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Operator: Welcome to the FirstService Corporation Third Quarter Investors' Conference Call. [Operator Instructions] Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's annual report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is October 23, 2025. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir. D. Patterson: Thank you, Didi. Good morning, everyone, and welcome to our third quarter conference call. Thank you for joining us. I'm on with our CFO, Jeremy Rakusin. And together, we will walk you through the results we reported this morning. I'll begin with an overview and some segment-by-segment comments. Jeremy will follow with additional detail. Total revenues were up 4% versus the prior year, driven by tuck-under acquisitions completed over the last 12 months. Organic growth was flat overall, as gains at FirstService Residential and Century Fire were offset by organic declines in our restoration and roofing platforms. EBITDA for the quarter was up 3% to $165 million, reflecting a consolidated margin of 11.4%, generally in line with the prior year on a consolidated basis. Finally, our earnings per share were up 8% to $1.76. Looking at divisional results. FirstService Residential revenues were up 8% with organic growth at 5%, in line with expectation. Solid net contract wins versus losses have led to an improvement in organic growth sequentially. We expect similar growth for Q4 in the mid-single-digit range. Moving on to FirstService Brands. Revenues for the quarter were up 1% in aggregate, with growth from tuck-under acquisitions largely offset by organic declines of 4%. Revenues for our two restoration brands, Paul Davis and First Onsite, were up sequentially relative to Q2, but down versus the prior year by 7%. I mentioned last quarter that we were pleased with the level of activity, both day-to-day at the branch level and in terms of our wallet share gains with national accounts. That continued into Q3. Industry-wide claim activity and weather-related damage was very modest across North America and generally down in every region, but we still generated higher revenue sequentially than the first 2 quarters of this year. We believe we're capturing market share gains during this prolonged period of mild weather. We were down from the prior year, as we were up against a very strong quarter, particularly in Canada, that benefited from significant flood and wildfire restoration work. As well, storm-related revenues in the U.S. were minimal this quarter compared to Q3 of 2024, when we generated about $10 million of revenue from named storms, primarily Hurricane Ian. Looking to Q4, absent widespread inclement weather or named storms over the next few months, we expect to be down from the prior year quarter by about 20%. We generated $60 million of revenue from Hurricanes Helene and Milton in Q4 of last year. On average, since 2019, our revenues from named storms has exceeded 10% of total restoration revenues. Based on our visibility today, we anticipate this year's revenues from named storms to land at less than 2%, a big drop that impacts Q4 in particular. Apart from cat storm events, which we all believe will, on average, increase in frequency, we continue to grow and improve our platform and believe we're in an excellent position to capitalize on the long-term opportunity in restoration. Moving to our Roofing segment. Revenues for the quarter were up mid-single digit, driven by acquisitions. Organically, revenues declined 8%, an improvement over Q2, but below expectations. We simply did not convert backlog into revenue at the rate that we anticipated. We continue to see the deferral of large commercial projects and a general reduction in new construction. Our 3 largest operations all benefited last year from several large industrial roof projects that have not been replaced this year. Most of our year-over-year decline relates to these specific operations. Bid activity remains solid, but award activity has been delayed. We're confident that our market position and relationships remain strong. The uncertainty in the macro environment is definitely impacting new commercial construction and causing delays in reroof and maintenance decisions. We continue to believe that the demand drivers in roofing and generally in commercial building maintenance are compelling, and we remain focused on investing in this segment. As evidence of that, we were pleased during the quarter to announce the acquisitions of Springer-Peterson Roofing in Lakeland, Florida and A-1 All American Roofing in San Diego, California. These operations extend our presence and capability in two key markets. The Springer-Peterson and A-1 teams will continue to operate the businesses, and we're excited to have them on board with us. They jumped right in, collaborating and creating value with our existing operations in the regions. Looking ahead to Q4, we expect total roofing revenues to be up modestly from prior year, again due to acquisitions. Organically, we expect continued weakness, with revenues down 10% or more in the seasonally weaker quarter. Moving on to Century Fire. We had another strong quarter, with revenues up over 10% versus the prior year. Growth continues to be broad-based across the branch network and again, is supported by robust repair, service and inspection revenues. Our backlog remains strong at Century, and we expect similar double-digit year-over-year growth for Q4. Now on to our home service brands, which as a group generated revenues that were flat with year ago, right on expectation, and a result we're proud of in the current environment with weak existing home sales and broad economic uncertainty. Consumer sentiment remains depressed and is down from Q2. Our lead flow reflects this trend. Our teams have held revenue steady by driving a higher close ratio this year, combined with a higher average job size. They are executing extremely well in a challenging environment. Looking forward, we expect a similar result in Q4, with revenues roughly matching the prior year quarter. Let me now hand it over to Jeremy. Jeremy Rakusin: Thank you, Scott. Good morning, everyone. Leading off with a recap of our consolidated third quarter financial results, we recorded revenues of $1.45 billion, up 4%, and adjusted EBITDA of $165 million, a 3% increase relative to the prior year period. Our consolidated EBITDA margin for the quarter was 11.4%, down slightly from last year's 11.5% level. Adjusted EPS during Q3 was $1.76, resulting growth of 8% quarter-over-quarter. The growth on the bottom line exceeded our EBITDA performance as we saw the benefit of reduced interest rates on lower outstanding debt compared to prior year. I'll provide more details on our balance sheet in a few moments. For the 9 months year-to-date, our consolidated financial performance includes revenues of $4.1 billion, up 7% over the $3.85 billion in the prior year; adjusted EBITDA at $425 million, a 13% increase year-over-year, with our overall EBITDA margin at 10.3%, up 50 basis points versus a 9.8% margin for the prior year period. And lastly, our adjusted EPS year-to-date is $4.39, reflecting 20% growth over the $3.66 reported for the same period last year. Our adjustments to operating earnings and GAAP EPS in providing adjusted EBITDA and adjusted EPS, respectively, are disclosed in this morning's press release and are consistent with approach in prior periods. I'll now walk through the third quarter performance within our two divisions. At FirstService Residential, we generated revenues of $605 million, resulting in 8% growth over the prior year period. EBITDA was $66.4 million, a 13% increase over the third quarter of last year. Our current quarter EBITDA margin came in at 11%, up 50 basis points over the 10.5% in Q3 '24, extending the year-to-date margin improvement we have realized through ongoing operating efficiencies and streamlining efforts across our property management platform. Our teams have done a terrific job of execution, driving to a year-to-date margin expansion of 60 basis points. For the upcoming fourth quarter, we expect some tapering of these favorable impacts, leading to margins roughly in line to slightly up versus prior year. Shifting over to our FirstService Brands division. We generated revenues of $842 million during the current third quarter, up 1% versus the prior year period. EBITDA for the division was $102.1 million, down from the $105.8 million last Q3. Our margin of 12.1% compressed 50 basis points compared to the 12.6% margin in last year's third quarter. The lower margin was attributable to negative operating leverage resulting from tempered activity levels and declines in organic top line growth at our restoration brands and roofing operations. Our Home Improvement and Century Fire Protection brands continue to deliver healthy margins, roughly in line with prior year. Reviewing our cash flow profile, we generated more than $125 million in cash flow from operations during the third quarter, driving to a total of $330 million year-to-date, a significant year-over-year increase of roughly 65% compared to prior year period's. Capital expenditures during the quarter totaled $34 million, and spending year-to-date sits at a little under $100 million. We expect to be in line with our annual target of $125 million in CapEx for 2025. Acquisition investment during the quarter was approximately $45 million, largely encompassing the roofing tuck-under acquisitions that Scott noted. Our balance sheet at quarter end included net debt of $985 million, resulting in leverage at 1.7x net debt to trailing 12 months EBITDA. Maintaining a strong balance sheet has always been a cornerstone of FirstService's operating philosophy and has been aided by the ability of our businesses to collectively generate strong and relatively consistent free cash flows in any type of environment. This has played out once again over the past almost 2 years since our Roofing Corp of America platform investment at the end of 2023, with the steady quarterly deleveraging bringing us now back in line with our long-term historical trend. We also have more than $900 million of total cash and credit facility capacity, providing us with ample financial flexibility and liquidity. In terms of outlook, to close out 2025, Scott has provided top line indicators by brand, which will aggregate to revenues roughly in line with prior year for our upcoming fourth quarter. This will culminate in mid-single-digit growth in consolidated annual revenues for the full year. We expect that our 2025 consolidated annual EBITDA growth will be in the high single digits, approaching 10% compared to prior year. During our February year-end earnings call, we will provide indicators on our outlook for 2026. And that now concludes our prepared comments. Didi, can you please open up the call to questions? Operator: [Operator Instructions] And our first question comes from Daryl Young with Stifel. Daryl Young: I just wanted to touch on the divergence in the performance between Century Fire and the roofing business. And I would have expected that both of those would have had similar end markets, and so it's just a bit interesting to see the performance delta between the two. Is there a specific end market versus industrial versus data center or something like that, that is maybe driving the difference between the two divisions? D. Patterson: Daryl, there's a few things. I'll start with the fact that Century, close to 50% of the business is service repair and inspection, more recurring in nature. And then you've heard from us over the last couple of years that Century has been very successful in driving consistent growth in this aspect of the business. Century does have a piece of its business, again, close to half, it's tied to new construction. It's been more resilient than our Roofing Corp of America platform, in part based on the verticals that it focuses on, as you alluded to in your question. Century has benefited from the growth in data centers. And also, they have a strong multifamily business that has been -- remained solid through the year. Their strong results are hiding the fact, though, that a number of jobs continue to be delayed, deferred at Century, similar to what we're seeing in our roofing platform. Work is not being released at the same rate as the prior year, although bid activity remains strong. Hopefully, that answers your question. Daryl Young: Yes. That's good color. One more for me, just on margins. The margins in the Brands division were actually, I would say, fairly healthy in the context of the weak restoration and roofing results. So just wondering if you can give me a little bit of color on where the strength is coming from in margins in that platform? Jeremy Rakusin: Yes. Thanks, Daryl. I'll take that. I touched on it, home improvement, a lot of initiatives over the last year or 2, 1.5 years and in a tough environment for the top line have really produced superlative profitability. Century Fire, we have top and bottom line, a terrific performance throughout. We've made great strides in restoration over the last couple of years. And even in periods of mild weather patterns like we're experiencing, just the focus on the brand, the platform, the client relationships, the national accounts that Scott touched on, a lot of efforts around that. And then there has been some streamlining and headcount reductions in appropriate places as we've centralized a lot of functions. So just terrific execution there, and notwithstanding the mild weather patterns that we've seen year-to-date. Operator: And our next question comes from Stephen MacLeod of BMO Capital Markets. Stephen MacLeod: Just a couple of questions I wanted to follow up on. Maybe the first one is kind of in line with what you were just -- or dovetails with what you were just talking about, Jeremy, just on the restoration side. You talked about having gained some share in the market despite the weak backdrop. And I'm just curious if you can point to kind of where that's coming from? D. Patterson: I think it's a lot of the things that Jeremy just referred to. It's the hard work our teams are doing in positioning with national accounts, solidifying the account base. We have evidence that we are gaining wallet share with a number of our larger accounts, and we're signing new national accounts. It feels healthier across the board. We just have more activity across the branch network. We're not relying on any one event or one region to drive results. And I think it sets us up well to continue gaining momentum in mild weather conditions, but also to really benefit during more significant weather conditions. Stephen MacLeod: Right. Okay. That's helpful, Scott. And then maybe just on the margins and looking at the FirstService Residential business, you guided to sort of flattish margins year-over-year for Q4. And I'm just wondering if some of the streamlining that you've seen that's led to the improvements in recent quarters, is that kind of coming to an end? Or is that more reflective of the seasonal Q4 weakness? And I guess, would you expect those kind of benefits to continue into 2026? Jeremy Rakusin: Stephen, I'll take that one. 2026, we'll go through budgets with the businesses, so I'll defer on that point. But in terms of the outlook for Q4, I think we've known all along that the performance should taper. We've been working on these initiatives or the teams have at FirstService Residential for the better part of a year or more. And we saw it carry through. We've had significant margin improvement. There's also some moving parts in the quarterly fluctuations. And so what we're seeing in Q4 between the mix of higher-margin ancillaries, the timing in terms of hiring teams in face of contract wins, when we're going for contract renewals and getting pricing, there's a whole bunch of moving parts in this large enterprise. So it's just what we're seeing, but we're always working on initiatives. And again, I think we'll have more to speak about in terms of margin outlook for '26 on the February call. Stephen MacLeod: Okay. That's helpful. Thanks, Jeremy. And then maybe just one more, if I could. Just maybe more higher level when you think about restoration and roofing, where we're seeing some of the near-term temporary macro headwinds. Do you believe this is just, particularly in roofing, just a delay of work that people are -- your customers are putting off? And I just want to confirm, is that more of a delay that you expect to get back over time? D. Patterson: We certainly expect to get back, but we need some -- we need macroeconomic stability to see improvement in commercial construction and to give buyers more comfort and confidence to release work. It's -- we're in an uncertain environment, and it's definitely impacting roofing. And of course, in restoration, we need some weather. And I said in my prepared comments that this is the lightest year that we've seen since we took the big step with our acquisition of First Onsite in 2019. And -- so we expect both to improve. When we made these decisions, originally, our focus was and remains on the long-term opportunity in both these spaces. There is more fluctuation quarter-to-quarter and year-to-year. But on the flip side, there are more tailwinds and opportunity as well. So we remain focused on the long term in these businesses. We believe that there's a huge opportunity in both of them. And we've got the right teams and the right platforms to capitalize on them. Operator: And our next question comes from Stephen Sheldon of William Blair. Stephen Sheldon: Maybe just starting on the M&A front. Can you talk some about the level of competition you're seeing for tuck-under deals? And is it generally getting tougher to deploy capital towards M&A at attractive valuations in this environment? So yes, just be helpful to get any color on what you're seeing there in terms of competition across the different segments, if you could. D. Patterson: Yes, Stephen, I think it's definitely competitive. Multiples remain high, particularly in fire protection and residential property management. They've been at elevated levels for a few years now. Very competitive environment. Multiples are trending higher in roofing. I've indicated previously that there are literally dozens of private equity-owned roofing platforms that are competing for acquisitions. So similarly, very competitive in that space. The one thing I would add is that activity has actually slowed in roofing this -- in the last couple of quarters, slowed considerably due to the uncertain environment and the fact that most roofing companies are experiencing exactly what we are and are down year-over-year. So there's a number of processes that have been pulled this year or deferred until results improve. But those are all private equity-owned, generally. And they'll be back to market. But to answer your original question, it is very competitive. I don't know if it's increasingly competitive. But as always, we've got to make smart decisions and pick our spots. And we've been in that place the last few years. And we have opportunities in the pipeline, and we'll deploy capital every year. We'll find a way. Stephen Sheldon: Got it. That's helpful. And then just maybe to dig in a little bit more on the slowdown in roofing awards. I guess you kind of answered earlier, it seems like it's kind of macro factors. I guess, any more detail you can give on some of the bigger factors weighing down roofing projects moving forward even with the strong bid activity? And this is not -- this would be a tough question to answer, but just how long do you think it could take for decisions there to be made and activity to move forward, especially on the reroofing side? I mean, I get new construction permitting starts are down. But on the reroofing side, it seems like -- how long could this kind of be a pause in activity? D. Patterson: Yes. I mean, I don't know the answer to that. Certainly going to carry through Q4. I do think we need macroeconomic stability. Some of these reroof projects can be patched and sort of prepared and kicked down the road for a time. So it's -- I would say it's uncertain right now. For us, I mean, the good news is that we have 24 branches, and most of them are performing at approximately year-ago levels or even better. We do have these 3 large branches that last year, were benefiting from significant large new construction and reroof work. And some of these jobs are $10 million to $15 million. So if they're not replaced, it can skew a quarter. But generally, backlogs in roofing are stable. They are weighted towards reroof. As a reminder, we're generally 1/3 new construction, 2/3 reroof and repair and service. Our backlogs are weighted at that even more heavily towards reroof. And so it's going to take some time. We just don't know. But again, I'll just repeat, the long-term demand prospects are excellent. Our thesis has not changed. The aging building stock, increased frequency of weather events, increased legislation around building codes and other drivers. The other thing I would add is that last year in Q4, our Florida operations were benefiting from weather, and we're not seeing that this year. And so that's 1 of the 3 operations that are down. And that is -- they're missing a few of their large roof projects, but it's also being impacted by weather. So weather would certainly help in a few areas for us. Operator: And our next question comes from Himanshu Gupta of Scotiabank. Himanshu Gupta: So just a follow-up on the roofing weakness here. Is there any commercial asset class, specific commercial asset class or geography which is where you're seeing most of the contract deferrals and weakness? I think you did mention Florida, but any other region or within... D. Patterson: One of our larger branches is in Las Vegas, and that market is very soft. And we see that, Himanshu, in all of our other brands. We're weak in Vegas, really across every business that we operate. So that's -- each of these branches has a little bit of a different story. In terms of the asset classes -- I think I can only really speak to new construction, and it's down everywhere except for data centers, and that's not a vertical where we have participated historically in our roofing platform. Himanshu Gupta: Got it. And I mean, assuming that the new construction cycle is further delayed, like without the help of new construction cycle, how much organic growth can you deliver, assuming the strength in reroofing business comes back? D. Patterson: Organic growth in roofing? Himanshu Gupta: That's right, yes. D. Patterson: Well, we've been down every quarter this year, in part because we were surging in a few areas last year. But we'll reset here and get -- and we'll start growing. We'll get to a point. Our branches are strong. The leadership at our branches are strong. It's -- this is market-driven. We're in a good position, and we'll start to see the growth come back. I just can't tell you -- I can't give you dates in time. We need more clarity in the marketplace. Himanshu Gupta: Got it. And is Roofing still a segment where you want to grow from an M&A point of view? Or would you wait for this weakness to pass and then get more active on the M&A side? D. Patterson: We're definitely interested. I mean, our thesis really hasn't changed at all. We're very pleased with the transactions we did last quarter. We continue to look -- we have priorities. We're focused on white space areas to build out the platform. We're very focused on fit with our culture and the people at any business that we'd be interested in. If we find the right opportunity, absolutely, we will participate. Himanshu Gupta: Got it. And then turning attention to restoration business. Can you comment on the backlog? I mean, in terms of the magnitude or directionally speaking, like, how is the backlog today versus last year or versus last quarter? And also, if I exclude the strong activity, how is the backlog looking? D. Patterson: The backlog is about the same as prior quarter and a little off from last year. And it's off from last year for some of the reasons I talked about in my prepared comments, just the strength we had in Canada with -- and some remaining named storm work. And at the end of September, we did start to see a little bit of Helene and Milton get into the backlog. So we're a little off from last year, but solid and healthy based on the environment we're in. I feel good about it. Himanshu Gupta: Got it. And my last question is on FSR, FirstService Residential. I mean, good to see organic growth back to 5% level this quarter. Question is, is Florida also at mid-single-digit level? Or is it a bit slower than the rest of the portfolio? And I remember, you've been talking about budgetary pressures in Florida a bit more than some of the other regions, so just to check how Florida is doing. D. Patterson: Yes. Florida is, I'd say, in line. And the budgetary pressures have been relieved a bit because the insurance market stabilized. It's still a difficult one because there are many communities that are underfunded. So it's our largest region, and it can influence results for the division, and we've seen that. But it's holding its own right now and is up low- to mid-single digit in the prior quarter, Q3. Operator: And our next question comes from Tim James of TD Cowen. Tim James: Just wondering if you could talk about the relationship between sort of pricing and costs in each of the different segments? And I realize that involves kind of different brands to talk about on one side of the business. But I'm just thinking about as we look forward or into next year and beyond, is there -- do you feel fairly confident that kind of your pricing power, if I can call it that, is going to be or is suitable to offset any cost pressures? Or is there potentially an opportunity to push pricing and actually use that as a lever to push margins slightly higher? D. Patterson: Jeremy, over to you. Jeremy Rakusin: Yes, Scott, I can take that. Well, right now, we think we're in a good equilibrium with FirstService Residential. We've always talked about that business being a very price competitive industry, always has been, and currently is in line with historical trends. So we're always needing to look for efficiencies even to maintain margins, and the teams have been very successful with that over time. In terms of the Brand side of the business, the Brands division, Century Fire, I think quarter in, quarter out, year in, year out, has been getting good pricing power in their business, and don't see any pressures there. Home improvement, it's a watch for us. Obviously, the top line, Scott spoke about lower lead flow, but we're converting at a higher rate, and the top line is holding in there. We will flex pricing there accordingly to ensure that we keep revenue -- top line growth and profitability intact. And right now, we're not using promotional activities extensively, with the exception of some local marketing. So we see that holding. I think the one area where we could see it is in roofing, the availability of labor, subcontractors in some of our operations versus self-perform, resulting in a little bit of an uptick in our cost there and perhaps competing more for reroof jobs with our competitors. Pricing and margins could come in a little bit there. But we're going to go through budgets with all of our businesses in November and through the end of the year, and we'll have greater visibility for '26, which we'll communicate in the appropriate fashion with you on the February call. Tim James: Okay. That's really helpful. My second question, and kind of along a similar track. Again, the margins are actually, I think, really good considering the challenges that the business had. But are there any particular initiatives that we should think about on the cost side or on the efficiency side? And I guess I'm thinking more about in the Brands business sort of going forward, where you're looking to focus on -- again, not maybe to drive net margin improvement, but to kind of stand still or to keep just making the business more efficient or making sure that you're keeping as cost competitive as possible. Jeremy Rakusin: I mean -- and that's exactly what we've been doing. I mean, we do it every year, year in and year out. The businesses are focused on healthy profitability. The last year, we pointed out the strides we made in home improvement. Longer term, I alluded to it in one of the earlier questions around the performance in the restoration brands over the last couple of years, focusing on the brand, focusing on accounts, but also streamlining costs. So every brand -- and including FirstService Residential, the strides we've done this year, always looking for ways to be more efficient. I wouldn't call anything major out for significant margin improvement in the Brands division heading into 2026. And if we do -- if any of that surfaces during the budget discussions, again, we'll build that into our thinking and communicate it in February. Operator: [Operator Instructions] And our next question comes from Sean Jack of Raymond James. Sean Jack: Just quickly switching back to roofing. If the short-term macro has been softening for a while, do you expect this to make acquisitions easier in the space coming up, especially and like specifically with mom-and-pops? D. Patterson: I don't see that. And again, it's because of the number of private equity-owned roofing platforms that are in the market. Private equity firms have made a bet on the space. They are all focused on adding to their platforms. And so we need to differentiate ourselves and focus on the long-term brand-building strategy that we have. I don't think it will be -- we'll value it appropriately, based on the results of the business. But I don't see us having an advantage or it being any easier to buy the companies. Sean Jack: Fair, fair. Looking at that brand-building strategy you mentioned, is there any new offensive strategies you guys are employing to position or gain share while the broader macro is weak? D. Patterson: Nothing of note. I mean, we -- the strategy, the focus we have on building iconic brands over time is all focused on people and customer service, building culture and incrementally improving the platform, and that does take time. But we approach these investments with a very long-term focus and timeline. Operator: Thank you. I'm showing no further questions at this time. This concludes the question-and-answer session and today's conference call. Thank you for participating, and you may now disconnect.
Operator: Greetings, and welcome to the Reliance Inc. Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] It's now my pleasure to turn the call over to Kim Orlando with ADDO Investor Relations. Kim, please go ahead. Kimberly Orlando: Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's third quarter 2025 financial results. I am joined by Karla Lewis, President and Chief Executive Officer; Steve Koch, Executive Vice President and Chief Operating Officer; and Arthur Ajemyan, Senior Vice President and Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.reliance.com. Please read the forward-looking statement disclosures included in our earnings release issued yesterday, and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are included in the non-GAAP reconciliation part of our earnings release. I will now turn the call over to Karla Lewis, President and CEO of Reliance. Karla Lewis: Good morning, everyone, and thank you all for joining us today to discuss our third quarter 2025 results. We delivered another solid quarter amidst market uncertainty, reflecting the strength and adaptability of our business model and solid execution across the Reliance family of companies. Our third quarter results demonstrate how Reliance's scale, diversification and high-performing management teams combine to deliver strong financial performance and capture market share in a uniquely challenging environment. Our tons sold were a third quarter record and outperformed the industry by approximately 9 percentage points, increasing our U.S. market share to 17.1%, up from 14.5% in 2023 due to our smart, profitable growth strategy. Driven by our high levels of customer service and broad inventory and processing capabilities, we offset declining industry shipment trends by winning new business opportunities that also better leverage our operating expenses and meaningfully contributed to our overall profitability. Trade policy uncertainty and readily available inventory are causing buyers to be hesitant, creating an extremely competitive market. In this environment, it is more difficult to immediately increase selling prices to fully offset mill price increases. These factors have contributed to short-term gross profit margin headwinds in the past 2 quarters. In addition, the aerospace and semiconductor markets that we serve, which have high-value specialty products that typically contribute meaningfully to our profits, continue to underperform due to excess inventories within these supply chains. We are confident, however, that the underlying margin profile of our consolidated business remains solidly intact, and we maintain our long-term annual sustainable gross profit margin range of 29% to 31%. Our scale, product and end market diversity and exceptional customer service, including next-day delivery and extensive value-added processing capabilities, were instrumental in our outperforming our competition and capturing significant market share. Overall, non-GAAP earnings per diluted share of $3.64 were within our expectations and guidance for the quarter. Our capital allocation strategy is designed to drive growth and deliver strong returns to our stockholders. We generated approximately $262 million in operating cash flow in the third quarter, that we strategically redeployed into high-value initiatives, including investments in advanced processing equipment and other projects that strengthen our long-term growth platform. Our 2025 capital expenditure budget remains at $325 million, with more than half directed towards growth initiatives. Including carryover spending, we expect total cash outlays between $340 million and $360 million in 2025. Our strong financial position also affords us the flexibility to pursue M&A opportunities that enhance our geographic reach, expand our value-added capabilities and strengthen our margin profile. At the same time, we remain committed to returning capital to our stockholders. During the quarter, we returned $124 million through dividends and share repurchases. Our year-to-date repurchases total more than 1.4 million shares, reflecting our balanced approach to growth and shareholder value creation. In summary, our teams navigated the quarter exceptionally well, keeping our people safe while managing market dynamics with discipline and focus. Our primarily domestic supply chain and strong relationships with our U.S. mill partners provide Reliance a distinct competitive advantage, while our nimble operating model, solid balance sheet and diversified product mix continue to underpin strong and consistent performance. These same strengths also position us favorably to capitalize quickly as market activity rebounds. Looking ahead, we remain focused on investing for growth and delivering value to our customers and stockholders, supported by our consistently strong cash generation. I'll now turn the call over to our COO, Steve Koch, who will review our demand and pricing trends. Stephen Koch: Thanks, Karla, and good morning, everyone. I want to begin by recognizing our teams across the organization for their strong execution in the third quarter, delivering outstanding service to our customers and navigating ongoing macro challenges with discipline while maintaining the relentless focus on safety. Looking at our demand and pricing trends. Third quarter tons sold were consistent with the second quarter of 2025, surpassing our expectations of down 1% to 3%. Our tons sold increased 6.2% compared to the third quarter of 2024, significantly outperforming the service center industry which reported a decrease of 2.9% in the same comparative period. Our outperformance of the industry demonstrates our ability to gain share in a demand environment constrained by market uncertainty through our smart, profitable growth strategy and the contributions of our continued investments in growth. Consistent with our outlook, our third quarter average selling price remained steady compared to the second quarter of 2025, even as tariff-related momentum quickly leveled off. Pricing upside from certain aluminum and stainless steel products was offset by pricing pressure on most carbon steel products as well as stainless steel products sold into the aerospace and semiconductor industries. Through industry overbuying in the first quarter of this year in advance of the tariffs as well as readily available inventory at domestic mills and depots, pricing for most products has been declining since April, resulting in a very competitive market, which, when combined with stable to declining end demand, has pressured our gross profit margins. As Arthur will expand upon when reviewing our outlook, we believe pricing for most products has now stabilized entering the fourth quarter. Our teams navigated these market dynamics very well while maintaining discipline in pricing and strong customer service levels. Turning to our key end markets. Nonresidential construction represented roughly 1/3 of our third quarter sales, comprising carbon steel tubing, plate and structural products. Shipments for these products were seasonally strong in the third quarter and increased compared to the third quarter of last year, driven by strong demand in public infrastructure work, including civil projects, schools, hospitals and airports, as well as ongoing data center construction. Our scale and broad geographic footprint enable us to capture growth across these key areas. General manufacturing, also about 1/3 of our third quarter sales, is highly diversified across geographies, products and industries. Shipments in this market also increased year-over-year as military, industrial machinery, consumer products, shipbuilding and rail sector shipments were seasonally strong and showed solid year-over-year growth. Relative weakness in agricultural machinery continued. Our sustained outperformance across key product groups in general manufacturing highlights the versatility and competitive advantage for our diversified business model as well as our ability to grow with both new and existing customers in an uncertain macroeconomic environment. Aerospace products comprised approximately 9% of total sales in the quarter. Demand on the commercial side was down slightly due to pent-up inventory in the supply chain, while demand in defense and space-related aerospace programs remained consistent at strong levels. Automotive, which we primarily service through our toll processing operations and are not included in our tons sold, represented about 4% of our third quarter sales. Our processed tons improved over the third quarter of 2024 supported by our investments in capacity expansion. Semiconductor market remained under pressure from ongoing excess inventory in the supply chain during the third quarter. In summary, I thank our team for their strong, focused and safe execution in uncertain and volatile market conditions. The scale and diversity of our product offerings and value-added processing capabilities, combined with dependable customer service, continue to win Reliance new business and new customers and increase our market share. To reiterate what Karla said, we are well positioned to capitalize and improve on our already strong results as market activity rebounds. I will now turn the call over to our CFO, Arthur Ajemyan, to review our financial results and outlook. Arthur Ajemyan: Thanks, Steve, and thanks, everyone, for joining today's call. We were pleased to report third quarter non-GAAP earnings per diluted share of $3.64, consistent with both our expectations and the third quarter of 2024. Of particular note, the third quarter of 2024 benefited from $50 million of LIFO income, compared with $25 million of expense this quarter, which equates to a $1.03 per share unfavorable year-over-year LIFO impact. I'll circle back to LIFO, but first, I'd like to expand on a couple of points that Karla and Steve mentioned: gross profit margin headwinds and market share gains. Trade policy uncertainty has contributed to temporary headwinds to gross profit margins since May of this year for most carbon steel products. Tariffs initially drove rapid price increases for carbon steel products, which slightly elevated carbon steel margins. But without a corresponding increase in demand and plenty of inventory availability in the supply chain, we encountered a very competitive pricing environment, which led to a third quarter margin decline for carbon products from somewhat elevated levels in the first half. In addition, ongoing excess inventories within the aerospace and semiconductor supply chain continue to pressure prices and margins across a range of stainless steel and aluminum products. In sum, gross profit margin associated with less than 10% of our sales has contributed to consolidated margin compression. We expect this pressure to ease as we move through 2026. Finally, the impact of our LIFO accounting method also contributed to margin pressure this quarter. Since LIFO is applied on a pro rata basis, we continue to carry LIFO expense through 2025 that reflected cost increases that occurred earlier this year. This LIFO effect tends to smooth out on an annual basis, though. For the full year 2025, we are still expecting $100 million of LIFO expense. Turning to organic growth. Our teams have done an outstanding job winning new business and growing with existing customers. We tend to outperform industry shipment trends at wider margins during uncertain times. The incremental volume of over 100,000 tons for the third quarter and over 300,000 tons for the year so far in 2025 has allowed us to meaningfully contribute to our overall profitability. On a FIFO basis, our gross profit margin was 29% in the third quarter, up from the third quarter of 2024, and our FIFO pretax income increased 30%. Looking at expenses, our same-store non-GAAP SG&A expenses were up 4.8% for the quarter and 3.6% for the 9-month period compared to the same prior year period, due to inflationary wage adjustments and higher variable warehousing and delivery costs to support our increased tons sold. We also saw higher incentive compensation in the third quarter due to a 30% increase in FIFO profitability. On a per ton basis, our same-store non-GAAP SG&A expenses were slightly lower in both the third quarter and the first 9 months of 2025 compared to the same period in 2024, demonstrating the operating leverage achieved through our smart, profitable growth strategy. I'll now address our balance sheet and cash flow. We generated approximately $262 million in operating cash flow in the 2025 third quarter, which reflected a working capital investment due to seasonally strong net sales. We continue to generate strong cash flow from operations throughout market cycles, that we redeploy to execute our opportunistic capital allocation strategy. We used that cash to fund $81 million in capital expenditures, pay $63 million in dividends and repurchase $61 million of our common shares at an average price of approximately $288 per share. Year-to-date, our repurchases have reduced total shares outstanding by 2%. And we have approximately $964 million available for further repurchases under our $1.5 billion share repurchase plan that we refreshed in October 2024. As previously announced, on August 14, 2025, we borrowed $400 million under a term loan agreement maturing in August 2028, and used the proceeds to retire of senior notes due August 15, 2025. As of September 30, our total debt was $1.4 billion, including $238 million in borrowings on our $1.5 billion revolving credit facility. Our leverage position remains favorable with a net debt-to-EBITDA ratio of less than 1, providing significant liquidity to continue executing our capital allocation priorities. Looking ahead, we anticipate overall demand in the fourth quarter will remain stable across our diversified end markets subject to ongoing domestic and international trade policy uncertainty. Accordingly, we estimate our tons sold will be up 3.5% to 5.5% compared to the fourth quarter of 2024. And consistent with seasonal trends, down 5% to 7% compared to the third quarter of 2025. We anticipate our average selling price per ton sold for the fourth quarter of 2025 will stay relatively flat compared to the third quarter. As a result, we anticipate flat to slightly improved FIFO gross profit margin in the fourth quarter. Based on these expectations and consistent with typical sequential seasonality where we experience approximately 20% to 25% decline in earnings per share in the fourth quarter, we anticipate Q4 non-GAAP earnings per diluted share in the range of $2.65 to $2.85, inclusive of quarterly LIFO expense of $25 million or $0.35 per diluted share. This concludes our prepared remarks. Thank you again for your time and participation. We'll now open the call for your questions. Operator? Operator: [Operator Instructions] Our first question today is coming from Katja Jancic from BMO Capital Markets. Katja Jancic: Maybe starting on the gross margin. So I understand that right now, the environment is such that it's resulting in gross margin compression. But is any of this compression attributable also potentially to your focus on growing volumes? Karla Lewis: Katja, from a gross profit standpoint, I mean, we've tried to, in our remarks and release, give enough context to help everyone understand the uniquely challenging market that we've been in the last couple of quarters. And what really said a lot to me in recently speaking with a couple of our people who run some of our typically higher-performing Reliance companies, who've been in the business 30 to 40 years, they commented that they've never seen a market quite like the one we've been operating in the last 2 quarters with the pricing strength coming from tariffs without the underlying demand to follow it. And that's what we think is a little unique in the current environment. We think our teams have done exceptionally well in winning business. And they are getting price increases from some of the mill increases that are coming through on products, more so in some products than others, just not at the rate that Reliance has experienced in more normal periods where there was demand pull forward. But we do think that that is temporary. We also tried to highlight, in particular, there's been a drag on margins for some of our special -- high-value specialty products that we sell into aerospace and semiconductor. We're bullish on both of those markets long term. There's just been a little pain, and it has a bit of an outsized impact on our gross profit margin that we've been experiencing the last couple of quarters. But as far as our smart, profitable growth strategy that we've been pushing the last couple of years, that we think our teams have executed really well on, it means grow your tons with good, profitable business and keep our gross profit margin in that sustainable annual range of 29% to 31%. We said there may be quarters where we dip down, which we experienced in this quarter, which there's a little bit of the LIFO timing that Arthur explained that impacts that. But the tons we're going after, we certainly have picked up tons in the flat-rolled space, which those margins aren't always as high as some of the other products that we sell. So could there be a little bit of impact from that? But overall, the end game is the right end game in our view because this is profitable business that's adding to our earnings, it's helping leverage our SG&A expenses, and we're really happy with the additional profit that those tons are bringing to us. So it's not the reason that our margin dipped down. It could be a factor to a certain extent. But there are other -- it's more of the market and a couple of those specialty lines for us having the bigger impact. Katja Jancic: Okay. Maybe when I look at your inventory level on your balance sheet, it seems like they're moving higher a little bit. I wouldn't expect this to be the case in this environment. Can you maybe talk a little bit about what's going on there? Karla Lewis: So part of that is pricing. Because as we mentioned, there have been mill price increases, so that's part of the dollars increasing. But we also have our tons up, and we buy based on what we're shipping. And so I think we might have a slight uptick in tons as well, but it's right for the market. And I think we've seen many of our competitors pulling back a bit from having inventory on hand, and this is allowing us to win some business and better service our customers. Operator: Our next question is coming from Timna Tanners from Wells Fargo. Timna Tanners: I wanted to follow up, if I could, on the inventory side. I know you said ongoing -- I think the quote I have was ongoing excess inventory was pressuring margins or contributing to the margin pressure. And another mill CEO this week said destocking was over. So I'm just trying to get a sense of, how close are we to putting that in the rearview mirror? When do you think we could switch to seeing appropriate levels of inventory? And did you mean that from your competitors or from your customers, I guess? Karla Lewis: Yes. So Timna, more at both the mill and the service center level in Q2 and Q3. There was a lot of inventory at the beginning of the year. We think a lot of service center companies were buying heavy to get in front of the tariffs, whether that was coming through import or domestic buys. So we believe service centers have been trying to work down that inventory. We do believe those inventories have come down. We're not going to say if destocking is over. We don't talk about destocking and restocking in our company. We talk about buying what we need based on our shipment levels. But we are starting to see lead times for certain products go out a bit, which is a positive sign. Are we at an inflection point? Potentially. If we're not there, we're probably closer than we were. And when we were talking about the impact on gross profit margin from the competitive environment with a lot of inventory, that was really talking about Q2 and Q3 and the markets we were in every day. So we do see momentum coming out of that. We think like our gross profit margin troughed in Q3 based on the factors we see today. So I would say we probably generally agree with that comment, but probably just wouldn't say it is strongly as others. Timna Tanners: Fair enough. I want to ask on the comment about winning new business. How does Reliance win new business? Is it execution? Is it price? Is it a little of both? Karla Lewis: Well, hopefully, it's execution and not price. That's the strategy. And we have changed our message starting a couple of years ago and set specific targets with certain of our Reliance companies, where we felt that they could grow their tons in a profitable way, and ask them to execute on that. And it's really them calling on customers, maybe their customers they had not been calling on prior to that. Maybe they're going back after some business they used to have. We also have much more expanded processing capabilities. We can do a lot more for our customers now with the investments that we've made in that equipment. And so it's really going back out educating our customers, and then getting their orders and proving ourselves. We think that -- we think we provide among the highest levels of customer service in the industry. And that's why typically, once our companies can get their foot in the door with business and show our customers how well we can service them, we expect to retain most of that business that we've earned during these last couple of quarters. Our model, though, does fit with the market that we've been in, where it's been competitive, people have been hesitant to buy too much inventory because of the tariff uncertainty and falling prices in certain products. Our ability to service small orders on a just-in-time basis is a positive in that type of market environment. So we probably won some business because some customers' buying patterns changed a bit. But I think we should be able to hold on to a lot of that business that we were able to win during the last couple of quarters. Timna Tanners: Okay, appreciate it. And I want to squeeze in one more if I could. I'm going to dare to ask a question about LIFO. But it's kind of bizarre to see continued LIFO expense at the same time as you're talking about prices having drifted lower recently. So I guess just at a high level, when do we clear the decks and start to have like a neutral LIFO environment? It sounds like you're still expecting continuation into Q4. But is it getting to a point where we run through that and start to see LIFO income or at least no LIFO impact? Arthur Ajemyan: Yes, Timna, good question. So LIFO is an annual estimate. So I guess, the way you're thinking about it, a lot of the cost increases, if you step back or look at the year, happened in the first half of the year. But because it's an annual estimate, we applied it pro rata. So you're right. And intuitively, when you look at Q3 and you say there's LIFO expense, it's essentially associated with cost increases that are in the rearview mirror. But again, because the accounting method is pro rata, you're effectively spreading that equally throughout the year. So as we head into 2026 and costs are relatively flat, then essentially LIFO expense is in the rearview mirror. Karla Lewis: And just as a reminder, Timna, when we're in more normal times with pricing moves based more on the supply-demand dynamics and prices are going up because of demand and that creates LIFO expense, we're happy to incur LIFO expense in that type of environment. But again, it's been a bit of an atypical environment the last couple of quarters. Operator: Our next question is coming from Phil Gibbs from KeyBanc Capital Markets. Philip Gibbs: The semis, infrastructure and aerospace pieces specifically certainly been noting excess inventories for most of 2025. And I know Timna made a general question about excess inventory in the supply chain. But those markets specifically, are you anticipating that those begin to turn around or levelize sometime in 2026? Karla Lewis: Yes. And Phil, maybe we want to make sure too that we're clear, these are -- in those markets, we're talking in particular about the high-value products. These are the products you've heard us start talking about the end of last year -- well, actually for the last couple of years, coming out of COVID, we saw lead times move to 80 -- 50 to 80 weeks, which we had never seen before. And the whole industry saw that. We do think there was some general overbuying in both the aerospace and semiconductor market of some of these products because there was just concern about availability. And so we've just seen the supply chain working through those products. There are pockets where you start to see some improved demand. So we don't think it's getting worse today. We think it's getting better, but it's, for certain products, it's just going to take some time. So we commented as we go through 2026, we think we'll see continued improvement in the supply chain working itself down for those products. Stephen Koch: Phil, I would say that if you think about the aerospace inventory, from a Reliance point of view, we're probably in the seventh or eighth inning of kind of getting our inventory under control and in a good position to start restocking in the first quarter of 2026. But the overall industry and our competitors and some of our customers, they're probably more in the fifth and sixth inning. So I think we're in good shape, but we're still going to have to deal with the market dynamics of the reality of there's a lot of inventory. Philip Gibbs: And on the CapEx side, I think you said around $350 million in cash CapEx this year. What should we anticipate for 2026? Because I know you've been kind of on an above trend for the last several years as you've invested in your capabilities and made more acquisitions. Karla Lewis: Yes, Phil, that is our current estimate for this year. We're working on our 2026 CapEx budget as we speak. It, we believe, will be probably below what our 2025 number was. We've had some record years the last few years, and it's been good investments for us. But we are pushing our people to really utilize the equipment that we have better, how can we maybe share some of that equipment within the Reliance network, and just really pushing for better utilization of the investments we've already made. But we will continue. We do continue to see growth opportunities and we will have some growth initiatives in our CapEx in 2026. We'll give you that number in February, but probably directionally lower than our budget of $325 million in 2025. And remember, there will be carryover. Some of these projects are multiyear projects. So the cash outlay might be more consistent with this year just because of some of the carryover coming into 2026. Philip Gibbs: And the last question, just on taxes. So I know there's been the Big Beautiful Bill and half a dozen other things that seemingly are changing cash tax rates and effective tax rates for companies. But is your cash tax rate for this year and next year relatively aligned with the effective rate? Or is it somewhat below? Arthur Ajemyan: Yes, Phil. So I mean, you can look at our tax rate, for the most part, it's -- we're a full rate taxpayer. I think as far as the new tax bill, yes, it is definitely -- especially the bonus depreciation, that's going to help lower our cash taxes paid. We're currently estimating the impact, but that could be an incremental reduction of cash taxes, probably into $30 million to $40 million range. So that's kind of the extent of the impact at the moment that we've estimated. Operator: Our next question is coming from Bennett Moore from JPMorgan. Bennett Moore: If I could circle back real quick on the aero comment, I think from Steve. It sounds like you're expecting maybe restocking could emerge as soon as the first quarter. Is there any difference there between the aluminum and stainless side just given some commentary for some other players this morning and Boeing moving to 42 a month as of Friday? Karla Lewis: Yes, Bennett. So from I think Steve's comment, again, he was talking specifically about Reliance's inventory position. And remember, we're talking about these specialty alloy steels, titanium, specialty aluminum products. So it's not impacting all of our aerospace inventory and aerospace business. We've seen relatively steady activity with like the aluminum plate and some of the other products that we consistently sell into aerospace. This is a