Centene Corporation (CNC) Earnings Call Transcript & Summary

Good day, and welcome to the Centene Corporation Third Quarter Earnings Conference Call. [Operator Instructions] Please also note today's event is being rewarded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our third quarter 2026 Earnings Results Conference Call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Specifically, our commentary on our full year 2026 outlook, including the drivers of such outlook, are forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our third quarter 2026 press release and other public SEC filings, which are available on the company's website under the Investors section. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter 2026 press release. With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Thanks, Jen, and thank you all for joining us to review Centene's Third Quarter Results. This morning, we reported third quarter adjusted diluted earnings per share of $0.58 ahead of our previous expectations. These results driven by outperformance in our Medicare segment and in line performance from our Medicaid and commercial businesses support an improved full year financial outlook. We now expect 2026 adjusted diluted earnings per share of greater than $5.20. As we remain focused on disciplined execution to finish the year strong we are excited to carry the positive momentum we are producing across our businesses into 2027. Let's unpack the results by business line, starting with Medicaid. Our Medicaid business is right on track for the quarter, reflecting the positive rate actions highlighted during our second quarter call and effective execution against key quality and affordability initiatives, including member and provider engagement, network management and a diverse portfolio of fraud, waste and abuse interventions. We reported a Medicaid HBR of 93.6%, improving sequentially by 30 basis points from Q2 and keeping pace with our trajectory to achieve a full year Medicaid HBR of 93.5. Overall, core trend in the quarter was in line with expectations, and the key drivers that we have been watching for the last 18 months, namely behavioral health, home health and high-cost drugs remain among our top areas of focus and intervention. On a positive note, we observed another quarter of year-over-year stabilization in behavioral health trend with a similar pattern beginning to emerge in home health, evidence of the impact of our cost management and policy advocacy efforts. In the quarter, as expected, we continue to see evidence of the states cleaning up eligibility ahead of OB3 implementation, including mix impact from New York's EP program changes. In the back half of the quarter, we also saw some increased utilization from Children's Medical Services members in Florida ahead of the program transition. In all cases, we were able to absorb that pressure with no impact to our overall trajectory. Medicaid membership tracked largely in line with expectations at quarter end. We continue to expect an incremental step down in Q4, in line with our previous view that year-end 2026 membership would reflect attrition of roughly 8% to 9% and compared to year-end 2025. As a reminder, 10/1 marked both the roll-off of the Florida CMS membership as well as the beginning of OB3 eligibility terminations for legal noncitizens and we have at least one state planning to begin work requirements in Q4. These shifts are reflected in our full year membership projections and we have accounted for corresponding Q4 acuity impacts in our guidance. Rate updates since July have been consistent with expectations and our view of the full year 2026 composite rate remains steady at roughly 5%. Just over 40% of our Medicaid revenue re-rates as of 1/1. And while our view there is still early, we do see signs that rates will continue to reflect better alignment with our cost experience particularly as 2025 dates of service come more fully into focus for the look-back period. As we think about rate actions specific to the Medicaid expansion population, you'll recall that we had a few states in the 7/1 cohort who explicitly accounted for anticipated acuity shifts related to work requirements. Mainly states with either early starts or intentional OB3 prep activity in the period. Based on our discussions, we expect the remaining expansion states to revisit rate discussions mid-cycle once their implementation time lines and plans become clearer. For the 1/1 cohort, we are similarly seeing strong engagement in the rate setting process with explicit dialogue around the best way to address OB3 acuity impacts as they construct and draft 2027 rates. Looking ahead, we are confident we can work with Medicaid departments across our portfolio to make progress on rate adequacy amid the evolving coverage landscape. In the meantime, our local teams are actively partnering to prepare for the implementation of work requirements. States are broadly opting for a more methodical approach to eligibility verification, which should smooth both membership and acuity impacts across 2027 and into early 2028. This will create more opportunities to correctly calibrate rate to the ultimate mix shift. Based on state guidance, we are mobilizing to support member education, work and community resource referrals as well as provider education and readiness support. These efforts are important to ensure that as a system, we can maximize the opportunity for coverage continuity. Ultimately, we see significant opportunity for margin restoration and sustainable long-term growth in Medicaid. Our unmatched expertise and uniquely mission-driven model position us to help our state partners achieve their Medicaid program goals while supporting our members throughout their health journeys. As signs of trend stabilization emerge and policy changes advance, we look forward to helping to shape the next chapter of Medicaid managed care. Turning to Medicare. Our Medicare segment results were strong in the quarter, with Medicare Advantage and stand-alone [ Part D ] performance, both exceeding our expectations. Strength in Medicare Advantage was driven by favorable medical cost experience and continued disciplined management of the business. As a result of strong execution against our turnaround plan, we are now on track to achieve breakeven financial results in 2026, a year ahead of expectations. With the annual enrollment period underway, we are closely monitoring our portfolio evolution for 2027. As many on this call are aware, we made changes to the way we are going to market for Medicare Advantage in 2027. Focusing our efforts on populations and geographies where we can provide differentiated products that create