, came in a little bit above quarterly. Is that the right run rate to kind of think about going forward?

Yes, I'll take the second one first. I don't think there's much to see on the cancels line Elizabeth in a world where 5 to 6 is whatever power is. We think it's in around that range. They came in pretty close to 6. I don't see anything in there to be candid, no change. I'm not entirely sure I understood the question on economics. I think when we look at the business, it's about making sure we understand the importance of converting this backlog to make sure we avail ourselves with some positive operating leverage. I think that's important. When we think about the pricing environment, I'm not sure if that's where you were going. It's not that the volume of work has changed transformationally. It's that the way we're going to do that work over time is transforming significantly. So the economics of how you factor in effort or how you factor in pricing and contracts will all evolve over time. And I think we're seeing customers vote with their feet. I think increasingly, customers are choosing providers who can, a, deliver value, confidence and results today at the same time as aligning with and leading that larger transformation, that disruption of the clinical development paradigm that I talked about. I don't know if there's anything more fundamental than win rate. And I think to a very significant degree, one of the reasons the teams have sustained win rates or book-to-bills that candidly are much better than we need them to be, right? I don't need them to stay that good to deliver the kind of results that we've been talking about. But the reason -- one of the main reasons they have done is because sponsors are telling us that the plan is resonating, the capabilities are delivering tangible incremental gains now at the same time as joining them on their glide path. There's always a hybridization of our transformation in theirs and making those 2 things fit together. And when I'm asked how I can differentiate in the marketplace, there's lots of different ways. But I always call out our approach to partnership. It's one of the things we hear back repeatedly. It's about the ability and the desire to meet customers where they are and we configure your site to match theirs rather than the other way around. So I hope I got the nuance on economics, but if not, please let us know, happy to follow up.

Your next question comes from the line of Michael Cherny from Leerink Partners.

Maybe just one clarification to make sure I heard you right. Did you say $43 million of net interest, I just want to get that right based on the press release. And then maybe building on Elizabeth's question a little bit. But as you think forward relative to that what you noted, Barry ongoing dynamic of price and rate conversations, what are you doing proactively to basically offset that? And how much of your push your investment in AI now is part of that managing to an EBITDA dollar profit level going forward?

Mike, it's Nigel. I'll take the first one. So yes, net interest expense, non-GAAP in the quarter was $43 million. And then, Barry, do you want to take the second one?

Yes. I think it's a pretty -- it's a pretty broad church again, Mike, if I understood your question well. I mean the first thing to say is that we manage pricing cost base and opportunity conversion in the aggregate. And a lot of it comes back to where we perceive economic value that we can create and economic value that we could capture. I think the teams have done an exceedingly good job on cost control. I'm not surprised by it, but I am pleased with it. So credit to Nigel, GBS team on the G&A cost controls. We've always said we will seek to phase our cost action and our investment agenda within the parameters of business performance in that period, and we continue to do that well, reflects that well. But I also think that the operating teams have done really well to grow operational head count where there's capacity to be done now or capacity to deliver now but also sought to offset that, where there are other efficiency gains elsewhere in the business where we perhaps didn't need the same way of head count to deliver the same volume of work. So it's a blend of all of those things. And when you get in the room with the customer, it's ultimately about understanding what's important for them. And there are times, I said this before, where we'll walk away from work. If I stratify the reasons why we lose when we lose, price will come out as high as anything else. In fact, I think it was joint cost in the last quarter, if I remember the data well. So there are times when a race to the bottom on pricing doesn't work for ICON, it doesn't work for the sponsor in my view either, but it certainly doesn't work for me and it doesn't work for our investors. And if that's the case, we are happy to pass on this one to keep making the argument for transformation efficiency, better study delivery strategy and conversion on that basis, and we'll catch you on the next go round. And I don't say that glibly. We don't like walking away from work. But I would much rather moves twice with the right idea and have a customer come back, then win once with the wrong idea and have them never work with us again. And that's a good core philosophy around here and not when I seem to change.

Your next question today comes from the line of Ann Hynes from Mizuho.

I'm sorry about before. I just want to talk about margins. Margins came in higher than my expectation. Is it tracking ahead of your expectation? Are you still on target to end the year at that mid-16.5% range. And also, I know you don't want to give 2027 guidance, but is there any major like headwinds and tailwinds that we should know about? .