pocket of our inventory that we were talking about. But I commented earlier we're long-term bullish on aerospace increased build rates, absolutely could help that supply chain excess inventory get worked through faster. So that's all positive for Reliance and for the industry if we realize increased build rates. Stephen Koch: Yes. We're in really good shape regarding our heat-treated aluminum with the 2x and the 7x for aerospace. We're a little more challenged with some of the specialty long products that we're working through. Bennett Moore: All right. And then turning to the steady pricing guidance, if I could kind of dig into some of the puts and takes here. I mean it seems like flat steel is looking pretty steady. I think you made some similar comments. But we have seen the tinted plate price hikes over the past few weeks with some success. Structural sounds pretty strong, and Midwest premium reached a record high over this past week. So could you walk us through kind of the puts and takes there? Stephen Koch: So from the wide flange beam point of view, the lead times have been extended and demand has been strong for most of the year, actually probably the last 12 to 18 months. We do appreciate the plate increase that was announced recently, because there was a continuous sliding of some of those products. So we believe that that stopped some of the bleeding, and we are looking for more of an uptick in the fourth quarter going into 2026. There's a merchant bar increase that we think is going to take hold. And just in general, there's been some halt in some of the tubing mills. And overall, looking for brighter days in some of the carbon products. Karla Lewis: And I would comment too, you mentioned aluminum, Bennett, on the common alloy aluminum, and we did get our prices up in Q3 based on those price increases, some pretty high levels on the Midwest spot, which are good for us, and we're passing through. But I think with the trade uncertainty and not knowing when and what some of those final agreements might be, there's overall some hesitancy of stocking up too much on inventory in case there is a trade action related to the aluminum products. Bennett Moore: That's great color. And if I could squeeze one more in maybe just on M&A. We saw some activity from peers this past month. Just hoping to get your latest read on the M&A landscape, valuations, if you're seeing any new opportunities emerge. Karla Lewis: Yes. So we're continuing to see a pretty steady flow of opportunities. We have commented the first quarter -- the fourth quarter of last year, we think, because of the elections, and first quarter of this year, it has slowed a bit. But the market's been -- picked back up to what we would call fairly normal levels and has stayed there. So we continue to look at opportunities as they become available, think about where we might want to be growing. So we think it's a decent M&A environment. I think valuations are generally reasonable. Each opportunity is a little different depending on what the sellers are looking for. But we're pleased with the level of activity we've been seeing. Operator: Our next question is coming from Mike Harris from Goldman Sachs. Michael Harris: Quick question. As you work through the gross profit margin headwinds, are there any SG&A leverage you can pull to help protect the operating margin? Karla Lewis: Yes. So I think, Mike, that's something we're focused on every day and pushing our people to be focused on. We have been talking more internally and pushing our people to really look for efficiencies in their operations, in their warehouse activities. We have reduced our head count even with higher tons being shipped over the last couple of quarters. So that's a focus, again, like I said, that we're always looking at. We look -- we have several different locations. They don't all perform at the same levels. So we are continuously looking at any underperforming assets. How do we make changes there? Sometimes we combine locations. We'll close small locations. That's kind of constant activity that we're doing. And also with our smart, profitable growth strategy, we are getting better leverage off of the fixed cost component of our costs. Arthur, anything you would add? Arthur Ajemyan: Yes. No, great color, Karla. And Mike, yes, we actually peak head count in Q2, and we've trended down. And that's part of the efforts that Karla mentioned around rationalizing our operations. I think the service levels in this environment are important, and our market share gains have had a lot to do with our service levels. So it's important to be really thoughtful about maintaining those and not just go in and reduce head count for the short term, but in the long term really impact our service levels. So we're being very thoughtful, methodical as we're navigating this environment and really growing the business, getting new customers along with existing customers. We've had some really good success with that, and we're looking forward to continue that. Michael Harris: Okay. Great color, guys. And then I guess just on the market share gain that you pointed out, going from 14.5% up to like 17.1%. Just curious as to how much of that would you attribute to organic versus inorganic growth. Karla Lewis: Yes. So certainly, Mike, we have had a few acquisitions over the last couple of years, 4 in 2024, that is part of that. But -- and we call out our same-store and our consolidated shipment trends. But the majority has been organic growth, both again investments we're making in some greenfields, some expansions, our increased value-added processing we're able to do. But really just our salespeople looking for more opportunities and going after good business that's out there that maybe we haven't been servicing the last few years. So we're really proud of what our teams have done going out aggressively, but aggressively through service, not through price, getting that increased business. Arthur Ajemyan: Yes. That majority is organic, so. Michael Harris: Okay. Great. And then just last one, if I could. If we look at the third quarter shipments, were there any, I guess, major onetime items in there or perhaps any pull-forward sales that you would call out? Karla Lewis: No, there's nothing there we would call out, Mike. I mean when your average order size is $3,000 an order, it's hard to get that one big order that really moves the needle. So I think it was just pretty broad-based. Operator: Our next question is coming from Martin Englert from Seaport Research Partners. Martin Englert: For nonresidential construction, it seems reasonably good. I'm curious, how much of this activity do you think is related tied to AI, data centers, semiconductor build-outs, kind of that camp of activity? Karla Lewis: Yes, Martin. It's hard for us to quantify just based upon the diversification we have within our companies and then the customers that we're selling into. And I think we commented on this last quarter, almost every one of our Reliance businesses is touching the data center trend and build, including the build of the electrification to support that, with many, many different products, right? It's not just building the shell of the facility. It's a lot of the internal, racking and enclosures and equipment. It's cooling systems. It's, again, the grid. So we're touching it. And it's been very positive for the industry that the data center trend is strong right now. But for us to quantify that -- we think it will continue to grow. You can look at all the estimates out there of the builds that are being announced, and that will continue. So that's all very positive for us, but difficult for us to quantify specifically. Martin Englert: And if the government shutdown continues for an extended period, does this pose any risk to any programs you might have exposure to or anything within defense spending? Karla Lewis: There's nothing that we're aware that's impacted us directly today. We're on -- I think the programs we're on are pretty solid programs, that we expect to continue. But certainly, there, like with anyone else, there could be some fallout if this continues. But it's not something that we've heard any warnings from any of our companies about any of the programs they're on. Operator: Our next question is coming from Lawson Winder from Bank of America. Lawson Winder: May I ask about capital return, and I guess, really in the context of capital allocation? One might expect that as the shares were a little bit weaker during the quarter, it might present an attractive opportunity, perhaps allocate more of your capital to the share buyback as opposed to less and maybe direct that away from other opportunities. I mean so how do you think about that in terms of return on your dollars in buying back shares versus investing in the rest of the business? And how should we think about that going forward? Karla Lewis: Lawson, we think buying Reliance stock is always a good decision, no matter what the price level is. But we do look at that, we do look at what the market value is, and adjust our activity accordingly. We've been active the last few quarters. The exact volumes vary a bit. But we look to be in the market, we look to buy at attractive levels. We've got the balance sheet and the ability. We look at it as a pretty low-risk use of our capital when we're investing in Reliance by repurchasing our shares. And yes, it could be more attractive at different price levels, the same, I think, as for the general market. Lawson Winder: Okay. That's helpful context. Can I also ask you, are you being impacted by, any way, by the aluminum supply disruption in New York State? Karla Lewis: Yes. So we do, in our toll processing businesses, directly, we do work with the mill, that I think you're referring to there specifically. And it has created some disruptions in the market that was not expected. And we are working closely with our mill suppliers as well as the end users of the metal, the automakers and others, to try to do whatever we can. We try to be a problem solver for them, whether it's storing metal for them, processing metal for them, actually leveraging the whole Reliance company to see if we can source the metal and fill some holes through some of the other Reliance businesses. So definitely a collaborative effort within Reliance trying to help that particular mill and its customers, as well as the overall industry, because it's having a much broader impact on multiple end-use customers and different mills. So we're just trying to do what we can to help lessen the disruption for those impacted. Lawson Winder: Is it material enough for Reliance that that could show up on your cost item or impact profitability? Karla Lewis: No. And the good news with our tolling operations, if they do lose some processing business to this particular mill, they generally have more demand than they can accommodate, that they can process metal for some other customers and end-use applications. Lawson Winder: Okay. Great. And can we maybe talk a bit about seasonality or can you give us some perspective on that? I mean we've talked for a number of quarters about kind of negative impacts of seasonality on the business. In Q1, we saw seasonality benefit Reliance. When you think about the business today, and looking out to Q1, I mean, overall, across the business lines, should we be looking at a recovery in Q1? Or how are you thinking about seasonality going forward from here? Karla Lewis: Yes. Lawson, as much as anything is kind of normal in our business, the last few years hasn't been that much normal. But in the service center business, our activity is really based on shipping days and it's based on the number of shipping days that our customers are open. So the normal seasonality is Q1 and Q2 are our 2 strongest shipping quarters. They're usually fairly even, but there can be a little give or take. But the first 2 quarters of the year are our strongest. Q3 typically trends down a bit because a lot of big OEMs will do shutdowns for -- planned shutdowns during the summer in industries that we're selling into. Also a lot of the smaller customers, there are vacations and things going on where small businesses will shut down for a week or 2. So we generally see probably a 3% to 5% falloff in our shipping volumes in Q3 versus Q2. I think the fact that our Q3 '25 shipments were equal with Q2 '25 is a big positive and again shows how our businesses, the Reliance businesses, are going out and winning business from others. And the fact that there was no dip in our shipment levels -- because the industry, I think we'll see, did have the normal seasonality. And then Q4, with the holidays, that's usually another 5% to 7% reduction in shipment levels from Q3, just again because of customers being shut down more days, us being shut down a couple of days for the holidays. And then you see the bounce-back in Q1 when there are just more shipping days, people are back to kind of full staffing moving into the year. So we certainly expect that to happen. I would comment, when people look at seasonality, I just talked about shipment levels, but that obviously trickles down to earnings. And we -- our guide for Q4 earnings per share, typically, we've been down -- earnings per share from Q3 to Q4 dips about 20% to 25%, which is consistent with our guide. However, it was not reflected in the consensus numbers that were out there. So we ask that people putting those numbers out there do steady history and pick up on some of those trends and react accordingly. Operator: Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Karla Lewis: Well, again, we'd like to thank everyone for joining the call today and your continued support of Reliance. In particular, we'd like to thank all of the Reliance family members for continuing to operate safely and for all that you're doing in these challenging market times and the successes that we've had. We're very proud of what you're accomplishing out there. And also before we close out the call, I'd like to remind everyone that we'll be in Chicago next month presenting at Baird's Global Industrials Conference. And we hope to meet with many of you there. Thank you, and goodbye. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Alexis Bonte: Good morning, and welcome to the Stillfront Q3 presentation. I am Alexis Bonte, the CEO of Stillfront, and I will be joined later by Tim Holland, our Interim CFO. I would like to start with a slight focus on Europe. As you can see, we had solid progress in Europe. We said a few quarters ago that we were in an investment phase in Europe in the first half of the year and that we would start reaping some of those rewards towards the later part of the year. As you can see, Europe returned to growth for the first time since Q1 of 2024, so in Q3, where the growth was just under 1%. What is important to say here, this is before the launch of the main new games that will happen in Q4. Those big new games, as a reminder, will be Big Farm: Homestead, that will launch towards the end of the year and will be within the Big franchise, and we'll build on the success that we had with Sunshine Island. Another big game that we announced previously that will launch in Q4 is Warhammer 40,000, which is a big important new launch on the Supremacy franchise with a major IP. And we also soft launched with a narrative franchise, the Unfolded: Webtoon Stories game with the Webtoon IP, and that soft launch is having some encouraging results. The marketing efforts also that we'll have in what we call Q5, which is right after Christmas. It's a good time to basically start scaling game. We'll see most of that revenue come into next year. Obviously, and that will impact the margins in Europe in Q4. But I just want to show that we say that we were going to basically really work on building up Europe in the first part of the year. And so I'm very happy to see that, and to be able to share that we are now reaping some of the results with the existing franchises, which are kind of showing the results in terms of live operations and how that is really performing. And also obviously excited about the new launches in our core business area of Europe. If we go into the KPIs that we have in Europe, so that resulted in a net revenue of SEK 643 million. That's up 0.6% year-on-year. UAC was at SEK 207 million, relatively stable. We were able to apply quite a lot of UA, especially in Supremacy at the beginning of the quarter. Then towards the end of the quarter, it was a bit harder to put more UA. But overall, I think we're with a healthy level in UA for Europe. And as you know, every quarter, it varies a lot whether we're able to place UA or not place UA. So that's something that we're always very, very attentive to. Adjusted EBITDAC was solid at SEK 154 million, which is a margin of 24%. Our key franchises in Europe grew by 0.4%, good performance. I was very happy, in particular, with Albion Online, who started doing a lot of investments in product marketing. I told you that I wanted the company to be less dependent on performance marketing and Albion Online's is a great game to be doing more product marketing and they had a really strong effort in product marketing, which actually has borne fruit and has been successful, and that gives me a lot of confidence for that franchise going forward. The smaller franchises actually grew faster in Europe. That was mostly due to -- from our Playa studio, a smaller franchise called Shakes & Fidget, which performed well year-on-year, and also had a small new launch called Mobile Dungeon, which helped that franchise scale a little bit. So that's Europe, very happy with the results in Europe. Continuing on to North America, as you know, and as we said from the beginning, North America has been our turnaround case. It's been really our problem side. It's the only business area that has negative growth. It is the business area that's actually dragging us down overall in terms of organic growth. Without North America, we would have very healthy growth across the group since both Europe and MENA and APAC are growing business areas. But that being said, we're continuing our turnaround efforts in North America, and we're -- and we are deliberately focusing on profitability. That's really what we want to do. We want to find the right level. We've made some very serious cost cutting in North America. I think we have a much healthier base now in that area. We also took some very hard decisions moving games to other business areas. And I would say that a lot of that work is done now. We ended up with basically SEK 246 million of revenues. That's 32.9% down year-on-year. So that's what is dragging down the organic growth. UAC was SEK 110 million. As I said before, we are extremely disciplined about UAC and what games it goes to, and we've really increased the discipline in North America around that. And that obviously has an impact on the net revenue profile of the business area. But then it also resulted in a large increase in our adjusted EBITDAC, which was SEK 36 million, which is a 15% margin. I think most of you will recall that North America was barely profitable a few quarters ago. And that obviously is a big change that now North America is a net positive contributor to our EBITDAC margin. And I think this is just a much more healthy base to work from. Both key franchises and other franchises were down in North America. Now the challenge for North America is going to be to work from that base. I do expect the decline to continue into Q4 as we're continuing with our discipline, but I do also expect North America to continue to be a net positive contributor in terms of EBITDAC as we work on improving things there. MENA and APAC, continued solid growth. Actually, growth has slightly increased quarter-on-quarter. Very happy with MENA and APAC. We have -- if you look at our key franchises, they grew by more than 18%. That's -- and going into even more detail, both Jawaker and the Board Ludo franchise from Moonfrog had very healthy double-digit growth. Very, very solid situation in MENA and APAC. Small level of UAC. There's very little dependency on UAC, EMEA and APAC. I think actually, we do have an opportunity there to boost a little bit the growth in the future and more likely in 2026, particularly for the Board franchise if we're able to place a bit more UAC there, but that's something that we're going to do carefully and slowly, and just basically the -- and with discipline as we've been very disciplined all the time. And adjusted EBITDAC as a result has continued to increase significantly with SEK 276 million, which is a 57% margin. So that's basically the main things on this side. I will now pass on to our interim CFO, Tim, for -- to talk a little bit about finance. Tim Holland: Thank you, Alexis, and good morning, everyone. On a group level, revenues declined by 7.8% organically, coupled with a 6% foreign exchange headwind. Our net revenue declined from SEK 1,595 million, down to SEK 1,373 million. And that was driven by a few different things, but primarily, it was driven by BA North America and specifically Word and HGM franchises. And as Alexis noted, we are much more focused on the profitability of those titles. So we did decrease user acquisition on a year-over-year basis. However, when you do decrease UA, that's obviously going to increase profitability, but it is going to decrease net revenue. But that was partly offset by strong performance in BA Europe. As Alexis noted, we're almost at 1 percentage point of organic growth for BA Europe, and that was driven by strong performance for Big, for Albion Online and for Supremacy as well. And we also had strong performance from BA MENA APAC, where we got to almost 3 percentage points of organic growth, and that was driven again by Jawaker and Board franchises. Looking at UAC. UAC came down year-over-year from SEK 462 million down to SEK 336 million, and that was driven primarily by year-over-year declines in UA spend for HGM and for Word. Looking at adjusted EBITDAC, that's up year-over-year from SEK 385 million up to SEK 436 million. I should note that's a 13% point increase on an absolute basis year-over-year, and our net revenue obviously declined by 14%, but we are showing strong margin resilience even with that net revenue decline. Adjusted EBITDA came in at 32% in terms of margin. Again, that's up 8 percentage points compared to Q3 of 2024. Again, that's primarily driven by decreased UAC as a percentage of net revenue. But one thing to point out as well is that our gross margin has improved on a year-over-year basis from 80 to 83 percentage points, and that's due to the continued success of our Web shop rollout, where we've improved our direct-to-consumer share of revenue year-over-year from 33% up to 44 percentage points in Q3 of 2025. Looking at our LTM free cash flow, that's down slightly year-over-year. Last time we spoke, we reported SEK 1,089 million in terms of LTM free cash flow. That's down to SEK 974 million, but that change is primarily related to working capital adjustments, which is a natural part of our business. So you are going to see that fluctuation from positive to negative in terms of our working capital adjustments. Next slide, please. Digging a bit further into our cash flow generation. Cash flow before changes in net working capital came in at SEK 357 million, of which is SEK 77 million in paid financial expenses. That is down year-over-year from SEK 101 million, down to SEK 77 million. The decrease that you're seeing there is due to two things. That's primarily due to a reduced interest rate environment, and then also a reduction in our interest-bearing debt. Of that cash flow from operations before changes in net working capital, there is taxes paid of SEK 90 million. That's up year-over-year from SEK 42 million, up to SEK 90 million. The reason for the increase is primarily due to Jawaker, where we're paying taxes for Jawaker in the UAE now under that new legislation where you have to pay 9% of your corporate tax -- taxable income there. I should note that we are under CFC taxation in Sweden, so we will be getting a credit back for that amount. So the SEK 42 million to SEK 50 million amount is more of a normalized basis for our taxes paid. Net working capital came in at SEK 47 million, negative SEK 47 million, and that is due to negative SEK 98 million in terms of liabilities. That negative movement for liabilities is due to a reduction in our UAC, but that was partly offset by a positive impact of SEK 51 million for our receivables, and that's primarily due to reduced net revenue. Looking at cash flow from investment activities, that came in at SEK 119 million, and that was primarily driven by SEK 116 million in terms of product development. I should note that, that's about 8.5% of our net revenue spent on product development. Last year, it was 9.4%. So we are spending less in terms of product development. However, we are taking a much more targeted approach in terms of product development by specifically spending more in Europe, spending more in MENA and APAC. We were spending less in terms of BA North America. Looking at our cash flow from financing activities that came in at SEK 326 million. That was primarily driven by SEK 335 million that was used to pay down our RCF. That's up year-over-year, and that shows our continued focus on deleveraging this business. Turning now to our free cash flow. You can see our free cash flow for the LTM basis was SEK 974 million. That is up year-over-year from SEK 835 million. And the difference between the two values primarily comes from reduced financing charges, reduced product development, and it's partly offset by taxes paid. And this table on the right primarily shows what we've done with that free cash flow. So we had, obviously, the cash portion of our earn-outs at SEK 618 million. And we also reduced our borrowings by SEK 268 million. Again, that's up year-over-year. And then we had our share buybacks for SEK 142 million over an LTM basis. And I will note, and as you probably saw from the press release this morning, we have announced a new program that will begin tomorrow. Next slide, please. Looking at our financial position, our financial position, total net debt decreased from SEK 5.9 billion last year in Q3 of 2024, all the way down to SEK 5.1 billion. That's a reduction of almost SEK 800 million, again, showing our focus on deleveraging this business. The middle table shows our maturity profile. The maturity profile remains strong. As you know, we don't have any major maturities until 2027. That large bar there of SEK 2.9 billion represents SEK 1 billion for a bond that's due in 2027, the RCF drawn of SEK 1.2 billion and SEK 0.7 billion in terms of our SEK term loan. Then we have a bond due in 2028, and a bond due in 2029. Looking at the right table, that's our net debt to EBITDA. We came in at 2.06x for our leverage ratio. That's obviously above where we want to be for our 2x leverage ratio target. However, we are down sequentially from Q2 2025. We are down from 2.18, down to 2.06. And then on a year-over-year basis, we're down from 2.08 to 2.06. I should note, excluding earn-outs, we are at 1.87x. And then we'll flip to the next slide here. Then this is the last slide before I'll pass it back to Alexis. But as we've noted in our report this morning, we are announcing the conclusion of our cost optimization program, which has been driven by fixed cost savings and direct cost savings. And this has been announced 1 quarter early. We view this program as being a fantastic success. As I noted, we saved a significant amount of costs, specifically with fixed cost in North America, and we've been very successful with our direct cost savings with the rollout of the Web shop, improving our gross margin. Going forward, we're, of course, going to continue to focus on cost savings and direct cost improvements. However, we want to take a balanced approach to invest in our key franchises and invest in the future of Stillfront. And with that, I'll hand it back to Alexis. Thank you. Alexis Bonte: Thank you, Tim. So basically, to conclude, we are starting to deliver on what we set ourselves to deliver a year ago. We have concluded the cost optimization program a quarter in advance at the maximum level that we had set. We are advancing very decisively with the turnaround in North America and making sure that it's got a healthier base and healthier profitability. We are returning Europe to a more healthy level of organic growth while still having solid margins, and a very interesting pipeline of new games coming in. And we have MENA and APAC that is continuing to go from strength to strength. And we're also leveraging some of the talent there to move some of the games that we had in North America into that region. So we are still very much at the beginning of what we would like to deliver, but we are definitely seeing the first signs that our strategy is working, which gives me a lot of confidence, but also makes me extremely thankful to all the teams at Stillfront. In terms of our key focus going forward, we're going to continue to focus relentlessly our investments on the key franchises. That is something that we will do more and more and more. We obviously -- we're a games company. So we will continue focusing on successfully launching new games. But as you can see from our CapEx with a lot more disciplined approach, but at the same time, I want to make sure that we have the right level of ambition. We will continue to -- with our discipline of delivering on strong margins and cash flow. And obviously, we are continuing to execute on the strategic review. You've seen that we've done some game closures this past quarter. We've also announced that we'll likely do some extra game closures, and we're also looking at, still, very carefully at some potential divestments. So with that, I think we are ready to take your questions, and thank you very much for your attention. Operator: [Operator Instructions] The next question comes from Erik Larsson from SEB. Erik Larsson: I have two questions. First off, I appreciate the outlook comments here on Q4. And as I understand it, your wording on Europe as we will potentially see weaker organic growth rates in Q4 versus what we saw here in Q3. But are you still confident on the ability to grow sequentially here, just to sort of get a feeling on the magnitude? Alexis Bonte: Yes. Maybe I can take that question first, and then Tim, you can build up. So yes, as we've indicated, we do believe that Europe might potentially be a little weaker in Q4, but still, it will be a completely different level to what you saw in Q1 and Q2. The reason why it's very difficult for us to really know where Europe will be is a lot of it depends on the year that we're able to allocate for Supremacy. And also most of the impact of the new games will be in the later part of the year and also towards next year, and it's very difficult to basically balance what will happen there. But it's definitely on another level going forward, and we're very confident that we've kind of found a new rhythm for Europe now. Tim, I don't know if you want to... Tim Holland: Yes. I mean, just as Alexis said, there's going to be variability from quarter-to-quarter, but we do believe in the long-term improvement in Europe. And then as Alexis mentioned as well, that's going to be heavily influenced by the new games. Erik Larsson: Okay. Then second and final question. Looking at your debt structure, it's start to look at some refinancing next year. So I just wanted to hear some thoughts how you think about the capital allocation. I guess you have reducing the absolute debt, giving better earn-outs, et cetera. So any thoughts there would be interesting to hear? Tim Holland: Yes. I mean we're going to get back to that. I think that our debt structure is strong. We have our maturity profile. Everything is primarily due in 2027 onwards. And that's a good timing as well because our earn-outs will be finalized in 2027 as well. So what we'll do with the extra cash could be amortizing much more on our RCF. We can also potentially do dividends. We could do acquisitions, but we'll get back to that at the appropriate time. Operator: [Operator Instructions] The next question comes from Rasmus Engberg from Kepler Cheuvreux. Rasmus Engberg: Warhammer Supremacy, when is that the game supposed to be out? Alexis Bonte: Rasmus, good to hear from you. So basically, we are having an initial launch, I think, around the end of this month, which will be a soft launch. And then we expect to basically scale the launch during the year to have, basically, a larger launch towards the end of the year. So Q4, but later part of Q4. Rasmus Engberg: Okay. And would you dare to say anything about Europe for next year? Do you think it's going to be largely stable then? Or you've taken some measures with launches and improvement of titles? Is Europe stable from these levels going forward? Or how do you think about it? Alexis Bonte: Yes. I mean the way we're thinking about it is we did a lot of work that was necessary to be done in Europe. We're really focusing our investments, focusing on the key franchises, making sure that we have a proper pipeline going forward. We're seeing the results, I think, basically more or less when we expected them, which is good. And that gives me very solid confidence for next year. Rasmus Engberg: And these new measures, you talked about closing some further games in North America, or potentially lowering them. That sounds like though there are more fixed cost savings sort of outside of the program? Or how should we think about that? Or is that going to be reinvested in something or? Alexis Bonte: Yes. I think there's a time to be doing cost savings and there's a time to go on the offensive. I think we've done what we had to do in terms of cost savings. And any further savings that we might receive from other game closures and all that, it is very much our intention to reinvest and to go on the offensive and to strengthen our pipeline. I think we have a strong base to do that. I think the cleanup that we had to do has mostly been done. And now it's about really being more aggressive going forward. Rasmus Engberg: Would it be possible to talk about sort of the better part of North America? Is that a stable part? How much is it? Is it possible to give any indication on that? Alexis Bonte: I mean we don't do breakdowns of business areas, obviously. I mean, I'll let Tim to build up. But obviously, we have some key franchise in North America. Those -- some of those key franchises, I think, have really good potential, but they need to increase their performance. I think we we've really raised the bar in terms of what we consider as good performance. I think there is a few franchise in North America that could do well. Some can do well within North America. Others, clearly, we didn't have the team or the right resources to make them work in North America. For example, like Word. And that's why we moved out Word games to Moonfrog in India, where the team there, a lot of people are former Zynga people that worked actually on Word games. So it was a perfect match. So we'll be kind of very direct with that. But yes, there are some good elements in North America, but they're going to have to demonstrate over the next 3 to 6 months that they can deliver basically. Tim Holland: Yes, nothing further to add other than we have some very strong franchises in North America. Like BitLife, there's probably nothing like it globally in terms of that title. And so we have high hopes for that title. But of course, we do need to see some stronger performance in that region. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Alexis Bonte: Well, on behalf of Tim and myself, thank you very much for joining this call on the Q3 Stillfront results. As I just said, we're executing on what we said we were going to do. And we are happy to start seeing the first results of our strategy. And obviously, we aim to continue to deliver over this over the next quarters. Thank you very much for your time. Tim Holland: Thank you.
Operator: Good afternoon, and welcome to Alfa's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would like to turn the call over to Mr. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano, you may begin. Hernan Lozano: Good day, everyone, and thank you for joining us. Further details about our financial results can be found in our press release, which was distributed yesterday afternoon, together with a summarized presentation. Both are available on our website in the Investor Relations section. Let me remind you that during this call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. It is my pleasure to participate in today's call together with Roberto Olivares, Sigma's CFO. I will provide a brief update related to Alfa, Sigma, then Roberto will discuss Sigma's third quarter results and outlook. It is exciting to report Alfa, Sigma's first complete quarter as a streamlined global branded food player. We have experienced a smooth transition into a steady-state business after years of transformational developments. To better reflect Alfa's new identity and to concentrate on growing Sigma's corporate brand equity, we are implementing a re-branding initiative. As a first step to sunset the Alfa brand, an extraordinary shareholder meeting will be convened soon to propose adopting a Sigma-related entity name at the Alfa level. We will share updates on these changes in due course. Returning value to shareholders through cash dividends will remain core to capital allocation. On October 1, the Board approved the first dividend under the company's new food-focused structure, a $35 million payment, bringing total cash dividends for the year to $119 million. This amount is aligned with distribution levels historically supported by Sigma's strong cash generating ability. With that, I will now turn the call over to Roberto to discuss Sigma's results. Roberto Olivares: Thank you, Hernan, and thank you all for joining us today. We are pleased to report another quarter of positive sequential improvement in volume, revenues and comparable EBITDA, underscoring consistent progress adapting to raw material cost pressures in a global environment of soft consumer confidence. Consumers are moving across channels, categories and brands, including varying shift between retail and food service, dairy and packaged meats as well as value and premium brands. The good news is that Sigma's diversified business platform gives us a relative advantage to maintain strong connections with consumers throughout the broad marketplace. One of the biggest industry-wide challenges we continue to face is rising raw material costs. In particular, turkey breast has experienced the sharpest price increase, reflecting supply constraints amplified by seasonal avian flu. Prices reached an all-time high of $7.10 per pound at the close of 3Q '25, which was an outstanding 244% increase from a year ago. Although we have certainly felt the effects of high turkey prices and other protein costs, Sigma's large scale and global supply chain have helped reduce their impact on our results. Looking ahead, we anticipate that current high prices, vaccination and low feed cost will be supportive of a gradual improvement in turkey supply and cost. In addition to Sigma's structural advantages, our experienced teams have done an incredible job staying on top of consumer needs and expectations. All the initiatives we have undertaken drove third quarter revenues to a record $2.4 billion, up 8% year-on-year and 5% sequentially. We have been implementing targeted price actions through a balanced approach to mitigate rising input costs while also supporting volume. EBITDA was down 9% year-on-year due to sustained raw material cost pressures and a record high comparison in 3Q '24. Adjusting for the Torrente property damage reimbursements in the second quarter, comparable EBITDA increased 3% sequentially, marking the third consecutive quarter of improvement. As a result, 9-month comparable EBITDA of $722 million is tracking in range with our full year guidance. We are confident that this upward trend will continue gaining momentum into the fourth quarter, which implies significant year-over-year growth for the first time in 2025. Moving next to key highlights by region. Mexico was once again the standout with revenues in local currency increasing both year-over-year and sequentially. Volume increased 1% quarter-on-quarter as growth from retail channels offset weaker performance in food service, which was impacted by soft hospitality demand. By product, yogurt and value branded packaged meats were key drivers in the retail channels. FX-neutral EBITDA improved 6% sequentially as ongoing revenue management and efficiency initiatives offset higher raw material costs. In the United States, revenues were flat year-on-year and quarter-on-quarter as favorable pricing was offset by lower volume in both periods. Softer demand for packaged meats in national brands was partially offset as Hispanic brands continue to gain traction in mainstream channels and new customer acquisitions. EBITDA was 17% lower quarter-on-quarter, reflecting lower volume in national brands and changes in mix involving lower dairy sales. Staying in the Americas, Latin America delivered 2% currency-neutral revenue growth in the third quarter, driven by higher volume year-on-year and sequentially. EBITDA decreased 11% versus 3Q '24 due to higher protein costs and mix effects, but increased 10% quarter-on-quarter due to operating efficiencies achieved in the Central American operations. The underlying business in Europe has maintained an upward trajectory. Adjusting for all insurance reimbursements received last quarter, EBITDA increased more than 100% sequentially as effective price actions and Torrente-related production adjustments drove a recovery trend that is expected to be amplified with seasonality effects in the fourth quarter. Lastly, Sigma's Europe capacity recovery plan continues advancing on schedule towards full restoration in 2027. Looking at our financial position and select cash flow items, we maintained a strong consolidated net debt-to-EBITDA ratio of 2.7x at the close of the third quarter with a stable net debt. CapEx represents our largest use of cash, driven by planned investments. Projects underway include capacity and distribution expansions, primarily in Mexico and the United States, plus the previously discussed capacity recovery in Spain. Next, let me briefly touch on some of the exciting steps we are actively taking to strengthen the business model for long-term success. Our growth business unit remains focused on piloting and scaling new products and ventures with disruptive growth potential. Grill House, our direct-to-consumer venture that caters to the grilling enthusiasts is ready to make its entrance into the U.S. after uninterrupted growth in Mexico for the last 5 years. At the same time, the Studio, Sigma's Global Center of Excellence for design and innovation is moving forward in its first year with developing 46 prototypes and advancing on 11 innovation commitments to boost core brands. Advancements in these areas like these will continue to set us apart from competitors in all regions. With this, let's open the call for questions. Please, operator. Operator: Our first question comes from Ricardo Alves from Morgan Stanley. Ricardo Alves: I had a question on Mexico. I think that certainly, as you mentioned in the preliminary remarks, another quite positive and resilient performance in top line in the low double digits. With that in mind, can you break that down into more details as it pertains to eventual share gains? I'm really looking forward to what has been driving the strength of you relative to other food players in Mexico. If you can talk about share gains or your revenue management initiatives or even on a channel by channel? Is it exposure to smaller purchases that is benefiting you more than others with a less diversified SKU? So just trying to get some more granularity to try and explain the strength in top line in Mexico and if that's something that should continue going forward, that would be helpful. My second question, I think that, Roberto, you did refer to the guidance. We appreciate the fact that the company is reiterating the guidance. I think that the message is pretty clear here, and it does imply to the comment that you made that the fourth quarter should be significantly stronger. I think that we're talking about almost 10% EBITDA growth on a sequential basis. So, with that in mind, can you also lay out in more details in your view, what are the key value drivers from the third quarter into the fourth quarter for this big sequential improvement? Is it -- when we look historically, the seasonality doesn't really help us to come to a conclusion that the fourth quarter is going to be significantly better. So is it something that we cannot model as well as you can, meaning your hedges may be looking better or to one of the points that you made, maybe Europe is going to be improving much faster than expected. Is there any top 2 or top 3 value drivers for us to be more confident about this sequential recovery into the fourth quarter? Roberto Olivares: Thank you, Ricardo, for the question. Let me first address the first one related to Mexico. In general, let me first explain that in Mexico, we do have the retail business and the foodservice business. We have seen different dynamics in each one of them. Foodservice first being more soft on volume, particularly due to raw material cost increase, particularly beef, but also softer hospitality trends, as I explained in my initial remarks. If you divide the business, retail is actually growing a little bit more on volume and foodservice is decreasing in volume. And in retail, we have a good presence in both the modern and traditional channel and a good presence across the different value segments across the socioeconomic spectrum. So we do have brands that whenever a consumer is trading down or trading up, we manage to catch the consumer as they move. So we have been seeing a little bit of trading down. So volume from our value brands is growing a little bit higher than the premium and the mainstream brands. And also volume in some of our dairy brands, particularly yogurt, continues to increase. I would say those are the 2 main drivers of the resilient volume that we have seen in Mexico. Then let me address your second question regarding reiterating the guidance and what we see in the fourth quarter of 2025. First, let me just make the comment that last quarter was -- fourth quarter '24, we have some extraordinary impacts, particularly in Mexico. If you see the margin that we have seen through this year in Mexico up to today, up to the third quarter, we were almost at 15% EBITDA margin. If you normalize that effect, we have close to $30 million more in Mexico in the fourth quarter versus the fourth quarter of 2024 just because of that. Additionally, we do expect to receive -- to continue receiving the reimbursement from the business interruption insurance from the Torrente incident we expect between $15 million and $20 million of business interruption coming in the fourth quarter. We actually already received a small portion of that during the month of October. We do also expect the European operation to have better results than the fourth quarter of 2024 because of higher prices and the momentum that we have seen in the operation between $5 million to $10 million in that sense. And in the case of the U.S., we see that we will move from a decrease versus last year in this third quarter to actually being able to have a similar result in the U.S. versus the fourth quarter of 2024. So those are the main key drivers for us being in range with the guidance. Ricardo Alves: Exactly what we are looking for, Roberto. Operator: Our next question comes from Renata Cabral of Citi. Renata Fonseca Cabral Sturani: So I have 2 regarding the U.S. business. One -- the first one about category trends. How would you describe the overall competitive environment right now in the U.S. in packaged meats and refrigerated food? Are private label or value play is gaining share right now? And how is Sigma positioning to defend pricing? And still on the U.S. business, in the release, it's mentioned that we have volumes in the national brands. My question is to what extent was this driven by category contraction or share loss and how the company has just seen the product mix to reaccelerate volumes in 2026? Roberto Olivares: Thank you, Renata, for your question. Regarding category trends in the U.S., we have been seeing just more competition of private label in the category, particularly, I would say, because of all of our regions, probably the U.S. is the one that has a softer consumer confidence recently. Consumers in the U.S. are managing a tighter budget. They are more cost conscious. Having said that, we -- particularly in the national brands business, we play as a smart choice, I would say, very close to the segment where private label is playing. And although we have seen that private label is penetrating more in the category, has not necessarily impacted our brands, has impacted more of the mainstream brands in the category. We try to position ourselves as a smart value brand, playing a lot with innovation on convenience on -- not only on affordability that has helped maintain our position with the consumers. And actually, we, in that sense, have been doing well. In regards to what we see going forward, definitely, the category this year, mainly in the Americas has suffered a lot because of raw material cost. We have mentioned a lot that turkey, but also pork and also other -- beef, other materials has been increasing. We do expect for 2026 for raw materials to ease, to start to recover production, particularly in turkey, that will increase the supply in the production and also impacting raw material to the downside. And hopefully, with that, we do expect a pickup in the category for next year. Operator: Our next question comes from Federico Galassi of Rohatyn Group. Unknown Analyst: I don't know if I was allowed to speak. It's [ Matteo ] here. I wanted to know if you could give us some color on how is operating leverage looking in this scenario with lower volumes. I think the picture in terms of raw material costs is very clear. Everyone understands the pressure particularly turkey has had on your results. But I wanted to see if you could provide us some guidance on what we should expect in terms of OpEx as a percentage of sales with more granularity by country, if possible? Hernan Lozano: Matteo, this is Hernan. Let me see if we understand your question correctly. So the first part refers to operating leverage and whether the decrease in volume is creating some slack in terms of the level of operation that we maintain across the different regions. Is that right? Unknown Analyst: Yes, exactly. Hernan Lozano: Okay. So the answer is no. This is not creating any slack in terms of operating leverage. What we're seeing is we are operating at pretty much capacity, especially in the Americas, in Mexico and the U.S., if you look at many of our CapEx projects, these have to do with catching up with volume that has grown at a pretty strong rate before 2025. So from an operating standpoint, the operations are normal, I would say. Roberto Olivares: I will add that -- thank you. I will add that it's not that volume is necessarily decreasing a lot. I mean, again, in the case of the U.S., was 1% this quarter is -- we do expect to continue growing in volume in the next years. Unknown Analyst: And one quick follow-up related to cost of raw materials. It should be fair to expect that particularly turkey prices stabilize towards the end of the year and that we see lower raw material prices for next year. What's your strategy, your view on pricing, if you could give us any idea on that for next year? Roberto Olivares: Sure. Thank you, Matteo. I mean, in general, we do expect, I would say, more friendly raw material environment next year. We -- let me talk about turkey. We are starting to see some indications that some recovery in the turkey production is starting to happen. There was an inflection point in July where production is starting to increase versus last year. And actually, the rate of increment or the rate of how the production has increased has been at a good rate. Having said that, there is still some uncertainty on how it's going to continue that rate in the next months, particularly because, again, we're entering the winter in this hemisphere and potentially, there could be more diseases coming along. There was a particular disease that affected a lot the Turkey this year was a pneumovirus. And they developed a vaccine for that virus that started to help. They started to vaccinate the turkeys around April and May. So we do expect that, that continues helping with the production over the next months. We are cautiously optimistic. I will say that we do expect production of Turkey to continue increasing. But again, cautious about the rate of that increase. Operator: Our next question comes from Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Roberto, Hernan can you hear me? Roberto Olivares: Yes. Fernando Olvera Espinosa de los Monteros: Perfect. My question, just a couple of follow-ups. Regarding or linked to the cost outlook, I mean, thinking that turkey prices should start easing going forward, how are you thinking about pricing mainly in Mexico towards year-end and next year, trying to see if any additional adjustments might be needed. And also thinking about volume softness overall, how are you thinking about CapEx for next year? Roberto Olivares: Thank you, Fernando. Let me just make the comment that although we have been seeing that some indication that production of turkey started to increase, prices of turkey has not reflect that. So prices of turkey continues to be at a record level, both in turkey breast and turkey thigh. And we do expect them to decrease in the following -- particularly in the following year. I will say more as the -- probably between the first and second quarter of the next year, that is our expectations. Regarding pricing, when that happened, we have been working very closely with the revenue management teams to be able to protect both margin and volume. We try to do any price increase that we do, we try to do it very -- with a lot of analysis in regards to elasticity, how the competition is moving and also how the consumer perceives that price increase. We want to maintain the preference of our consumers. So whenever there is something that we can see that we can act both on higher raw material costs and lower raw material costs, we will act upon that to be able to protect and to continue growing volume. In regards to that, your question about CapEx in general, again, particularly Mexico and the U.S. operation, for the last couple of years, we have been working at capacity or almost at full capacity. So we have been planning and investing in some projects to increase the capacity. We also have the recovery plan in Europe to recover the capacity that we lost in the Torrente flood. So we will be working also on that on next year. So at least, we still don't have our guidance number for CapEx for next year. But what I will say directionally, we'll continue to be around the same level that this year. Fernando Olvera Espinosa de los Monteros: Okay. Roberto, regarding pricing, I mean, at this point, do you feel comfortable with the price hikes implemented so far or additional hikes might be seen going forward in that sense? I mean, thinking about the turkey price that you were saying that they might start to decline until the first and second quarter of next year. Roberto Olivares: Yes. Thank you, Fernando. I will say that unless, again, the raw materials continues to increase, which we are not expecting that. We not necessarily will do something structural on prices as of right now. There might be the need to do some particular adjustments in some particular product, but not something that will be structural for the whole company. Operator: Our next question comes from Felipe Ucros of Scotiabank. Felipe Ucros Nunez: A couple of questions on my end. So one has to do with your pricing power. Can you talk a little bit about your capacity to maintain your pricing levels when costs start coming down and margins start expanding. Historically, what has been the behavior of your competitors? Are they typically disciplined? And I guess, how does that change by region? I have an impression that perhaps Mexico and the U.S. are stronger than Europe. But any color you can give us on that would be great. And then on the second question, is there any direction you can give us about which proteins are most important to you out of the ones you use? And I know this varies because there's reformulations depending on where the costs are at given times. But even if you can't give us precise numbers, perhaps you can give us a ranking or some directional idea of which ones are the most important proteins. Roberto Olivares: Thank you, Felipe. Let me first tackle the second one. So we -- regarding protein, -- and when we have this information in our website in our corporate presentation, around 40% of our protein -- of our raw material cost of -- the raw materials is pork. Then we have close to 20% is turkey, then around 10% is chicken and then around 30% will be dairy, mainly milk, but also cheese and some other dairy proteins. We -- particularly pork ham, I would say, is our largest material that we buy, both in -- particularly in Europe, but also in Mexico. And in the case of Mexico, more turkey, turkey thigh, turkey breast and in the case of the U.S., particularly chicken. Regarding your first question, I will say we -- again, as I explained to the question that Fernando did, we try to take a very disciplined approach in terms of price management. Whenever the -- we take a look of elasticity, how the competition is moving. And whenever we see an opportunity area where we can either protect margin or protect volume, we will be taking that opportunity. In general, I will say it varies by region. But in Europe, given the competition, the penetration of private label and some excess capacity that there's in the industry, we have -- it takes us more time to increase prices between the rest of the regions. Operator: There being no further questions, I would like to return the call to management. Roberto Olivares: Thank you, everyone. On a final note, we entered the fourth quarter focused on a strong close for 2025, building upon our positive sequential momentum. Looking ahead, we're preparing to capitalize on opportunities in 2026 and advance our long-term consumer-centered growth initiatives. Thank you very much for your interest in Alfa, Sigma. Please feel free to reach out to us if you have additional questions. Have a great day. We will now disconnect. Operator: This concludes today's conference call. You may disconnect.