the most value for our members and the communities we serve. We expect Medicare Advantage membership to be down year-over-year in 2027 as we construct a footprint that will allow us to advance margin expansion in 2027 and beyond while delivering high-quality service and benefits to our members. Earlier this month, [ CMS ] released Medicare Advantage STARS results, which impact the 2028 plan year. These results representing roughly 42% of members at or above 3.5 [ STARS ] with 10% of members in 4 [ STARS ] were in line with our expectations given known program headwinds. Despite cut point pressure, the team delivered meaningful raw score improvement in key categories, including results that outpaced the industry in several measures related to preventative care and clinical outcomes. We remain focused on improving quality fundamentals, and we continue to advocate for STARS reforms that will better support the vulnerable populations we serve. We believe this important work will ultimately lead to better STARS scores and the associated revenue benefit. Our stand-alone [ Part D ] offerings also performed well in the quarter, once again demonstrating the benefits of prudent bid posture, scale and continued optimization of our cost structure. Reflecting year-to-date results, we now expect PDP to generate pretax margins in the mid- to high 3s, a step-up from the greater than 3% outlook we shared in July. While we are still early in [indiscernible] based on the landscape and our product positioning, we expect enrollment to tilt toward growth. We continue to see excellent long-term opportunity in [ Part D ], leveraging a deeply established footprint and expertise that we believe uniquely positions us to provide affordable access to pharmacy benefits for American Seniors. Finally, our marketplace team continues to deliver, positioning the product for meaningful year-over-year margin restoration in 2026. The Marketplace business fundamentally outperformed in the quarter with trend in our higher acuity Silver tier continuing to moderate. During the quarter, we received updated data and refreshed our estimates relative to 2026 independent dispute resolution activity and other standard program integrity processes. The strength of the underlying business allowed us to absorb the impact of these adjustments, and we now expect Marketplace will produce a full year pretax margin at the top of our previous range of 4.5% to 5%. [ CMS ] continues their efforts to reduce unauthorized roles and crack down further on broker fraud. The reserves we had in place coming into Q3 sufficiently accounted for the revenue and risk adjustment impact of this activity in the quarter, and we believe we have similarly accounted for the trailing effects of these efforts through the end of the year in our full year guidance. Our full year assumptions for Marketplace also include continued membership attrition and the expected sloping of Q4 medical expenses. In September, we received updated risk adjustment data from weekly, reflecting claims through July of 2026 and inclusive of data on unauthorized membership. This data was in line with our expectations, and we continue to expect to be in a meaningful receivable position at the end of the year. While the Ambetter team has been expertly navigating a dynamic landscape, they have also found time to innovate. We will step into 2027, open enrollment with an expanded product suite, including more tailored benefit plans and whole health programs that meet our members where they are and make it easier for them to get affordable, local and innovative support for their health. We are pleased with where Ambetter's pricing strategy has positioned our products for the 2027 shopping season and remain focused on driving additional margin expansion for Marketplace in 2027. We are proud of how this team has executed in the wake of market disruption and coverage changes, demonstrating agility in 2025 that paved the way for meaningful margin recovery in 2026. We believe we are well positioned to harness this positive momentum as we enter the 2027 cycle. Overall, we are pleased with the performance of our core businesses in the quarter and the momentum we are building across the portfolio. And while we have made great progress managing cost trends and improving our own cost structure, I'm equally excited about the impact the Centene team has had, delivering health outcomes for our members. One example of this is the work we have done across the country to turn food from a basic need into a powerful driver of health and affordability. For example, our Nebraska Total Care team has partnered with a leading grocer to offer a healthy food benefit with incremental rewards for evidence-based nutrition counseling, education and blood sugar screenings to reengage at-risk members and drive behaviors that improve diabetes management. Improving quality of life, encouraging healthy choices and supporting chronic disease management are just some of the ways our members can benefit from healthy food programs. Along the same lines, over the last 2 years, Centene has taken a data-driven approach to design our Medicare D-SNP supplemental benefits around groceries, housing and transportation, based on a hypothesis that by investing in critical needs like food and security, we would not only be offering an attractive benefit for enrollees, but one that we know drives better health outcomes. Over the last 2 quarters, we have completed analysis of these member cohorts and saw that members with higher healthy food benefits had almost $200 per member per month in lower claims spend and better clinical outcomes, including lower [indiscernible] blood pressure, HbA1c and BMI. By using proven models, prioritizing rigorous data-driven evaluation and embracing innovation, Centene is delivering on the promise of managed care, better outcomes, lower costs and improve quality for the members we serve. As we turn our focus to next year, we look forward to building on the important progress we are making operationally, financially and relative to the impact we have on our members and the communities we serve. Drew will speak to headwinds and tailwinds in more detail in a moment. But based on what we know today, we expect to grow earnings in 2027 off both our updated baseline and our updated guidance. We'll be able to provide more precision on this view as we gain visibility into [ AEP and OEP ] performance, one on Medicaid rates and the overall extra trajectory of the businesses. We look forward to sharing more details when we issue formal 2027 guidance in early February. With that, I'll turn it over to Drew to provide more detail on the quarter and our early view of 2027.