Operator: Good afternoon, and welcome to the Boyd Gaming Third Quarter 2025 Earnings Conference Call. My name is David Strow, Vice President of Corporate Communications for Boyd Gaming. I will be the moderator for today's call, which we are hosting on Thursday, October 23, 2025. [Operator Instructions] Our speakers for today's call are Keith Smith, President and Chief Executive Officer; and Josh Hirsberg, Chief Financial Officer. Our comments today will include statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. All forward-looking statements in our comments are as of today's date, and we undertake no obligation to update or revise the forward-looking statements. Actual results may differ materially from those projected in any forward-looking statement. There are certain risks and uncertainties, including those disclosed in our filings with the SEC that may impact our results. During our call today, we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our earnings press release and our Form 8-K furnished to the SEC today, both of which are available at investors.boydgaming.com. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges and certain expenses. Today's call is being webcast live at boydgaming.com and will be available for replay in the Investor Relations section of our website shortly after the completion of this call. With that, I would now like to turn the call over to Keith Smith, Keith? Keith Smith: Thanks, David, and good afternoon, everyone. The third quarter was another quarter of growth for our company with revenues once again exceeding $1 billion, while EBITDAR was $322 million for the quarter. After adjusting for our recent FanDuel transaction, we continue to deliver revenue and EBITDAR growth on a company-wide basis, while margins were consistent with the prior year at 37% as we successfully maintained efficiencies throughout our operations. During the third quarter, play from our core customers continued its long-term growth trend, and we saw further improvements in play from our retail customers. This strength in play drove healthy gaming revenue growth across all 3 of our property operating segments and more than offset the weakness in destination business. Across the portfolio, our results reflect continued broad-based improvements in customer demand, sustained operating and marketing efficiencies and the success of our capital investments focused on enhancing our property offerings. Now turning to segment results. Our Las Vegas Locals segment posted revenues of $211 million and EBITDAR of $92 million for the quarter. Gaming revenues continued to grow during the quarter, driven by strong demand from our locals customers. We continue to benefit from ongoing growth in play from our core customers as well as improving trends in play from our retail customers. This growth in gaming revenue was offset by declines in our destination business, primarily at the Orleans. Excluding the Orleans, our Locals segment delivered year-over-year growth of 2% in both revenues and EBITDAR with gaming revenue growth in line with the broader locals market for the quarter, while margins for the third quarter were consistent with the prior year at 47%, supported by disciplined marketing and operating efficiencies. For the broader Las Vegas Locals market as a whole, gaming revenue growth was up more than 3% over the last 12 months, reflecting the resilience of the Locals market. The health of the Locals market is supported by solid wage growth throughout the Southern Nevada economy. Through August, average weekly wages were up more than 6% over the trailing 12 months, outpacing the national average. Over the last 10 years, the local population has grown at twice the national rate, reaching 2.4 million last year. And during the same time frame, per capita income in the Las Vegas Valley has grown by more than 5% on an annual basis, while total personal income in Southern Nevada has nearly doubled. An important driver of this growth has been the increasing diversification of the local economy. While hospitality has continued to grow over the past decade and currently represents approximately 25% of the local job market, job gains have been more substantial in other sectors. These include education, health services, transportation, warehousing and professional and business services sectors. Construction jobs have also remained a steady performer, growing more than 5% since 2019. With more than $10 billion in projects currently underway across the Las Vegas Valley, construction employment should remain healthy well into the future. And as we head into next year's tax season, we believe that our customers around the country will benefit from the tax bill passed by Congress this summer, including new deductions for tips and overtime and an additional deduction for seniors as well as a larger standard deduction for all taxpayers. In all, the Southern Nevada economy remains resilient and is more diversified than ever, positioning our Las Vegas Locals business for continued success. Next, in our Downtown Las Vegas segment, revenues and EBITDA were in line with the prior year, supported by continued strength in play from our Hawaiian customers. Much like our local segment, growth in gaming revenues were offset by softness in destination business, including lower hotel revenues and reduced pedestrian traffic along the Fremont Street experience. Next, our Midwest and South segment achieved its strongest third quarter revenue and EBITDAR performance in 3 years. For the quarter, revenues rose 3% to $539 million, while EBITDAR grew to $202 million, more than 2% over the prior year. Operating margins once again exceeded 37% as we remain disciplined in our cost structure and marketing spend. Growth in the segment was broad-based, including continued gains at Treasure Chest more than a year after the opening of our new land-based facility there. Similar to our Nevada segments, gaming revenues increased year-over-year in the Midwest and South, driven by continued growth in play from our core customers and further improvements in play from our retail customers. Next, results in our Online segment reflected growth from Boyd Interactive as well as changes related to our recent FanDuel transaction. Given current trends, we are increasing our guidance for this segment to $60 million in EBITDAR for this year. For 2026, we expect approximately $30 million in EBITDAR from this segment. Finally, our managed business had another strong performance with continued growth in management fees from Sky River Casino. Demand has remained strong over the 3 years since Sky River opened, giving us in the Wilton Rancheria Tribe great confidence in the growth potential of the property's ongoing expansion. The first phase of this expansion will add 400 slot machines and a 1,600 space parking garage upon completion in the first quarter of next year. Once this first phase is complete, we will begin a second phase that will further enhance Sky River's appeal by adding 300-room hotel, 3 new food and beverage outlets, a full-service resort spa and an entertainment and event center. On its completion in mid-2027, we are confident this expansion will further strengthen Sky River's position as one of Northern California's leading gaming and entertainment destinations. So in all, the third quarter was another quarter of growth for our company. Across the country, we continue to see strengthening play from our core customers and improvements in play from our retail customers against the backdrop of consistent and efficient property operations. And while the fourth quarter has just started, it is worth noting that the customer trends we saw in the third quarter have continued into October, including improving play from both core and retail customers. Our strong operating performance is supported by the investments we are making throughout our portfolio as we enhance our casino floors, food and beverage outlets and hotel rooms. Hotel room renovations will be completed early next year at the IP and work is set to begin next month on our room renovation project at the Orleans. We are also continuing our modernization project at Suncoast with the complete transformation of our casino floor as well as enhanced meeting and public spaces. While we are dealing with ongoing construction, we are encouraged that Suncoast performance is in line with the prior year, further increasing our confidence in the long-term growth potential of this investment. Following completion of our Suncoast renovations around the middle of next year, we plan to begin a similar project at the Orleans as we look to further enhance our offerings at this important property. In addition to these property enhancements, we are continuing to work on our growth capital projects with an annual budget of $100 million per year. In September, we completed our expanded meeting and convention center in Ameristar St. Charles. By nearly tripling the size of its meeting space, Ameristar can now accommodate more and larger events. This will create incremental visitation from new customers as well as groups who had previously outgrown our space. We are already seeing great interest with strong bookings in the fourth quarter and into the next several years. In Southern Nevada, construction is progressing on Cadence Crossing, our newest Las Vegas Locals property, scheduled to open in the second quarter of 2026. Cadence Crossing will replace our existing Joker's Wild casino with a modern and appealing gaming and entertainment facility. This investment will allow us to better serve the adjacent community of Cadence, one of the fastest-growing master planned communities in the nation. And we are well positioned to keep pace with continued residential growth in the area with future plans for hotel, additional casino space and more non-gaming amenities. Next, in Illinois, we are continuing the design and planning work for our new gaming facility at Paradise and expect to start construction in late 2026, pending regulatory approval. Finally, development is well underway on our most significant growth opportunity, our $750 million resort development in Norfolk, Virginia. Pending regulatory approval, we are just a few weeks away from opening our transitional casino at the site. And while we look forward to reaching this key milestone, our focus remains on the development of our permanent resort scheduled to open in November of 2027. This market-leading resort experience will feature a 65,000 square foot casino, 200-room hotel, 8 food and beverage outlets, live entertainment and an outdoor amenity deck. In addition to offering the highest quality gaming experience in the market, we will have the most convenient location for much of the 1.8 million residents of the Hampton Roads region as well as the 15 million tourists who visit nearby Virginia Beach each year. In all, our capital investments are delivering strong returns for our company, enhancing our competitiveness and supporting our long-term growth. At the same time, our substantial free cash flow and strong balance sheet allow us to continue returning capital to our shareholders. During the third quarter, we repurchased $160 million in stock and paid $15 million in dividends. So far this year, we have returned a total of $637 million to our shareholders. Share repurchases and dividends are important components of our balanced approach to capital allocation, and we intend to maintain a pace of $150 million per quarter in share repurchases, supplemented by our recurring dividend. In closing, we are pleased to deliver another quarter of strong performance as we continue to execute on our strategy and create long-term value for our shareholders. During the quarter, we continued to benefit from strong growth in plate from our core customers as well as improving plate from retail. Our capital investment program is delivering excellent returns and positioning us well for future growth. Our teams across the country are successfully maintaining efficiencies and delivering consistent property operating results, and we continue to return substantial capital to our shareholders while maintaining the strongest balance sheet in our company's history. Our success is a reflection of the dedication and contributions of thousands of Boyd Gaming team members across the country, and we are grateful for all that they do for our company and our guests. Thank you for your time today. I would now like to turn the call over to Josh. Josh Hirsberg: Thanks, Keith, and good afternoon, everyone. During the third quarter, play from our core customers continued its long-term growth trend, while retail customers play also continued to improve. Management teams did their part remaining focused on operating efficiently and generating returns from our capital investments. As a result, excluding the effects of our recent FanDuel transaction, we continue to deliver growth in revenue and EBITDAR despite weakness in our destination business. We are continuing our capital investment program to enhance our guest experience while expanding our opportunities for growth. During the third quarter, we invested $146 million in capital, bringing year-to-date capital expenditures to $440 million. We now expect total capital expenditures for this year to be approximately $600 million. Our capital plans include approximately $250 million in recurring maintenance capital, an additional $100 million in maintenance capital related to hotel room renovation projects. A $100 million in growth capital, which includes the recently completed meeting and convention space at Ameristar St. Charles and the ongoing Cadence Crossing development here in Las Vegas. And then finally, $150 million or so for our casino development in Virginia. Our growth capital projects remain on budget and on schedule. In terms of our shareholder capital return program, we paid a quarterly dividend of $0.18 per share during the quarter, totaling $15 million. Also during the quarter, as Keith mentioned, we repurchased $160 million in stock, acquiring 1.9 million shares at an average price of $84.05 per share. Actual shares outstanding at the end of the quarter were 78.6 million shares, an 11% reduction in our share count since the third quarter of last year. Since we began our capital return program in October 2021, we have returned more than $2.5 billion in the form of share repurchases and dividends while reducing our share count by 30%. Going forward, we intend to maintain repurchases of approximately $150 million per quarter, supplemented by our regular quarterly dividend. This equates to more than $650 million per year or more than $8 per share. With strong free cash flow, low leverage and ample liquidity, we are maintaining the strongest balance sheet in our company's history while continuing to invest in our business and return capital to shareholders. As you may recall, during the quarter, we closed on our transaction to sell our 5% stake in FanDuel. We initially used proceeds from that transaction to repay our Term Loan A balance and borrowings outstanding under our revolver. As a result, our total leverage ratio declined from 2.8x at the end of the second quarter to 1.5x at the end of the third quarter. Our lease adjusted leverage declined from 3.2x to 2.0x. Finally, beginning with this quarter's financial results, we have provided the tax pass-through amounts as a separate line item on our GAAP income statement. Excluding the tax pass-through amount for this quarter, company-wide margins for the third quarter this year would have been 510 basis points above the margin we reported. In conclusion, with strong play from our core customer and improving trends among our retail customers, efficient operations, robust free cash flow and a strong balance sheet, we have outstanding flexibility to continue executing our strategy for creating long-term value for our shareholders. With that, I'd like to turn the call to David to open the call for questions. David? Operator: Thank you, Josh. [Operator Instructions] Our first question comes from Barry Jonas of Truist. Barry Jonas: I wanted to start on Vegas. Can you talk about what you see as the main drivers of the weakness you're seeing in the destination business? And just help us feel comfort that you think the non-destination business won't see any of that related weakness. Keith Smith: So maybe starting with the second half of your question. I think as we noted, we've seen strong play from our core customers. And as we look at the database here and the source of our revenue here in Las Vegas, our locals customers are performing extremely well, and our core customers are growing extremely well. The shortfall really was all about the destination business has been kind of widely reported and talked about. How long that continues? We'll all have to see. We have seen, as we look at our kind of forward 90-day bookings in our hotels here in Las Vegas, we've seen improvement, still soft, but certainly better results than we saw 3 months ago. So we turned the corner, hard to say, but the 90-day booking results certainly look better than they did 3 months ago. Josh Hirsberg: And Barry, one thing I would add to Keith's remarks is when we -- pretty much the impact of the destination business, as we said in our remarks, are focused on the Orleans. So when you separate the Orleans from the rest of the business, you see a couple of things going on. You see growth in gaming revenues throughout the remainder of the portfolio. You see growth in overall revenues. You see growth in EBITDA. You see consistency in margins. So I think we see -- and the gaming revenue kind of is growing in line with the overall market. So I think we feel pretty good about the underlying customer trends overall. It's just one aspect of the business that we're trying to deal with. And in fact, when you look at the segment's performance, you could really attribute the EBITDA decline in Q3, all to the Orleans because it was down even more than what we're seeing in the segment for the quarter. Barry Jonas: Got it. That's really helpful. And then just as a follow-up, we're starting to see some M&A deals come about. Curious if you could share your thoughts on the M&A pipeline, the environment, either in terms of buying whole assets or opcos? Keith Smith: Look, we obviously have a fairly successful track record of M&A based on a disciplined strategy of making sure it's the right asset in the right market at the right price. And so we continue to look at it. We certainly note that a few things have traded recently. I don't know that we're necessarily seeing more pitch books across our desk, but we certainly pay attention and monitor opportunities. And for the right opportunity, we're certainly prepared to dig in. But other than that, I'm not sure we have a whole lot to comment on. Operator: Our next question comes from Steven Wieczynski of Stifel. Steven Wieczynski: So Keith or Josh, if we think about the Midwest and South properties, I mean, those results were really solid, came in much better than we were expecting. So if you think about that portfolio, wondering if the trends you witnessed there were pretty much broad-based or there were markets or pockets of strength versus other markets? I guess just trying to figure out if certain markets are kind of outperforming other markets. And obviously, you guys called out Treasure Chest, I guess, excluding Treasure Chest. Keith Smith: I think when we look across that portfolio that comprises some 17 properties, it was generally broad-based. Look, there's always 1 or 2 that don't perform maybe quite as strong in any given quarter, but it generally was broad-based strong results. We called out Treasure Chest because it's interesting to us and very positive that it continues to grow even after anniversarying its opening. So Josh, I don't know if you have anything to add? Josh Hirsberg: Not really, Keith. I think that covers it. Steven Wieczynski: Okay. And then, Keith or Josh, a little bit of a bigger picture question. But wondering if you kind of take a step back and look at your Vegas Locals assets, how do you think they're positioned today from a CapEx perspective? I mean -- what I mean is, do you think the majority of your assets in that market are in a pretty good spot relative to your peers in that region? And -- or is it something where you guys might have to spend a little bit more across your portfolio over the next couple of years to keep up with some of that newer supply? I heard your comment about Orleans and Suncoast there. Keith Smith: Right. So look, we've been talking about the renovation work we're doing at the Suncoast over the last year or so. And so that has been, I think, a very positive investment for us as we're not even fully through it yet, and we're seeing performance that's in line with the prior year. So that gives us confidence that this will be a successful investment. Look, the Orleans needs a little bit of an updating also. It's an important asset for us. Look, other than that, I think our portfolio of properties here in Las Vegas are well positioned. We're looking at a number of restaurant projects just as part of our overall capital plan to make sure the properties remain competitive. It's not significant capital, but it's an important capital to be competitive. So you look at our slot floors, and I would put them on par with anybody's in the market and probably better than most. And so I think we feel pretty good with the exception of once again, needing to make, I think, an important investment in the Orleans to make sure it's competitive for the long-term. Operator: Our next question comes from David Katz of Jefferies. David Katz: So I just wanted to get your updated thoughts on the investments that you're making internally in the portfolio and how you're thinking about returns, the timing to those returns or hurdle rates? And just -- it will help us think about forecasting out into the future. But what's the return process? And how should we think about the earnings potential on it? Josh Hirsberg: Yes. Dave, it's Josh. I'll take it and then Keith jump in and add anything. Generally, I think kind of for good rule of thumb and modeling purposes, we generally think of kind of a 15% to 20% kind of cash-on-cash type of return. And so we certainly achieved that with Treasure Chest. I think we're seeing the early signs of achievement with that with the meeting space at Ameristar St. Charles. The next one up will be Cadence, which is like a $60 million investment. So that will be in that, we fully expect that property once it comes online to generate incremental EBITDA above what we're getting today from the current Jokers Wild facility that would generate that return. And then after that, I think we're more dependent on regulatory approval for Paradise, but we're excited about that opportunity. So good rule of thumb is that 15% to 20%. We've been fortunate enough to kind of meet or exceed that on the projects that we've announced to date. We have as we've tried to condition the market to think about kind of a pipeline of these projects and we continue to kind of better choose the one that have the highest return potential throughout. A lot of the stuff around Suncoast, most of the hotel renovations even the Orleans will be in our maintenance capital budgets. But as Keith mentioned, the early signs that Suncoast or -- we're seeing new customers in the building. We're seeing people visit more frequently. And so we're encouraged by those type of investments even though they kind of qualify in our book as maintenance capital. So I hope that kind of gives you some color. David Katz: It does. And if I can just follow up and clarify, when we're thinking about the Orleans because it's in the maintenance budget, we aren't necessarily sort of holding it to the same standard or thinking about its earnings power longer term in the same way with that 15% or 20%, right? Josh Hirsberg: Yes, I think that's right, because it gets to be a blend of maintenance and capital and growth, and it's just hard to kind of distinguish between kind of what that project? Is it more maintenance or is it more growth. So I think that's why we put it in maintenance really. Operator: Our next question comes from Brandt Montour of Barclays. Brandt Montour: So first question is just a clarification about the Orleans project for next year, which you mentioned. Is that -- I mean, I imagine your hotel rooms, you mentioned a few things. Is that something we should consider some -- potentially some disruption impact? I know that it's got easy comps here, and there's a couple of different things going on in the market that's affecting that property. So how do you think about that property into next year? Josh Hirsberg: So I think it's a little early to try to figure out kind of disruption. I don't -- I think our view would be that at the beginning of a project like that, if we're even able to get it started in the second half of next year, it'd be more limited in terms of the disruption. Once we understand the actual program scope and the timing, we can provide better color on that. We've been -- our management teams at Suncoast have done a very good job to manage through the disruption to date at that property, and it's been significant and that construction activity continues. So we're learning how to manage that -- those processes. Each one will be unique and different. But to date, we've been pretty good at managing through it at the Suncoast. No doubt, it is affecting our performance in some way. But the fact that it is, like Keith said, in line with prior year at this point, that's pretty encouraging. So I think at this point, we wouldn't be calling out expectations for disruption related to Orleans and until we have better clarity on timing and the full scope of the project. Keith, I don't know if you want to add to that. Keith Smith: No, I think just tagging on to what Josh said, as you're thinking about 2026 and thinking about the Orleans, I wouldn't anticipate anything significant as we begin to have more clarity on the timing of all of that and what's going to take place first and second. And when we end up getting to "the middle of the casino," which, yes, we will have some disruption as we get into those types of things, yes, we'll be able to update you. At this point, as you're modeling out 2026, I wouldn't anticipate anything. Brandt Montour: Great. That's helpful. Just a quick second question about Midwest and South. How would you describe the promotional environment across your markets? Any sort of changes quarter-over-quarter? Or has it been pretty consistent from competitors? Keith Smith: In several markets, there have been competitors who've been stepping on the gas, so to speak, with respect to marketing spend and being more aggressive. We have generally remained very disciplined. It is reflective in our margins that remain consistent year-to-year. And while we may be up just a tick just a little bit overall, once again, it is highly efficient, highly productive dollars reflected and we're able to grow revenue, we're able to grow EBITDA and we're able to maintain margins. So we are seeing some enhanced marketing by our competitors, but we're not responding. Frankly, some of the enhanced marketing we're doing is in relation to declines in destination business, not in relation to what our competitors are doing. Operator: Our next question comes from Ben Chaiken of Mizuho. Benjamin Chaiken: On the Suncoast renovation, you mentioned in line with the prior year a few times, but I would think that there was still some disruption. So to the extent there was, could you quantify that impact in 3Q and then maybe how you're thinking about 4Q even just anecdotally? Keith Smith: Yes, I'd love to, but it's really difficult to quantify the disruption. Look, when we say it was in line with prior year revenue and EBITDA perspective, I think that says it all. There's clearly disruption. We have fewer slots on the floor today than we did a year ago because we're in the middle of the casino. There are a lot of walls up. There's ceiling work being done. So it is disruptive, and it will continue to be disruptive. If you were to walk in the building today, we have a temporary front desk because we're doing work around the front desk area. But to date and through Q3, and we'd expect it to be through Q4, things are in line with the prior year. Our customers are hanging in there with us. The management team is doing a great job of taking care of our guests. The guests have had very, very strong positive reactions to what we've unveiled thus far. And so everything is working, but hard to quantify. Benjamin Chaiken: Okay. Understood. And then you've got a large expansion at Sky River, I believe, that opens early next year, 1Q, I believe. Understanding you earn management fees here, is there anything we need to watch out for in Q4 in terms of construction, just ahead of that opening? Keith Smith: From a construction standpoint, everything is on the outside of the building. And so there really isn't any impact to -- on the negative side to the ongoing construction or "the opening whenever that happens sometime early next year," it's parking garage, along with some added casino space that will house the added slots. The second phase that I described, which includes hotel towers, more restaurants, also is on the outside of the building. And so there will be no immediate impact or construction disruption from that. Operator: Our next question comes from Steve Pizzella of Deutsche Bank. Steven Pizzella: Just curious, as we think about early next year, can you share any expectations you might have for a benefit from the tax bill? Josh Hirsberg: Yes, Steve, I mean it's a question we get asked quite a bit. I don't -- we've not really found a way that we're comfortable to kind of estimate the overall benefit from that. We -- there's several elements to it from -- and I think Keith mentioned in his remarks, ranging from tax on tips to certain higher standard deductions and credit for seniors. I think ultimately, we come away thinking it's just incremental benefit to us overall, but we have not quantified it in terms of revenue and EBITDA. Operator: Our next question comes from John DeCree of CBRE. John DeCree: Josh or Keith, I wanted to ask if you could provide a little color on kind of how the quarter played out and maybe the Cadence month-to-month. We kind of use the state GGR data to help us, but July and August looks pretty strong. September, maybe a little bit more mixed. So any color you could give us on kind of how the quarter played out, particularly in the Midwest and South regions. Keith Smith: I think as we look across our portfolio, it was fairly steady. You have to take into account like in September where the holiday fell different, and therefore, we got a little bit bigger benefit technically in August than we did in September. But that's over the course of a 10-day period, it flips in 1 month versus the other. But when we look at kind of core trends in the business week-to-week, not a lot of fluctuation. So I don't know that I have anything else to add other than that. John DeCree: That's great, Keith. And then maybe I know this one is difficult to kind of track given the limited data, but curious if you could give us a little bit more color, again, in the Midwest and South, specifically on the retail play, some of the better trends you're seeing there. Is that kind of year-over-year growth in kind of spend, more customers come in the door? And if you have any guesses, a number of theories, but kind of what might be driving that uptick in retail play? Keith Smith: So it's a trend that actually has been going on for a couple of quarters now. We've actually been talking about it, and it continued in through the third quarter with the improvements kind of increasing, so to speak. I think we're seeing generally on the rated side, increases in frequency and increases in spend. So both ADT or spend are going up and frequency is increasing, which are positive trends. Josh, I don't know if there's anything else to add. Josh Hirsberg: Yes. I would just add, just to clarify for everyone, retail is 2 buckets. It's the lower end of the rated. That's what Keith was just talking about in terms of spend and frequency. And then there's the unrated component as well. So we can kind of understand what's going on with the lower end of the rated piece. What's interesting as a group is the unrated business has also been improving sequentially over time as well and actually been a big driver of the retail component. So both the low end of the retail rated piece that we know about and the unrated segment have both been kind of in lockstep improving year-over-year as we've moved through this year. So -- and it's been a consistent trend. It's been very interesting to watch. Operator: Our next question comes from Dan Politzer of JPMorgan. Daniel Politzer: I was wondering maybe we can walk through the fourth quarter. It seems like there's a few moving pieces there. So maybe just to get some clarity. I think Tunica is closing in November in Norfolk. I think there's a temporary casino that opens also in November. And then I don't know if you gave -- I don't think you gave an update for Managed & Other, but then also that would help. And then any impact from the cybersecurity incident in the quarter? Keith Smith: I think as you think about Tunica, you should expect obviously a fairly negligible impact. I wouldn't adjust your models for anything related to that or for Norfolk for that matter. We've talked in previous calls about this is a very small, modest temporary facility, and our focus really is on the permanent. And so you assume that this will be a breakeven as you think about the fourth quarter or even next year. As you think about the cyber event, once again, not much we can say other than what was in the 8-K, which is it did not have any impact to our business operation and we've got cyber insurance to backstop us. There was a third question in there, I lost -- fourth I lost track of... Daniel Politzer: Managed & Other? Josh Hirsberg: Yes. I'll let you answer that. So Managed & Other, I think the key for Managed & Other, it's going to be a pretty stable business in Q4 relative to when you think about the trends of this year just because the business is operating at or very near capacity. And then once it gets the incremental slots early next year, that's in the quarters following that, I think, is where we'll start to see the benefit of that and then eventually from the expansion of the hotel and meeting space in mid -- probably mid 2027. So I think for Managed & Other for Q4 will be very similar to what you've seen in the quarters of other -- earlier quarters of this year. Daniel Politzer: Got it. And then just for my follow-up, I don't think you paid the taxes in the quarter on the FanDuel stake sale. When can we expect that? And then along with -- on the tax front, the one big bill, is there any impact or offset you could get from that, that may be applied here? Josh Hirsberg: Not much of an offset. More than likely, the payment will occur sometime in the first quarter of next year. Operator: Our next question comes from Stephen Grambling of Morgan Stanley. Stephen Grambling: I was hoping you could dig into the balance sheet a little bit. Just how are you thinking about the optimal leverage of the business, particularly if M&A opportunities maybe don't come to fruition, could we see that leverage tick back up? Or what would you be looking to do in terms of optimizing the balance sheet longer term? Josh Hirsberg: Steve. So before the FanDuel transaction, our leverage was about 2.8x as -- and our leverage target was around 2.5x long-term. Post -- as a result of the FanDuel transaction, which happened in late July, early August, our leverage is, as I stated in my remarks, around 1.5x. I think based on just the capital plans that we have now, primarily related to Virginia coming -- the capital related to the permanent of Virginia, our leverage will tick up over time. It will go back up to around probably in the next 1.5 years or so to around 2.5x. I think it's odd to talk about your optimal leverage being at least for us, it's odd for optimal leverage to be above where a target above where we are. But I think that it doesn't -- it's not something we strive to achieve given where we are today. To the extent that we have opportunities I guess the way I would say, in other words, we're not trying to hit the target just because we're a 1.5x, and we want to be at our target leverage. It could be that our leverage remains at 1.5x over time. We don't think that's probably the right leverage, but we don't have anything that warrants increasing our leverage at this point. And so we'll continue to think through this and continue to be kind of prudent on how we think about it. But it's kind of like we were in a good place and doing everything we were doing at 2.5x, happened to get a big windfall, we're 1.5x, and that doesn't really change the way we think about anything that we were doing before. If opportunities come along, if we decide to buy back more shares or return more capital, then that will be just part of our thought process that we develop over time. But until then, we'll be running the business between 1.5x to 2x and will gradually tick up as a result of our capital plans and the plans we have in place today. Keith, I don't know if there's anything you want to add to that? Keith Smith: No, look, I think what Josh was alluding to is, first, it's only been -- it's less than 90 days since we received the payment and leverage has been pushed down to 1.5. And we want to take a long-term view, be thoughtful about what to do with the current leverage, how best to position the company, could be M&A, could be other things, could tick back up. And so we don't have an answer for you right now other than we understand it, and we're having thoughtful discussions about where that should be. I'm sure we'll have more to talk to you about in future quarters, but nothing really to say right now. Stephen Grambling: That all makes sense. If I could sneak one unrelated follow-up in. As we look at the Locals market, and you talked about the 6% wage growth there. It seems like it's about as wide as I've seen it relative to the GGR growth for that market in aggregate. Do you think that there's a lead lag here? Or is there anything else that you would point out that's maybe creating that wider gap versus history? Josh Hirsberg: Yes. So Steve, I think that like -- I mean, it's a good observation, but I think you perhaps at least in our business, the impact of the destination business is shown and visible on the income statement when you look at hotel revenues year-over-year. You can look at that, see they were down about $5 million. But that destination business is a significant amount of hotel room nights. While it's primarily at the Orleans, it affected really every property in Las Vegas and outside of Las Vegas to some degree. And there is F&B. There's banquet business, is highly profitable to us, and there's a significant amount of gaming revenue associated with that business. So it's very profitable business to us. And while it's very difficult to estimate the impact, I think the reality is that, that's probably what's creating that gap. There's wage growth that we're seeing show up in our business in terms of a stronger local customer, but if you had backed up and said, okay, we had that wage growth and destination business, you would see probably a healthy gaming revenue growth that would mirror maybe what your expectations were. So that's how I think about it at least. Operator: Our next question comes from David Hargreaves of Barclays. David Hargreaves: So in terms of Hawaii, I think you said revenue was steady. I'm wondering about headcount and volumes. How are things there? Keith Smith: Specifically coming out of Hawaii? David Hargreaves: Yes, with Downtown. Keith Smith: Look, Downtown volumes on the street are down, and that's frankly driven by visitation to Las Vegas because there's a strong, strong correlation between visitor volumes Downtown and visitor volumes to Las Vegas. And so visitation on the street is down, which is what kind of impacted, we call it destination business in the downtown area for us. Kind of our core market, which is the Hawaiian market, performed normally. And -- but we felt softness in the destination business. We felt softness from lack of tourism on the street. David Hargreaves: And then with respect to the Tunica closure, I'm just wondering if there's just leaving the building and leaving town something that maybe happens with the gaming equipment. Did you try to sell that property? Curious as to what happened there? Keith Smith: I think the way to think about the closure of Tunica, first of all, when we're all done with this, the site will be scraped clean. We'll take everything down. We've already found homes for the equipment and all the recoverable assets, so to speak, in the building. The property had gotten to a point where EBITDA was fairly small and the level of maintenance capital required to maintain it at our standards was growing. And frankly, there was not going to be a good return on that capital investment to maintain that building or standards because we do have standards as to how we want our buildings to look and feel and what we want our guests to experience. And so we're just looking at the data, looking at the maintenance capital that's going to be required and the current level of EBITDA and where the market is, it just made sense to close the building down. Not a decision we came to lightly, but it's a decision we came to. And once again, we will be able to reuse a lot of the gear and a lot of the equipment, sell off some stuff that we don't have use for. Everything will be scraped clean. It will be turned back into just raw land, and we'll attempt to dispose of the land. David Hargreaves: Last one. I really applaud your conservatism with the balance sheet. If we look at your properties that are leased, are you happy with the EBITDA coverage of interest and rent at this point as you are with your leverage? How do you feel about the rent coverage picture? Josh Hirsberg: Yes. I think we're happy with it and our landlord is happy with it, quite honestly. They don't have a corporate guarantee, but they really don't need one given the coverage there. So everything is a happy partnership there. Operator: Our last question comes from Chad Beynon of Macquarie. Chad Beynon: First one on the opening or start of Missouri sports betting. I know you have a partnership with Fanatics. I believe it might be the first with them. And I know that includes some of their branded retail sports books at your properties. So could you maybe talk about anything you're willing to disclose in terms of the relationship and then maybe future opportunities with this company given their ascension on market share that we've been able to track? Keith Smith: Yes. So you're right. We have 2 properties in Missouri, Ameristar Kansas City, Ameristar St. Charles. And both of them received licenses as did Fanatics yesterday when the Missouri Gaming Commission issued licenses. So people could be prepared to open the 1st of December. It is our first relationship with Fanatics. And whether or not that expands, always hard to tell. It's a strong relationship thus far. We know some of the folks in that organization. So we have a good relationship there. And we'll see, once again, how it develops and what other opportunities exist to take that relationship further. Nothing really to report other than that at this point. Chad Beynon: Okay. Great. And then in terms of some of the near-term, I guess, an inflection in Vegas in the destination market, we met with a lot of the companies on the strip in the past couple of weeks and some pointed to November, others obviously talked about F1 maybe being more of a good guy this year and then the strength into Q1. Should all of that help you as well? And in terms of internal bookings, are you viewing maybe November as kind of an inflection point where you're starting to see good year-over-year growth? I guess that would be more Downtown, maybe excluding Orleans with some of the things that you've talked about? Keith Smith: Yes. So once again, I noted earlier that as we look at our kind of 90-day booking pattern, today, sitting here today or a week or so ago, it is much more positive than it was 3 months ago. And it's still soft, but it is significantly better than it was 3 months ago. And so that makes us feel good about kind of the next several months given those numbers, and that's true for Downtown as well as it is for our Locals properties with hotels. So we'll see how it all comes together. As the strip continues to do better, as occupancy and rate on the strip continue to rebound, clearly, that will benefit us. It's just an indication that people are traveling again and coming back out. So that will help us. But overall, our own bookings are once again better over the next 90 days than they were a couple of months ago. Operator: This concludes our question-and-answer session. I'd now like to turn the call over to Josh for concluding remarks. Josh Hirsberg: Thanks, David, and thanks to everyone for joining the call and the questions we received today. If you have any follow-ups, please feel free to reach out to the company. This concludes our call and you can now disconnect. Have a good day.