Thank you, Sarah. We are pleased to report another very good quarter on our path to margin restoration, including $45.1 billion in premium and service revenue and adjusted diluted earnings per share of $0.58. This was better than our expectations, such that we are raising our full year adjusted EPS guidance to greater than $5.20 per diluted share. Similarly, the consolidated HBR at 92.7% was better than our expectations, fueling a full year improvement in our 2026 HBR guidance. Let's go through the drivers that you can think about 2026 progress in the context of 2027 and beyond. In Medicaid, at 93.6% in Q3, we were right on track with our full year forecast of approximately 93.5%. We ended Q3 with 11.9 million members, down 5% year-to-date, and we expect some states to continue to trim Medicaid roles leading up to OB3 implementation in 2027. So we are holding our full year view of membership down 8% to 9% and along with the 2026 forecasted 93.5% HBR. Our full year view on rates and trend has not changed since our Q2 call and we still see good collaboration and recognition by states for the need to match rates with acuity and trend. We are pleased with the stability of Medicaid and look forward to continued HBR improvement ahead. Medicare segment results, including an HBR at 93.8% were stronger than expected, driven by both Medicare Advantage and PDP with PDP representing the majority of the outperformance. Medicare trend was lower than what we had planned for as we continue to execute on trend management initiatives. As Sarah mentioned, we are pleased to be forecasting to reach Medicare Advantage breakeven in 2026 and a year earlier than our multiyear plan. And PDP continues to perform strongly with the 2026 forecasted pretax margin in the mid- to high 3s zone. The commercial segment led by Marketplace continues to demonstrate a marvelous turnaround from 2025. In the quarter, we are on track, and we were able to cover both rounds of CMS unauthorized enrollment, as previously anticipated. In addition, in Q3, we reflected other program integrity measures as well as continued headwinds from certain providers gaming the system with the independent dispute resolution process prompted by the No Surprises Act. We are working with the administration and Congress on plugging the holes that are prompting this health care system waste and abuse. The strength of our underlying performance in marketplace enabled us to account for these matters without missing a beat. In fact, the underlying strength enabled us to move to the top of our previous 4.5% to 5% pretax range for 2026. Marketplace membership was slightly down from Q2 with a year-end forecast around 3.2 million members. The improved outlook on Medicare and Commercial segments for 2026 improves our full year consolidated HBR by 15 basis points at the midpoint. Our adjusted SG&A expense ratio was 6.5% in the third quarter compared to 7.0% last year a little better than our expectations, reflecting continued discipline and execution. With the anticipated Q4 seasonality and spending, we are holding at a full year midpoint of 7.2% for 2026. We are also holding the guidance of approximately $1.5 billion of investment and other income for 2026. We ended the quarter with $175 million of cash available for general corporate use. Since our Q2 call, we repurchased an additional $1.1 billion of senior notes, including the full redemption of our senior notes due 2027 during October. So our total debt as we sit here today is $15.0 billion down from $18.5 billion at the end of 2024. This not only helps address near-term maturities, it