Operator: Welcome to the Enea Q3 Presentation 2025. [Operator Instructions] Now I will hand the conference over to the CEO, Teemu Salmi; and CFO, Ulf Stigberg. Please go ahead. Teemu Salmi: Thank you so much, and good morning, everyone. This is Teemu Salmi speaking, CEO of Enea. And with me in the room, I have Ulf Stigberg, CFO as well. Today's agenda is going to be very similar to the way we have presented the previous quarter since I joined Enea after Q1 this year. A short introduction and summary of the quarter. We will do a more deep dive into our financial results. And then we will talk about the way forward and our outlook as well at the end of the presentation. And obviously, there will be time for questions and answers as well at the end of the presentation. But let's get straight into it and talk about the key numbers of third quarter, where we are reporting a net sales of SEK 213 million, which in reported currency is a decrease with 1.8% from last year, but in constant currency is a growth of 3% year-over-year. Our margin is coming in at 33%. Our net debt is at SEK 212 million and our cash flow coming in a little bit increased year-over-year at SEK 21 million. What I would say that we have spent quite a lot of time on the last 2 quarters is to clean up our balance sheet to ensure that the items that are impacting the financial net in our result is being handled. So the exposure from those have been taken down, and we can also see a clear improvement on our earnings per share with SEK 1.77 as a result in the quarter compared to SEK 0.18 in quarter 3 last year. We're going to come back to these key numbers in depth when Ulf takes you through the financial summary as well. Obviously, last but not least, we continue to invest in R&D, which is the key fundament for making sure that Enea stays relevant and ahead of the curve and competitive on the market. So 25% of our turnover is invested back into R&D. Some highlights from the market and business development in the quarter. I think that we see the continued trend that we reported in the second quarter as well that the geopolitical developments are fueling the need of increased Security Solutions in communication, and that has not -- it has accelerated, I would say, in the quarter, and I'm going to come back shortly to tell you about a couple of incidents in the quarter that actually are also fueling the need for the Enea solutions. We also see a good continued momentum for our traffic management business. The need for increased network intelligence is there and it's accelerating as well. So that's good. So fundamentally, we see traffic management business continue to grow. And then in the short term, at least in this year, year-to-date, the continued strengthening of the Swedish krona with more than 16% stronger currency or exchange rate today compared to the beginning of the year is creating pressure on us when it comes to our top line. So I'm actually very pleased to say that we show 3% growth in constant currencies in the quarter, even though this strengthening of the currency is impacting our reported top line result. On the business side, we have a good underlying business, and we have also a good and solid pipeline, which gives us confidence that we are well positioned to reach our ambitions. We see also from a market point of view that the business in Middle East and North America is developing well from a regional perspective. And those are also the regions where we made 2 press releases of new deals during the quarter for 2 different Tier 1 operators, respectively, and also for traffic management solutions. On top of that, we also see our Deep Packet Inspection developing well in the Security core area according to plan or maybe even a little bit ahead of the same. When we look at the new customers that we have acquired in the quarter, we have 5 in total, and they are all in the Security area. We have 3 new customers when it comes to our firewall solutions, and we have 2 new customers when it comes to Deep Packet Inspection, and they are spread across the world, as you can see on this slide. Then if we continue to look at, as I said on the previous slide, of course, the geopolitical development is just continuing to accelerate, not always in the most positive side. But on the other hand, it's good for Enea and our solutions become even more relevant than they have been before. I'm highlighting here 3 examples of incidents or happenings in Q3 that we see -- where we see an increased trend. For instance, when it comes to massive SIM farms, there are more and more of those out in the world that are being revealed. And of course, these pose a big threat to national infrastructure from many different perspectives and is used for fraudulent activities. Here, our firewalls can counter such threats by detecting and blocking fraudulent traffic in real time. Another thing that we see developing as well is that there's a lot of leaked location data that's been exposed and where users' movements into sensitive areas and private movements can be tracked. And then these movements are tracked by different apps that we all of us download from App Store or from Google Store and where we just accept the terms and conditions. And our location data is being saved when it comes to how we move and how we act. And that data is then in turn being sold to different actors in the world. The third, I would say, trend that we see and that we hear more and more about escalating is, of course, the increased drone traffic and threats in general. I think that we've seen in the quarter, we know the warfare that's happening all around the world. And of course, on that also the hybrid warfare with -- in the Nordic countries, many drones being, so to say, disturbing traffic around major airports in major cities in the Nordics and in Europe. And here, we -- at Enea, we are right now developing fingerprints so we can actually help our customers track drone traffic in mobile networks to make sure that we can help secure those threats in the world that we see emerging. Two other press releases that we've done in the quarter that is not related to new deals. We have renewed our partnership with Suricata. Suricata is an open source, rule-based framework where we contribute with our expertise from Enea, but we also use the Suricata framework for the development of our own solutions and products. We believe strategically and strongly that open source is a good way of developing and contributing to our product development for the future. We have also announced a new customer win with a French AI-based network detect and response supplier, called Custocy. Custocy is using our Deep Packet Inspection engine in their solution. And they have also announced a win with the French region, Haute-Garonne. It's a major department council in France, and they have chosen Custocy's MDR technology to secure their asset base that consists of more than 25,000 different assets and 1,500 subnets in their operations. We are very happy and proud to be part of that journey from an Enea point of view. Last but not least, before I hand over to Ulf and we dive deeper into financials, we continue to be very active on the market, sharing our thought leadership. This slide shares you 4 examples, and I will only comment one of them. I think that we focus very much on together with GSMA to impact and help the development of both existing and future standards when it comes to mobile communication. And we are very proud to be part of that and to help that and of course, also making sure that the products that we develop for the future also support the new standards that are being brought out into the market. We want to stay at the edge. We want to be relevant, and we want to make sure that our thought leadership is seen in different parts of the ecosystem out in the world. With that introduction, I would like to hand over to Ulf, who will take us through the more details of our financials. Please, Ulf. Ulf Stigberg: Thank you, Teemu. 3% growth in fixed currency for the quarter, and we report a 2% decline in reported net sales for quarter 3. Over 9 months, we also reported 3% growth in fixed currency, and we are in line with the 9 months net sales previous year. We reported 33% adjusted margin for the quarter. And for the 9 months result, we report a 30% adjusted EBITDA margin. And this is partly thanks to, of course, the net sales development, but also that our operational expenses are declining compared to previous year. And if we exclude D&A, we are in line with the cost base that we had previous year in quarter 3. We report a 16% EBIT margin for the quarter. Compared to last year, the reported EBIT margin was 13%. So it's a slight increase. But the major difference compared to last year is the development of the earnings per share, which is reported now in Q3, SEK 1.77 compared to SEK 0.18. If we look into our product area, Security Solutions, we report similar revenues in the different revenue categories. We have licenses almost at the same level. We have professional service almost at the same level and support and maintenance almost at the same level as previous year. For Network Solutions, we can see an increase compared to Q3 previous year and a sequential decrease actually in support and maintenance. But giving the increased number of new deals and solid recurring revenue, we foresee a good development of license sales going forward as well. If you look into the different product areas, we can see a growth of 9% within the Network area compared to Q3 previous year. And we are having a slight growth in the Security area, all in fixed currency, and we have a currency impact for the quarter of SEK 10 million. Looking at the 9 months report, we see a slight decline for Security and a 7% growth in Networks, all in fixed currencies. And if we sum up the core, putting Security and Network together, we report a growth of 3% in fixed currency for the 9 months period. Over to cash flow. We have an operational cash flow that's in line with Q3 previous year or a slight increase. We also can see that the investments and the buybacks are also in line. However, we have done some amortizations higher than previous year, and we are utilizing some of our credit facilities. That gives us a net cash flow that's better than last year, but mainly driven by financial items. We reported net debt of SEK 211.9 million, equity ratio of 71.1% and a net debt to EBITDA of 0.78. Coming back here to the improved financial net that Teemu mentioned initially. In the quarter 3 this year, we report a financial net of SEK 87,000. And this needs to put in perspective of that we had quite negative items in the beginning of the year. And an explanation to that is that we have a total impact for currency net of positive SEK 4 million this quarter. It's a combination of bank revaluation -- bank balance revaluations impacting us with SEK 1 million and impact from intercompany loans revaluations of positive SEK 5 million. And in the quarter, we have been active in reducing our dollar positions. We have optimized our cash balance. We also have worked harder with our global treasury to secure optimized operational liquidity. And also, we are reviewing, as we speak, our balance sheet to optimize our currency exposure in all different items in the balance sheet. And this will lead to a reduced exposure when it comes to currency fluctuations in the future. We continued with the buyback program. And in the quarter, we bought 232,000 shares for a total consideration of SEK 17.7 million. And this is part of the program that was decided by the AGM in May, and we are executing on this decision that gives us or that is on a plan of buying back up to 50 million share -- or SEK 50 million of shares until the next AGM 2026. Teemu Salmi: Good. Thank you, Ulf, for that. And we will conclude the presentation with a bit of a short-term outlook. We see that the market for us remains stable to moderately positive. And we also say our portfolio is highly relevant for the markets and the segments that we serve. I have myself spent quite some time on the road meeting quite many of our customers in Middle East and the North American region in the past quarter. And I can confirm that we are seen very strong as a partner to our customers serving both network intelligence, but also Security Solutions. We also expect to deliver on our short-term targets for the full year as we have stated since the beginning of the year. And also, as I mentioned from the first day when I started at Enea, we have been doing updates to our strategy, and we will communicate them now in quarter 4 as promised, and that content will be focusing on an accelerated growth agenda for us as a company. So we will come back with that message later on in quarter 4 of this year. So finally, our guidance stays exactly the same. We have not changed our long-term guidance or our short-term guidance. So we -- in the short term, our guidance for the year is that we will see continued growth in our focus areas, Network and Security, with an EBITDA margin in the range of 30% to 35% and a stable cash flow for the conclusion of 2025. And obviously, we're going to come back also in our strategy update with more information later on in the fourth quarter. That actually concludes our presentation, and we are now ready to take some questions. Operator, please. Operator: [Operator Instructions] There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments. Teemu Salmi: All right. Thank you for that, operator. We have actually a couple of written questions. We will take them now as we speak. We will start with the first one. How much of cost improvement is driven by FX? Ulf, do you want to comment? Ulf Stigberg: Yes. And round figure for this quarter is that the change in FX has improved our cost level by roughly SEK 5 million. Teemu Salmi: Thank you, Ulf. We continue with the next question. Could you please comment on the organic growth and the weakness seen despite late quarter deals, has there been any deterioration in end markets since Q2? Are deal closing extending further? I would say, well, I mean, our business is very volatile when it comes to kind of single deals that we are signing. They might come in a quarter or they might slip out into the next quarter. I would say that we actually see a stronger market, like I also shared in the presentation that we see a slightly moderate positive market development. That's kind of my and our assessment of where we stand right now. Then if a deal lands in one quarter or another, that can be depending on days, right? So we still report in constant currencies 3% growth. Under these circumstances, we are not happy, but it's an okay result, I would say. So -- and we have a strong and mature pipe that we are currently working on turning into sales as well. So I would not say that we see a weakness in the market, slightly on the opposite, actually. Then we have another question with 25% R&D investments, why are you not able to deliver better growth in the last couple of years now? Is 25% R&D needed to stand still? Well, I think that the answer to the question is that we have a mixed portfolio, right? We don't only have a growth portfolio, we also have a part of our portfolio that is in structural decline that we have discussed and presented many times. I think showing our core areas that we are growing in those, not to the speed that we want and that we hope to see moving ahead that I should be clear about. But we see a 9% growth of our Network business in the quarter, which is one of our focus areas. And then in the Security business, we see a bit of slippage when it comes to signing contracts and closing deals, not necessarily that we are losing. So I think definitely, we are -- we need to spend those money to stay relevant and to continue to grow. And the ambition is, of course, to have an accelerated growth further than we've had over the past couple of years. Do we have any more? I think those are actually the questions that we have in the chat. So with that, then I would like to thank you for listening. Thank you also for your questions, and I hand it back to you, operator. Thanks for today.
Operator: Good day, and thank you for standing by. Welcome to the ICON plc Q3 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kate Haven, VP of Investor Relations. Please go ahead. Kate Haven: Hello, and thank you for joining us on this call covering the quarter ended September 30, 2025. Also on the call today, we have our CEO, Barry Balfe; our CFO, Nigel Clerkin; and our former CEO and Non-Executive Board member, Steve Cutler. 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 are not guarantees of 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 SEC reports filed by the company, including the Form 20-F filed on February 21, 2025. 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 press release section titled Condensed Consolidated Statements of Operations. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. Included in the press release and earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share exclude stock compensation expense, restructuring costs, foreign currency exchange, amortization, transaction-related and integration-related costs, goodwill impairment and their related tax effects. We will be limiting the call today to 1 hour and would therefore ask participants to keep their questions to one each in the interest of time. I would now like to hand over the call to our former CEO and Non-Executive Director, Dr. Steve Cutler, for opening remarks. Steven Cutler: Thank you, Kate, and good day, everyone. As I reflect back on the last 14 years I've spent at ICON, I feel a strong sense of pride for what we've accomplished over that time, growing from a company of 8,500 employees that was #6 in the industry to 40,000 people worldwide and a ranking in the top tier of global CROs. It's been an honor to lead this organization, and I have no doubt that the future opportunity for ICON is robust and the leadership team in place is the right one to move it forward. I want to sincerely thank all my colleagues and friends at ICON for their partnership and dedicated efforts that have fueled our success over the years. I also want to thank our customers for their partnership and loyalty in working with us to deliver their projects through some external challenges, including COVID and several geopolitical conflicts. Finally, I want to thank the analyst community and our many loyal shareholders who I've come to know well and who have supported our company and its evolution in my time here, particularly as the CEO. I look forward to continuing to support Barry and the rest of the ICON team in my role as a Non-Executive Director, and I remain confident in the continuing success of ICON over the longer term. Barry, I'll now hand it over to you. Barry Balfe: Thank you, Steve. And I'd like to start by expressing my gratitude to you for your partnership in ensuring such a smooth transition period and for your leadership and support over many years. On behalf of the whole ICON team, I wish you the very best in retirement and look forward to your continued engagement and contributions as a valued member of our Board. Turning to our results for the third quarter. Our performance was broadly in line with expectations as we successfully navigated a mixed market characterized by known challenges and emerging opportunities. We executed well on the encouraging level of RFPs that went to decision in the quarter. Similar to quarter 2, overall gross business awards were strong, totaling $3 billion and were up mid-single digits on a year-over-year basis. Encouragingly, these awards were broad-based across large, midsized and biotech customers with notable strength in the areas of oncology, cardiometabolic disease and FSP. Revenue increased on both a sequential and year-over-year basis in the quarter with therapeutic mix driving strong pass-through revenues. Our overall burn rate was flat sequentially in quarter 3 at 8.2% in line with our previously communicated expectations. While quarter 3 results reflect continued strong cost control across the business, our overall margin profile was negatively impacted by the higher pass-through revenue mix. Adjusted EBITDA margin was 19.4%, a 20 basis point sequential decline. During quarter 3, we bought back $250 million in shares, bringing our total share repurchases to $750 million year-to-date. This all translated into adjusted earnings per share of $3.31, a 1.5% increase over quarter 2. Additionally, we generated strong free cash flow totaling $334 million in the quarter and $687 million on a year-to-date basis. While I'm particularly pleased with gross business awards in the quarter, our net book-to-bill of 1.02x was negatively impacted by elevated cancellations of $900 million, broadly flat with quarter 2 levels with a bias towards previously awarded studies that were canceled prior to commencing enrollment. Looking to the remainder of the year, we expect largely similar conditions to persist in the market and have assumed this in our updated guidance. I am particularly encouraged by our strong pipeline of actionable opportunities, reflecting our continued focus on commercial excellence and broader and deeper market penetration across customer groups. A notable area of strength in quarter 3 was in the biotech sector with a significant increase of RFP flow on a year-over-year and sequential basis. However, despite recent improvements in biotech funding, the environment remains mixed regarding the time lines for conversion of opportunities to award and contract. We have amended our full year guidance range to reflect the nature and phasing of business wins and cancellations as well as stronger pass-through revenue activity. We now expect full year revenue to be in the range of $8.05 billion to $8.1 billion and full year adjusted earnings per share to be in the range of $13 to $13.20. While we're not providing 2026 guidance at this stage, our outlook for the year will in part be influenced by the extent which we can sustain the positive trends of the last 2 quarters regarding RFP flow and gross bookings, transition to more normalized levels of cancellations in 2026 and optimize the burn rate of studies that are actively enrolling. Accordingly, we remain focused on executing our strategy with an emphasis on accelerating top line growth, rigorous cost management, the deployment of novel technologies to enhance our offering and a balanced approach to capital allocation. Regarding revenue, our plans prioritize expansion of opportunity flow and win rates in biotech, diversification of our revenue streams in large pharma, increased share of market in the important midsized segment and further acceleration of strong growth in our labs, early phase and FSP business. ICON continues to manage costs effectively, and our investments in enhanced resource demand management and allocation technologies continue to play a key role in our ability to scale our workforce rapidly and effectively in line with business needs. While revenue mix and pricing pressure are expected to weigh on gross margins in the near term, we continue to differentiate primarily based on capability, expertise, solution design and technological disruption of the clinical trials process. This enables us to take time and cost out of the development cycle while creating and capturing value. A key priority for me is the deployment of innovative technologies that allow for greater speed and predictability as well as enhanced efficiency. We're building on the significant progress that we've made in the area of process automation and will accelerate investments in AI-enabled technologies and external partnerships that enhance our capabilities and provide for seamless analysis and interpretation of clinical trial data. We continue to see value in returning capital to shareholders, while our strong financial position also gives us latitude to invest organically in our capabilities and to consider opportunities for inorganic growth in the right circumstances. In summary, while recent cancellation levels are a headwind to revenue growth in the immediate term, ICON's global scale, industry-leading capabilities and financial strength provide us with an excellent platform for growth. The recent demand dynamics provide significant grounds for optimism regarding the midterm trajectory as we move beyond a period of volatility and return to normalized levels of growth. I'm excited by the path ahead given the strong market position we've established and how we can continue to evolve our offering to better serve our customers and patients around the world. I'll now hand it over to Nigel for a more detailed review of our financial results. Nigel? Nigel Clerkin: Thanks, Barry. Revenue in quarter 3 was $2.043 billion, representing a year-on-year increase of 0.6%. Revenue was up approximately 1.3% sequentially on quarter 2 2025. Overall, customer concentration in our top 25 customers was broadly aligned with quarter 2 2025. Our top 5 customers represented 24.6% of revenue in the quarter, our top 10 represented 39.8% and our top 25 represented 66.6%. Adjusted gross margin for the quarter was 28.2% compared to 29.5% in quarter 3 2024 and down 10 basis points on quarter 2 2025. Adjusted SG&A expense was $179.2 million in quarter 3 or 8.8% of revenue. Relative to the comparative period last year, adjusted SG&A was down by $1.2 million in quarter 3. Adjusted EBITDA was $396.7 million for the quarter, an increase of $0.7 million sequentially. Adjusted EBITDA margin decreased 20 basis points over quarter 2 2025 to 19.4% of revenue. Adjusted operating income for quarter 3 was $356.9 million, while adjusted net interest expense was $47 million. The effective tax rate was 16.5% for the quarter. We continue to expect the full year 2025 adjusted effective tax rate to be approximately 16.5%. Adjusted net income for the quarter was $258.8 million, equating to adjusted earnings per share of $3.31, a decrease of 1.2% year-over-year or an increase of 1.5% on quarter 2 2025. U.S. GAAP income from operations amounted to $86.6 million or 4.2% of quarter 3 revenue. U.S. GAAP net income in quarter 3 was $2.4 million or $0.03 per diluted share compared to $2.36 per share for the equivalent prior year period. From a cash perspective, quarter 3 had cash from operating activities coming in at $387.6 million. This resulted in free cash flow in the quarter of $333.9 million, bringing our total year-to-date to $687.2 million. Overall, cash collections were solid in quarter 3 with our free cash flow higher than quarter 2, reflecting the timing of interest and tax payments as well as restructuring expenses. At September 30, 2025, cash totaled $468.9 million and debt totaled $3.4 billion, leaving a net debt position of $2.9 billion. This was broadly in line with net debt at June 30, 2025, of $3 billion. We ended the quarter with a leverage ratio of 1.8x net debt to adjusted trailing 12-month EBITDA. Our balance sheet position remains very strong, which affords us the flexibility to continue to strategically deploy capital. We are focused on an approach that balances further investment in our business as well as future growth while also returning capital to shareholders. We made significant share repurchases in quarter 3, totaling $250 million at an average price of $175 per share, bringing our total share repurchases year-to-date to $750 million. With that, we'll now open it up for questions. Operator: [Operator Instructions]. And your first question today comes from the line of Elizabeth Anderson from Evercore. Elizabeth Anderson: Congrats, Steve, and congrats, Barry. Excited for the next steps for both of you. Maybe turning to the question. Could you maybe dive a little bit more into the cancellation dynamics? I appreciate that the cancellations in the quarter came spot on with what Steve previewed on the 2Q call. So how do you kind of think about those trends going forward? Are you sort of saying maybe we'll see elevated levels in fourth quarter and then you kind of -- that should taper down? Is there something other kinds of dynamics that are sort of driving some of that? Just a little bit more color there would be helpful. Barry Balfe: Elizabeth, it's Barry here. I'll take that. I think as you say, cancellations came in broadly in line with where we projected -- there was a balance of cancels across the group, some significant activity in pharma, it has to be said, within the quarter. And as I mentioned in my prepared remarks, there was a bias in those cancellations towards studies that had been awarded prior to quarter 3 and were canceled prior to commencing enrollment. And I suppose that addresses your question in the context of the profile of cancels. These were not, by and large, studies that were in flight and burning at a good clip, so perhaps moderately preferable in that regard. I still think that as we reflected in our guidance, we expect conditions to remain broadly similar throughout the rest of the year, but I also think we will see this moderate as we move into 2026, certainly over the course of the year. So I'm not quite sure where the high watermark and the low watermark is, but I do think we're certainly closer to the end of the period of elevated cancels than to the... Operator: And the question comes from the line of Michael Cherny from Leerink Partners. Michael Cherny: Maybe if I can dive in a little bit on some of the gross margin commentary you had. I think the dynamics on mix and pass-through clearly were in place. Is there anything that you're working on proactively from a gross margin side to try and offset some of those dynamics? And especially on the pricing side, how you think about firming up price in certain markets, areas where you'll compete, where you won't compete? Anything more you can give on that front would be great. Nigel Clerkin: Michael, why don't I start and then, Barry, obviously, feel free to chime in. So you are right in terms of the gross margin picture. Obviously, earlier in the year, we had hoped to exit the year at a margin closer to where we exited last year in terms of EBITDA margin. Clearly, as we've gone through this year, we have seen an increase in the proportion of pass-throughs. We've talked about that as we've gone through the year. So that is certainly weighing on the margin outlook for the balance of this year and frankly, into next year as well. We've also, of course, talked about the increasing pricing competitiveness that we're seeing in the market generally. Barry can touch more on that, which again is not so much of an impact for this year but is a factor that might weigh on margin outlook for next year. Having said all of that, you're absolutely right. ICON, of course, always has had a very long track record of managing its cost base appropriately, and we've continued to do that through the course of this year. That is partly through adjusting our resourcing to the demand environment that we see out there. And you can see that, for example, in our staffing numbers are about 5% lower now than they were at the end of last year, just as an example of that. But also, and Barry touched on how we are leveraging technology as well, for sure, in terms of efficiency and how that can help in terms of margin profile, but also in terms of effectiveness in how we deliver to our customers as well for all the reasons you mentioned. And Barry, I don't know if you want to add in, in terms of how we can use that to help deliver for our customers and ultimately improve our own margins over time, too. Barry Balfe: Yes. I think it's a fair question, Mike. I mean the first and obvious thing you do is you try and win more opportunities with heavy direct fee on them. I don't want to give back any of the opportunities that have high pass-through mix. I just want to augment them with even more direct fee awards, and that's -- our focus in terms of driving commercial excellence, making sure we can see more of this market and convert more of it into wins, that's important to us. We'll continue to do that. And I'm certainly pleased with our progress in quarter 3 in that regard. In terms of technology, Nigel's point is well made. We are looking to enhance the technological ecosystem here at ICON. We'll continue to do that. The deployment of agents to whom we can delegate workflows rather than simply ask questions is really important to us. Of course, in parallel, we do manage the processes that underline those workflows, manage our geographical footprint. And as I mentioned in my remarks, utilizing some of our existing technology to resource just in time and appropriately, identifying those projects that will burn faster when they benefit from some additional resources or frankly, areas of the organization where we might have a surplus of resource, migrating those resources where they can be more impactful. On your last point about pricing, I suppose there's a degree to which that will always bleed into the gross margin line, but we remain really focused on how we win. We're not going to cut our way to victory in terms of pricing. We've never done that. We're not going to do it now. We do tend to differentiate. When we win, we win by virtue of superior capabilities, greater expertise, scientific and operational and frankly, better solution design, being able to bring a study in faster and more cost effectively is a function of those things more than it is with pricing. So they're all factors, but they're some of the top level... Operator: Your next question comes from the line of Justin Bowers from Deutsche Bank. Justin Bowers: And I also echo Liz's sentiment, Steve and Barry. So Barry, can you maybe discuss the industry environment a little bit and bifurcate between pharma and biotech? And maybe more specifically around the tenor of those conversations in light of what seems to be a regulatory and trade environment of increasing clarity? Barry Balfe: Yes. It's a good question, Justin. There's a lot in there. So I'll certainly do my best. I think the first thing to say is I understand why people have been looking very carefully at biotech funding and taking some heart from the Q3 numbers, albeit it is a single quarter. Likewise, in pharma, I think we're pretty clear on why the markets reacted positively to some of the news over the course of the quarter around TrumpRx and the interactions with pharma in that regard. So there is certainly a sense that we may be getting closer to a point of some consistency. And I think we've said this before on the call, good policy or bad, consistent policy, certainty, dealing with some of the uncertainty that our customers have been facing is certainly net good for the sector. Whether or not that's what has driven the significant double-digit increases in RFP flow, whether that's what's trickling down into the successes we've had over the last couple of quarters in terms of gross bookings, it's a little early to see, but we're certainly glad to see it. What I would say just in terms of balancing that, though, is we said for a while, we would expect to see improvement on those leading indicators like RFP flow and gross bookings being trailed somewhat by follow-through onto the revenue and earnings line. So some positive indicators in terms of the environment, some interesting signs that perhaps deal flow is starting to tick up around large pharma as well. They're encouraging signs. But of course, we're still untangling the consequences of the last couple of years of volatility. So I think we should characterize the environment as encouraging, but still somewhat mixed. Operator: Your next question comes from the line of Jailendra Singh from Truist Securities. Jailendra Singh: I want to get more color on the competitive pricing environment. You gave some flavor of that. Has this got worse than what you guys have talked about in the past? Is it across the board? Are there any particular market segments you're seeing it? And based on your observation, are you seeing pricing pressure more driven by clients looking to squeeze extra dollar? Or is it more driven by your competitors trying to win more business? Barry Balfe: It's a good question, Jailendra. I don't think it's gotten worse for sure. I think what we've talked about over the last couple of quarters is that the prevailing environment in '25 is more competitive than in certain prior years. But I don't think that's something that we've seen continue to deteriorate by any means over the course of the year. I think that's fair to say. I think it's also fair to say that just given the structure of the relationships we have in large pharma that that's where a lot of the pressure comes from, which is not to say that our biotech customers don't require significant support, not just getting to the right price, but getting to really good predictability about that price. And this is a significant priority for us at ICON. We invest not just being in cost-effective, high-quality and speedy, but we also invest carefully to make sure we can be predictable. Our biotech customers really need to know when their studies are going to start, when their patients are going to be enrolled and when they're likely to be completed. So that's certainly something we've focused on. So I don't think it's something that's gotten worse over the course of the year, but I would characterize it as a particularly competitive environment. And to the last part of your question, I think when the bowl is smaller, the dogs are hungrier to a certain degree. So I think one feeds the other. We certainly see heightened level of competitive activity among our competitors, but I think that's driven by the upstream dynamics that are impacting our customers. Operator: Your next question comes from the line of Patrick Donnelly from Citi. Patrick Donnelly: Maybe one that kind of following up on some earlier ones in terms of the pricing and pass-through environment. I know you guys don't want to talk '26 too much. But just in terms of what those impacts could look like on the moving pieces on margins into next year. It seems like higher past-throughs will continue a little bit on the pricing that you've talked about. So can you just talk about just the levers on margins as we get into next year, just high level in terms of moving pieces? Again, obviously, pricing pass-throughs are an impact, but just trying to think about potential offsets and the opportunity to keep those flat to potentially up. Is that on the table? Nigel Clerkin: Patrick, it's Nigel. So yes, no, look, I think you've touched on the key major moving pieces there. And again, just as Mike asked through earlier. So you're absolutely right, pass-throughs and the increasing component of -- our composition of pass-throughs within the overall revenue mix is certainly going to be a weighing factor for next year. The pricing environment, to Barry's point, it has been tougher through the course of this year than perhaps previously. That's not so much going to impact us really too much this year, but it certainly would be more of a weighing factor as you go through next year. And again, countering that, all of the stuff that ICON has always had a long track record of doing, managing the business efficiently, investing in technologies that allow us to be more efficient as well as being more effective for our customers, all of the above. So exactly what that means in terms of margin outlook for next year, Patrick, we -- you'll understand we're not going to walk through today. We will provide that when we provide our guidance for next year in January or February when we get to there. So I appreciate your patience as we work through that ourselves. Operator: Your next question today comes from the line of Jack Meehan from Nephron Research. Jack Meehan: I wanted to follow up on kind of the margin question. I was wondering if you could provide more color on the level of pass-throughs. I'm not sure if there's any metrics you can share like as a percentage of gross revenue, where it was in 2024, where it's tracking in 2025? And based on what you look at the backlog now, like how much that could shift in 2026? I think just trying to get a sense for where gross margins can start to bottom out. Do you think 27% is close to a floor. Nigel Clerkin: Jack, yes, so Nigel, again. I'll take that. So yes, look, we report revenue in aggregate. So we don't obviously break that out between pass-throughs and direct fee. All we can really do is give you qualitative commentary around that as we have done in terms of that increasing proportion of pass-throughs. So -- and likewise, in terms of margins, I think we've touched on the various factors that are weighing on margins next year and also how we can hopefully help mitigate some of that challenge. So again, it's premature for us to give you any guidance on margin outlook for next year. Again, we'll do that when we get to there. Barry, I don't know if you wanted to add anything else to that. Barry Balfe: No, I think you covered it really well. I mean there's multiple different puts and calls. One of the big ones is business mix. The degree at which awards in different therapeutic areas manifest into revenue is not always linear and it's not always obvious. But as an indicator, over the last year, our level of RFP activity and indeed our level of awards in an area like cardiometabolic, which carries a very significant pass-through load have increased by more than an order of magnitude. So when we see significant shifts in pass-through [ heavy TAs ], this is good news. These are gross bookings that will drive direct fees, that will drive margins in time. But they do also make us consider what the pass-through load will be. So it takes time to work how that works through the flow, and we'll certainly be taking that into account when we set guidance early in the new year. Operator: Your next question comes from the line of Eric Coldwell from Baird. Eric Coldwell: I am curious, when looking at backlog and bookings, you've always had an approach of taking written confirmations as opposed to formally contracted awards, which is a bit unique versus the rest of the group, but you've been clear about that. How have those ratios changed over time? And when you parse the higher cancels that you're facing today, what percent of those cancels are coming from the noncontracted bookings, the ones that don't have formally legally bound terms and conditions in them? I'm just curious what that -- again, the ratio of noncontracted in bookings and backlog and then how that ratio has changed and then where the cancels are coming from? Nigel Clerkin: Eric, maybe I'll take that, and Barry, obviously, feel free to add. I can't really comment on what others do, frankly, in terms of how they book awards. I'll leave you to assess that on what they do. You are right, our practice has been to take bookings on award and the logic rather than on contract and the logic for that is that, that is closer to now, if you will, in terms of what's happening on the ground commercially because obviously, there is a lag from awards to signing a contract that can be several months. So it is a more real-time measure, if you will, of what's happening in terms of commercial demand. On your question on the timing of that over time or the pattern of awards and cancels, I think Barry touched on the point that the predominance of the cancels that we've seen have been in awards that haven't yet moved to enrollment. So that is a mixture of both. Frankly, I don't have at my fingertips the mix of that between the 2. But it is reflective of, again, the factors that we've seen and touched on over the last few quarters around cancels being elevated because of reprioritization decisions because of, for example, in the biotech arena, funding environment and companies hoping to raise money or haven't raised money or have been delayed and so on and reprioritizing where they spend and likewise in large pharma. So it is a mixture, frankly, and that's what we've seen so far. Operator: Your next question comes from the line of Charles Rhyee from TD Cowen. Charles Rhyee: Maybe if I could follow-up to Eric's question. When you look at the backlog, and I'm sure you've done sort of analysis of the backlog itself. I mean, do you feel comfortable that maybe we've gotten through most of the potential projects that could -- that you think could get canceled? Or I mean, do you have a better sense of what the quality of that -- of the remaining backlog that you're looking at today? And then a follow-up, Barry, at the beginning, you kind of talked about good RFP flow in biotech. Any kind of additional information you can kind of give us in terms of sort of win rates in biotech and how your market share has changed in biotech? Has that increased during the third quarter or in 2025 versus 2024 and maybe sort of what you're seeing there? Barry Balfe: Expertly managed 2-parter, Charles. I'll do my best to address both. I think on the backlog, look, as we said, there are a mix of reasons why studies cancel, whether it's emerging clinical data from an ongoing study, whether it's reprioritization of the portfolio or other reasons. And there are a mix of contracted and ongoing, ongoing and precontract, et cetera. So there are really a mix. What I would say is that to the degree that the turmoil of the last couple of years did result in some delays and some disruption in terms of awards proceeding to contract and contract proceeding to study start. I am confident we are closer to the end of that process than the beginning. Now who knows what normal looks like in this business. But as I said earlier, I do anticipate that we will return to more normalized levels of cancels, which I think is germane to the question that you're asking about backlog. I'm also encouraged by the profile of the awards that are going into backlog of late. I do think there's a much healthier association between the awards that are coming in now and in the last number of quarters than perhaps those that are coming out of backlog or at least those that are driving us above historical norms for cancel. So I'm encouraged by that for sure. In terms of biotech RFP flow, I mean, retrospective rationalization is a dangerous thing. We know biotech funding has improved somewhat. We've spoken repeatedly that that's sort of a 2-sided coin. There's the level of funding, but there's also the amount of the allocated funding that gets deployed. And I think that's probably the underdiscussed side of the argument. We do see a number of our biotech customers not just moving forward to deploy capital, but to deploy it in indications where they're running larger studies relatively deep into the development cycle. Now is that good for us? Yes, I think it is. Does it mean occasionally you see some larger cancels come out of that biotech organization or that biotech field? Yes, it does. But I think in the main, I am optimistic and encouraged. We made a strategic priority out of seeing more of the biotech market. We are being successful in that regard. We're looking at very significant increases in RFP flow quarter-over-quarter, year-over-year trailing 12 months. That's a good thing. We also, in balance, said that we wanted to see a significantly higher win rate in biotech, and that's materially flat on a quarter-over-quarter basis. So there's work to do for ICON there. In all honesty, there's areas of the biotech market where ICON wasn't historically as present or as focused as I want us to be and as I believe we are now. And if that means we show up on other people's radar more than we did in the past, then I think that's a really good thing and the focus of the teams will be converting that elevated RFP flow into sustained higher book. Operator: Your next question comes from the line of Michael Ryskin from Bank of America. Michael Ryskin: Great. I love the -- when the bowl is smaller, dogs are [ hungrier, a metaphor ]. That's a great way of putting it. I want to sort of go back to that and maybe comment the pricing and the pass-through component from another angle. Just curious, there's obviously fluctuations in therapeutic mix, customer mix, pricing dynamics, pass-through. This all happens on a regular quarter-to-quarter basis. Just anything you could say in terms of what you're seeing now? Is it -- how short term is it? Is it a little bit more cyclical, more structural? As you look forward longer term, just any visibility or any comments you can make on the duration of this dynamic and when you think things could sort of normalize a little bit? Barry Balfe: I think I said on our last call, Mike, that history makes fools of us all. So I'm going to be careful of prognosticating around what the pricing environment might be like a year or 2 or 5 from now. I think the important thing to note is that it's stable, right? It is an elevated competitive market. And I've always said, good companies have great competitors, and that's a good thing. So there's an onus on all of us to realize that drug development is too expensive, and it takes too long. And the over-under on more cost-effective drug development skews substantially towards better process, more effective interaction with regulators to reduce the onerous burden on patients and on drug developers and on the deployment of technologies to move this whole industry in the right direction. I think that will drive up net spend in the sector actually. I don't think it will drive it down. I just think we'll get more research done per dollar spent. So I don't want to overstate the impact of pricing per se on the cost pressures that are actually creating those pricing dynamics in the first place. So it's stable. Is it competitive? Yes. Do I think that's a function of the upstream dynamics, be they regulatory, geopolitical or LOE related for our customers? I absolutely do in pharma and likewise, funding for our biotech customers. I said a few times now, we didn't get to where we are in a heartbeat, and I don't think we'll get back in a heartbeat. But as things begin to normalize in terms of funding, in terms of deployment of capital, in terms of a clearer regulatory and political picture, I imagine we will see things graduate back towards more normalized levels right across the sector. But I'm afraid I'm not going to throw out a number and a date for you. I think that would be a little [ premature ]. Operator: Your next question today comes from the line of David Windley from Jefferies. David Windley: Best wishes to Steve and Barry for your next phases. I wanted to try to combine 2 of the major themes here, margins and bookings together and ask the question, how do you balance labor force stability and the benefits of that in both productivity and also perceptions of clients of stability of their project teams and things like that with the defensive margin. I figure over multiple years, ICON has had several risks, both synergy driven by PRA and the market environment demand-driven. So again, how do you balance that stability of workforce and the external perceptions that, that can create? Barry Balfe: It's a pretty broad question, Dave. And I think I appreciate where you're coming from, albeit I'm not entirely sure how to answer it to be candid. Maybe the easiest way is to say that our headcount moved by about 100 FTE over the course of the quarter, which in a 40,000-person organization isn't substantial. I think our trailing attrition remains near historic lows, and that's been a good number for us, pretty much in a straight line since the COVID peaks where the whole industry saw a bit of a peak. So we focus on really driving efficiency, making sure we have the right resources in the right roles, in the right locations at the right times. And that's not so much a function of bookings actually as it is a function of what is required to move these studies forward. I talked earlier on about a more algorithmic approach to resource management. Part of that is being able to spread your risk over your portfolio. You remember earlier in the year when we talked about some very large studies coming in, then going on hold, some canceling, some renewing and then stopping. And we didn't see massive swings in the labor force. We didn't see massive swings in the margin dynamics, and we didn't see massive disruption of the customers on the other studies that were in the books. So I think the answer is we pull all the levers that any professional service company does. We continue to invest in the best talent. I believe we have the best expertise in the industry. It's absolutely vital to me that we sustain and improve that position. But I don't really see it as a trade-off of margin and bookings. It's more about making sure that we give our customers the best people, and we give our people the best environment in which to be successful. Operator: Our next question comes from the line of Dan Leonard from UBS. Kyle Crews: This is Kyle on for Dan. It sounds like you expect cancellations to moderate in 2026, given your current view on the backlog. But is there a risk that elevated cancellations related to order not yet started studies will persist throughout 2026? Separately, could you provide an update on BARDA-funded COVID-related trials that you continue to service? Barry Balfe: I'll take the second one, Dan (sic) [ Kyle]. I mean, I think we've talked about 1% to 2% COVID revenue. So there's not much of a cliff to fall off there, more of a curve? Kate Haven: On a full year basis expectation. Barry Balfe: Yes. I think any change there is to the upside, very honestly. In terms of cancels, I mean, no one can ever say there's not a risk of anything happening probabilistically. I think it's unlikely. What we think we're seeing, at least my sense of it is we are seeing the consequences of the last couple of years. You've got the confluence of a couple of issues, funding pressures, LOE, driving reprioritization, perhaps some of the science that got funded when money was cheap and abundant not perhaps being followed through. And that has put a different light on some of the studies that were planned, awarded and in some cases, started. Am I confident that we will see a return to more normalized level of cancels in 2026? Yes, I am. Am I willing to sign on the dotted line and say that will be linear from January 1? No, I'm not. But I do think we're closer to the ninth inning than the first. On the basis of how we interpret the backlog, on the basis of how we speak with our customers and on the basis of the broad demand dynamics across the industry, I think that's a reasonable assumption. How far, how fast and how soon, I think it's a little early to say. But as we've said, we do consider them likely to remain elevated in [ quarter 4 ]. Operator: Your next question comes from the line of Luke Sergott from Barclays. Luke Sergott: I just want to talk a little bit about the burn rate and the -- it's been relatively stable here. Your 4Q based on the midpoint kind of implies like a little bit of a step down there. Talk about the recent bookings that you're getting, what's coming out of the backlog and just the visibility that these burn rates will stick around this like 8 to 8.2 level as we think about kind of modeling in the toggles for '26. Barry Balfe: Luke, it's Barry here. I'll start, and Nigel might want to elaborate a little bit. I would point you first in my remarks that the cancels that we took during the quarter, not entirely, but they did skew disproportionately towards studies that had not yet started that were sitting in the backlog effectively at a 0% burn rate. I'd also point you to the increase in gross bookings, which in the immediate term actually are a drag on burn rate as studies take time to ramp up. So I think there are some of the primary dynamics. But Nigel, you might want to expand. Nigel Clerkin: Yes. Look, I think you -- look, again, you're right. Obviously, we had expected burn to be approximately stable -- stable at approximately 8% through the course of the year, and that is what we have seen. In fact, it's come in a little better than that, as you've noted, year-to-date. So let's see exactly where we land in Q4, but in and around 8% was what we anticipated and what we are seeing. Going into next year, absolutely, it will be a function of, of course, what happens in terms of cancels, as Barry touched on, and importantly, gross wins as well, but also on all the initiatives that we are driving, frankly, to enhance and improve that burn rate over time. Look, again, that's also, of course, one of the important components of how we frame our guidance for next year, which we will provide you more color on when we get to there. Operator: Your next question comes from the line of Max Smock from William Blair. Christine Rains: It's Christine Rains for Max. I wanted to echo the congratulations to both Steve and Barry. In terms of our question, hoping you can discuss if you're still seeing strength in early phase work that you called out previously? Or if there's been more of a shift towards late phase work? Barry Balfe: Thanks, Christine. Appreciate your good wishes. The answer is yes. We continue to see good activity in our early phase business with strong growth, both on a year-over-year and a sequential basis. That's a business that's grown at double digits on a year-over-year basis, and that's growth that we intend to sustain and improve... Operator: Your next question comes from the line of Casey Woodring from JPMorgan. Casey Woodring: Yes, Steve, Barry, congratulations. So just quickly, 2 quick ones. First one, any more granularity on the trial mix that drove the higher pass-throughs this quarter? Was it all cardiometabolic? And then just one on the cost management side. Automation has been a theme you've called out in the past as a margin driver. Going back to your last Analyst Day, you talked a lot about the advancements you've made there on taking man-hours out. So just curious on kind of the progress you've made on that front and how much you can offset pricing pressure there via automation and AI? Nigel Clerkin: Casey, I'll start on the trial mix. Certainly, that is a factor, and Barry touched on the strength we're seeing there in terms of opportunities and wins. Of course, he touched on the COVID study as well or the vaccine study that was ongoing that was particularly active in the third quarter, was a particular impact there. But in general, the comments we've made before around pass-throughs being an increasing proportion of our revenue over a more sustained period is not so much that. It's more around the therapeutic mix as we've talked about. On automation, you're absolutely right. That is, of course, one of the levers that we lean into always in terms of driving more efficiency and it's something we will continue to do. Barry, I don't know if there's anything you wanted to add to that in terms of -- I know you've touched on already our priorities there. Barry Balfe: Yes. I think you've dealt with it well. I mean at the end of the day, Casey, our customers depend on us to take time and cost out of the development cycle and create value in that regard, we get to share in some of that value. That's the basic premise of our partnerships. So when we think about cost management, there's puts and calls there in terms of what we save and what we share. But certainly, technology is a huge part of it. And I've talked before about the importance to me of leaning more assertively into some of these AI-enabled technologies. We just actually progressed the project to roll out an end-to-end project management, workflow management system, which is a really important evolution for us to be able to bring all the data together, put it in the hands of the PMs and inform more rapid and accurate decision-making. We're obviously engaged in a range of external partnerships where these technologies allow us to recruit patients more effectively, more quickly to manage patients, both in terms of their care, the stipend that they're paid more effectively, our clinical trial management systems with our external partners and indeed risk-based quality management. One of the big areas that will drive efficiency is actually in the area of agentic AI. So we started deploying over the course of the last year or so agents across our business to help us delegate workflow and process to these agents rather than simply information gathering via large language models, et cetera. And one that I would call out is a proprietary technology we developed by the name Orbis, which is effectively a multi-agent digital assistant. If you think about multiple agents across the ICON landscape, this is the front door through which employees can go in and relate to multiple agents at the same time without needing a PhD in the organization's digital infrastructure to access that information. So effectively an agent of agent that allows you to run multiple analyses, source multiple different data points from multiple different agents across the system. Now that's early days, but that's exactly the kind of thing that would create and I hope capture value for the company and its customers. Operator: We will now take our final question for today. And the final question comes from the line of Rob Cottrell from Cleveland Research. Rob Cottrell: I guess I want to dig back into the margin and potential benefit from technology investments that both Barry and Nigel, you focused on to help offset some of the price and pass-through margin pressure. Can you just share how some of these customer conversations are developing as it relates to how you balance sharing the savings with customers versus capturing the savings to help your margins in the near term? And when you expect these potential efficiency savings to begin to flow through for you all into 2026 or 2027? Barry Balfe: It's a good question, Rob, but a multifaceted one. I guess I wouldn't encourage you to think about it as a single day on which we start managing margin through technologies or otherwise. That's an organic process. It's been going on for the 20 years I've been here, and it's continuing. The other thing I would point out before I get to the heart of your question is we are calling out sustained margin pressure in the immediate term. It's not like we're calling out massive upside in the immediate term because of a particular technology that's going to solve all of our problems. But to your question about the customer conversation, one of the interesting things that's cropped up as we're developing and in many instances, co-developing these transformational technologies and capabilities with our customers, it forces us to think in the context of long-term relationships about whether our pricing and commercial arrangements now will be reflective of the situation by the time those relationships come to maturity. So if you're signing a 5-year partnership 10 years ago, you probably agreed your terms, plus or minus inflation. Now we're very much building into those discussions. Hey, guys, here's how efficient we believe we can be together based on the nature of that relationship. But let's build into the governance model a forum and a format where we can recognize efficiencies as these new capabilities come on stream. That's a big part of the attraction of working with a company like ICON. We're going to get incrementally more efficient with you, through you and for you, and we want to be in a creative conversation about how we share the benefits. And that co-development piece is actually quite a high bar because there's a huge level of IT and technological investments between ourselves and probably 1 or 2 others and the larger customers in the space, but we are very much having conversations with them about how we will revisit commercial terms as the clinical trial paradigm gets disrupted and as we become more efficient as a company. Nigel, I don't know if there's anything you want to add there. Nigel Clerkin: Yes. No, I think you've outlined it well, Barry. Rob, I guess the only things I would add is that as Barry just went through, that's a clear example of the benefits of scale that, frankly, we can bring to those conversations, we are able to. We have the capability of making those investments, providing that sort of longer-term perspective. And secondly, the only other thing I would add is that point of how do we share these benefits together, it's a great question, but also it's fundamental, frankly, to the philosophy and culture that you should have as a service organization to your customers. In the end, it is about delivering better service to them more effectively and more efficiently and jointly sharing in that. And that is how we always have and will continue to approach these topics. Operator: I would now like to hand the call back to Barry Balfe for closing remarks. Barry Balfe: Well, thank you. Very briefly before we close out, I would like to extend my thanks to our 40,000 dedicated employees across ICON for their continued commitment and outstanding delivery for our customers and the patients we all serve. And for all of you joining us on the call today, we thank you for your support. We look forward to connecting again over the course of the coming quarters. Thank you. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by, and welcome to the First Merchants Corporation Third Quarter 2025 Earnings Conference Call. Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to the future performance and financial condition of First Merchants Corporation that involve risks and uncertainties. Further information is contained within the press release, which we encourage you to review. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today as well as a reconciliation of GAAP to non-GAAP measures. As a reminder, today's call is being recorded. I will now turn the conference over to Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin. Mark Hardwick: Good morning, and welcome to First Merchants Third Quarter 2025 Conference Call. Thanks for the introduction and for covering the forward-looking statement on Page 2. We released our earnings yesterday after the market closed, and you can access today's slides by following the link on the third page of our earnings release. On Page 3 of our slides, you will see today's presenters and our bios, including President, Mike Stewart; Chief Credit Officer, John Martin; and Chief Financial Officer, Michele Kawiecki. Slide 4 has a map with all 111 banking centers, a few awards that we've received recently and some Q3 financial highlights, including a 1.22% return on assets for the 9 months ended September 30, 2025. On Slide 5, our strong balance sheet and earnings performance reflects strength and resilience of our business model. We delivered another 9% loan growth quarter and $0.98 of earnings per share. ROA totaled 1.22%, the same as our year-to-date number I mentioned previously, and the efficiency ratio was 55%, which is consistent with the high performance we strive for. As you all know, we announced the acquisition of First Savings Financial Group on September 25, adding approximately $2.4 billion in assets and expanding our presence into Southern Indiana, which is part of the Louisville MSA. We are confident in our ability and excited about building on their meaningful deposit franchise to create a true community bank in Southern Indiana, much like we've done in previous acquisitions. [indiscernible] Bank in the Northwest part of Indiana and IEB in Fort Wayne are 2 great examples of acquisitions where we saw potential and successfully built them into high-performing parts of the First Merchants franchise over time. We also believe the verticals will prove beneficial by enhancing fee income through their originate and sell models for SBA loans and first lien HELOCs by adding an additional loan growth and liquidity lever through their triple net leasing business, and we will now have an SBA product offering available throughout our current footprint. You may know that we have completed $8 million of SBA originations so far in 2025, while First Savings has originated over $100 million. Our commercial and small business teams are excited to finally have a more robust offering for our communities. Larry Myers will be joining our Board of Directors upon the close of the acquisition, and Tony Shane will stay on Board to lead their verticals and enhance the financial expertise of our commercial team. We anticipate a mid-first quarter closing, a mid-second quarter integration and are confident in achieving the announced 3-year earn-back. On Slide 6, year-to-date net income totaled $167.5 million, an increase of $31.9 million or 23.5% from the 9 months ended 2024, while earnings per share totaled $2.90, an increase of $0.59 or 25.5% during the same period. Michele will discuss our capital position to include our tangible common equity of 9.18%, which provides meaningful capital flexibility. And John will discuss nonperforming asset data to include our 90 -- our NPA plus 90 days past due to total loans of just 0.51%, down from 0.62% a year ago. Now Mike Stewart will discuss our line of business moment. Michael Stewart: Thank you, Mark, and good morning to all. Allow me to share some context for my portion of this call. I'm calling in today from Charleston, South Carolina, where the First Savings Bank, SBL team is gathered. SBL stands for Small Business Lending and represents First Savings Bank's dedicated 45-person team that has a national footprint delivering SBA loans. They gather once a year in person to review their accomplishments and prepare for their upcoming year, and I am pleased to be able to meet this team later this morning as an early bridge to the integration with First Merchants. So back to our earnings call. The business strategy summarized on Slide 7 remains unchanged. We are a commercially focused organization across all these business segments and our primary markets of Indiana, Michigan and Ohio. So turning to Slide 8. As Mark stated earlier, this was another great quarter of loan growth across all segments and across all markets. It is very pleasing to see our Midwest economies continue to expand, our clients' businesses continue to grow and see our bankers continuing to win new relationships. $268 million in commercial loan growth for the quarter, over 10% annualized. $699 million of loan growth year-to-date, over 9% annualized. CapEx financing, increased usage of revolvers, M&A financings and new business conversion are the drivers of this growth. Another encouraging bullet point on this page is the quarter ending pipeline, which is consistent with prior quarter end and gives me optimism that we will be able to maintain our loan growth and increasing market share activities into the fourth quarter. The Consumer segment also shared in the balance sheet growth with residential mortgage, HELOC and private banking relationships driving the $21 million of loan growth for the quarter. Pipelines for these segments also ended at consistent levels to June. So we can turn to Slide 9, deposits. I will start with the Consumer segment on the bottom page, which was the driver of our deposit growth during the quarter, $96 million in total. The mix is particularly pleasing with the non-maturity categories growing at nearly 5% annualized. Maturity categories also grew by $27 million. The primary driver of the nonmaturity balance increase is market share and household growth. Note the last 2 bullet points on this page. Maturity deposit balances have decreased $198 million year-to-date with nonmaturity deposit balances increasing by $178 million. Commercial Business segment on the top of this page has a similar story. While total deposits declined by $23 million in aggregate, core relationship or operating account balances grew by 4.9% or $56 million. Improving the mix of all deposit categories has been the focus of our teams for the past year and has been accomplished by focusing on primary core accounts and deposit cost. Overall, I'm gratified with the active engagement our teams are having with their clients. We have continued our pricing discipline, specifically maturity deposits and public funds and remain hyper focused on relationships and converting single product users into a broader bank relationship. So before I turn the call over to Michele, one last comment regarding First Savings Bank. I'm excited to be working directly with them. Larry, his executive team and his Board have been welcoming and supportive of building their market presence in Southern Indiana with First Merchants as a partner. I have already spent time with their teams, visiting banking centers and meeting their clients. They have a strong reputation within Jeffersonville, New Albany and their Southern Indiana footprint. Their community bank model and reputation are well established. Continuing their growth within this community will be our priority as their branch network and commercial capabilities are well positioned. Being able to meet their SBL team and other verticals is also a priority for me as these businesses drive a solid fee-generating revenue stream for the bank. So Michele, I'll let you take it from here. Michele Kawiecki: Thanks, Mike, and good morning, everybody. Slide 10 covers our third quarter performance, which reflects positive trends in all categories. Total revenues in Q3 were strong with meaningful growth in both net interest income of $0.7 million and noninterest income of $1.2 million. This resulted in overall pretax pre-provision earnings of $70.5 million. Tangible book value increased 4% linked quarter and 9% when compared to the same period in the prior year. Slide 11 shows our year-to-date results. The first 3 lines highlight continued balance sheet growth alongside an improved earning asset mix. Over the past 12 months, we reduced the lower-yielding bond portfolio by $280 million and increased higher-yielding loans by $927 million. Reviewing lines 11 through 14, total revenue increased by 4.5% when comparing year-to-date 2025 with the corresponding period in 2024, while expenses remain unchanged, demonstrating positive operating leverage. Adjusted pretax pre-provision earnings increased by 4.7% and totaled $208.6 million year-to-date 2025. Slide 12 shows details of our investment portfolio. Expected cash flows from scheduled principal and interest payments and bond maturities over the next 12 months totaled $283 million with a roll-off yield of approximately 2.18%. We plan to continue to use this cash flow to fund higher-yielding loan growth in the near term. Slide 13 covers our loan portfolio. The total loan portfolio yield continued to expand, increasing 8 basis points from the prior quarter to 6.4%. This increase was primarily driven by loan originations and refis during the quarter at an average yield of 6.84%. The allowance for credit losses is shown on Slide 14. This quarter, we had net charge-offs of $5.1 million and recorded a $4.3 million provision. The reserve at quarter end was $194.5 million and the coverage ratio of 1.43% remained robust. In addition to the ACL, we have $14.4 million of remaining fair value marks on acquired loans. When including those marks, our coverage ratio is 1.54%. Slide 15 shows details of our deposit portfolio. The total cost of deposits increased 14 basis points to 2.44% this quarter, reflecting the competitive deposit dynamics in our markets. We expect the rate paid on deposits to decline as a result of the September rate cut and plan to reduce rates more, assuming there are cuts in October and December. On Slide 16, net interest income on a fully tax equivalent basis of $139.9 million increased $0.7 million linked quarter and was up $2.9 million from the same period in prior year. Our quarterly net interest margin of 3.24% was stable linked quarter and continues to be resilient. Next, Slide 17 shows the details of noninterest income. Noninterest income totaled $32.5 million with customer-related fees of $29.3 million. Customer-related fees were strong in all categories, reflecting continued momentum. Moving to Slide 18. Noninterest expense for the quarter totaled $96.6 million and included $0.9 million of severance and acquisition costs. When excluding those onetime charges, core expenses were $95.7 million and in line with our guidance from last quarter. The core efficiency ratio remains low at 54.56% for the quarter. Slide 19 shows our capital ratios. The tangible common equity ratio benefited from strong earnings and AOCI recapture, increasing 26 basis points to 9.18% while returning capital to shareholders through share repurchases and dividends. During the quarter, we repurchased 162,474 shares totaling $6.5 million, bringing total share repurchases year-to-date to 939,271, totaling $36.5 million. We remain well capitalized with a common equity Tier 1 ratio at 11.34% and are well positioned to support continued balance sheet growth. That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality. John Martin: Thanks, Michele, and good morning, everyone. I'll begin with an overview of our loan portfolio on Slide 20. In Q3, we saw robust loan growth across the portfolio with a $289 million increase in total balances quarter-over-quarter or 8.7% annualized. C&I lending grew by $169 million this quarter, continuing its strong momentum from last quarter. Commercial real estate added $87 million, reflecting steady demand and disciplined execution. We continue to be well below the CRE regulatory concentration guidance. And with the pending FSB merger, we have ample room for new originations in the portfolio. Our Midwest footprint remains the core of our portfolio with 82% of borrowers located in our 4-state region. Turning to Slide 21. Our sponsor finance portfolio continues to perform well with $911 million in outstandings across 100 companies in diverse industries. The credit metrics in this portfolio remains solid with 85% of the borrowers having a senior leverage under 3x and 63% maintaining a fixed charge coverage ratio above 1.5x. Losses have remained nominal over the life of the portfolio with only $15.1 million in losses over a 10-year history with nearly $2 billion in funded loans. We also continue to manage our shared national credit exposure prudently with $1.1 billion across 94 borrowers, primarily in Wholesale Trade, Agriculture and Manufacturing. Underwriting and credit quality remains strong across consumer and residential mortgage portfolios with over 96% of our $727 million in consumer loans and more than 91% of $1.9 billion in residential mortgage loans originated with credit scores above 669. Turning to Slide 22. Our investment real estate portfolio now stands at roughly $3.1 billion, as shown above, with the more significant concentrations highlighted here on Slide 22. Within non-owner occupied office, we continue to monitor our exposures with the top 10 loans representing 53% of total office exposure with a weighted average LTV of 62.8% at origination. The largest individual office loan is $25 million, secured by a single-tenant mixed-use property at 67.2% loan-to-value. The second largest is a $24.1 million medical office facility. Turning to Slide 23. Asset quality remains solid with nonperforming loans declining 3 basis points from $72 million to $68.9 million. Our nonaccrual loans tend to be small and granular, with the largest being $12.9 million to a multifamily secured loan. Classified loans finished the quarter lower with improvements across the C&I portfolio. Our charge-off -- our net charge-offs for the quarter were 15 basis points of average annualized loans. Performance was strong coming out of the second quarter and resulted in a solid performance for the portfolio in the third quarter. Then turning to Slide 24. Closing out the nonperforming asset roll forward highlights the strong performance just mentioned. We added $15.5 million on Line 3 and various nonaccrual loans. The largest was a $4.3 million contractor. We resolved the $6.8 million brewery relationship from last quarter, which is included in the $9.4 million on Line 3. With a $6.5 million -- or with $6.5 million in gross charge-offs at Line 5. We added $1.3 million in OREO from the mortgage portfolio and had a $2.5 million decline in 90 days past due. Overall, our credit portfolio continues to perform well as we continue to use consistent underwriting and proactive credit risk management. I appreciate your attention, and I'll now turn the call back over to Mark Hardwick. Mark Hardwick: Thanks, John. Turning to Slide 25. The compound annual growth rate of tangible book value per share on the bottom left continues to grow at a healthy 7% level post dividends, post buybacks and post acquisitions. When adjusted for the AFS AOCI volatility, which is now at $2.72 the combined annual growth rate is actually 8.5%. And then differential back in 2002 was nearly $4 per share. So we've made up some ground as the portfolio has matured and as rates have changed slightly. Slide 26 represents our total asset CAGR of 11.5% during the last 10 years and highlights how acquisitions have improved our footprint and helped fuel our growth. As we look forward to the last couple of months in 2025, we expect more of the same strong performance. Thank you for your attention and your investment in First Merchants. And at this point, we're happy to take questions. Operator: [Operator Instructions] Our first question comes from Damon DelMonte with KBW. Damon Del Monte: Just wanted to start off with kind of the expense outlook. I know going into '26, it gets a little confusing because of the merger closing at the beginning part of the year. But just kind of wondering, Michele, your thoughts on kind of core expenses here in the fourth quarter and kind of what you anticipate for core growth as we look through '26? Michele Kawiecki: Yes. Well, I'll start with the fourth quarter. We would expect Q4 to be relatively in line with Q3. And that is, I would say, after you back out those onetime expenses. And so really looking at Q3 core expenses. We always use Q4 to true up with incentive accruals and such, but not expecting any meaningful increase. So we should have a pretty disciplined finish to the year. and we're going through our planning process for '26 right now. And so we'll be more prepared to give guidance, I think, on our next call for 2026. Damon Del Monte: Got it. Okay. And then with regards to the margin, nice to see it hold up pretty steady quarter-over-quarter. Can you help us think a little bit about the impact if we do have 2 rate cuts here in the fourth quarter and kind of remind us how the margins kind of position for future cuts? Michele Kawiecki: Yes. I mean, assuming we get rate cuts in October and December, I would expect to see a few basis points of margin compression in Q4. As I've shared before, if there are rate cuts, our ALCO model predicts that for each 25 basis point cut, our margin declines about 2 basis points. And of course, that's because 2/3 of our loan portfolio is variable rate. So it will -- the loan yields will decline. But we're actively moving rates paid on deposits down in response. And if you look back at last year, we were really successful in doing so at that time. And so we'll have to see what the deposit dynamics in the market are like, but we're hopeful that we'll be able to try to minimize the compression as much as we can. Damon Del Monte: Okay. And just kind of along those lines, it looks like the deposit costs were up this quarter. Any color on kind of what occurred during the quarter? Michele Kawiecki: Yes. We really had to juice up some of our specials in order to stay competitive. And so I feel like that's the primary driver. Damon Del Monte: Okay, that's all that I had for now. So... Mark Hardwick: Damon, I would just add we had such strong loan growth that we needed to make sure that we had the funding on the other side and decided that it was worth being a little more aggressive with specials this quarter. Operator: Our next question comes from Nathan Race with Piper Sandler. Nathan Race: Just going back to the deposit pricing and cost increase in the quarter. Just curious if you're seeing any rationality or improvement from a competitive pricing perspective these days now that we have the Fed cut from last month and likely 1 or 2 more in the fourth quarter. And just can you remind us how much in the way of kind of managed or exception rate deposits you guys have that can reprice following those cuts in the future as well? Michele Kawiecki: Yes. With the September rate cut, we've been watching the market closely. And I wish I could tell you that we see some of our competitors backing off of rate. But I got to tell you, it still feels pretty high. So we're hopeful that with this next one, we'll start to see the competition get a little more rational. We have probably about $2.5 billion in deposits that are indexed. But as Mike Stewart covered in his remarks, even on our consumer portfolio, we're a little more variable than we were even at this time last year. And so we'll be able to -- we'll have the ability to move pricing on a pretty good chunk of deposits down. We already have with the September rate cut, and we think we'll have the ability to do more over the next 2, assuming we get those before the end of the year. Nathan Race: Okay. That's helpful. And then just thinking about the impact from First Savings. I believe you're picking up around a $700 million or $800 million portfolio of kind of lower yielding single-tenant lease finance loans. So just curious how you feel about that asset class. Is that a portfolio you want to grow in the future? Or do you think there's an optionality to maybe sell that book just to maybe reduce kind of the rate accretion that would be associated with marking that portfolio to market upon closing? And just any other thoughts on maybe repositioning part of the legacy First Merchant securities portfolio with the cover of the deal closing in 1Q? Mark Hardwick: Yes, Nate, good question. I think what I love about the triple net lease portfolio is we have optionality. So if we continue to feel bullish about loan growth in the core bank or in the legacy bank, First Merchants, at a 6.84% kind of yield like we had this quarter. And if there are rate cuts, obviously, that will come down. But the triple net lease portfolio is marked to about 6.25% and it's fixed rate. So it kind of just depends what our loan growth looks like in the variable rate portfolio and the yield differential. And we know that we have outlets if we wanted to sell a portion of it. And yes, we're always looking at the rest of our balance sheet. We have some mortgage loans that are yielding a little over 4.5% and some public finance loans that are in the same place and then the bond book. And so we're always just trying to look for opportunities to take advantage of shifting that liquidity into a higher-yielding asset. Nathan Race: Got it. And it seemed like a pretty opportunistic addition to add first savings. But maybe, Mark, just curious if you can touch on future M&A ambitions into next year. Are you seeing more opportunities to maybe consolidate some subscale banks across your footprint? Or are you just going to be more focused on kind of the organic runway that you have in front of yourselves? Mark Hardwick: Yes, I would say we're busy. I mean when I look at the talent that I have within our organization and just performing organically, and then throwing on top of that, the acquisition that will require time and energy to do it right and the opportunity that exists still in our Detroit MSA as well as now the Louisville MSA. I don't feel like M&A is a priority. We're in a position where we have the one we were looking for and the one we were most interested in. We love our geographies. And at least for now, that's 100% of our focus. And I would just add, the Comerica, Fifth Third announcement is an opportunity for us, and we're actively looking at how we take advantage of that. And so I know every time we have an acquisition, competitors do the same thing in the markets that we're moving into. But we're very aware of the 50-plus commercial bankers in that marketplace. We're very aware of the 24 locations that are within a mile where there's overlap and would love to find a way to turn First Merchants into a more meaningful franchise than it already is in the Detroit MSA as Fifth Third and Comerica come together. Nathan Race: Yes. To my follow-up question on Detroit specifically, and it seems like you're really well positioned there, particularly given that I think a lot of the Level 1 commercial bankers came out of Comerica way back when. So I appreciate all the color. Mark Hardwick: Yes, it's interesting. I was talking to Pat Ferring, who is the CEO of Level 1, and he said his phone has been ringing off the hook. And so he's been helpful in helping us figure out the best way to approach the disruption. So thank you. Operator: Our next question comes from Daniel Tamayo with Raymond James. Daniel Tamayo: Let's see. The loan growth was very strong this quarter. You've talked about it, particularly on the C&I side. You've had significant momentum there over the last few quarters. I think you said pipelines are pretty stable. Does this feel like -- I mean, I'm looking at 14% loan growth on a year-over-year basis in the C&I space. Does this feel relatively sustainable to you guys for the next few quarters? Is there anything that is unusual about the strength of the pipelines? Michael Stewart: I'll jump in on this, if you don't mind. I do think it's just good normal activity. I don't think there's anything unique about it. Businesses in the Midwest, like I referenced before, still have good outlooks themselves. They've taken a deep breath on what this tariff mean, so to speak, and they're navigating that. We've got a really focused segmented group of bankers that have great reputations in the market. And we haven't even got into that disruption that Mark talked about potentially in Michigan. I think that will add to the potential there. So what I'm saying is it is just core bread and butter, if you will, C&I activity that we really like. And then in the investment real estate side, which I think we stay to our knitting there, but lower interest rates, capital stacks, understanding of cap rates, those have become better understood. So developers are able to push projects to a faster pace and the way we underwrite fits that really well, too. So I do feel good about the fourth quarter. And there's nothing -- typically at the end of the fourth quarter, there's like something with taxes or year-end closing. There's not any crazy activity like that. This is just -- I feel like normal run rate. We'll see what happens with rate cuts and how businesses want to start out 2026. John Martin: I might add, contributing to what I agree with everything Stewart just said, with the asset-based lending team coming online actually gives even more optionality and momentum to the C&I team. Michael Stewart: John, I'm glad you brought that up. That's so true. Absolutely. Daniel Tamayo: Terrific color guys. And I apologize if I missed it, but did you give the impact that paydowns had on the CRE book? You did have significant growth in the non-owner occupied bucket in the quarter and kind of across the industry, we saw pretty sizable paydowns. Mark Hardwick: Did you say CRE book or... Daniel Tamayo: Yes. I want to make... John Martin: Yes. I mean our non-owner occupied for the quarter was, as I mentioned earlier, was up $87 million. So what we're booking primarily, we've got a concentration, as you can see in the real estate slide is in multifamily. And then obviously, we've got -- we continue to look at opportunities there. And what we're seeing this year is largely driven by the commitments, particularly in the construction side by what we booked last year [Technical Difficulty]. Operator: Please standby. Daniel Tamayo: Can you guys hear me now? Michael Stewart: John, we lost you when you were talking a little bit about last year's production in IRE multifamily and how the construction draws are funding out through this summer. So and then we lost you. John Martin: Okay. Thanks for getting in there. And so what we're seeing, obviously, last year yield itself into this year, produces what we're seeing this year. But there's no question that higher rates. I was just ending with what higher rates obviously have reduced the rate at which that portfolio has grown. So I still feel good about it, but it's not 2 years ago, 3 years ago. Daniel Tamayo: Yes. No, I appreciate that color. I recognize it grew significantly. I guess it was I was more curious kind of how that was able to happen despite paydowns. So that's terrific. And then I guess last one, just maybe for John on the credit side. Classified loans came down in the quarter, which was nice to see. Just curious pace of that -- those balances going forward, if you have any color. John Martin: Yes. When I look at classified loans in the quarter, we've been able to address in the -- really it was in the commercial real estate side when rates jumped, we had interest reserves that needed to be addressed, and we've done that really over the last 1.5 years, which we're on the grading. And so that will drive -- potentially drive those higher. We've addressed a lot of those issues. We've resolved some nonperformers, which has helped as well. But as I look forward, we're kind of -- I feel like we're in a place right now where we're kind of just trading dollars in the classified buckets to maybe seeing some improvement. There are a couple of segments that are maybe a little bit more challenged than others, but we're kind of just, I'd say, trading dollars at this point. Operator: Our next question comes from Brian Martin with Janney. Brian Martin: Just maybe, Michele, just maybe one for you or 2 on the margin. Just can you remind us the fixed rate loan repricing that you kind of got coming up here? And then also, I think just on the securities portfolio, I think someone asked about optimization and/or just runoff in that portfolio to fund loan growth. I guess, how are you thinking about that kind of the legacy First Merchants bond book? Is there more room to use cash flows to redeploy the loans? Or is some optimization possible? Michele Kawiecki: Okay. Well, I'll start with your first question on fixed rate loans. And so in the fourth quarter, we have about $130 million of fixed rate loans that will mature, and those are sitting at about a yield at about 5%. If we look into 2026, we've got about $350 million that have a yield of about 4.50% million that will mature in 2026. And so hopefully, that answers your first question. On the securities portfolio, our plan is to continue to use that roll-off, the cash flow to fund loans on a go-forward basis. And as Mark said, particularly when we close with First Savings, we'll continue to evaluate options to optimize our earning asset mix, looking at their portfolios, our portfolios, et cetera. In the First Savings deal, we did assume that we would sell their bond portfolio, which had about $240 million, but we'll also continue to evaluate our own. Brian Martin: Got you. And the roll-off of the securities portfolio, if you don't do anything with the legacy book, Michele, what does that look like in the next 12 months? Michele Kawiecki: We have about $280 million of cash flow that will be generated from the bond portfolio over the next 12 months. Now that includes interest. And so about $100 million of that will have -- will be interest. And so -- and then the rest is paydowns and maturities, and that will be rolling off at a 2.18% yield. Brian Martin: 2.18%, okay. Perfect. And then just on the sensitivity, how does First Savings impact your asset sensitivity, I guess, as you kind of look at once we get the combined company... Michele Kawiecki: It actually reduces our asset sensitivity a bit. So we actually land in a really nice place. We're still going to be a little asset sensitive, but less so than we were on a stand-alone basis. Brian Martin: Got you. Okay. And then you talked about -- I'm not sure if it was you or somebody else, just on the competition on the deposit side, are you seeing similar competition on the loan side in terms of where new yields are coming on, given, I guess, some of the repricing we've got to look at in terms of the fixed rate. But what does competition on the loan side look like today? Unknown Executive: Pumping down a little bit. Go ahead. Mark Hardwick: If I go back to Danny's comment just about loan growth, what we're having fun with now because we're growing at a pretty strong clip is just looking at the yield of everything we put on the balance sheet and trying to make sure that we're prioritizing the highest yielding products given the credit constraints as well. But it's been fun for us to have this kind of growth success to feel like we're winning despite competition in the marketplace and then just being smart about which loans we're putting on the books and at what yield, which is -- it's a good place to be. I'd rather be here than the alternative. Brian Martin: Yes. Okay. And then last one, Mark, I guess you -- just the opportunity. It sounds like the loan growth, I think maybe one of the other people mentioned just the strong loan growth you've had, particularly on the C&I side. But is some of that -- I know you've talked recently about maybe a couple of quarters ago about some pretty good hires you had brought on Board and kind of if they're contributing. And just it sounds like that's something you're thinking about with the -- if you're not looking at M&A next year, do you see opportunities to kind of lift out some more talent to kind of sustain the good momentum you've got here? Mark Hardwick: Yes. That is the reason that you saw a little uptick in our noninterest expense, and it was in the salaries. It's the talent that we've added to the team. And I would think next year, there's going to be an opportunity, especially in the Detroit marketplace to take advantage of some additional recruiting that just strengthens our franchise. Operator: Our next question comes from Terry McEvoy with Stephens. Terence McEvoy: Maybe just to start with a question for you, Michele. Were deposit costs at the end of the quarter below that 2.44% average? And what are your thoughts on where that could go in the fourth quarter? I know you talked about a decline, but just to frame some expectations, where do you see that trending in Q4? Michele Kawiecki: Yes. Good question. Yes, we did see them come down a few basis points at the end of the quarter, and that was just because we were anticipating that September rate cut and made some adjustments really quickly that we were able to get pushed in even before the end of the quarter. And so with anticipated rate cuts in October and December, we're going to keep pushing those rates down. Terence McEvoy: And then just a small question when I look at the First Savings presentation, and I think Mike Stewart was with that group today. The SBA lending, those that are on the balance sheet, are those guaranteed or unguaranteed loans? And then what are your thoughts on managing that business going forward in terms of retaining some of the unguaranteed portion, which has a higher risk profile than the rest of your commercial portfolio, I would assume. Michael Stewart: Yes, I do think the -- go ahead, Mark. Sorry, I can't see you. Mark Hardwick: Yes, we're in different locations. The unguaranteed portion is what is on the balance sheet. And the spread is about 2.75% over prime. And so it's a pretty high-yielding portfolio. And we're really excited about just putting that entire team on top of our current footprint. And Mike, maybe you want to talk about the volume we think we can add just within the First Merchants franchise. And I know that's where you are today. Michael Stewart: Yes. One last comment on the team, as I'm learning, self-contained within their SBA group, is a dedicated, I'll call it, workout team, and they've had a really good track record of low losses in that portfolio. They understand the process. They have a really nice documentation and relationship to the SBA flow. So they manage that portfolio, I think, in a very positive manner. And then to Mark's point, what's on the balance sheet is their unguaranteed piece. Getting my arms around and working with the team is they've built a model and built an infrastructure that they feel really comfortable that generates about $150-ish million of SBA volume a year. You heard Mark say they probably did around $110 million or so last year. Their fiscal year is in September. Their earnings release is next week, so you can pick up some of that information. And then juxtapose that to what Mark said earlier, First Merchants originated $8 million of SBA volume, [indiscernible], and that's what they do really well. So when you think about Indiana, Michigan and our Ohio footprint and having an outlet, if you want to call it that, or an opportunity for our business banking teams or community banking teams to have a place to send SBA volume. I think it becomes really easy for us to fill in their capacity in a meaningful way and just use it as another wonderful fee opportunity and be more relevant in our local communities. So that's how I feel like the strategic fit is in place. Mark Hardwick: And you may already know -- Terry, you may already know all this, but the SBA program loans can't exceed $5 million, which means the unguaranteed portion can't exceed $1.25 million or $1.25 million. And then if you originate $150 million and we kept all of the unguaranteed, it'd be $37.5 million for the year. And obviously, you have runoff as well. So it's a portfolio that has some higher risk. That's why the ACLs are higher and especially what we purchased will come on at more like 4% or 5%. And -- but the yields are really nice, like I said, with a spread of about 2.75% over prime or yield of 2.75% over prime. Operator: Our next question comes from Brendan Nosal with Hovde Group. Brendan Nosal: Maybe just starting off here on capital. TCE ratio back above 9% for the first time since late 2021. I know that you'll deploy some here with First Savings soon, but ratios remain healthy pro forma even for the deal and you'll be building pretty healthily off that base. Can you just walk us how you think about capital generation and uses of excess capital, particularly considering the near-term lack of interest in additional M&A? Mark Hardwick: Yes. I mean we'll continue to use 1/3 or more for our asset generation. It's been requiring a little bit more than that recently, 1/3 for dividends. And the remaining amount, we're just going to continue to look at ways to either take advantage of our current multiples. Pretty interesting if you just look at buybacks and this is -- if I think about next year, I think we're trading at $1.16 of our adjusted book value if you make the adjustment for AOCI back in or $1.27 of stated book value. And if we make $4 a share, just where we are effectively today, we're trading at 9x earnings and 9.25x. And so I feel like it's smart to be active in the share buyback space. And then we're also just looking at ways we can optimize our balance sheet, like I think Nate was asking us about earlier and whether or not it's smart use of the capital to optimize some of those loan categories that are underpriced where we don't have a deposit relationship or maybe a little bit of our bond restructuring. But I've looked at a couple of -- actually, last night, I was going through the releases of Horizon Bank and Simmons Bank and their major bond restructurings. And I would just tell you that's not happening here. We're not interested in anything that would require a tangible common equity raise. If we were to do something smaller that might require a piece of sub debt, then that is interesting to us. But we're performing at a level despite some of those underyielding assets that we're really proud of, and we think we have the ability to just make incremental improvements. Brendan Nosal: Okay. Great. Thank you for the definitive answer on a wholesale restructuring there. Maybe turning to asset quality and the reserve. I'm just kind of curious why you're still carrying such a large reserve at 143 of loans like before you even factor in remaining fair value marks. Like credit has been really healthy this year, and you're something like, I don't know, 20 or 30 basis points above your peer group when it comes to ACL coverage. Michele Kawiecki: Yes. I mean it has come down over the last couple of years. And some of it is just the methodology that you select when you build your model and ours, the quantitative model produces a higher, more conservative number. The good news is we had really positive credit migration this quarter. When you think about -- and so we always consider loan growth first and how much provision we want to take and we had really strong loan growth this quarter, but really positive credit migration. And then even looking at the macroeconomic scenarios, some of the changes in a couple of the macroeconomic variables moved in a direction such that we were -- it actually lowered the amount of provision that we required. And so despite the high loan growth, that kind of landed us at the $4.3 million provision. Mark Hardwick: And I would just add, that's the perfect GAAP answer, and it's the right answer. I would say if we tried to be more aggressive and put more in earnings, I don't have confidence that we would get paid for it. Brendan Nosal: Yes. Yes. No, that's totally fair. Better to have more than enough. Final one for me. Just thinking about like the progression of NII dollars from here, even if we get the rate cuts that are forecasted, which I think is 2 this quarter and then maybe 2 more in 2026, do you think you can continue to grow dollars of NII even as the Fed is cutting rates as expected? Michele Kawiecki: Yes, we do. And I say that because we've got confidence in our ability to manage deposit costs down, as I talked about earlier. And then even just if you look specifically at this quarter, our end-of-period loans is really quite a bit higher than our average for the quarter, average loans for the quarter. And so I think that will produce some good interest income coming into Q4 as well. Operator: Our next question comes from Nathan Race with Piper Sandler. Nathan Race: Just want to clarify on the buyback appetite. It sounds like there's still interest there just given the valuation disconnect that you discussed, Mark. And then I just want to confirm that with FSG pending, you guys aren't precluded from additional share repurchases. Mark Hardwick: Yes. That's -- thanks for the clarification. I wouldn't anticipate anything between now and closing. Just when you think about capital deployment, if we stay at these higher levels and our price continues to be where it is, we would be active. Nathan Race: Okay. But you're not necessarily precluded with the deal announcement pending? Mark Hardwick: We're not intending to do anything between now and close. Operator: I would now like to turn the call back over to Mark Hardwick for any closing remarks. Mark Hardwick: Well, thanks, everyone, for the great questions. It was an exciting quarter for us. We're really proud of the performance, the core organic performance of the company. We're excited about our M&A, announced M&A opportunity that we have. And as I mentioned, we're really kind of thrilled with the markets that we're in and the future that it can provide for our company. So just thank you for your investment, and it was a fun call. Thanks. Have a great quarter. Operator: Thank you. This concludes today's conference. Thank you for your participation, and have a great day. You may now disconnect.