reduces interest expense, including avoiding higher current interest rates and maybe most importantly, creates capacity for growth opportunities down the road. We ended the quarter with a debt-to-cap ratio of 41.1%. Our medical claims liability totaled $21.5 billion and represents 48 days in claims payable, an increase of 1 day as compared to the second quarter of 2026. During the third quarter, cash flow used by operations was $3.7 billion. As expected and previewed during the Q2 call, we paid out over $3 billion of Medicaid pass-through payments that were sitting on our balance sheet at the end of Q2. Cash flow provided by operations was $4.3 billion year-to-date, driven by net earnings and the timing of claims and other payments. Overall, given the strength of the quarter, we now expect greater than $5.20 of adjusted diluted EPS in 2026. This increase from prior guidance of greater than $4.80 is driven by: one, continued strength in our Medicare segment led by PDP; two, moving our marketplace pretax margin expectation up to the top of the prior 4.5% to 5% range; and three, lower interest expense to a midpoint of $610 million. We are pleased to be forecasting significant EPS improvement from 2025, and we look forward to showing continued progress of earnings restoration ahead. Now let's review 2026 in the context of 2027 and beyond, starting with our current 2026 adjusted EPS guidance of greater than $5.20. Recalling our discussion on the Q2 call, 2026 earnings includes $0.50 that we wouldn't expect to recur in 2027. As we detailed at the end of July, the $0.50 represented $180 million in marketplace and $160 million in our Medicare segment, largely PDP. Overall, we believe the appropriate jump-off point upon which to apply 2027 tailwinds and headwinds is approximately $4.70 of adjusted EPS. As we sit here today, with still a quarter of 2026 to deliver and other open items such as open enrollment in three of our lines of business and partial visibility on 2027 Medicaid rates, we expect to grow adjusted EPS relative to not only the $4.70 jump off, but also relative to our revised $5.20 2026 adjusted EPS guidance. Underneath that, here are some of the 2027 drivers, most of which we have covered heretofore. For selected tailwinds relative to the $4.70 2026 jump-off point, we are currently forecasting continued progress matching Medicaid rates with Acuity, though partially offset by OB3 headwinds such that we still expect a slight improvement in the Medicaid HBR. Improved marketplace pretax margin, Medicare Advantage moving from breakeven in 2026 to better than breakeven in 2027. PDP membership growth and an increase in premium yield given the increase in the direct subsidy. And an improved SG&A rate on a consolidated basis. For a couple of selected headwinds we are currently forecasting, membership attrition in Medicaid from OB3 and the removal of the unsatisfactory immigration status population from managed care in California. And PDP 2026 pretax margin outperformance resetting at least initially in 2027 to a lower margin. Hopefully, that gives you some early insight into where we sit here in October of 2026. We have a lot of work to do to finish 2026 strong and construct and finalize a plan for 2027 that will be the basis of initial guidance we intend to provide on our Q4 call. [ Chris Nesepor ], our next CFO, has been side-by-side with me and the finance team for the last couple of months, and we both look forward to sharing results with you on the Q4 call in February. Thank you for your interest in Centene and Rocco, please open it up for questions.

[Operator Instructions] And today's first question comes from Dave Windley at Jefferies [indiscernible].

Great. So you answered a number of the questions -- a number of the topics around Medicaid. I guess I'd be interested in a little more color around the dialogue you're having with states and the prospective rate adjustments that they seem to be -- at least some of them seem to be willing to provide. Can you give us any color on that and kind of the. Mechanism by which they are doing that given their desire to look back at rates? And then more specifically, what you're expecting for 1/1?

Yes. Thanks, Dave, for the question. Obviously, very relevant because we're in flight in those conversations as we look at the 1/1 cohort. It is still early. But I would say that we are seeing positive signal in terms of first of all, a very high engagement rate, really good conversation in data exchange. We have a number of states that have already put explicit provisions in their draft rates, and then we have others that are still evaluating, but it is really consistent with where they are in the drafting process. I think what we are seeing is two things. One is the sort of increased benefit of having 2025 come into the baseline period. That's obviously more relative to kind of core trend that we've been battling for the last 18 months. But we're also seeing states acknowledge the need to prospectively account for the acuity shifts of work requirements. And I think the hypothesis that we had coming into this process that because the Medicaid expansion population is a very discrete population, they're rated in a very specific cell. And actually because a lot of the work the states have done to prepare for the process has required them to go get data, right, to figure out what their [indiscernible] definition would be to get those codes together to define the community exemption kind of data framework, it means actuaries have more data than we did going into the redetermination process to actually scenario model the impact on the population. So we saw in that 7/1 cohort, we had a few states that were explicitly stepping into work requirements activity, put those in the rates prospectively. I feel like we're seeing that same trend stepping into the 1/1 cohort. We've got really good verbal dialogue with the states that 7/1 cohort that would come back mid-cycle. And I think we're continuing to see strong support from CMS in terms of the requirement for explicit explanation of revision around work requirement impact in the rates and encouragement around mid-cycle adjustments and the ability to leverage current period as they set those rates rather than requiring the look back as they have on more sort of traditional trends. So early but positive signals in terms of what we're seeing.

And our next question today comes from Justin Lake at Wolfe Research.

Just a couple of quick numbers questions. First, on the exchanges going into 2027. I'm curious on how you expect the market as well as your own growth to kind of shape up. I think the exchange market overall kind of grows in '27. And then just quickly through on your PDP comments, you talked about a reset margins. Should we expect a reset back to target at or back to where you initially guided 2026 at 2%?

Yes. Thanks, Justin. I'll hit the exchanges and then turn it over to Drew for PDP. I think coming into 2027, our view, and if you think about sort of the changes of 2026 relative to expiration of the eAPTCs. Our view is that there would be the most significant shift in 2026, but some degree of tail into 2027 just in terms of the program integrity measures really sort of readjusting the baseline of membership. So our expectations for market overall are still some degree slight contraction. And then our membership TBD, it's a little too early. We need to see the results of open enrollment period. But I would say we feel very good about how the team position the products across our geographies with a focus on driving continued margin expansion in 2027.

Yes. Justin, on PDP, we feel good about our positioning. Obviously, we've entered the open enrollment period. And like our positioning, not just in the low-income population but also in the enhanced product as well. So excited to be able to forecast some growth there. And then to your point, yes, we typically bring back at least for initial guidance to a more of a target margin. I'd say in '25 and '26 coming out of the chute that was artificially suppressed because of the Inflation Reduction Act. You'll recall we came out at 1% in 2025 and 2% as our initial targets in 2026. We're sort of past that wear off of the Inflation Reduction Act. So -- we still need to get data from open enrollment, but probably somewhere in that 2% to 3% range would be the opening expectation for PDP for the year, and then we would work our tails off to outperform that during the year.

Our next question comes from Stephen Baxter at Wells Fargo.

I appreciate the color on the exchanges. I was wondering if you might be willing to call out, I guess, how much of an issue in the quarter, this [ IDR ] catch-up was just we can think about bridging to a reasonable Q4. And then -- if we look at where you're trending for the full year [ MLR ], I guess it looks like it's probably going to exceed the initial guidance that you staked out in February, but you're still talking about achieving the high end of this revised margin that you've laid out. Could you help us just kind of bridge some of these moving pieces and why you're still expecting that level of outperformance?

Yes, Stephen, thanks for the questions. If you step back -- well, first of all, it's good to understand that marketplace is not the only item within the commercial segment. I know it's almost all of the segment, but there's about $4 billion of commercial group business in there, which does weigh on the results for the commercial segment. And as you probably picked up in the press, we have decided to exit the Health Net Commercial group business, largely in California, and that will we'll be able to exit on a very orderly fashion over the next, call it, 18 to 24 months. So that's part of it. But when I step back and look at the marketplace P&L, we're going from a minus 1% pretax margin last year, as we talked about in '25 to a now 5% forecasted pretax margin. So that 600 basis points of pretax margin improvement and HBR largely tracks with that. So we're sort of hitting -- we're doing better than expected in Marketplace. The underlying fundamentals are good. And to your point, the underlying fundamentals for the quarter essentially helped pay for bolstering the [ IDR ] reserves based upon data we got and took a look back of the run out of 2025, some of the run out of [ IDR ] assertions and claims. And then look at other program integrity measures like coordination of benefits to make sure that we don't get stung in the future by any past items. So we don't expect that bolus to recur in Q4. Hence, the continued execution and underlying strong trend performance in marketplace gets us to the top end of that range so we can produce a 5% pretax margin, which is, I think, in my history in managed care is an incredible turnaround from what we saw in the summer of 2025.