Juha Rouhiainen: Good afternoon, good morning, everyone. This is Juha from Metso's Investor Relations. And it's my pleasure to welcome you to this conference call, where we discuss our third quarter 2025 results that were published earlier this morning. The results will be presented by our President and CEO, Sami Takaluoma; and CFO, Pasi Kyckling. And after that, we will have a Q&A session. And as usually, we try and limit the length of this call to 60 minutes. Before we go, I want to remind about forward-looking statements that will be made in this call. And I think without further ado, it's time to hand over to President and CEO, Sami Takaluoma. Sami, please go ahead. Sami Takaluoma: Thank you, Juha, and good morning, good afternoon also from my side. Without further ado, let's start to look for the Q3 highlights. The market activity was very much in line with our expectations, and that also resulted us then to deliver healthy order growth. We had also strong sales growth for the quarter, and our adjusted EBITA was good, normal strong. And for this quarter, cash generation was very solid and gave us quite a clean sheet for the Q3. Looking more than from the group perspective of the key figures. So orders received growth compared to the previous Q3 last year was 2%. And as we have highlighted in the Q3 '24, we did have significant large minerals CapEx orders that we did not have in the Q3 '25. Sales growth was then 10% compared to the previous quarter last year. And adjusted EBITA grew by 9%. All in all, the EBITA as the second quarter was having this dip, so we are now back in the normal Metso EBITA numbers. Looking for our 2 segments, let's start from the Aggregates. We had healthy orders growth coming in the quarter, EUR 280 million. That is 13% in constant currencies. This growth was mainly driven by the normalized market in North America and then the pickup that we have seen coming from the Europe. Equipment orders did represent growth of 11% and the aftermarket, 2% of the order growth. Sales was also stronger than a year ago. Equipment sales growth was 14% and aftermarket 1%. Aftermarket share now with these numbers was then 32% compared to 35% that it was 1 year ago. And adjusted EBITA improvement by EUR 3 million, so EUR 48 million for the quarter, and that represents then 15.6% margin for the segment. And Minerals had a very solid quarter in many ways. Orders grew 5% in the constant currencies, and aftermarket orders growth was now 12%. We saw in the CapEx side, very solid order intake when it comes to the small and midsized equipment orders. And in the aftermarket side, increase of the upgrades and modernizations as we have commented that they are in the pipeline. Regarding the sales, EUR 1 billion plus compared to the EUR 928 million a year before. Aftermarket was delivering 4% growth and the equipment side was now a 19% growth for the quarter. Aftermarket share of the sales in this quarter was 60%, and the adjusted EBITA EUR 184 million was reported, and that gives the margin of 18.0%, which is pretty much in line from the last year, 18.1%. And now Pasi, the CFO, will go more in detail the financial aspects. Pasi Kyckling: Thank you, Sami, and good day, everyone, on my behalf. I would like to start by reminding that we have restated our comparative figures for 24 quarters and first 2 quarters this year regarding the Metals & Chemical processing business that we decided to retain. And consequently, we have reclassified the comparative information. Let's then look at our group income statement more in details. I mean, sales increased 12% in constant currencies from the comparative period to EUR 1,328 million. Adjusted EBITA, EUR 222 million, which is EUR 18 million or 9% improvement from the comparison period. Net financials slightly up, reflecting the higher debt load that we have in our balance sheet. And income tax rate for the quarter, 24%, and then for the first 9 months or 3 quarters this year, 25%, so very much a standard -- within the standard range that we expect. Earnings per share from continuing operations, EUR 0.17, up by EUR 0.01 from the comparative period. If we then look at our financial position. The average interest rate for the period was 3.4%. Our net debt, roughly EUR 1.1 billion. Liquid funds continue to be solid, EUR 460 million is end of September. And our net debt-to-EBITDA KPI when using rolling 12 months in EBITDA was 1.3x which is below our 1.5x target and also down from 1.5 that we had end of second quarter, thanks to good earnings in the quarter as well as strong cash flow during the third quarter. When it comes to available credit facilities, our position is unchanged. We have our fully undrawn RCF. And then we have also a CP program, which is currently not in use. And then our ratings also, no changes. So a BBB flat from S&P and Baa2 from Moody's. If we then move to the cash flow. So we delivered a healthy cash flow during the quarter, the strongest quarterly cash flow this year, EUR 266 million from operations. And overall, we have delivered during the first 9 months, EUR 609 million. A positive note is that working capital is not a drag for us anymore. Of course, the release, EUR 12 million is small. But given that we -- that the business growth was solid, we are quite happy with this and continue to work with further working capital efficiency improvements. With that, I would like to hand back to Sami to talk about our strategy execution and outlook. Sami Takaluoma: Thank you, Pasi. So in Q3, we also launched our new strategy. We go beyond. We are very happy of the launch, both internally and also externally. And in a nutshell, we are striving for being the best in the customer experience in our industries. We are working for the higher and higher aftermarket share of our businesses, and we also set a target for ourselves to be the frontrunners when it comes to sustainability and safety. And all this combined will then also ensure that we do deliver the financial excellence. This is a growth strategy. We have set the target for ourselves for annual growth, and excellence means everything that Metso does, and that will be resulting then that Metso will be the #1 in our selected areas. We do count a lot to our very engaged employees, Metsonites out there. So the customer-centric growth culture is one of the key success factors and also ensuring that we do have the industry-leading capabilities in our organization to help our customers for the upcoming years. I'm talking about the revised financial targets, just a reminder here. So annual sales growth target is 7%. And, well, starting point now looking for the year-to-date '25 numbers. So 2% we have been able to do. So this is clearly the ambition to accelerate this growth. Adjusted EBITA margin, we upgraded that to 18% from the 17% previously divided by the segments so that Aggregates to deliver more than 17% and Minerals more than 20%. And year-to-date so far, we are in 15.7%. Net debt-to-EBITDA, the target for ourselves is that we will be below 1.5x. And that one currently, we are well on track already, and we are targeting to keep that, that way. And regarding the dividends, so the payout is going to be at least 50% of the earnings per share. And as you all remember, 2024, that was 63%. The strategy execution is already ongoing. We have done investments, acquisitions to improve our selected areas. Screening business, Saimu, was acquired in China that made Metso to be in top 3 in the Chinese market for this business. And then 2 smaller ones, TL Solution, which is sustainability-related, mill liner recycling technology company. And then Q&R Industrial Hoses, which is linked to our pump businesses where we are also having accelerated growth targets. We are currently reviewing some of our businesses. One of them is the loading and hauling business and looking for the next strategic steps regarding that business. Investments we have done already during the last year, some investments, especially to support our intentions to grow our aftermarket share, and one of them, the latest one is screening manufacturing center that we are currently building up in Romania. And when it comes to the market outlook, we expect that the market activity in both of our segments, Minerals and Aggregates, will remain at the current level. And we also want to highlight in this context now that the tariff-related turbulence is not over. We do hear this from our customers, and there is potentially effect then for the global economic growth and also the market activity. Juha Rouhiainen: All right. Thank you, gentlemen, for the presentation. And operator, we are now ready for Q&A. Operator: [Operator Instructions] The next question comes from Michael Harleaux from Morgan Stanley. Michael Harleaux: I have two, if I may. The first one would be on your impressive aftermarket order growth. If you could help us unpack what's underlying and if there are any one-offs in that, that would be very helpful. And then regarding the Aggregates segment, one of your competitors mentioned dealer restocking. So I was wondering if you could tell us if you are seeing any of that happening? Sami Takaluoma: Excellent questions. Regarding the aftermarket growth in orders especially so, we have commented in these calls earlier that one element of the aftermarket portfolio that we have is the upgrades and modernizations. They do have a small cyclic element, and that has affected them so that the comparison period, especially last year, did not see almost any of those coming through. And then our pipeline has been quite solid at the funnel. We know that the cases are there. There has been slight hesitation from the customers to make the decision, the timing of the decision. And now in Q3, they started to come through from the funnel as an order. So that was in line of our expectation in that sense. When it comes to the Aggregates, the distributor network in -- especially in the U.S. had a situation that 2024, the end customers did not purchase machines at a normal pace, and that created the situation that the distributor stocks were quite full. What we have seen from our side is that the normalization of the U.S. market started to happen at the end of last year, beginning of this year, and that's visible for us when we look at the stock levels of our distributors. They have gradually month after month coming down from the very high levels that they were at the mid '24. So from that perspective, there is element of distributor stock has an impact also to our numbers, but we also see that the market has normalized from that behavior during this year. Operator: The next question comes from Edward Hussey from UBS. The next question comes from Christian Hinderaker from Goldman Sachs. Christian Hinderaker: I want to start on Aggregates. At the CMD, you mentioned equipment utilization was down 20% or so from the year before. Obviously, interested then in the OE order growth in that segment at 11% and some of the comments in the release that you're seeing a better demand environment in both North America and Europe. What's driving that? And also, I wonder if you could perhaps give an indication on the average age of the installed fleet on that side of the business? Sami Takaluoma: Yes. So the running hours is having an impact mainly for the aftermarket demand. Then the new equipment need is not always clearly linked for this because the new technology will enable more cost-efficient operation for the customers. So the renewal of fleet is depending on customers' own behavior in his or hers business case. So from that perspective, it varies based on the customer, normal age, we have a very wide portfolio and deliveries every year, and that makes that there is also second owner or even third owner for the equipment normally. So this is how the aggregate mobile equipment business works. And the typical full lifetime, if well maintained, is between 15 and 20 years when the life is fully ended. Christian Hinderaker: That's helpful. Maybe we can turn to working capital. At the CMD, you set out ambitions to take share in the aftermarket. I guess, keen to understand if we should think about this requiring higher inventory levels over the coming years, either in euro million terms or in percent of sales, or whether you think you can unlock some efficiencies that mean you can grow the top line whilst improving that inventory number? Pasi Kyckling: Thanks, Christian, excellent question. And indeed, one of our pillars -- main pillars in the strategy is to grow the aftermarket business. And I mean, it's not a straightforward question to answer. But of course, if we grow the business in absolute terms, it will require more inventory. But then what we also believe is that in relative terms, when it comes to inventory turns or inventory in comparison to our top line. And there is room for improvement across the board, but then also in the aftermarket part of the business. So that's how we are looking at that. Operator: The next question comes from Chitrita Sinha from JPMorgan. Chitrita Sinha: Congrats on a strong set of results. I have two, please. So my first one is just on the Minerals margin, which was broadly flat at 18% despite the aftermarket mix. Could you provide more color on the organic development here? Sami Takaluoma: Yes. I think 18% is something that at this point, we are happy. It's okay. It's in line of our expectation. As we build the road map in the Capital Market Day that how we are going to be reaching the 20% targeted number for the strategy period, so there are several elements. And in this quarter, the aftermarket was having a good contribution for that one. There is a need for the capital equipment sales to be higher in terms of leveraging that part as well, and then we continue to work with our self-help initiatives, and as 75% of the company is Minerals segment, the impact will be mostly seen there when we do company-wide actions. Pasi Kyckling: Sami, I would like to complete or complement a bit. I think what you have also seen or what we have experienced in the third quarter is the strength of our capital business. I mean, relative share of the capital increase overall, but especially in the Minerals. And we have a good healthy business there and then it supports also delivering this kind of margins, and we are quite satisfied with that. Chitrita Sinha: Great, very clear. So my second question is on the Aggregates margin where you've brought back some costs, I think, in Q2 in anticipation for a ramp. So what is the best way to think about the volume threshold where you can comfortably achieve more than 16% again? I'm trying to drive whether we should expect to pick up in Q4? Will it be more 2026? Pasi Kyckling: Yes. So first of all, this cost that we have taken gradually back in Aggregate refers to our Finnish operations there and the fact that the local legislation here enables laying people off on a temporary basis. And during this low period, we have used that opportunity and are now during first half of this year when our order books have been strengthening, we have taken people back to work, and they are busy, currently working with the order book that we have. Then I'm afraid we are not in a position to give you exact volume guidance on when certain thresholds when it comes to margins are reached, but overall, I mean, we delivered a few percentage points below 16% now in the third quarter. And this is also a volume gain. So there is still capacity in the system to deliver higher volumes without, for example, increasing manpower and then the drop-through from additional business comes with significantly higher margins. Operator: The next question comes from Vivek Mehta from Citi. Vivek Mehta: I hope you can hear me well. It's Vivek on behalf of Klas. First question is around the restatement of the Minerals EBITA from discontinued operations. That impact grew in the second quarter. And curious to know what was the uplift to the Minerals EBITA from this in the third quarter? Was it similar to the second quarter? I appreciate that it doesn't impact the organic growth in margin. Just curious about the absolute impact. Pasi Kyckling: Yes. No, thanks, Vivek, for that, and we published the restated numbers with quarterly breakup of '24 and first half of '26 earlier this month. And while we will not provide a specific third quarter numbers and then going forward, we'll not comment specific business lines, what we can say is that the impact was sort of a similar in third quarter as we experienced in average during these periods that we have restated. And I know that in the second quarter with these numbers, it was slightly higher than in average. But what we had was sort of the average from these restated periods. Vivek Mehta: Understood. My second question is just following up on the outlook and your comments around tariff uncertainty and so on. We're seeing very good growth in Minerals, excluding the larger orders. Appreciate maybe the Section 232 and tariff concerns might be more applicable to Aggregates. So curious, given the strong commodity price backdrop, why you've not potentially raised that Minerals outlook? Sami Takaluoma: Yes. It's true that the tariff situation has impact on both of our segments, but it's also true that the impact potentially is higher for the Aggregate. So, tariff, in Minerals side is a little bit related to the U.S.-based customers and projects. And then generally, globally, the uncertainty, which is not helping making the significant decisions of the investments of multibillion for the new projects. But that, hopefully, is stabilizing and not having impact on that side. And then in the Aggregates, it's really all about how the U.S. market will be reacting because the tariff situation is having an impact on, for example, what is the end customer pricing and these kind of elements. So that might slow down the U.S. now normalized the market from that perspective, potentially. Pasi Kyckling: And also when it comes to Aggregates, and you made a reference to this Section 232. So the cross advance screens have been something that have been earlier excluded. Now it seems that they will be included in the tariff. And then certainly, it will have some impact on Aggregates market in the U.S. going forward. Operator: The next question comes from Panu Laitinmäki from Danske Bank. Panu Laitinmaki: I have a couple of questions. Firstly, on the Minerals market outlook, how do you see the kind of likelihood of receiving very large orders still in this year? We haven't seen any so far, and it's a bit more than 2 months left. So do you think it's still likely or is it more like 2016? And maybe related to that, what is the kind of pipeline or sales funnel for these large projects now compared to what it was like a year ago, for example? Sami Takaluoma: Yes. Thank you. A very good question. And this is something that we also are very interested to get the answers, but unchanged situation, how we read the customer negotiations and discussions, meaning that there are these projects, they are there, they are having a lot more tangible way of discussing, meaning that there is already customer organizations for the greenfield projects and so forth. And that's answer maybe for your second question, that this is something that we see as a difference for 1 year or 2 years ago that there is more concrete, tangible actions happening already on the customer side. And then we remain in the same view that we have had, 2026 is almost like guaranteed that these orders start to come through and still staying on a positive that one, two might be even coming at the end of this year, but as you said, the clock is ticking, and there is 2 months to go. So that remains to be seen. But then beginning of '26, definitely. Pasi Kyckling: From a commodity split point of view, these are gold and copper projects that are more advanced in our pipeline. Panu Laitinmaki: Okay. Let's hope for that. So secondly, I wanted to ask about the Aggregates and the European outlook. So you talk about European recovery. Can you talk a bit more about like what you see, which countries are driving this? Is it the German infra package already? Or what is driving this? Sami Takaluoma: Yes. We believe that the German infra package actually had an impact. The orders that we have been receiving in the last 2 quarters, they are not so much from the Germany. But that decision created the trust in the European countries close by for the future. So the orders are coming from multiple countries into Europe and they are related to infrastructure projects in those countries moving forward and then the customers making the equipment orders to be ready to serve what they have promised to serve. Panu Laitinmaki: Okay. I have a third one, if I may. On Minerals aftermarket, so really good growth in orders, obviously, from the service projects. But if you take that out, how has the kind of underlying spare parts. Spare parts business growth developed? Is it like at the same level? Or has that accelerated significantly? Sami Takaluoma: No major changes there. We have seen already a long time, solid, good single-digit growth for that, what we call day-to-day spare parts and consumer pools and service orders. So that continues the same way also in the Q3. Operator: The next question comes from David Farrell from Jefferies. David Richard Farrell: I'll go one at a time. First question relates to Aggregates. I was wondering in terms of the 9% organic order intake growth, what percentage of that is related to tariff-related surcharges on your U.S. business? Can you kind of unpick that element for us, please. Pasi Kyckling: Thanks, David, very, very good question. I mean a small part is from that factor. But I mean, it's not very material. I mean, I'm afraid I can't -- we can't quantify it, but that's the way to look at it. David Richard Farrell: Okay. And then my second question relates to the Minerals margin. It looks kind of -- by the increase in OE revenue and the impact that has on absorbing fixed costs probably played quite an important role in driving the margin up. Yet, if I look at the book-to-bill for OE so far this year, we're below 1x. Is there a risk that, that is a bit of a headwind as we think about 2026 margins that you simply don't have the OE levels that you had this year, and therefore, margins will face an incremental headwind? Pasi Kyckling: David, good question there. I mean we are not thinking that way. I think when it comes to Minerals capital, book-to-bill, we have basically sold similar amount as we have gotten orders this year. And obviously, some of the orders that we are receiving now in the fourth quarter, they will still play a role also in 2026 sales delivery. But under the assumption that we continue to get healthy order book build during the fourth quarter, maybe some of those larger projects moving forward that we discussed earlier. So we don't see that situation. And then obviously, already this year and also going forward, when we look at, within Minerals, there is quite different situation in the underlying business lines. Some of them are more busy than the others. And that's also the reason you may have seen that we announced and started some labor discussions earlier this month just to adjust our capacity in some of the business lines where we have less work currently. Operator: The next question comes from Vlad Sergievskii from Barclays. Vladimir Sergievskiy: Yes. It's Vlad from Barclays. I'll ask 3 questions, if I may, and go one by one. Firstly, could you give us some maybe initial idea what directional sales growth outlook could we have for 2026. On one hand, commodity prices are super supportive. But on the other, book-to-bill slightly below 1 this quarter, backlog broadly flat. Do you think you could grow next year top line in line with strategic targets, which you recently released or it will be some kind of different phasing here? Pasi Kyckling: Yes, Vlad. Excellent question. And you know also that we are not in a position to give such guidance. However, what we can confirm is that our target is to grow 7% CAGR going forward. And with that clock starts ticking 1 January next year, and we are working hard day in and day out to make sure that we can grow. And if I look at across the portfolio from 1 January onwards to end of September, our order book has increased by EUR 200 million, so -- or EUR 180 million to be specific. So that gives us a much stronger starting point for next year compared to the starting point that we had when we entered 2025. Vladimir Sergievskiy: Excellent, and that's great to hear. And if I could ask you on the consolidation point that you -- the changes you have made this quarter. I appreciate you are not giving the precise numbers for Q3. Would you be able to go to give us some idea what was the impact on the orders because orders for this business that you are consolidating has been super volatile. I think in the comparative quarter, it was almost no orders Q3 last year. Any color you can give us here would be very helpful. Pasi Kyckling: Yes, I can comment on that order specifically. So it was a very low order number also in the third quarter this year. So the order growth is certainly not driven by this MCP business. Vladimir Sergievskiy: Excellent. And the final one from me. On the inventories, trade receivables, obviously, they are optically up sequentially this quarter compared to what we saw before. Is it largely driven by the gain, the consolidation scope that you've done? Or there are some underlying changes there as well? Pasi Kyckling: Yes. Thanks, Vlad. And the consolidation change, for example, in inventory terms has some tens of millions impact on our inventories, i.e., increasing when we brought the MCP business back from discontinued to be part of the normal business, so to say. And then what we see overall happening in the underlying inventories is that we continue to decline the Finnish product inventories. And if I look one level below the balance sheet that we published, the Finnish products have continued to decline from end of June to end of September, order of magnitude EUR 50 million. And then we see a bit growth in the other areas, which is work in process and then raw materials. And you may remember that this EUR 200 million inventory program that we completed by end of June this year, that was really focused on Finnish goods. And then we continue on that journey. And overall, both inventory, trade receivables, but then over the larger working capital continues to be a focus area going forward. Operator: The next question comes from William Mackie from Kepler Cheuvreux. William Mackie: A couple of questions. Firstly, could you perhaps talk a little about the pricing environment and the price realization you've achieved across Minerals and Aggregates in Q3 in your efforts to fully offset any other remaining inflationary pressures? And secondly, against the review in Minerals of the backlog up and the orders strong in the smaller and conversion business, can you talk a little to the seasonality of the business revenue realization in the fourth quarter? Historically, there has been seasonality. What should we think about the Q4 versus Q3 in this year regarding your bookings and realization of revenues off backlog? Sami Takaluoma: Thank you, William. I can take the pricing one. Two segments. In the Minerals side, we see a very little pushback for our pricing. So we use our pricing power where we see that applicable. And that part is working okay. There is some discussions with the customers when they are not sure when they will be ready to release the orders for the capital side to get the price validity longer than we usually do. And so far, we have not gone that route. Then in the Aggregates side, it is a little bit more the current situation in the markets under pressure. So there, it's difficult to use our normal way, the pricing power, and that is quite obvious at the moment in the Aggregate market. Pasi Kyckling: And then, William, when it comes to Minerals seasonality. Overall, in Aggregates, we see clear seasonality, for example, third quarter, also this year was a slower period compared to some of the other quarters. In Minerals, we see much less of that. And we are delivering, we are completing the projects from our backlog also during the fourth quarter normally. So we don't expect anything specific there. Then of course, if I compare to third quarter, for example, there is Christmas and there is holiday seasons, and that may have some limited impact, but that's how we see it. William Mackie: One follow-up, if I may. Building on the earlier question regarding the order pipeline in Minerals. Can you talk a little to the discussion around the upgrades and modernization pipeline rather than large, normally highlighted projects? Do you see the ongoing trend that we've seen in Q3 with exceptional strength continuing in the fourth quarter? Sami Takaluoma: Yes, that's an excellent question. And as you might remember, I was responsible of this business area. And typically, we had the funnel of these upgrades and modernizations, 6 months ago, it was the largest ever in the euro value. So a lot of projects in a very good state of the discussions with the customer. And now we have started to see that they are released. And typically, I'm now referring what has happened in the past. They tend to then follow for 1, 2, 3 quarters in a row as a cycle when the customers make these orders. So expectation is that we do see also those orders coming in the Q4 and maybe also Q1. Operator: The next question comes from Tore Fangmann from Bank of America. The next question comes from Mikael Doepel from Nordea. Mikael Doepel: I have a few questions. I can take them one by one. So just firstly on the Aggregates business and what you see there, particularly in the U.S. If I hear you correctly, you seem to expect Europe to continue to recover into the fourth quarter, but I didn't really catch your views in the U.S. market clearly. So is it so that you see distributor inventory levels currently at normal levels? Or do you also expect some restocking effects there? Have you seen any negative impact of tariffs thus far? Or is it just an expectation that it must come? Just a bit of a clarification on how do you see the demand in the U.S. Sami Takaluoma: I'll try to open that a little bit up. We have not seen yet, but what we look is the distributor inventory levels. And from that perspective, it supports that the business that we see coming from the U.S. would be the normal as the levels are not over high as they used to be 1 year ago, for example. Then on the other hand, there is a risk that the new tariff included price levels of equipment and also parts might have an impact on how the end customers are evaluating their investment timing. Are they doing it now or expecting to look a little bit later. And even might have some challenges to fulfill the business plans with the new pricing coming through. So these 2 are both there and giving this a little bit uncertain situation, if I put it this way. The other one is supporting that the business continues normally and the other one is putting a little bit of the dark clouds out there. Mikael Doepel: Okay. No, that's helpful. And then second question relates to the mining business and maybe the project pipeline you're talking about. Just wondering, if I'm not wrongly remembering things, I think there should be a bit of a tail still left, for example, from the Uzbekistan, fairly large copper smelting order you got back in 2024. There might also be some other tails from other bigger projects. I assume when you talk about larger projects, you are not referring to these ones, but if you could maybe just give an update on the ones that you have won but haven't yet gotten all the orders from, the bigger ones. Pasi Kyckling: Yes. So first of all, Mikael, you have understood it the right way. So when we spoke earlier about the larger projects, so we were talking about future orders, which we have not yet seen and our expectation when they will realize, et cetera. Then when it comes to sort of existing pipeline, you are indeed correct that there is the Uzbekistan project, Almalyk, which is ongoing. And then there is also a number of other not only tails, but activities from the past, which are under delivery, and they are moving forward as per the plans. And then from financial statements point of view, we recognize revenue based on the percentage of completion. And typically it takes quite some time from the order until we start deliveries because of either engineering needs to go forward or if that is done, then just manufacturing activities with some of these equipment takes quite some time. And then the local construction projects, also, they are not small by nature. So it could be 24, 36 months from the order until we are complete with our deliveries. But yes, that's part of the backlog realization that we see every quarter. Mikael Doepel: That's fair. And maybe just a follow-up on that. So what is the reason? I mean, why the tails from Uzbekistan is not coming through? It's a question about the progress on site, which is slow? Or is it financing? Or is it anything else? Just wondering enough when we should expect that one to go through? Pasi Kyckling: Mikael, which way are you thinking? Because I mean, the project execution is moving forward, and we are realizing revenue and so forth, or how are you thinking about this? Mikael Doepel: No, I think there should be still some order value less from project. Have you already received everything? Pasi Kyckling: No. I mean, there is further potential on this and some of the other cases, but we cannot really comment single customer cases in such manner. Operator: The next question comes from Edward Hussey from UBS. Edward Hussey: Sami and Psi, can you hear me now? Pasi Kyckling: Yes, Edward, we can hear you. Edward Hussey: Okay, cool. Sorry about earlier. Just sticking to the rebuild and modernization theme. So first question is just on the order side. My understanding is that the comps in Q4 were also extremely weak. So should we expect to see a similar growth rate on the rebuild and modernization side in Q4? Sami Takaluoma: Yes. I said that these ones are those aftermarket orders that are not super critical from the timing perspective. And that's also the reason why they have this cyclic element. So we do have -- now we got the orders. We are happy of those. They were expected that they start to come during this year. We also expect that we see some of a similar way coming through in the Q4, but fully to be able to estimate or quantify the amount is challenging because they do not have this criticality the same way as other aftermarket products. Pasi Kyckling: And you are right that it's a -- sorry, you are right that it's a weak comparison point in the Q4. We did not see these orders last year in Q4. Edward Hussey: Okay. And then maybe just thinking about the mix in orders. I mean, is it -- when you think about these rebuild modernization orders, do they make up a sort of normalized mix in Q3? Or are they still below what you'd consider a normalized mix? Sami Takaluoma: I would say that when looking at the backlog, for example, so they look normal, and then orders that we are expecting once again, difficult to really estimate very accurate way that how much we will get those. But I would say that they are normal, if something. Edward Hussey: Okay. That's very helpful. And then final question just on the theme is just on the revenue side. Clearly, it seems to be margin accretive from the aftermarket business. In terms of the revenue mix, the rebuild modernizations, are these at normalized levels now? Or is there -- I mean could we potentially see a sort of acceleration in rebuild modernization revenues in Q4, and therefore, support from a margin perspective? Sami Takaluoma: Generally, I can comment that much that upgrades and modernizations for us, they are good and very healthy business when it comes to the margins. So they are in a good level from our sales mix perspective. Operator: The next question comes from Tore Fangmann from Bank of America. Tore Fangmann: Sorry, can you hear me now? Pasi Kyckling: Yes, we can. Tore Fangmann: Perfect. Sorry for before. A little bit of tech issues and cut out sometimes. So excuse me if this was asked before. Just one more question from my side. The Aggregates margin has recovered quite nicely quarter-on-quarter despite the lower revenues total and also like in equipment itself. I was expecting before that the main kicker for a margin improvement would be basically the volumes coming back for the cost absorption. So what would you say is the reason now quarter-on-quarter with the margin recovery that we've seen? Pasi Kyckling: Yes, it's a good question. And Tore, you may remember that, overall, we had some extra costs in the second quarter. And while, of course, Minerals is the one carrying larger share, Aggregate was also impacted. And from that angle, situation has normalized. And overall, not only in Aggregates, but generally, we had sort of a good cost control quarter, and that helped also Aggregate to deliver the margins they did. Tore Fangmann: Okay. Then just as a brief follow-up, if I remember correctly, then the main part that could have impacted aside from the ramp-up of the production cost would have been the ERP system rollout in Q2? Or am I missing out something here? And then when you say good cost control, is this something that you would then expect to continue into Q4? Is it like basically structurally now better cost control? Or is it a little bit more by circumstance that we have better cost control in Q3? Pasi Kyckling: I mean, I was mainly referring to the extra costs, i.e., ERP that we had in the second quarter, and like we said 3 months ago, that was one-off costs. Those have not repeated third quarter. And from a cost performance point of view, our expectation is to remain in a similar position going forward. Juha Rouhiainen: All right. There seems to be no further questions. So we are able to wrap up this conference call well in time. Thanks again for listening. Thanks again for asking questions. We will be back with our fourth quarter and full year results on February 12 next year. But in the meantime, we are sure to meet many of you on the road in different events during the remainder of this year. Looking forward to that. And now we say thanks again, and goodbye. Sami Takaluoma: Thank you. Pasi Kyckling: Thank you.
Operator: Good day, and welcome to the Enova International Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Lindsay Savarese, Investor Relations for Enova. Please go ahead. Lindsay Savarese: Thank you, operator, and good afternoon, everyone. Enova released results for the third quarter 2025 ended September 30, 2025, this afternoon after market close. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com. With me on today's call are David Fisher, Chief Executive Officer; and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements and as such, is subject to risks and uncertainties. Actual results may differ materially as a result from various important risk factors, including those discussed in our earnings press release and in our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Forms 8-K. Please note that any forward-looking statements that are made on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, Enova reports certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. And with that, I'd like to turn the call over to David. David Fisher: Thanks, and good afternoon, everyone. I appreciate you joining our call today. We are pleased to report another great quarter, highlighted by solid loan growth and strong credit metrics across our portfolios, driven by our nimble online-only business model and well-diversified portfolio. Before we dive into the quarter, as a reminder, last quarter, we announced that Steve Cunningham, our CFO, will take over as CEO on January 1, at which time I will transition to the Executive Chairman role. I've committed to remain as Exec Chair for at least 2 years. Scott Cornelius, our Treasurer, will succeed Steve as CFO. Steve and Scott are preparing well for their new roles, and we expect a seamless transition with the continuation of our focused growth strategy and consistent performance. Now turning to the quarter. In Q3, we once again generated strong growth, supported by stable credit and significant operating leverage. Thanks to our diversified product offerings, the sophistication of our machine learning models and outstanding team, we've been able to consistently deliver significant portfolio growth while maintaining stable credit, resulting in strong financial results. Third quarter originations increased 22% year-over-year and 9% sequentially to almost $2 billion. The strong origination growth produced a 20% year-over-year increase in our combined loan and finance receivables to a record $4.5 billion. Small business products represented 66% of the total portfolio and consumer 34%. Revenue increased 16% year-over-year and 5% sequentially to $803 million in the third quarter. SMB revenue increased an impressive 29% year-over-year and 7% sequentially to a record $348 million, and our consumer revenue increased 8% year-over-year and 4% sequentially to $443 million. Overall, the stability of our customer base continues to underpin our growth as credit quality is solid across the portfolio. The consolidated net charge-off ratio for the quarter was 8.5% compared to 8.1% last quarter and 8.4% in Q3 of last year. Despite some noise in the macro environment, the underlying trends for our customers continues to be positive. The job market remains healthy with unemployment rates staying historically low at 4.3% as of August, and wage growth continues to outpace inflation for our target customers. In addition, August consumer spending data showed a meaningful uptick, reinforcing steady household demand. When looking at external data, it's helpful to keep a couple of key factors in mind. First, our consumer customers in some ways are always in a recession. As a result, they are adept at managing variabilities in their finances. Second, these customers tend to have jobs with more fungibility in terms of being able to move between companies. This can lead to less volatility in their earnings over time. Looking back to our Q2 earnings call, we discussed how early in the spring, we had seen some minor elevated default metrics in one of our consumer products. As we mentioned, in response, we tightened our credit models for that product, particularly for new customers. Because we're able to adjust so quickly, we avoided any significant impact to our consumer business. Taking swift action like this to adjust our models is routine for us. We're able to do this because of the rapid performance feedback we get as a result of the design of our products and the sophistication of our credit models. It's something we do all the time, hundreds of times per year, and this goes both ways, whether we're making adjustments to tighten credit or to expand it. So as expected, following the adjustment to this one product, credit performance has quickly returned to normal. In fact, credit in that product now exceeds our expectations with some of the lowest early default metrics we have witnessed. As a result, we've begun rapidly reaccelerating its growth. So looking forward to Q4, we expect to see consumer origination growth rates accelerate sequentially and credit metrics continue to improve. Also contributing to our stable financial performance through market fluctuations are the benefits of having a diversified portfolio. Having operated in the nonprime space for decades, it's common to see short-term fluctuations in demand and credit in any one product or customer segment. In addition to being well diversified across our SMB and consumer businesses, within each of those, we offer a wide variety of products, adding multiple layers of diversification across our portfolio. This structure gives us the flexibility to allocate resources towards the strongest opportunities and have the confidence to moderate exposure where risks are elevated. With this in mind, we continue to see compelling opportunities within our SMB business, which had another fantastic quarter in Q3. Our leading brand presence, scale, solid credit and low levels of competition again resulted in solid demand and credit performance. Originations for SMB increased 11% sequentially and 31% year-over-year to nearly $1.4 billion in Q3. Insights from internal and external sources reflect solid underlying trends for small businesses. In conjunction with Ocrolus, we released the eighth iteration of our small business cash flow trend report earlier this week. This offers key insights into the state of small businesses and highlights ongoing trends observed over the past year. Small business confidence is high as tariffs remain manageable and the economy and in particular, consumer spending remains strong. Small business growth expectations stayed strong in Q3 with 93% of owners anticipating moderate to significant growth over the next year. And approximately 3/4 of small businesses were from nonbank lenders with nearly 40% of those in business reporting being denied by traditional banks. Further, external data aligns with these observations. Small business sentiment reached a new high in the third quarter with the MetLife and U.S. Chamber of Commerce Small Business Index climbing to 72, its highest reading ever and up from 65.2% last quarter, signaling strong optimism across the sector. Driven by the operating leverage inherent in our online-only business, growth in EPS again outpaced both origination and revenue growth in Q3. Adjusted EPS increased 37% year-over-year, primarily as a result of our strong growth, efficient marketing and a lower cost of funds. Before I wrap up, I'd like to spend a few moments discussing our strategy and outlook for the remainder of 2025 and beyond. We've carefully designed our business with a thoughtful unit economics approach that has enabled us to operate profitably for more than 2 decades. This is through many different environments, including downturns in consumer spending, interest rate hikes, surges in inflation, not to mention the Great Recession and a global pandemic. During this time frame, we've successfully navigated periods where the unemployment rate was more than double where it is today. And our business is better prepared than ever to withstand changes in the macro environment as our technology and analytics continue to be more sophisticated and our balance sheet is stronger than ever, while our portfolio has become more diversified. I said this last quarter, but I've never been more excited about Enova's future. We have an incredibly experienced team, a strong foundation, a time-tested playbook and industry-leading products, all clear signs of the opportunity ahead of us. Steve and I share a common vision that our focused growth strategy will continue to steer our path forward. We continue to adapt and innovate and remain committed to producing sustainable and profitable growth while meeting the needs of our customers and driving shareholder value. With that, I would like to turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. And following Steve's remarks, we'll be happy to answer any questions you may have. Steve? Steven Cunningham: Thank you, David, and good afternoon, everyone. As David noted in his remarks, we're pleased to deliver another solid quarter of top and bottom line results that were in line or better than our expectations, with strong growth in originations, receivables and revenue, along with solid credit, operating efficiency and balance sheet flexibility. Turning to our third quarter results. Consistent with our expectations, total company revenue of $803 million increased 16% from the third quarter of 2024, driven by 20% year-over-year growth in total company combined loan and finance receivables balances on an amortized basis. Total company originations during the third quarter rose 22% from the third quarter of 2024 to nearly $2 billion. Revenue from small business lending increased 29% from the third quarter of 2024 to $348 million as small business receivables on an amortized basis ended the quarter at $3 billion or 26% higher than the end of the third quarter of 2024. Small business originations rose 31% year-over-year to $1.4 billion. Revenue from our consumer businesses increased 8% from the third quarter of 2024 to $443 million as consumer receivables on an amortized basis ended the third quarter at $1.5 billion or 9% higher than the end of the third quarter of 2024. Consumer originations grew 4% year-over-year to $590 million. As David mentioned, the slower consumer growth this quarter was intentional to ensure we were maintaining solid credit quality across the portfolio. For the fourth quarter of 2025, we expect total company revenue to be 10% to 15% higher than the fourth quarter of 2024 as a result of strong SMB growth and a reacceleration of growth in our consumer portfolios. This expectation will depend upon the level, timing and mix of originations growth during the quarter. Now turning to credit, which is the most significant driver of net revenue and portfolio fair value. Our consolidated credit performance continues to demonstrate that our diversified product offerings and discipline around our unit economics enable consistent results across different operating environments. The third quarter consolidated net revenue margin of 57.4% was in line with our expectations and reflects continued solid credit performance. The consolidated net charge-off ratio for the third quarter was 8.5%, flat to the third quarter of 2024 and reflects our typical consumer seasonality and continued strong small business credit performance. Sequential stability and year-over-year improvement in the consolidated 30-plus day delinquency rate and a stable consolidated portfolio fair value premium reflect our expectation of stable future consolidated portfolio credit performance. Small business credit performance remained strong. Sequentially and compared to the third quarter of 2024, the net charge-off ratio, the net revenue margin, fair value premium and 30-plus delinquency rate for our small business portfolio all improved and reflect continued and expected stable credit performance. Consumer credit also remained solid. Following our typical seasonality, the consumer net charge-off ratio rose sequentially to 16.1% for the third quarter and while higher than the year ago quarter, remained in our expected range. The consumer net revenue margin and credit metrics for the third quarter were influenced primarily by mix shifts and the rate of originations growth on the heels of consumer portfolio adjustments that we discussed last quarter. Those adjustments and our overall balanced approach to growth meaningfully reduced the year-over-year change in the consumer 30-plus delinquency rate compared to last quarter. And as David noted, we exited the third quarter with the lowest ever initial defaults on weekly vintages on the consumer product we adjusted, allowing us to accelerate sequential growth opportunities into the fourth quarter. Additionally, during the quarter, year-over-year consumer installment originations grew at the fastest rate that we've seen in several years as we saw higher demand from existing customers for refinancing and debt consolidation. This is another example of how the breadth of our consumer products and credit segments, combined with our disciplined approach to unit economics, enables us to navigate varying operating environments and generate consistent consolidated results. The fair value premium on our consumer portfolio at the end of the third quarter was flat to last quarter and remained consistent with levels observed over the past 2 years, indicating a stable risk return profile and strong underlying unit economics for our portfolio. Looking ahead, we expect the total company net revenue margin for the fourth quarter of 2025 to be in the range of 55% to 60%. This expectation will depend upon portfolio payment performance and the level, timing and mix of originations growth during the quarter. Now turning to expenses. Total operating expenses for the third quarter, including marketing, were 31% of revenue compared to 34% of revenue in the third quarter of 2024 as we continue to see the benefits of our efficient marketing activities, the leverage inherent in our online-only model and thoughtful expense management. Our marketing spend continues to be efficient, driving strong originations growth and was in line with our guidance range for the quarter. Marketing costs as a percentage of revenue were 18% compared to 20% for the third quarter of 2024. We expect marketing expenses to be around 20% of revenue for the fourth quarter, but will depend upon the growth and mix of originations. Operations and technology expenses, which were driven by growth in receivables and originations were 8% of revenue for the third quarter, similar to the third quarter of 2024. Given the significant variable component of this expense category, sequential expenses and O&T costs should be expected in an environment where originations and receivables are growing and should be between 8% to 8.5% of total revenue. Our fixed costs continue to scale as we focus on operating efficiency and thoughtful expense management. General and administrative expenses for the third quarter increased to $40 million or 5% of revenue versus $39 million or 6% of revenue in the third quarter of 2024. While there may be slight variations from quarter-to-quarter, we expect G&A expenses in the near term should be between 5% and 5.5% of total revenue. We continue to deliver solid profitability and strong returns on equity this quarter. Compared to the third quarter of 2024, adjusted EPS, a non-GAAP measure, increased 37% to $3.36 per diluted share, delivering an annualized third quarter return on equity of 28%. We ended the third quarter with $1.2 billion of liquidity, including $366 million of cash and marketable securities and $816 million of available capacity on debt facilities. Our cost of funds declined to 8.6% or 15 basis points lower sequentially and nearly 100 basis points lower than the third quarter of 2024 as a result of lower short-term interest rates and strong execution on recent financing transactions. Continuing our track record of strong capital markets execution that reflects our solid credit performance. During the third quarter, we upsized our corporate revolver by $160 million to $825 million, extending the final maturity to 2029, reduced the cost by 25 basis points and expanded our bank lender group. Our balance sheet and liquidity position remains strong and give us the financial flexibility to successfully navigate a range of operating environments, while delivering on our commitment to drive long-term shareholder value through both continued investments in our business and share repurchases. During the third quarter, we acquired 339,000 shares at a cost of $38 million, and we started the fourth quarter with share repurchase capacity of approximately $80 million. Before wrapping up with our fourth quarter expectations, I'd like to touch on our valuation. Enova has delivered strong and consistent results over many years and operates a highly scalable online-only model with more diversification than any nonbank specialty finance company. Since our acquisition of OnDeck 5 years ago, we've not only maintained our strong profit margins, we've done so while cutting our consolidated net charge-off rate in half. Our demonstrated world-class risk management capabilities and approach to unit economic decisioning has driven our differentiated financial performance and return on equity as well as our ability to finance the business at market-leading spreads. To put this in perspective, Enova has never reported a quarter of negative adjusted EPS. And over the past 10 years, has delivered $1.8 billion of adjusted net income and grown annual adjusted EPS at a compound average annual growth rate of approximately 20%. Over that same time, we reduced our financing costs by hundreds of basis points from lower credit spreads that are a direct result of our portfolio credit performance and predictability. Despite our demonstrated operating model advantages and unmatched financial performance as a public company, we remain frustrated by a persistent valuation gap. We continue to trade at discounts to the S&P 600 and Russell 2000, the financial components of each of those indexes and to other specialty finance lenders that have less consistent performance and profitability. In fact, at the end of the third quarter, Enova traded at a similar price multiple on 2026 consensus adjusted EPS estimates but similar to 2016 and 2017 forward PE ratios when we were a much smaller consumer-centric company. We continue to believe there is meaningful upside to our current share price and continuing to unlock the value our company creates remains a top focus of Enova's leadership. You should expect that we will continue our focus on growth with financial consistency and we'll continue to lean into our capital returns through opportunistic share repurchases. To wrap up, let me summarize our fourth quarter expectations. For the fourth quarter, we expect consolidated revenue to be 10% to 15% higher than the fourth quarter of 2024, with a net revenue margin in the range of 55% to 60%. Additionally, we expect marketing expenses to be around 20% of revenue, O&T costs to be between 8% to 8.5% of revenue and G&A costs to be between 5% and 5.5% of revenue. These expectations should lead to adjusted EPS for the fourth quarter of 2025 that is 20% to 25% higher than the fourth quarter of 2024. Our fourth quarter expectations will depend upon the path of the macroeconomic environment and the resulting impact on demand, customer payment rates and the level, timing and mix of originations growth. Our third quarter results reflect the strength of our diversified product offerings and the ability of our team to consistently deliver strong growth, revenue and profitability while maintaining solid credit. Our operating model has now delivered 6 consecutive quarters of year-over-year adjusted EPS growth of at least 25% or more, and we remain confident in our ability to generate meaningful financial results for the remainder of 2025 and beyond. And with that, we'd be happy to take your questions. Operator? Operator: [Operator Instructions]. The first question today comes from David Scharf with Citizens Capital Markets. David Scharf: Congratulations again. Dave and Steve, you're the latest. What's becoming a long line of lenders that have reported very stable, positive and constructive credit commentary this earnings season. So I'm going to leave the credit questions to some others to ask about. I was curious, maybe 2 more granular things. One is just on kind of capital actions. This is, I think, similar commentary on how you perceive the stock's valuation as you provided in the last couple of calls. Is there any kind of update you can provide us on whether you would ever consider seeking additional covenant relief to return potentially even more capital in terms of buybacks or whether a dividend is potentially something the Board would consider? David Fisher: Yes. I think everything is on the table. Certainly, both of those over time as well as other ways of utilizing excess cash. We have plenty of excess capital, other ways of using excess capital to maybe further diversify the businesses and increase our valuation. I think as Steve said very well in his prepared remarks, given the incredibly strong track record of the performance of our business, how much it's evolved over the last 7 or 8 years just in terms of stability, diversification, balance sheet strength to be trading at the same PEs we were back then is obviously not where we think the value of the business is. So yes, opportunities to increase the buyback. The returns on our buybacks over time has been very, very, very strong. Certainly, a dividend at the right time, although that's, I think, usually a better tool when the stock is more fully valued. And then are there places -- other places in the market where we could utilize our capital. David Scharf: Understood. Understood. Maybe as a follow-up, on the marketing side, there have been quite a number of quarters now where at least as a percentage of revenue, marketing dollars have come in below your guidance. And I think you guided to 20% last quarter, it came in at 18% again. And at some point, trying to figure out what's a feature versus a bug. And are you seeing anything about the composition of either by channel or just percentage of repeat borrowers or just maybe it's the mix shift towards more SMB. But is there anything that would kind of lead you to tell us structurally the operating model is potentially more profitable than we've been sort of modeling and that 20% is maybe too high a ceiling? David Fisher: Yes. I mean, look, the model continues to get more profitable, and I'll give a lot of credit to our marketing and business teams who are continuing to get more efficient on the marketing and acquisition and conversion side, those all tie together. But some of it's also just a confluence of events. If you kind of go back to Q4 of last year, volume came really, really late in the quarter. And so we probably underspent because we didn't see the volume earlier in the quarter. Q1, there was just a tremendous amount of volume that we never would expect to see in Q1. So we're probably underspending again. And then we had a lot of excess revenue from the strong Q4 and Q1 kind of increasing the denominator for Q2 where actually the spend was actually kind of pretty near where we would have thought it was going to be. And then as we talked about in Q3, we pulled back a bit on the consumer side just while we were letting the credit settle in the -- that one consumer product. So as we look for Q4 as we're now accelerating growth, especially on the consumer side. Now the credit, as I mentioned on my prepared remarks, credit looks incredibly good right now, not just solid. I mean it looks like incredibly good at the moment. We're going to lean into that accelerate growth. And look, a lot can change between now and the end of the year, and it's hard to predict the holiday season. But we would -- we're certainly expecting higher levels of spend in Q4. Operator: The next question comes from Bill Ryan with Seaport Research Partners. William Ryan: Question on the growth outlook. I mean you obviously seem very optimistic on the consumer originations going into Q4. Looking at Q3, consumer installment, as you noted, was very, very strong, a little bit of decline in consumer line of credit originations. I presume that might be reflective of the tightening and kind of the wait-and-see approach that you took from Q2 to Q3. Just was that the case? And do you expect kind of a mix of growth between the 2 products going into Q4, like a reacceleration in line of credit? David Fisher: Yes. I mean, very observant view, Bill, so I'll give you credit for sure. Steve guess that someone is going to pick that up and he was right. So yes, that was the product. And yes, that is where we're expecting the most acceleration going into Q4. Again, we're filling demand here. So we don't always know for sure. But that is certainly our expectation on the consumer side that we'll see a reacceleration of that line of credit and a mix shift in favor of line of credit. Not that there's any issue with installment right now, there's not. But there's just more -- there's more acceleration opportunities in line of credit given the slight pullback we had intentionally in Q3. William Ryan: Okay. And I assume this might relate to that as well, but the change in fair value on the consumer loan portfolio little bit of an uptick in Q3 as well. I assume was that related to some of the adjustments that were made. Steven Cunningham: Yes. I mean if you think about the change in fair value line item in terms of dollars, there's 2 components. One of them is the back book sort of running its course, which the fair value premium was very stable. So all of that was as expected as we just sort of continue to mature the back book. The bigger difference would have been the slower originations growth overall on the consumer portfolio, which would have been a negative in the change in fair value line item for the quarter. Operator: The next question comes from Vincent Caintic with BTIG. Vincent Caintic: I guess I'll ask the credit question. But -- so your credit trends have been strong, both in SMB and in consumer. And I was just wondering, I guess, with the applications you're getting in or maybe just kind of a broad industry outlook, if you have any of where you might be seeing or where there might be any sort of deterioration that might be out there, like perhaps are you getting more applications in certain areas where you might be declining more or anything where you might be seeing that? David Fisher: I mean, look, we adjust credit hundreds of times a quarter. So there's always something here or something there, but there's no significant pockets at all. our subprime business has some of the best credit metrics we've seen in a long, long time. And so our near prime book business has like some of the best credit metrics we've seen in a long, long time. So it's broad-based. I know there's been a lot of questions about it because of subprime auto and maybe 1 or 2 vintages and some of upstarts older securitizations. But I mean, those -- that kind of one vintage doesn't mean much of anything. And subprime auto, we've seen many, many times over Enova's history is just not correlated to what we do. It's so much based on asset prices and supply and demand. So no, we are seeing top to bottom consumer and small business incredibly good credit. And it's not surprising. The economy remains strong. The job market remains strong. Inflation has moderated. There's no reason to expect that it wouldn't be. So yes, no areas that we're really concerned about at all right now. Vincent Caintic: Okay. Great. And I guess relatedly, on the competitive front, so I know maybe banks aren't your direct competitors, but some of the failings that maybe have happened amongst other lenders, particularly in commercial side, there's maybe some of those lenders are now relooking at their portfolios and so forth and maybe tightening up a bit. So I'm kind of wondering if you're seeing that and if in turn, that allows you to take more share and maybe that's part of the marketing opportunities that you're seeing. If you could talk about that. David Fisher: Yes. I mean -- yes, sure. On the small business side, we continue to see banks being extremely conservative, and that's created an enormous opportunity for us over the years. And we don't -- we haven't seen that change at all. I mean, if anything, we've seen more conservatism from banks, which has obviously been a huge positive for us there. And then on the consumer side, there haven't been any new entrants into that space in a long, long time. And when we see kind of people on the fringes, more prime lenders try to dip their toes into near prime, we see them pull back very, very quickly. It's just that they're just different businesses. And they're not good at lending above 36%, no different than we would not be good at lending at 12% or 18%. It's just not what we do. We're not going to compete with Capital One, and I think they've been pretty smart about not trying to compete with us. So I think as we've talked about, the competitive dynamic is good for us, and we continue to not see many changes there. Operator: The next question comes from Kyle Joseph with Stephens. Kyle Joseph: Just in terms of growth, obviously, it's been weighted towards the small business side of things and kind of you guys mentioned kind of the credit blip you saw in the spring. But yes, touching on competitive dynamics, and then I think you mentioned that you expect consumer to reaccelerate. Just give us a sense for kind of the competitive dynamics between the 2. David Fisher: Yes. So look, we don't purposely push growth in one versus the other. As you've heard us talk about, it's all based on our unit economics framework. We have excess capital. So where we can originate loans above our ROE targets, we will and we let the market dynamics play out. And I would say the variances in the growth rates between the 2 businesses over the last 2 years have been almost all market and credit driven. So in 2023, for example, consumer outgrew small business by a fair amount. This year, small business is outgrowing consumer. That's fine, but that's great. This quarter, you might see that revert, especially with the reacceleration on the consumer side. And next year, we don't know. What we do know is we have a lot of good products across a pretty wide spectrum of the non-prime credit base. And so if one market is stronger than the other, we'll lean into it and take advantage of that diversification. But -- so that's kind of the longer term and shorter term, like I said, we are pushing pretty hard on the consumer side right now, pushing hard relative for Enova, obviously. I mean we're always very balanced between growth and credit. You've never seen us get out ahead of our skis, and we're certainly not going to do that now. But we just -- credit looks so good on the consumer side that we're certainly leaning in. Operator: The next question comes from Alexander Villalobos with Jefferies. Alexander Villalobos-Morsink: Congrats on the results. My question was more on the cap market side and just interest expense. I know you guys generate a ton of cash. And is there anything on the bond side or just cap market side where you guys can, in the future, kind of lower the interest expense a little bit more and kind of get a little more push on the EPS side from there? Steven Cunningham: Yes, for sure. So we've talked about the expectation that we're going to see lower benchmark rates in the short end of the curve, which is where we tend to fund. So that we expect over the near term over the next year or 2, that's going to be a tailwind for us. But -- more importantly, just the performance of the portfolio has allowed us just to continue to bring our spreads down. You saw that I mentioned in my commentary. Every transaction here over the last year or so, we've talked about the decline in the credit spreads over the benchmark because of that performance. So I think there's clearly some opportunity between those 2 things to capture some of the tailwinds in the capital markets to help support growth in EPS. Operator: The next question comes from John Hecht with Jefferies. John Hecht: So I'll only ask one question, but it's kind of, I guess, a broad question. I mean you've got rates declining. It sounds like very good consistent current trends. I think the competitive environment continues to be favorable for you, but then we're high prepayment activity, which in some cases, looks like it's tied to just excessive amounts of liquidity in the system. So the point is like things seem good, but they are on the margin kind of moving targets. How do those things affect your -- kind of the way you think about near-term and intermediate term strategies? David Fisher: Yes. It was a little hard to hear some of that with the background noise. I think -- look, competitively, you talked about, there's not much new. I think you said -- you asked about prepays, like elevated prepays. Look, in the subprime and near prime space, that just doesn't move the needle much. I mean it's just -- our customers need the cash. And so we don't tend to see that a lot. So again, look, we don't get overly confident in Enova. It's just something we don't do. But the model, the products are looking really strong and stable right now. We're not seeing many cracks. We're not seeing many changes other than improving credit. Our customer bases look very solid kind of across any metric that we can look at. I mean when we think about prepayment rates haven't changed, average loan sizes are staying steady. We're not seeing customers being more or less price sensitive. It just -- it's a very stable environment right now. Again, we're fully cognizant that, that can change, and we're watching all the metrics every day. But right now, things are looking very stable. Operator: The next question comes from John Rowan with Janney. John Rowan: Obviously, you spent a lot of time talking about current credit, given obviously what's going on in the news. But maybe just touch on quickly what you think about 2026, in particular, think about what's going on with tax laws and tips and overtime and changes to child care tax credit and some of those other programs. Just give us an idea of maybe how much of your consumers are impacted by some of those large changes in tax policy. David Fisher: Yes. Well, I think the estimates are for higher tax refunds next year, which should help with credit. And then, look, I think this year, we saw what we thought was going to be one of the bigger impacts, which was the resumption of payments on student loans and the resumption of collections on student loans. And we've been able to navigate with that with no problem at all. And I think some of the tax -- some of the tax changes next year kind of pale in comparison to that in terms of magnitude and if anything, are likely to be helpful. So again, we you don't know until it actually plays out, but it doesn't seem like it's going to be an issue for us at all. Operator: [Operator Instructions]. The next question comes from Moshe Orenbuch with TD Cowen. Moshe Orenbuch: Most of my questions have actually been asked and answered. But I was sort of hoping to kind of just -- and maybe the idea of you talked about leaning in kind of on the line of credit side of the consumer and the consumer being significantly stronger in Q4 than Q3. I guess given your approach, does that mean that you will have less origination on the small business side? Or does it mean that we should just think about you kind of investing just incrementally heavily in Q4? David Fisher: Completely incremental. As you know, we have plenty of excess capital. I think we had about $1 billion of excess liquidity at the end of Q3. So we have plenty of capital to invest in both in Q4. And SMB looks really good as well. I mean they had just killer Q3, and that momentum has continued into Q4. So -- the only reason we talked -- haven't talked more about SMB is because it's just doing well and it's continuing to do well. And we'll -- yes, we have plenty of capital to keep that business going full speed. And then -- so it's really just that the change is really just on the consumer side where now that we're accelerating growth again, we should see stronger growth in the consumer book. Moshe Orenbuch: Got you. Okay. And the -- and this may be just our forecast, but you bought back a little less stock in Q3 than we had in our model. Given that you've got this kind of extra kind of faster growth expected in Q4, should we think that buybacks would be similar to Q3? Or more like prior quarters. Steven Cunningham: Moshe, so as we've talked about, we have the capital and liquidity to do all of it organic growth as well as buybacks. And our buyback is we run an opportunistic program. So we still bought 60% of the capacity this quarter, but you also remember, we touched all-time high for a couple of weeks, which at those levels, we would still be buying, but at a lower level than we would, say, for example, right now. And in those quarters where we were buying nearly all of the capacity, we were trading off of where we are today. So you should expect us to follow that approach. We have about $80 million available in Q4, which is -- we kept some of that powder dry in case there's volatility as we go forward from here, and we'll continue to be opportunistic and buy as much as we can against that program and continue to grow the business as fast as we can against our focused growth -- balanced growth approach. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to David Fisher for any closing remarks. David Fisher: Thanks, everyone, for joining our call today. We certainly appreciate it and look forward to speaking with you again next quarter. Have a good evening.