Our next question today comes from A.J. Rice at UBS.

I might just ask you about G&A. That's obviously been part of the performance in the recent quarters. Where are you at with respect to rightsizing? I know that's been part of the driver of improved G&A performance but also any other initiatives and where those stand? And if I could just tack on one little specific one. Drew mentioned that you've got seasonality impact reflected in 4Q for the public exchanges. Is that normal seasonality? Or is there any reason given the loss of the tax credits, et cetera, to think that there might be more step up in utilization in the fourth quarter this year.

Yes. Thanks, A.J. I'll hit the last one quickly, which is that is normal seasonality, particularly for those businesses that are commission-based that are going through enrollment periods in Q4. So nothing out of normal there. Relative to overall G&A, obviously, it was slightly favorable in the quarter. And as you've heard us talk about, we continue to be focused on optimizing the enterprise, really thinking about how the organization, simplify our processes, all in service of delivering industry-leading health outcomes with an industry-leading cost structure. And so that has been an ongoing effort. I think there are a number of initiatives around that, everything from streamlining our processes, driving further automation. We've made tremendous progress over the last couple of quarters from a data and context layer standpoint to start to implement ROI-driven AI in order to make our team members smarter and faster at the work they're doing to service members. And so feel good about what we've delivered in '26. And as you heard from Drew, we see SG&A as a driver of and a tailwind in 2027. So we continue to believe that we'll build momentum around those efforts and see those materialize in 2027.

Our next question today comes from Ann Hynes at Mizuho Securities.

Great. Thank you for the question. I just want to ask about commercial for 2027. How should we think about pricing in 2027 versus 2026? And how should we think about metal mix in 2027 versus 2026? And any major learnings from kind of this mix shift from silver versus gold versus bronze this year going into next?

Yes. Thanks, Ann. So the team took, as usual, while we operate in a significant number of states, we actually break that down county by county. So the granularity of the portfolio that we use to construct pricing is pretty significant, and the team did an excellent job thinking about where there would be opportunities for growth, where there are opportunities to harvest additional margin, again, with sort of the net goal of the portfolio to balance both improved margin yet again year-over-year 26% to 27%, also trying to make sure that we are offering affordable products to folks who need insurance coverage in the individual marketplace. So as we thought about year-over-year pricing. Obviously, the portfolio saw and the markets increases, not as significant as last year, but trying to incorporate both what we're seeing in terms of trend as well as the expectation for additional acuity shifts as we believe that there will be some of that additional sort of lingering market contraction. Obviously, 2026 broadly saw a huge shift out of silver and into the bronze metal tier and that are moved in that direction as well, but made a less significant move than our peers, and a lot of that was based on historical experience with the Bronze product and just being really thoughtful about the desire to recover margin in 2026. So I don't think you would expect huge shift in our overall metal tier, but we do continue to see bronze as a really important part of the portfolio and took that into account as we constructed the 2027 strategy.

Our next question today comes from Andrew Mok at Barclays.

Wanted to follow up on the G&A comments. Last quarter, you called out $480 million of workforce and enterprise optimization costs that would be excluded from results this year. And we saw the severance adjustment increased to $276 million in the quarter. Can you give us a sense of the expected annualized savings from these initiatives? Should we think about it being 1:1 with the cost adjustments or something closer to half that? And how should we think about the cadence of those savings across 2026 and 2027?

Yes. You're right on the $480 million, Andrew, and that our we took most of that in Q3. There's still some more in Q4, and that will probably trail and some of that gets amortized into service periods, maybe into early '27. That's all outside of adjusted. So the $480 million still stands with respect to sort of the broad workforce and enterprise optimization execution that we're undertaking. And then to your point, that is one of the drivers of the view that a tailwind for next year is that the SG&A rate will come down as -- on a consolidated basis, the percentage will come down. Now some of that might be mix, but a fair amount of that should be like durable improvements in the company. And so we're not prepared yet to map that out quarter-to-quarter, but that will occur throughout the year.

Our next question today comes from Sarah James at Cantor Fitzgerald.