Operator: " Diego Echave: " Head of Investor Relations Sameer S. Bharadwaj: " Chief Executive Officer Jim Kelly: " Chief Financial Officer Andres Cardona: " Citigroup Inc., Research Division Tasso Vasconcellos: " UBS Investment Bank, Research Division Alejandra Obregon: " Morgan Stanley, Research Division Leonardo Marcondes: " BofA Securities, Research Division Jeff Wickman: " Payden & Rygel Jaskaran Singh: " Golman Sachs Operator: Good morning, and welcome to Orbia's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Diego Echave, Orbia's Vice President of Investor Relations. Please go ahead, sir. Diego Echave: Thank you, operator. Good morning, and welcome to Orbia's Third Quarter 2025 Earnings Call. We appreciate your time and participation. Joining me today are Sameer Bharadwaj, CEO; and Jim Kelly, CFO. Before we continue, a friendly reminder that some of our comments today will contain forward-looking statements based on our current view of our business, and actual future results may differ materially. Today's call should be considered in conjunction with cautionary statements contained in our earnings release and in our most recent Bolsa Mexicana de Valores report. The company disclaims any obligation to update or revise any such forward-looking statements. Now I would like to turn the call over to Sameer. Sameer S. Bharadwaj: Thank you, Diego, and good morning, everyone. Before we begin discussing this quarter's results, I would like to thank our global employees for their continued commitment to improving business performance and staying customer-focused in difficult market conditions. Turning to Slide 3. I will share a high-level overview of our third quarter 2025 performance. Revenues of $2 billion increased 4% year-over-year and EBITDA of $295 million increased 2% compared to the prior year period. Our performance this quarter reflects subdued end markets in some of our business groups with some positive signs in others. As a result, we are reaffirming our 2025 EBITDA guidance adjusted for nonoperating items of between $1.1 billion and $1.2 billion, with results likely falling in the lower half of the range. In this environment, we are intensely focused on strengthening our leading market positions, making important progress on cost reduction and cash generation, realizing incremental profitability from recently completed investments, executing noncore asset sales and taking proactive actions to simplify and strengthen our business and balance sheet for the long-term. I will now turn the call over to Jim to go over our financial performance in further detail. Jim Kelly: Thank you, Sameer, and good morning, everyone. I'll start with a discussion of our consolidated third quarter results on Slide 4. Net revenues of $2 billion increased by 4% year-over-year, reflecting higher sales across all business groups. Revenue growth was mainly driven by strong demand in Precision Agriculture and Connectivity Solutions. Higher volume in Polymer Solutions, favorable pricing across several regions in Building & Infrastructure and strength in Fluor & Energy Materials. I'll provide a more comprehensive description of these factors in the business by-business section. EBITDA was $295 million in the quarter, a 2% increase year-over-year. Higher volume in Connectivity Solutions and a favorable product mix in Precision Agriculture were partially offset by lower resins pricing in Polymer Solutions, restructuring costs in Building & Infrastructure and higher input costs in Fluor & Energy Materials. Operating cash flow of $271 million decreased by $12 million compared to the prior year quarter and free cash flow in the quarter of $144 million improved by $2 million year-over-year. The decrease in operating cash flow was driven by lower cash generation from working capital. The increase in free cash flow was driven by lower capital expenditures, which more than offset lower operating cash flow. Net debt to EBITDA decreased from 3.98x to 3.85x during the quarter. This decrease was primarily driven by an increase in cash and cash equivalents of $132 million and an increase in the last 12 months EBITDA of approximately $7 million, offset by an increase in total debt of $26 million. The increase in debt was entirely driven by the appreciation of the Mexican peso during the quarter and included a paydown of $7 million of debt in the quarter. Net debt to EBITDA at the end of the third quarter using adjusted EBITDA to better reflect underlying earnings decreased from 3.51x to 3.42x. On October 6, 2025, Orbia redeemed and canceled the remaining portion of its 2027 senior notes in accordance with their underlying indenture. This transaction represented the final step of the completion of the refinancing of our near-term debt maturities that was initiated in the second quarter. Turning to Slide 5, I'll review our performance by business group. In Polymer Solutions, third quarter revenue of $647 million increased 2% year-over-year, largely driven by higher resins volume, partially offset by lower derivatives volume and lower resin pricing. Third quarter EBITDA of $78 million declined 13% year-over-year with an EBITDA margin of 12%. The decrease was primarily driven by lower resin pricing and higher ethane costs. In Building & Infrastructure, third quarter revenue was $647 million, an increase of 2% year-over-year, driven by better pricing across most of EMEA, Brazil and the Andean region, partly offset by lower volume and pricing in Mexico and Eastern Europe and the recently completed noncore asset divestments. Third quarter EBITDA was $76 million, a decrease of 3% year-over-year with an EBITDA margin of 12%. The decrease was driven by restructuring costs and an unfavorable product mix in Western Europe, partially offset by better results in the UK and Brazil and continued benefits from cost reduction initiatives. Moving to Precision Agriculture. Third quarter revenue was $257 million, an increase of 11% year-over-year. The increase in revenues for the quarter was primarily driven by strong demand in Brazil and the U.S. as well as higher project activity in Africa and Peru. These improvements were partially offset by declines in Mexico and Central America. Third quarter EBITDA was $30 million, an increase of 28% year-over-year with an EBITDA margin of 12%. The increase was driven by higher revenues and a favorable product mix. In our Connectivity Solutions business, third quarter revenue was $253 million, an increase of 8% year-over-year. The increase in revenues for the quarter was driven by strong volume growth, supported by increased demand in telecommunications and data center markets as well as a favorable product mix, partially offset by lower prices. Third quarter EBITDA increased 36% year-over-year to $42 million with an EBITDA margin of 17%. The increase was primarily driven by higher revenues, higher plant utilization levels and benefits from cost reduction initiatives, partly offset by lower prices. Finally, in our Fluor & Energy Materials business, third quarter revenue was $227 million, an increase of 3% year-over-year, driven by strong demand across most of the product portfolio, partially offset by constrained volume and shipment timing for upstream minerals and intermediates. Third quarter EBITDA was $64 million, a decrease of 3% year-over-year with an EBITDA margin of 28%. The decrease was driven by higher input costs across key raw materials, freight costs and unfavorable currency fluctuations, partly offset by strength in refrigerants and the benefits from cost savings initiatives. Turning to Slide 6. I'd like to provide an update on our progress in improving earnings and strengthening our balance sheet as first outlined in our October 2024 business update and reviewed again last quarter. First, by the end of Q3 2025, our cost reduction program achieved $169 million in annual savings compared to 2023. This represents 68% of our target to reach a savings level of $250 million per year by 2027. Second, the contribution from recently completed or close to complete organic growth investments, which are primarily focused on new product launches and capacity expansions, reached approximately $35 million of EBITDA year-to-date. The goal is to achieve $150 million in incremental EBITDA per year from these investments by 2027. And finally, we have signed agreements that have generated net proceeds of approximately $83 million from noncore asset divestments as of the end of the third quarter of 2025, exceeding our full year target of at least $75 million. We continue to aim for total proceeds of approximately $150 million by the end of 2026. Before I turn the call over to Sameer, I'd like to comment on a recent change in our credit rating. On Tuesday, Moody's announced the downgrade of our debt rating from Baa3 to Ba1, largely as a result of their more pessimistic view of the chemical sector trends and their belief that a market recovery does not appear imminent. We remain focused on our plan to generate cash and reduce leverage supported by the initiatives that we've been executing on since last year. As I previously indicated, all of these initiatives are on track. The business continues to show its resilience with year-to-date adjusted EBITDA margin slightly above 15%. We also have strong liquidity with cash on hand of $991 million and availability of $1.4 billion of committed funds on our revolving credit facility. Finally, we extended all of our material debt maturities to 2030 and beyond, and we have healthy and stable cash generation from operations to service our debt commitments. We will continue to maintain an open dialogue with the credit rating agencies, investors, bankers and the general public, consistent with how we have done this over the last years, providing updates on our progress toward improving our financial ratios and strengthening our balance sheet. With that, I will now turn the call back over to Sameer. Sameer S. Bharadwaj: Thank you, Jim. Turning to Slide 7. I will now provide an update to our outlook for the current year. The underlying assumptions for the company's guidance reflect a continued subdued environment in Polymer Solutions and Building & Infrastructure, partially offset by improving conditions in Precision Agriculture, Connectivity Solutions and Fluor & Energy Materials. Therefore, we reaffirm the full year 2025 adjusted EBITDA guidance range of $1.1 billion to $1.2 billion, likely falling in the lower half of the range. The company also reaffirms its 2025 capital expenditures guidance of approximately $400 million with a continued focus on investments to ensure safety and operational integrity completing growth projects under execution that are close to revenue and being extremely selective on any new growth investments. Now looking ahead in each of our business segments for the coming quarter and remainder of the year. Beginning with Polymer Solutions, persistent weak market dynamics driven by excess supply and lower export prices from China and the U.S. are expected to continue for the remainder of the year alongside rising ethane and ethylene input costs. While the first half was marked by raw material disruptions and operational issues in derivatives, the business has now stabilized operations and is focused on running at high utilization to improve profitability and cash management control. In Building & Infrastructure, we anticipate modest growth driven by new product launches and margin expansion. This growth is expected despite persistently challenging conditions in Western Europe and Mexico. To navigate this environment, the business remains intensely focused on realizing operational cost efficiencies to further improve profitability. In Precision Agriculture, market conditions are expected to remain stable to slightly improving, supported by continued positive momentum in Brazil and the U.S. The company anticipates continued strong performance in parts of Latin America and from projects in Africa. The business will remain focused on driving growth through deeper penetration in extensive crops while maintaining a consistent emphasis on cost management and working capital improvements. In Connectivity Solutions, we expect continued volume growth throughout the year, supported by sustained momentum in network deployment, data center demand and investment in the power sector. Profitability is set to grow, driven by the benefits of cost-saving initiatives and higher facility utilization. And finally, in Fluor & Energy Materials, we expect continued strength in Fluorine markets with resilient demand and pricing expected through the remainder of the year, which will help offset input cost increases. To support margins, the business is centered on prioritizing cost control initiatives complemented by active portfolio management -- product portfolio management to maximize value creation. In summary, our near-term priorities are to deliver on our commitments, delever the balance sheet, simplify operations and focus on our core business. We aim to improve EBITDA and cash flow through cost savings and growth from recently completed project investments, complemented by cash generation from noncore asset sales. These actions will enable us to significantly improve our leverage and strengthen our balance sheet by the end of 2026 without relying on potential market recovery or further benefits from business simplification. We remain committed to meeting customer needs and generating long-term value for our shareholders. Before I turn the call over for Q&A, I would like to note that we have issued a formal statement regarding recent market rumors about the Precision Agriculture business. As indicated in that statement, the company is continually engaged in assessing opportunities to optimize its portfolio and create value for its shareholders. Operator, we are ready to take questions at this time. Operator: [Operator Instructions] And your first question today will come from Andres Cardona with Citi. Andres Cardona: Stay on the capital allocation front, I just wanted to ask a very straight question about the JV you have with OxyChem and if there is any tag right that you may eventually decide to secure to exit your investment in this particular business. And if it exists, if there is any time for you guys to trigger it? Sameer S. Bharadwaj: Thank you, Andres. As you are aware, earlier this month, it was announced that Berkshire Hathaway had agreed to acquire the Occidental Petroleum's Chemicals business, including our joint venture with OxyChem in Ingleside, Texas. Now this joint venture is important and of significant value to both parties, and we are pleased that Berkshire Hathaway has decided to make this investment. Their long-term perspective and their commitment now at the bottom of the cycle validates the belief in the long-term prospects and value of the PVC chlor-alkali sector. And so on our side, we look forward to building a strong collaborative and productive relationship with our new partners, Berkshire Hathaway. And as far as any tag-along rights are concerned, no, there are no tag-along rights as such, and things continue as usual. Operator: And your next question today will come from Tasso Vasconcellos with UBS. Tasso Vasconcellos: I do have a question on the CapEx side. You did reaffirm the $400 million in CapEx for this year. I'm just wondering how do you view this level of CapEx as being sustainable looking forward? Because we have been reducing the disbursements because of the low of the cycle. So I'm just wondering if the cycle turns or if it doesn't, maybe looking one, two or three years ahead, if you should do some kind of catch-up on this CapEx or if eventually, you'll be able to maintain the maintenance CapEx at this low level? That's my question. Sameer S. Bharadwaj: Tasso, thank you for the question. In fact, the way we think about capital expenditures is our first and foremost priority is safety and asset integrity that allows business continuity. And so we will not compromise on that because that can have serious consequences both from a disruption standpoint as well as safety standpoint. And so our steady-state maintenance CapEx, it varies depending on the turnarounds for the different plants in various years, but it's somewhere in the range of $250 million to $270. And anything in addition to that is basically completing projects that we have already started so that they can get to revenue as soon as possible. And we would be extremely selective about any growth capital investment while we are going through the bottom of the cycle, right? And so our expectation would be to not compromise on maintenance CapEx and be super selective on growth CapEx going forward. Operator: And your next question today will come from Alejandra Obregon with Morgan Stanley. Go ahead. Alejandra Obregon: Hi. Good morning and thank you for taking my question. I actually have 2. The first one is on your optimization program. I was wondering if you can elaborate on what has been achieved so far? Where do you think there is more room for 2026? And if there's any region or any division that you believe could be optimized more for the coming year? And how should we think of it? And then the second one is on the Fluorspar division. I was just wondering if you have observed any recent change in the supply chain of fluorspar or maybe HF among your conversations or with your customers and competitors. This in the context of tightening export policies in China and of course, the increased scrutiny over critical minerals. It's clear that fluorspar is gaining some recognition, I have to say, as a strategic resource. So just wondering if you think that Mexico and Orbia could emerge as a relevant partner or a more relevant partner for the U.S. Sameer S. Bharadwaj: Okay. Well, look, I'll let Jim respond to the first question, and I can complement that as necessary, and I'll take the second question. Jim Kelly: Thanks, Alejandra. Appreciate the question. In terms of the optimization efforts, as I mentioned during my comments, the 3 key legs of the program that we announced a year ago are very much on track. So the cost reductions of $169 million achieved cumulatively over the -- since 2023, so over the past couple of years, with $250 million. And I would say at this point, honestly, $250 million plus being the objective by the time we get to 2027. We continue to look for alternatives and are proactive about continuing to drive cost reductions across all areas of the business. And secondly, we talked about the generation of EBITDA through already implemented or as Sameer calls it sort of near revenue growth projects that we've been driving, and that is on track to generate another $150 million of EBITDA by the time we get to 2027. And then the third element being the cash generation from the sale of noncore assets, where we've said we would generate approximately $150 million or potentially even more through 2025 and 2026, and we are ahead of schedule on that. We mentioned already having achieved about $85 million on that so far through this year relative to our target of $75 -- so that is well on track. And I believe that there are additional alternatives that we can be executing as we go through the remainder of the period of the next couple of years to continue to drive the delivering plan that we've stated. And important to note that as you see the results of that is in the third quarter, we did see leverage come down, as I noted in my comments from 3.51 to 3.42, and we would expect that process to continue over the remainder of this year and through next year. So I think we are beginning to see the results of that, and we'll continue to be aggressive in finding ways to continue that process. Sameer S. Bharadwaj: So as far as your second question is concerned, Ali, Fluorspar is on the list of U.S. critical minerals. -- and Orbia maintains its position as the global market leader in fluorspar supply. This competitive edge is difficult to replicate due to the unique assets Orbia controls and its exclusive rights to operate these critical resources in Mexico. So in that context, we expect the fluorine chain to continue to remain tight through the course of the decade with growth in new applications such as lithium-ion batteries and semiconductors. And the Mexico-U.S. corridor will play a very important role in securing that value chain for the U.S. So you're absolutely right. This is very important to us, and we are very well positioned to take advantage of this. Alejandra Obregon: And perhaps can you remind us of your utilization in your fluor plant in San Luis Potosi at the moment? Sameer S. Bharadwaj: So the mine actually is running at -- we are basically producing at maximum output. There have been some constraints with respect to the optimization of the tailing circuit and the water circuit, and we have been optimizing that over the last year with new technologies, and that will allow us to increase the output even more next year. But the bottom line is we sell every fluorine atom we produce. So we are completely maxed out. And our strategy is to place that fluorine atom in the highest value segments and the most profitable segments down the chain. Alejandra Obregon: Okay, Thank you very much. Sameer S. Bharadwaj: Thank you. Operator: And your next question today will come from Leonardo Marcondes with Bank of America. Please go ahead. Leonardo Marcondes: Good morning, Thank you for picking my questions. I have 2 from my end and the 2 are regarding the Netafim, right? So you mentioned the noncore asset sales, right? But could you maybe provide a bit better color on what you're thinking about the sale of core assets, right? How relevant this is for you nowadays? If you guys -- if this is something that you guys are considering? And the second question, this one is more related to Netafim, right? I mean when you bought the assets in 2018, right, and the first time you disclosed the company's EBITDA, I mean, Netafim's EBITDA was in 2019, the EBITDA was around $190 million, right? So if you guys could do a small analysis of what happened with Netafim over the past years that lead to a drop in profitability and drop in EBITDA as well. If you guys see any micro or macro trends there, I mean, this would be very helpful. Sameer S. Bharadwaj: Okay. Leonardo, let me address both of your questions here. In terms of noncore asset sales, what we call noncore are these small sales of smaller businesses or segments that are not strategic to us long term or sale of land buildings and machinery. And these are relatively small amounts. And as Jim said, we executed on about $83 million of noncore asset sales this year. With respect to Netafim, right, we are aware of certain recent media reports and market speculation concerning a potential divestiture of the business. Now we are continually engaged in assessing opportunities to optimize the company's portfolio. And we don't comment on market rumors on speculation. We are obviously committed to providing material information to the market in accordance with our disclosure obligations and regulatory requirements. We continue to assess ways in which potential changes to our portfolio could on our focus, reduce leverage and create significant shareholder value. And this includes considering divesting in whole or in part businesses that we determine are not an optimal fit within our portfolio or that would create more value under a different owner. Any such process would be done deliberately on a time line we determine. Our focus remains building a strategically focused, highly synergistic portfolio going forward with a single-minded dedication to creating value for our shareholders, okay? Now in terms of what happened to Netafim over the last several years in terms of profitability, Netafim's profitability at its peak was around in the mid-180s, around $180 million, $185 million. And back then, the market, particularly in the U.S. for our traditional heavy wall market and also in Europe were very strong. And these heavy wall crops typically are almonds, pistachios, walnuts, the entire greenhouse market in the Netherlands, where all the major greenhouses use Netafim equipment. And that took a significant hit after COVID, okay? So there were blockbuster years. There were huge inventories created, supply chain restrictions prevented exports of these materials. And then there was a significant slowdown in our traditional heavy wall markets. and that led to a decline in profitability. And the breaking out of the war in Europe had energy costs go through the roof and that impacted the greenhouse market, the drip irrigation equipment that we sell into greenhouses in a very significant way. We compensated for that by growing in new areas, in particular, the thin wall market, which is used for a broader fruits, vegetables and seasonal crops. And we have had tremendous growth in volume in the thin wall segment, but that comes at a somewhat lower profitability and wasn't enough to offset the decline in profitability in the heavy wall segment. Now what we have seen in the past 12 to 18 months, and you've seen a consistent improvement in Netafim's performance over the last couple of years, -- and we have also been focused on reducing costs, optimizing the footprint, focusing on cash generation. There's a huge focus on cash flow generation within Netafim. And you can see that in the results. And we are beginning to see some of our core markets like the United States, Mexico come back. And in particular, Brazil is an exceptionally strong market, driven by growth in coffee, cocoa, oranges, citrus and a number of other crops, okay? So I think we are in a very good trajectory to continue the improvement that we see in Netafim and with a strong focus on cash generation. But essentially, that's what happened with that business over the last several years. Leonardo Marcondes: That’s very clear, Thank you very much. Sameer S. Bharadwaj: Yes. And the thing to note is the thin wall market that we have created is completely complementary. So when the heavy wall market recovers, and we are beginning to see signs of that, that will be all additive. And so there is tremendous operating leverage in Netafim's earnings going forward. Leonardo Marcondes: Thank you. Operator: [Operator Instructions] And your next question today will come from Jeff Wickman with Payden & Rygel. Jeff Wickman: Thank you for the call, Could you provide an update on where you think leverage will be at the end of this year and then at the end of 2026, please? Sameer S. Bharadwaj: Jim, do you want to take this question? Jim Kelly: Sure. I'd be happy to do that. Thanks for the question, Jeff. So as I mentioned, we do expect that we'll continue to see a reduction from where we were at the end of Q3. So this is -- normally, we have a seasonal reduction in working capital, in particular, on top of all the initiatives that we've been driving. So my expectation for the end of the year is we talk about the leverage based on our adjusted EBITDA. That's the one that I talked about that went from 3.51 down to 3.42. I would expect that to end in the roughly 3.2 region by the end of the year. And we continue to drive significant reductions as we go through 2026. And I would expect to be in probably the kind of certainly between 2.5 and 3, probably around the middle of that range, 2.7ish, 2.8ish range, by the end of next year, based on what we see right now. Jeff Wickman: " Got it. Thank you. And then could you give us an update on what Netafim EBITDA is currently. [Audio gap] Sameer S. Bharadwaj: Jim... Go ahead. Jim Kelly: EBITDA for Netafim. So when you say what Netafim is currently in what regard in terms of their EBITDA or? Jeff Wickman: EBITDA, please. Jim Kelly: So on a year-to-date basis -- just give me 1 second. 135... So on a year-to-date basis, we are at $103 million. And we would have an expectation to be in the -- close to the $130 million or slightly above $130 million range, I would say, for the full year in that business. Jeff Wickman: Thank you very much. That’s it from me Jim Kelly: Thank you Jeff Operator: And your next question today will come from Jaskaran Singh with Goldman Sachs. Jaskaran Singh: Just a small clarification on the debt maturities that is there in the appendix. It shows a bank loan of $266 million in 2025. Is the expectation that this will be rolled? [Audio gap] Jim Kelly: Yes, I'm sorry. Yes, I did. the question now. So the expectation is, yes, that the bank debt that we have outstanding will be rolled over. We do not expect to have to pay that down. We'll speak with the banks and just roll that over. Although as we pay down our debt in the coming years, that may be one of the alternatives that we consider in terms of debt reduction, some combination potentially of that and the outstanding bonds. But the expectation right now, I would say, would be to roll that debt. Jaskaran Singh: Got it. So second question is just on Moody's. You mentioned like you are in constant touch with the rating agencies. I see that ratings are still on a negative outlook, and Moody's looks at a downgrade trigger is gross leverage of around 3.5x. I think -- so within that, could we expect any divestment that you already that is rumored? And would that lead to basically redemption of bonds? Just if you can share any thoughts on that because gross leverage as of LTM is around 4.8x, which needs to be around 3.5x for Moody's to at least stabilize the ratings at Ba1. Sameer S. Bharadwaj: I think you've already Go ahead, Jim. Go ahead, Jim Kelly: No, I was just going to say that we can't predict necessarily what other rating agencies will do. Moody's has decided to downgrade based on their metrics and their view of what the chemical sector is going to look like in the coming years. Their projections of leverage are through their model and how they view the world. We will continue to drive, as I mentioned during the comments that I made, the initiatives that we've had going that we talked about starting a year ago, but honestly, which we began considerably before the time that we had a public discussion about the sort of the 3 legs of the initiatives. We will continue to drive those things and the things that are within our control to bring our leverage down. So in terms of whether we would be looking to divest of assets to help to drive this or whatever, I think Sameer addressed that. And any potential divestiture of assets, I would say, would be largely driven by shareholder value creation and focus of Orbia's portfolio and our ongoing strategy more so than being focused just to delever. So we'll continue on the things that we control. And as you have seen, we will continue to bring the leverage down as we've already begun to do. And that process will continue over the course of the next coming years. Sameer S. Bharadwaj: Yes. But as Jim said, we have a strong plan to continue to delever as we generate earnings growth and free cash flow over the next 2 or 3 years. And any portfolio move only accelerates that effort. That's it. Operator: And your next question today is a follow-up from Alejandra Obregon of Morgan Stanley. Alejandra Obregon: If I can just piggyback on the prior question about the EBITDA for Netafim. If you can help us understand how much of that is the Netafim business and how much of that is Mexichem's legacy irrigation business? And if you were to explore alternatives around the division, would that include the whole thing? Or would that exclude Mexichem's irrigation legacy business? Sameer S. Bharadwaj: I think there's some confusion around that. I mean, at this point of time, there is no -- I mean, there is only one irrigation business. And so a long time ago, all operations were merged. And as of today, there is only one irrigation business. And Netafim is what it is, Alejandra Obregon: Got it. Understood, thank you very much. Sameer S. Bharadwaj: Yes, there might be some confusion with PVC pipe we may have sold through Wavin into the Irrigation segment, but that is completely independent of the drip irrigation systems that we sell. Operator: Okay, This will conclude our question-and-answer session. I would like to turn the conference back over to Sameer Bharadwaj for any closing remarks. Sameer S. Bharadwaj: Thank you, Nick. Our business continues to show resilience in challenging market conditions. With all our actions, we have created meaningful operating leverage to increase profitability when market conditions normalize. Thank you for participating in today's call. I look forward to our next update in February. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the Sallie Mae Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Kate deLacy, Senior Director and Head of Investor Relations. Please go ahead. Kate deLacy: Thank you, Chloe. Good evening, and welcome to Sallie Mae's Third Quarter 2025 Earnings Call. It is my pleasure to be here today with Jon Witter, our CEO; Pete Graham, our CFO; and Melissa Bronaugh, Managing Vice President of Strategic Finance. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here due to a variety of factors. Listeners should refer to the discussion of those factors in the company's Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include, among others, results of operations, financial conditions and/or cash flows as well as any potential impact of various external factors on our business. We undertake no obligation to update or revise any predictions, expectations or forward-looking statements to reflect events or circumstances that could occur after today, Thursday, October 23, 2025. Thank you. And now I'll turn the call over to Jon. Jonathan Witter: Thank you, Kate and Chloe. Good evening, everyone. Thank you for joining us to discuss Sallie Mae's Third Quarter 2025 results. I hope you'll take away 3 key messages today. First, we delivered a successful quarter and peak season. Second, we're pleased with our year-to-date performance and believe we have real momentum that will carry us through the rest of the year. And third, we're optimistic about the long-term outlook for private student lending and the growth of Sallie Mae. Let me begin with the quarter's results. GAAP diluted EPS in the third quarter was $0.63 per share. Loan originations for the third quarter were $2.9 billion, representing 6.4% growth over the year ago quarter and 6% growth year-to-date. We were pleased to see that the credit quality of originations remain strong, showing incremental improvement year-over-year and steady but meaningful improvement over the last several years. Our cosigner rate for the third quarter was 95% compared to 92% in the year-ago quarter and the average FICO score at approval increased to 756 from 754. These indicators reflect continued discipline in our underwriting standards. We have continued to see positive momentum in our credit performance. Private education loan net charge-offs in Q3 of '25 were $78 million, representing 1.95% of average private education loans and repayment, down 13 basis points from the year ago quarter. While we are certainly living in a period of economic ambiguity, we have not observed any material change in our borrowers' ability to meet their obligations to Sallie Mae. During the third quarter, we successfully completed the previously announced sale of approximately $1.9 billion in loans, generating $136 million in gains. We continued our capital return strategy in the third quarter, repurchasing 5.6 million shares at an average price of $29.45 per share. Since initiating this strategy in 2020, we have reduced our outstanding shares by 55% with an average price of $16.75. Pete will now take you through some additional financial highlights of the quarter. Pete? Peter Graham: Thank you, Jon. Good evening, everyone. Let's continue with a discussion of key drivers of earnings. For the third quarter of 2025, we earned $373 million of net interest income. This is up $14 million from the prior year quarter. Our net interest margin was 5.18% for the quarter, 18 basis points ahead of the year ago quarter with 13 basis points behind the prior quarter given the drag from the initial liquidity that we hold to satisfy the requirements of peak season. We continue to believe that an annual NIM target in the low to 5% range -- low to mid-5% range remains appropriate over the longer term. Our provision for credit losses was $179 million in the third quarter, down from $271 million in the prior year quarter. This was largely due to $119 million of provision release resulting from the third quarter loan sale. Our total allowance as a percentage of private education loan exposure modestly improved to 5.93%, slightly below the prior quarter's 5.95% and just 9 basis points above the year ago quarter. The change from the year ago quarter results from a few factors. As we noted last quarter, the Moody's economic forecast that we use in our CECL models have deteriorated, driving a significant portion of the increase to our allowance. This model-driven impact was partially offset, however, by continued improvements in our credit performance and portfolio quality. At the end of the third quarter, 4% of private education loans and repayment were 30 days or more delinquent, up from 3.6% at the end of the year ago quarter. It's important to note that this year-over-year increase is largely attributable to changes we made last year to our loan modification eligibility criteria. Specifically, since October of last year, we've restricted loan modifications to those who are at least 60 days delinquent. This change was purposeful based on our observation that many early-stage delinquent borrowers tend to self-cure without intervention. We believe that approximately 25 basis points of delinquencies this quarter can be attributed to borrowers who would have qualified for a modification prior to entering our reported delinquency buckets under the prior eligibility criteria. Importantly, we've seen stability in our late-stage delinquencies and roll rates. Our loan modification programs continue to deliver strong results. When we look at borrowers who have been in the programs for over a year, 80% are consistently making payments. Additionally, following the previously mentioned change, monthly loan modification enrollments declined and have now stabilized around half the level that they were prior to the change. We continue to believe that our loss mitigation programs are helping our borrowers manage through periods of adversity and establish positive payment habits. Third quarter noninterest expenses were $180 million compared to $167 million in the prior quarter and $172 million in the year ago quarter. This aligns with our full year outlook and positions us well as we head into the final months of the year. And finally, our liquidity and capital positions remain strong. We ended the quarter with a liquidity ratio of 15.8%, total risk-based capital was 12.6% and common equity Tier 1 capital was 11.3%. We're encouraged by the exciting opportunities ahead as we continue to grow and evolve our business, enabling strong return of capital to shareholders moving forward. Now I'll turn the call back to Jon. Jonathan Witter: Thanks, Pete. I hope you share my belief that our third quarter performance reflects strong execution and positions us well to sustain momentum through the remainder of 2025. As we look ahead, we're optimistic about the impact of recent federal reforms and the opportunities they create for our industry and for Sallie Mae to better serve students and families. As the leading private student lender, Sallie Mae is well positioned to support them through this transition. At the same time, we recognize that these changes create new challenges for our school partners. We are proud to be working closely with many of them to design innovative solutions that help ensure students can access and complete their desired degrees. In parallel, we have been actively exploring alternative funding partnerships in the private credit space to expand our ability to serve students. We expect to announce a first-of-its-kind partnership in the near term, and we'll share more details soon after. We view this as a strategic step toward unlocking the value of our attractive customer base, setting the stage for sustainable growth of capital-light fee-based revenues. We are looking forward to sharing more at a second investor forum later this year. Let me conclude with a discussion of 2025 guidance. To kick off this partnership, we anticipate selling both a small portfolio of seasoned loans and a portion of our recent peak season originations either in the fourth quarter or early in 2026. Accordingly, we expect to designate a portion of our loans as held for sale prior to the end of the year. As a result, we now expect our GAAP earnings per common share for 2025 to be between $3.20 and $3.30. At the same time, we are reaffirming all other elements of our 2025 outlook, including originations growth, net charge-offs and noninterest expense metrics, reflecting continued confidence in our strategic trajectory. With that, Pete, why don't we go ahead and open up the call for some questions? Operator: [Operator Instructions] Our first question is coming from Moshe Orenbuch with TD Cowen. Moshe Orenbuch: Great. I guess maybe 2 thoughts and questions. The first, I guess, is, is there a way to kind of think about the performance of the current delinquency out a little further than the end of the year. I guess, I know it's not your custom to give guidance past the current year, but -- and we've looked at roll rates and we see that they've gotten somewhat better, but there has been some concern about the level of delinquency. So could you -- is there any way to kind of give us a sense as to how you expect that -- the current book to perform over the next several quarters? Peter Graham: Yes, Moshe, it's Pete here. I think, look, we've been really pleased with the performance of the loan mod programs. We are encouraged by the stability we've seen in terms of new entrants to the programs that we've seen over the last few quarters. Given the seasonality of our business, yes, early-stage delinquencies ticked up a little bit in this quarter, but we don't view that as anything troubling in terms of longer-term trends. And we expect to continue to see stability in the late-stage delinquencies and our roll rates. And so we're comfortable with the guidance we've given through the end of this year, and we continue to believe that, that kind of high 1s, low 2% net charge-off rate is the right way to think about us over a longer term. Moshe Orenbuch: Got it. And obviously, your new partner in terms of this sale is obviously also, I would assume, given that some thought. Is there any way to give us any further texture around how to think about that sale and how -- what the terms would be like? Peter Graham: Again, we're still in final -- sort of the final stretch of the deal coming together, and we'll release appropriate level of detail when we complete that, and we look forward to talking in more detail about what that means for the future as we go into the investor forum, as Jon said. Operator: We'll take our next question from Jeff Adelson with Morgan Stanley. Jeffrey Adelson: Just wanted to circle back on the modification question. Listen, I recognize that the pace of modifications has slowed. And if we look at the 10-Q disclosure on the payment status table, the volume of modifications over the past 12 months has come down a lot. But if we do look at that table, it does seem like there's a higher percentage of 12-month mods rising on a delinquency basis. So just maybe some color there. And how are you thinking about the roll-off of those modifications as borrowers are graduating out over the next 12 months? Peter Graham: Yes. Again, we're happy with the performance of people in the mods. For those that have been in for 12 months or longer, there's strong sort of payment patterns amongst that cohort. And we believe that these programs have been successful in helping people through a period of stress and to establish positive payment patterns. And so we're optimistic as we look to those sort of first graduating wave from these that will have a high degree of success, and that's something that we're keeping an eye on. Jeffrey Adelson: And just on a partnership opportunity, any sort of early details you can give us ahead of the Investor Forum later this year, just maybe any sort of insight into the economics, length of the terms? And are you going to potentially be starting to use some of the current book? Or will that be more for the forthcoming opportunity with Grad PLUS going away? And just any sort of like high-level commentary on how that might shift economics. Peter Graham: Yes. Again, we're close to being done, but we're not done. So I can't share too much detail. We've said pretty consistently that we were looking to establish a multiyear arrangement with a strategic partner and that still holds true. I think if you consider Jon's comments around our revision of guidance, the fact that we're designating a portion of our portfolio of loans as held for sale as we go into the fourth quarter, that's an indicator that we have loans in the current book that are going to be part of it. Operator: We'll move next to Mark DeVries with Deutsche Bank. Mark DeVries: I have a follow-up question on Moshe's first question about kind of the outlook for credit, given where we are with the delinquency trends. I mean I get that -- I think you indicated roughly 25 basis points of the delinquencies are due to kind of changes in eligibility for the loan mods, but that would still imply we're kind of up year-over-year on -- I think you commented on stable, not necessarily improving roll rates. So is it still right to assume that delinquencies at best or kind of I mean, charge-offs as we look forward, are going to be kind of flat, if not slightly higher, just given we're up year-over-year on delinquencies net? Jonathan Witter: Yes, Mark, it's Jon. I'm not sure I have a lot to add over what Pete said to Moshe. But look, I think if you look at the overall delinquency trend, I think the change in program terms really accounts for the majority of the change in delinquency rate year-over-year. We obviously have a methodology for figuring that out that points to the specific cases that we know with certainty. By the way, there's a sort of confidence band around that, it could be even a little bit higher. But I sort of consider delinquencies to be sort of plus or minus flat within sort of normal operational variability that we're seeing in the book. And I think as Pete said, we feel pretty comfortable about the roll rates being consistent and flat and the performance of the mod. So as I mentioned, we are certainly in an ambiguous economic environment. It's hard to make predictions now 15 months out if you start to think about the end of next year. So we're not going to do that here today. But I think we continue to feel confident in sort of the long-term through-the-cycle sort of metrics that we laid out before, the 1.9% to sort of 2.1% numbers that have been commonly cited. And I think we believe that we're delivering on those commitments pretty well and are excited to continue that progress next year. Mark DeVries: Okay. Fair enough. And then just turning to, I think the marketing strategies that you talked about being kind of the reason that you had to kind of reduce the origination guidance for this year. Are these strategies that you've kind of revisited and potentially looking for ways to kind of reaccelerate origination growth as we look into 2026? Jonathan Witter: Yes. I mean, I think, Mark, a couple of thoughts. One, I think we put up over 6% origination growth for the quarter year-over-year. That's really strong and I think attractive origination growth that I think probably fares and compares well with what a lot of other consumer credit-oriented companies would do. So one, I don't think we're making any apologies for the level of originations growth that we've seen. Two, as I think Pete shared at a conference earlier this fall, there's gives and gets every year in how we think about originations growth. We, every year, strive to be better, more efficient, more effective in our marketing. I think we've done that. You've seen that in our cost of acquisition coming down over time. We've also been really thoughtful about ways that we can continue to hone and refine our underwriting models to make sure that we are sort of getting the very best type of customer that we can and the ones that will really maximize our ROEs. And I think Pete shared that over the last 3 or 4 years, we've taken rough justice, $600 million to $700 million a year out of our annual originations. So the growth rates that we're talking about, which I think are really attractive growth rates are happening simultaneously to us improving pretty dramatically the quality of our originations. I think that's a trade our investors really do like and should like. That's value creation. I think this year, we had a plan that we thought would get us to slightly higher originations growth in light of the headwinds of sort of those underwriting changes. I think we executed most of it. We didn't quite get all of it. But again, I think we believe we are on a trajectory, and we've built a marketing machine that will allow us to continue to sort of maintain and at times, potentially grow our already industry-leading market share. We see no reason to believe that we won't continue our successful growth next year. And we look forward to not only competing for the traditional business we have, but quite frankly, also competing very hard for the emerging PLUS opportunity as it unfolds. Operator: We will take our next question from Terry Ma with Barclays. Terry Ma: Just wanted to follow up on credit. If I just think simplistically, historically, there's a positive correlation between delinquencies and net charge-offs. So when you sit here today and look at the 4%, like any color you can kind of give us on, like why that wouldn't kind of imply maybe higher charge-offs for 2026? Peter Graham: Yes. I think I covered it in my prior comments, Terry, that like we feel like the combination of the loan modification programs we put in place are going to behave as we intended them to do when we designed the programs. And what we're seeing so far with those programs is that we've got stable levels of late-stage delinquency and the roll rates are stabilized as well. So like that's our expectation going forward. Again, barring any exogenous sort of market event, we feel like we're set up for success there. And we reconfirmed our guidance for this year, and we reconfirmed our longer-term read on destination net charge-off range. I'm not sure what more we can say. Terry Ma: Okay. Fair enough. And I guess, like in your deck, you mentioned Grad originations are up 11% year-over-year. Any color you can give us on kind of what's driving that, whether it's behavioral changes from borrowers as a result of the bill that passed earlier? Or are you just kind of gaining share? Jonathan Witter: Terry, we won't have share numbers for the quarter for probably another month plus on that. We have always had a grad business. It is one that in the grand scheme of all the grad business out there was relatively small because of the Grad PLUS position from the government. There were only pockets where we felt like we could really profitably compete with the Grad PLUS program. We have obviously, since PLUS reform was announced, started to pay a lot more attention to the opportunities to innovate in our graduate marketing. I think we felt like it was important to sort of continue to break out our sort of Grad performance. And so my guess is the result is probably in part the change of a little bit of customer behavior. I think we don't quite know that yet, but it wouldn't surprise me. I think it's also just a focus of us beginning to gear up and get ready for what we think will be a much larger opportunity ahead. But we see it as an exciting opportunity for us, not only in next year's volume, which given the phase-in of the PLUS reform is going to be smaller, but really playing out here over the course of the next couple of years. Operator: We'll move next to Don Fandetti with Wells Fargo. Donald Fandetti: In terms of the recent credit and ABS market volatility, do you think that's going to impact your gain on sale margins for the Q4, Q1 production? And is the 7% this quarter sort of a good base level run rate? Peter Graham: Yes. I think what I would say there is, there's different phases in the cycle. We've done over time, pretty successful loan sales over a multiyear period in kind of that sort of mid- to high single-digit range. Sometimes we've gotten above that. Sometimes we're a little below that. But I think it's really tied to kind of where spreads are in general at any point in time when we're executing a trade. At the margins, it can also be impacted by the implied structure that the purchaser is intending to use for their leverage takeout as well. Operator: We'll take our next question from Sanjay Sakhrani with KBW. Sanjay Sakhrani: Pete, I just want to make sure I understood sort of the fourth quarter impact on moving those loans to held for sale. Does that mean that you sort of recognize -- do you move provisions over? I'm just trying to think about like it has an earnings benefit, correct? It's not the actual gain on sale that you recognize. Peter Graham: Correct. So when you -- the accounting for held for sale, it is essentially a lower cost of market. So to the extent you expect a premium, you don't really have a change in the value of the loans themselves. You can continue to carry them at their sort of par basis for lack of a better term. And then to the extent they're in held for sale, you don't have to put a CECL provision against them. So the impact that we've reflected in our updated guidance is the release of that provision. Sanjay Sakhrani: Got it. And is there any way to sort of dimensionalize that as far as sort of what the contribution was to the annual guide? Peter Graham: Again, you need to know the exact amount of loans that have been reclassified, which we haven't disclosed. And it's roughly the CECL reserve rate that we talk about each quarter that gets released. Sanjay Sakhrani: Okay. You guys haven't disclosed that yet what you've reclassified? Peter Graham: Correct. Sanjay Sakhrani: Okay. And then, Jon, just one follow-up on this repayment wave that's coming through in November. Obviously, lots of discussion about graduates and the challenging job market. I mean, is there any -- I know all the commentary that you have was pretty constructive in terms of what you're seeing. I mean, do you guys have any foresight into sort of how those cohorts will behave as they come into repayment? Or is that sort of a point of scrimmage type of event? Jonathan Witter: Yes, Sanjay, great question. And look, I read all the same stories that I'm sure you and others read and sort of see the same facts. Let me see if I can paint a little bit of a picture here. But I would start by saying the period where students graduate and transition into their adult lives, we know is -- always has been, and I suspect always will be one of the most difficult periods in sort of their life. And that's reflected by the fact that rough justice half of all financial distress that we see, and this has been true, Sanjay, for many, many years, happens in that first year or 2 after they finish their higher education experience and enter repayment. So this is always a time where unemployment is higher. This is always a time where financial distress is a little bit higher. And by the way, that's our business. That's why we've built the programs we've built. That's why we're really expert in sort of understanding how to market to and educate our students and their cosigners about the transition to higher education and the like. It's a known period of sort of performance importance for us. So that's sort of thought number one. Thought number two is if you go back and you look at what's been going on with early graduate unemployment rates. So think about students who are sort of 20 to 24 years old. And if you take out the COVID year or 2, which was obviously unusual, what we have seen for the last 3 or so years is early kind of graduate unemployment rates are slightly elevated from where they were pre-COVID. What's really interesting is despite all the stories of sort of a gloom and doom for the current graduating class, the current unemployment rate for early-stage graduates is only up about 10 basis points over last year. And that's even smaller on a percentage basis than what you might imagine. And I'd encourage you to go back and look at the data for yourself. And so while I said earlier in my prepared remarks that we are certainly living in, I think my term was ambiguous economic times, I think I was also pretty clear in saying we just haven't seen that yet in our operating results. Now as the leader of a credit-oriented company, I'm not ever going to tempt fate by sort of trying to predict what the future economic environment is going to be like. But I think we would say the unemployment story is always a challenge. We are really well prepared and suited to manage it. The impacts year-over-year, I think, are not what maybe is the popular perception out there and I think sort of the data tells a pretty clear story. And we haven't seen it in our performance, but we're not taking that for granted. We are continuing to work really constructively with our borrowers. We're continuing to up our outreach program for soon-to-be graduates to really help ease their transition into repayment because we do view this as a really important performance moment for us and really more importantly, a really important moment for our students and their families and helping them be successful in this transition. Operator: We'll move next to Rick Shane with JPMorgan. Richard Shane: A couple of things. Look, the decision to sell loans in the fourth quarter, doing some rough math, it looks a little bit different from what you guys outlined strategically 2 years ago in terms of growing the book a little bit faster and reducing or at least keeping flat the actual dollar volume of loans sold. So I'm curious sort of what shifted in your thinking there. And then I want to make sure I understand the answer to Sanjay's question because it sounds like there are basically 2 scenarios here. One scenario where loans are held for sale, you release the reserves, but you don't recognize the gain on sale. Second scenario is you complete the sale and you get both the gain on sale and the reserve release. Given where gain on sale margins are, it would seem that the variance between those 2 scenarios is significantly more greater than the variance between the high end and low end of your guidance. And so I'm trying to make sure I understand this fully. Jonathan Witter: Yes. Rick, let me take those in reverse order, and I'll invite Pete at the end to jump in if I miss anything. We have not assumed anything in our guidance about a gain on sale. I think we said very clearly that the actual loan sale would happen either in the fourth quarter or in the first quarter. We don't know that timing yet. We felt like it was inappropriate for us to incorporate the gain into our outlook. So there is nothing about the gain in our guidance. I think what we said was we expect to sort of conclude and to hopefully sign this deal here in the near term. When we do, we will identify the loans that will be a part of that sort of initial deal. And as I think is appropriate and good accounting, we will, therefore, start to account for those loans differently at that time regardless of whether or not the actual closing date for that sale has a '25 handle on it or a '26 handle on it. So hopefully, that sort of answers your question. And again, we've tried to be as clear as we can be about that so that you can model it appropriately. I think in terms of your question -- I'm sorry? Richard Shane: I was going to say that's helpful. Basically, the reserve release is contemplated in that guidance, but you're not embedding a gain on sale. If the deal closes in the fourth quarter, it's probably upside to the number? Jonathan Witter: Correct. In terms of your question of sort of what strategically has changed, I think the answer in short form is nothing, but I think it's a little more complicated than that. We are still very, very committed to the strategy that we -- the general strategy that we laid out at the Investor Forum 2 years ago, December, which is the idea of modest balance sheet growth in the bank, using loan sales to moderate that growth, still have aggressive return of capital and so forth. What I think has changed since then is really 2 things: one, PLUS reform, which if you look at it when fully implemented, has the opportunity to increase our annual originations meaningfully, and I think we've given all those numbers on past calls. The other is both the growth in sort of size and sophistication of private credit and sort of our ability to think about creating a new sort of third funding leg of the stool, if you will, and sort of a real business around that. And so our view is at one end of the spectrum, you've got growing the bank balance sheet, and that comes with really stable, high-quality earnings, but it also has a fairly high and heavy capital requirement to it. At the other end of the spectrum, you've got our traditional loan sale program, which we still really like which is attractive earnings economics but -- and very attractive sort of capital characteristics, but a little bit more volatility in the earnings. I think you heard Pete talk about that a minute ago. I think what we believe we have the opportunity to create is something that's a little bit in the middle that has the potential of having sort of more stable long-term earnings. I think we've talked about this over time, the kinds of things that would be easier to sort of model and manage, think about it almost in a sort of asset under management kind of construct. At the very same time, really attractive sort of capital characteristics that go along with that. And Rick, you've known us long enough to know that we really care about capital efficiency and capital return as sort of our North Star. And so I think what you're hearing us talk about and you've heard us talk about for the last 3 or 4 quarters, is we're excited about building sort of that third leg to our stool. And I think this is the right time for us to do it as we're sitting here on the eve of PLUS reform beginning. Yes, that probably will cause us to think a little bit differently about balance sheet growth levels here over the next several quarters as we get that up and going. But make no mistake, nothing has changed in our strategy, except we have an exciting third opportunity, which should only make it better. Richard Shane: Got it. Okay. I suspect we'll see a slide on this in a few months. Jonathan Witter: I would hope so. Operator: We'll move next to Giuliano Bologna with Compass Point. Giuliano Anderes-Bologna: I appreciate a lot of the commentary around the new program. Maybe touching on the -- on that program and a little bit of the accounting around that. I'm curious when you talk about the loans that are being moved to held for sale, is that just for the initial sale that you're planning? Or is there -- or will you continue to roll loans into held for sale as you kind of keep executing to the program? Or will those go up more similarly to the current loan sales? Peter Graham: Yes. So the idea and the intent is to create a multiyear partnership arrangement. The specific loans that we've identified are sort of the start of that relationship. And so over time, we would have ideally some portion of our new originations that would go into this new partnership. Giuliano Anderes-Bologna: That's helpful. So we should see kind of an ongoing flow of loans that just go directly into held for sale at lower cost of market going forward. And then when I think about the -- I realize that there are limitations in terms of how much you can say, but in order to kind of get within the guidance range, it seems like it's -- you need to have a number that's well into the $1 billion, even close to $2 billion that would have to move to held for sale in terms of the reserve releases. Is that wildly off base? Or am I thinking about the right ZIP code? Peter Graham: I mean, again, the simple math would be our reserve rate times a notional number. So that's probably about all I'm comfortable giving you on the call. Giuliano Anderes-Bologna: That's helpful. And then maybe just one quick one. I realize that the prior questions come up a few times. I mean there's obviously been a bit of a structural change in the way that you're approaching the forbearance modifications and how to deal with delinquencies. And we had all the commentary in terms of what you expect when it comes to the ultimate improvements. I'm curious when you think about the overall kind of accounting impact, is the kind of lower usage of forbearance and higher usage of modifications post-COVID or in the current time frame and going forward, something that will have a benefit when it comes to more -- less interest rate reversals and that might move around the actual delinquency rate and benefit charge-offs over time? Or is there a potential that charge-offs might be higher, but you have less interest rate reversals because you're getting more loans to reperform and still benefiting on a net basis? Peter Graham: Yes. I think if you take a few steps back and you look broadly at our use of forbearance as a tool to manage the stress in the early-stage repayment portion of the book, the overall levels of people enrolled in that forbearance prior to our change in practice compared to the overall level of people that are now in the mod programs is relatively consistent. It's not exactly like-for-like, but it's -- on order of magnitude, it's pretty consistent. But what we substituted was sort of short-term and judgmental usage of forbearance to manage stress and forbearance, meaning no payments are required for a more programmatic tool that tries to adjust for where the borrower is in terms of their ability to make payments on the loan. And so we feel like these new programs that we have put in place are fit for purpose, so to speak. We believe that the metrics that we're seeing in terms of performance of the borrowers in those programs are promising and give us comfort that they're designed appropriately. And we believe that as these borrowers start to graduate out of those programs and step back into their contractual terms, we expect to see a high degree of success in doing that. Operator: We'll move next to John Arfstrom with RBC Capital. Jon Arfstrom: How are you thinking about buyback appetite at this point and the authorization as well? Jonathan Witter: John, it's Jon. I think the way that I would say that is, first of all, we are delighted with how our buyback program has performed through the course of this year. If you look at the numbers we just announced, we were obviously very active in the marketplace over the last couple of months during this period of dislocation. And I think bought back stock on attractive terms and at prices that I think when we look back in a month or 2 or a quarter or 2, we're going to feel absolutely great about. We've obviously talked a lot about the partnership on this deal. We've talked a lot about sort of the various gives and takes to sort of our balance sheet and business model over the course of the next quarter or 2. I think our view is we will sit back as we get this partnership across the goal line. We will look at the exact timing of that. We will determine, therefore, what's our appetite to do sort of additional share buybacks, how much of that we're going to do. And we'll set up our plan to sort of execute that over the course of this and coming quarters. So I can't comment today any more specifically on what it's going to be. I think we have to get through a couple of these sort of moving pieces. But I think you should expect, as has been the case for the last 5 years, we remain really committed to buying back our stock aggressively. It's something that we feel is an important thing that drives shareholder value. And we'll continue to do so at the time and in the quantity that we deem to be correct. Jon Arfstrom: Okay. Fair enough. And then just an optics question, the 4% delinquency rate. Is that a level that we should expect to continue to trend up over time? Or is it not clear? Or is that not the right way to really look at it? Peter Graham: Look, I think that we're -- this quarter, in particular, is a seasonal sort of peak with the way that the repayment waves come through. And so I would expect this to be kind of a high point in terms of delinquencies in any given year. In terms of absolute levels, again, we're not as concerned about what the absolute level is. What we're concerned about is what are the late-stage delinquency levels, what are the roll rates and how does that implicate in terms of net charge-offs. And we feel really good about the programs that we've designed and how they're performing. Jon Arfstrom: Okay. And then if I can ask one more, Jon, for you. Just very big picture. The noise is kind of deafening on consumer health and students entering the job market and delinquencies. Do you feel like we're all -- it's been a wild quarter in your stock. Do you feel like we're all too pessimistic on the credit outlook? Are we overreacting to it? Or do you have any thoughts on that, just bigger picture? Jonathan Witter: Yes, John, I'm not sure I have a lot to add over the answer I gave earlier. I think we have seen a relatively de minimis change year-over-year in the unemployment rate of early college grads or young college grads, those kind of 20 to 24. I think I said in my prepared remarks that we have not yet seen this ambiguous economic environment translate into anything that we sense as an inability for customers to not meet their financial obligations and sort of commitments to Sallie Mae. It's a little bit hard for me to say whether it's overblown or not. I'll just say we have not seen -- we have not seen the results of some of the stories that have been put out there. And it's obviously something that we take very seriously, and we'll continue to watch for. But the time of college graduation is always associated with higher unemployment and a little bit more financial distress. And I'm not sure that we're seeing anything right now that's particularly out of the ordinary from what we would expect to see. Operator: We'll move next to Caroline Latta with Bank of America. Caroline Latta: I just wanted to ask, how are you guys thinking about the opportunity from the PLUS program and other federal government policy changes? Jonathan Witter: Yes, Caroline, I probably won't do it justice here today. I think we see it as an important opportunity for the private student lending market to step in and help support families and students through sort of this time of transition. We gave some numbers on the last call of what we thought that could be worth in terms of annual origination changes to us when fully implemented. And I think we were thinking about that, if memory serves in the sort of $4 billion to $5 billion range. That will not all be sort of recognized on year 1. The PLUS reform phases in sort of each year. So if you're enrolled in a program and you've taken a loan before, I think it's July 1 of next year, you're grandfathered in under the old program. So that means it's really next year's undergraduate freshmen and graduate school first years that are sort of under the new program. So you have to sort of build it up over time based on the average length expectancy of sort of each of those programs. But if you go back and you look at sort of the details we provided on the last call, I think you'll get a pretty good sense of that. Caroline Latta: Awesome. And then maybe just a follow-up. Are you seeing any differences in how graduate loans are performing versus undergraduate loans in terms of like entry into delinquency and roll rates? Jonathan Witter: Yes. We have a number of different grad programs. It is an apples-to-oranges comparison. All the different programs perform differently. But all of them are sort of governed under the same kind of return and lifetime loss thresholds and standards that we hold. So while the timing and the patterns might be a little bit different, the underlying sort of decision and governance matrix and framework is the same. So yes, they're different on the surface, but we like those loans every bit as much as we like our other loans. Operator: This concludes the Q&A portion of today's call. I would now like to turn the floor over to Mr. Jon Witter for closing remarks. Jonathan Witter: Chloe, thank you, and thank you to everyone who joined today. We appreciate your ongoing interest in Sallie Mae. We look forward to speaking with all of you at the upcoming Investor Forum, which we will schedule here in the weeks ahead, but will happen before the end of the year and obviously look forward to continuing the conversation as well next quarter. With that, Kate, we'll turn it over to you for some closing business. Kate deLacy: Thanks, Jon. Thank you all for your time and questions today. A replay of this call and the presentation will be available on the investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call. Operator: This concludes today's Sallie Mae Third Quarter 2025 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.
Operator: Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to Business First Bancshares Q3 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Matt Sealy. You may begin. Matthew Sealy: Thank you. Good afternoon, and thank you all for joining. Earlier today, we issued our third quarter 2025 earnings press release. A copy of which is available on our website, along with the slide presentation that we will reference during today's call. Please refer to Slide 3 of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note our safe harbor statements are available on Page 7 of our earnings press release that was filed with the SEC today. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release. I'm joined this afternoon by Business First Bancshares' Chairman and CEO, Jude Melville; Chief Financial Officer, Greg Robertson; Chief Banking Officer, Philip Jordan; and President of b1BANK, Jerry Vascocu. After the presentation, we'll be happy to address any questions you might have. And with that, I'll turn the call over to you, Jude. David Melville: Okay. Thanks, Matt, and good afternoon, and thank you all for being with us today. It was another solid working day quarter for our company. Greg will follow my remarks with specific numbers that I know you're eager to dive into, but I'd like to use my time to highlight three themes on which we are focused. First, we continue to show incremental quality earnings improvement. And importantly, that improvement has been driven in large part by our strong expense control. To be specific, 3 quarters of essentially flat core noninterest expenses. We've made significant investment over the past few years in our effort to reach a meaningful asset size, distributed over what we consider to be an attractive footprint. And having done so, have been pivoting our focus to the generation of operating leverage and expect it to remain there. As a result, our aggregate earnings, our capital ratios, our tangible book value levels and our efficiency ratio all showed material improvement over the quarter and year-to-date, trends we expect to continue. Second, our team has executed magnificently on the operational challenges we committed to this year, converting our entire core bank at the end of the second quarter to a new processor. And following quickly behind that, converting Oakwood Bank to the new system at the end of the third quarter. Although this aspect of performance doesn't easily fit into an earnings model, it's critical to our ongoing performance as an institution, preparing to be better as we get bigger, creates value that unfortunately may only be recognized over time, but I want to be sure to congratulate our team now on job excellently done. In addition to system-wide efficiencies, operational excellence is also what allows us to feel confident that we can reap the financial potential associated with our two current M&A initiatives. We expect to see much more of the all-in economic benefit from the Oakwood transaction achieved by the first quarter of 2026. We also remain on pace to close the Progressive Bank transaction early in the first quarter and scheduled to convert that asset in August, enabling us to fully incorporate both institutions and demonstrate unified post-integration financials in full for the fourth quarter of '26. We are focused on execution as we optimize the partnerships and opportunities on our plate. Third, we have included a new chart in our deck on Page 15, illustrating the momentum we are experiencing in revenue generation from our young correspondent banking unit. We have about 175 banks that we partner with in some form and expect to generate over $17 million in revenue this year, leading to the unit contributing roughly $5 million towards our combined net income over the course of the year. We're only getting started on this front and believe the investments we've made towards this initiative will lead to even more capital-efficient earnings production as we grow operating leverage within the unit, much as we're beginning to see the efficiency benefit of scale across our entire bank. So our job for the next few quarters is relatively straightforward and clear, remain committed to effective expense control, fully execute on our recent acquisitions, maintain our historically stable and relatively strong net interest margin as we grow within our retained capital, and continue the progress we've been building -- as we've been building an alternate source of noninterest income through the building of our correspondent banking unit. As we execute on these priorities, we're confident the combined effect will create the steady profitability and tangible book value increases over the course of 2026 in both aggregate and per share basis with visibility into our roughly 1.2% core ROAA run rate by the end of the fourth quarter. It's an exciting time, and we look forward to answering any questions you might have. With that, I'll turn it over to Greg. Gregory Robertson: Thank you, Jude, and good afternoon, everyone. As always, I'll spend a few minutes reviewing our results, and we'll discuss our updated outlook before we open up to Q&A. Third quarter GAAP net income and EPS available to common shareholders was $21.5 million and $0.73 per share, and included $1.6 million merger in core conversion-related expense, $2.0 million employee retention tax credit and a $77,000 gain on sale of securities. Excluding these noncore items, non-GAAP core net income and EPS available to common shareholders was $21.2 million and $0.72. From our perspective, third quarter results marked another solid quarter of consistent profitability, generating a 1.06% core ROAA with our core efficiency ratio falling to 60.45% for the quarter. From a corporate perspective, we were active during the quarter with a successful core conversion of the Oakwood bank systems, which occurred at the end of September. Additionally, in conjunction with our announcing our third quarter results, we announced an increase in our quarterly common stock dividend by $0.01. Starting on the balance sheet. Total loans held for investment declined $26.6 million or 1.7% annualized on a linked-quarter basis. Scheduled and nonscheduled paydowns and payoffs accelerated somewhat during the third quarter totaling $479 million, while new loan production was $452 million during the quarter. On a linked-quarter basis, residential 1-4 family and C&D loans increased $47.6 million and $38.6 million, respectively. This was offset by total CRE loans decreasing $71.1 million, while total C&I loans declined $40.2 million from the second quarter of 2025. Based on unpaid principal balances, Texas-based loans remained flat at approximately 40% of the overall portfolio as of September 30, 2025. Total deposits increased $87.2 million, mostly due to a net increase in interest-bearing deposits of $131.4 million on a linked-quarter basis, somewhat offset by a net decrease in noninterest-bearing deposits of $44.15 million from the prior quarter. The net decrease in noninterest-bearing balances was not unexpected. As you might recall, at the end of the prior quarter, we experienced a large $60 million influx related to a single noninterest-bearing account relationship. This was a temporary deposit, which was expected to withdraw in early Q3. This withdrawal did, in fact, occur, which pressured overall growth during the third quarter. I think it's worth mentioning, in spite of the Q3 outflow, net growth in noninterest-bearing deposits since March 31, 2025, was $58.2 million, this represents approximately 9% annualized growth in noninterest-bearing deposits. As of the end of the third quarter of 2025, noninterest-bearing deposits represent 21.0% of total deposits compared to the 20.3% at the end of Q1. Lastly, on the funding side of the balance sheet, FHLB borrowings decreased $125.5 million from the prior quarter, which was a deliberate decision to reduce those excess borrowings. Moving over to the margin. Our GAAP reported third quarter net interest margin remained unchanged, linked quarter, at 3.68%, while the non-GAAP core net interest margin, excluding purchase accounting accretion, declined 1 basis point from 3.64% to 3.63% for the quarter ended September 30. The margin performance during the third quarter was driven by lower net loan growth during the third quarter and the influx of interest-bearing deposits, coupled with the outflow of the noninterest-bearing deposits mentioned before. Loan discount accretion during the quarter was slightly elevated at $1.1 million, which we expect to drop back into the $800,000 to $900,000 range going forward. On a linked-quarter basis, cost of total deposits increased 3 basis points, while total loan yields increased 5 basis points. Core loan yields, excluding loan discount accretion for the third quarter, was 6.94%. Total cost of deposits for the month ended September 2025 was 2.65%, which compared to the weighted average of the third quarter at 2.67%. We are pleased with our ability to hold the line in new loan yields during the quarter with a weighted average of new and renewed loan yield at 7.46% for the third quarter. We are equally pleased with our ability to manage funding costs for the quarter with the weighted average rate on all new accounts during September of 3.32%, down from June's weighted average rate on new accounts at 3.34%. I'd like to make a note of a few takeaways to Slide 23 in our investor presentation. We continue to see the 45% to 55% overall deposit betas as achievable regarding any future rate cuts. I would also like to point out, overall, core CD balance retention rate was at 83% during September. These impressive statistics reflects our team's continued focus on maintaining and retaining core deposit relationships. As you will see on Slide 24 (sic) [ Slide 23 ] in our presentation, we have approximately $3 billion in floating rate loans at approximately 7.33% weighted average rate, but also have approximately $646 million in fixed rate loans maturing over the next 12 months at a weighted average of 6.30%, which we would expect to reprice in the mid- to low 7% range. Lastly, on the topic of net interest margin, I'd like to mention a new slide we created and added to the quarterly slide presentation on Page 22 (sic) [ Page 21 ] of our investor presentation. It includes a longer-term look at our GAAP and core net interest margin in the context of the volatility of the Fed funds rate since 2020. We're proud of our ability over the years to maintain the margin with a relatively tight range with the core margin peaking at 3.99% at the end of 2020 and bottoming out at 3.27% in the beginning of 2024. Moving on to the income statement. GAAP noninterest expense was $48.9 million and included $1.16 million acquisition-related expense and $439,000 in conversion-related expense and $2 million in employee retention tax benefit, which ran through payroll taxes and employee salaries. Core noninterest expense for the third quarter of $49.3 million was down slightly from the prior quarter. We do expect this to increase modestly in Q4 just primarily due to the timing of various investments hitting in Q4. We do expect to recognize partial quarter impact of the Oakwood cost saves during the current quarter. Third quarter GAAP and core noninterest income was $11.7 million and $11.6 million, respectively. GAAP results did include $77,000 gain on the sale of securities, noninterest income results for the third quarter were relatively in line with our expectations. And over the long run, we continue to expect to build on our trend in core noninterest income, although the trajectory may be bumpy as we've mentioned, from quarter-to-quarter. Lastly, I'd like to provide some context of the credit migration from the second quarter. Total loans past due 30 days or more, excluding nonaccruals, as a percentage of total loans held for investment decreased from 0.89% to 0.27%, roughly $38 million at September 30, 2025. The ratio of nonperforming loans compared to loans held for investment decreased 15 basis points from 0.82% in September -- to 0.82% on September 30. While the ratio of nonperforming assets compared to total assets slightly increased 7 basis points to 0.83% compared to the linked quarter. The increase in the nonperforming assets ratio over the linked quarter was attributable to the transfer of some nonaccrual loans to other real estate owned. And that includes my prepared remarks for today. I'll hand it back over to you, Jude, for anything you'd like to add before opening up to Q&A. David Melville: I think, I'm good. We'll go and answer your questions. I will mention real quick that Greg mentioned the $0.01 dividend increase, and I will mention that we started paying a dividend in 2015. So this marks our ninth year in a row of increasing the dividend, we're proud of and we still have a very strong retail shareholder base, about 50-50 retail versus institutional and with a diverse set of interests and reasons for being partners with us. And I know the steady increase of that dividend over the years has been important, and we remain committed to trying to keep doing that. So excited about that news and wanted to be sure we highlighted that. So with that, I'm certainly ready to answer any questions that we might have in the queue. Operator: [Operator Instructions] And your first question comes from the line of Matt Olney with Stephens Inc. Matt Olney: I want to ask about expectations around the core margin for the fourth quarter in light of the recent September Fed cut and your expectations of any impact from additional Fed cuts that we could see as well in coming weeks? And then on deposit cost side, Greg, you disclosed the September interest-bearing deposit costs. I appreciate that. It sounds like there's some good momentum there. Just any other general commentary you can share with us within your marketplace with respect to deposit pricing competition? Gregory Robertson: I'll answer your first question first on the margin. We expect to pick up a couple of bps in the fourth quarter in margin for that to expand again. And primarily because of the momentum on the deposit side, but we also think that the loan growth will come back and normalize. I think it's worth pointing out, I mentioned in the remarks that the paydowns were about $479 million against originations of $452 million for the quarter. So the origination for the third quarter was very strong. And really, that was about an elevated payoff-paydown quarter of about $100 million more from the previous 2 quarters. So we feel like that with the normalization of loan growth and our management of deposit cost, we feel like we'll have a little margin expansion. We're seeing deposit cost is still competitive in the markets in all of the markets we're in. So I would think we'll continue to have to be nimble and be aware of the competition set out there. We do a pretty deep dive on evaluating competition in our markets every week. So we'll continue that. Matt Olney: Okay. I appreciate that, Greg. And then on loan growth, it sounds like, like you just mentioned, you think loan growth will rebound in the fourth quarter. Are you seeing some evidence of this in the first few weeks of the fourth quarter? Just trying to appreciate kind of what you're seeing that gives you the conviction. Gregory Robertson: Yes. I think a little bit of both. I think as I mentioned, we had a pretty steady clip of originations that slightly built over the years. I think Page 25 on our investor presentation kind of highlights that. But we had a little bit of early -- some early success in the quarter that lead us to believe we'll be back to the low to mid-single-digit loan growth in the fourth quarter. David Melville: We also had some success with unfunded line commitments in the third quarter that wouldn't have shown up in our net numbers. And we will see -- we'll have the opportunity to see some of that come to fruition in the fourth quarter. Operator: And your next question comes from the line of Feddie Strickland with Hovde Group. Feddie Strickland: I just wanted to touch back on the noninterest income piece again real quick. It sounds like you've still got some momentum there from the various businesses. It sounds like it's still going to grow, but Greg, I think you said it will be a little bumpy. As we think about the fourth quarter, do you think that you can kind of grow it quarter-over-quarter? And it sounds like you definitely think you can grow it year-over-year in 2026, considering you also have the deal in there as well, right? Gregory Robertson: Yes. I'll take you back to Slide 15 in our presentation, kind of to give you a little bit more insight into that. But specifically on the fourth quarter, we feel like the momentum is building with a little bit of caveat. The government shutdown greatly impacts the ability to sell the guaranteed portion of SBA loans. So there could be some influence on our performance in the fourth quarter with that. Now outside of that, we feel comfortable that our performance will continue to grow in those other areas. But I just want to note that. So because of that, might be more realistic to think that, that noninterest income quarter-over-quarter may be flat. We're approaching -- quickly approaching the midway point of the quarter and the government still hasn't resolved their issues. David Melville: Which still gives us an annual number that's over 20% above last year and no reason to think at this point that we wouldn't be able to achieve a similar level of accelerated growth over the course of next year. It's just a little harder to predict on a quarter-by-quarter basis than the spread businesses. Feddie Strickland: Understood. That makes sense. And then just shifting gears more strategically. Now you have Oakwood behind you, Progressive on the horizon, do you still anticipate doing additional M&A near term in the next 12 to however many months? Or do you really feel like organic growth and integrating these as maybe a little bit more of the priority? And a follow-on to that is, is there the opportunity to maybe do share repurchases down the road if the stock price doesn't pick up as much? David Melville: Yes. So that was essentially the point that I was attempting to make in my opening comments that I feel like we have a pretty exciting path, just executing on what we already have on the table and making sure that we're focused on not only following through on the acquisitions, but also our organic opportunities, which I think are only growing as others do M&A. In a number of our markets, particularly Dallas, there's been a lot of M&A. And I think that provides an opportunity for us from a recruitment standpoint and from a just production standpoint. So we want to -- I think our priority will be to let that play out. I'm not saying never would we consider just a perfect acquisition that gets us some core deposits in market, low risk, but we're not aggressively looking for anything. We're not even looking for anything. So we'll see what opportunities just come to our door, but we believe we have great opportunities in front of us just to do what it is that we do and to keep seeking operating leverage and to make sure that we're more focused on profitability than we are on growth just for growth's sake. So that will be our priority for the next -- for the foreseeable future. We like our footprint. We want to be deeper in our footprint, and we want to be more productive in our footprint. As far as capital allocation decisions go, we are pleased that we've been able to increase our capital ratios at a pretty good clip over the past year, really a couple of years. And if you think about the last time that we raised capital back in 2022, we have since then put on -- by the time we finish with the Progressive acquisition, we will have put on a little over $2 billion worth of assets, and we'll actually have higher capital ratios than we did at the end of that last capital raise. So we feel good about the accretion of capital that we've been able to prioritize, and that ultimately gives us more optionality on how to deploy that capital, more freedom to consider options, including potentially buybacks. So I do think that we are entering a period in which we could contemplate that over the next few years, and that's certainly been one of our goals as an organization to get our capital levels back up to a spot at which we have maximum optionality and that ought to be one of the options. So I would say we are open to considering that as we continue to think about organic growth within the construct of our retained earnings, which should lead to further capital accretion over the next few quarters. And the thing that also makes it attractive is it makes that worthwhile thinking about is that we feel like we are trading at a very attractive price. And one of the things that you have to consider when it comes to M&A is pricing, right? And when you think about M&A opportunities at certain prices versus the price that we find ourselves trading at, I like where we are. And that's certainly -- I shouldn't say I like where we are. I like the attractiveness of the price if I'm considering buybacks over time. And so that certainly heightens the need to give that some serious consideration over the coming quarters. Operator: And your next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Christopher Marinac: Greg and Jude and team, I just wanted to ask a little bit more about kind of pricing new loans and from your standpoint, as interest rates fall in months ahead, can you still get pricing for risk? Do you have to look at that differently as we move along? Gregory Robertson: Yes. I think, we have a pricing model we stick to that values our risk-adjusted capital. And so pricing for risk is part of the equation. So I think as rates continue to move, we'll have to be competitive, and we'll have to understand pricing relative to the type of credits we want. So that's logical that, that's going to move down from the, let's just say, the mid-7s, where we are today, into the lower 7s to high 6s as the rate environment moves and the competition set moves as well. Christopher Marinac: And have you had any, I guess, feedback from your customers just in recent weeks? Are they feeling more bullish about the next few quarters? Or is there more caution, I mean perhaps just a little bit of a temperature check, comparing now with earlier in the year. Gregory Robertson: Yes. I would say that the feedback we're getting from our markets is the customers, I think, with interest rates moving downward, it gives them a little bit of hope. I don't know that they're bullish would be quite the word, but maybe more optimistic with the lower rate environment or the prospects of rates continuing to fall. Unknown Executive: Yes, they remain active. I mean, we see a lot of forward planning from the client base as they forecast their own interest rate environment. Operator: And your next question comes from the line of Michael Rose with Raymond James. Michael Rose: Just wanted to touch on expenses. Core expenses flat, really good expense control this quarter. I believe last quarter, you guys had talked about kind of somewhere in the low 50s. So just trying to better appreciate the delta there. And then more broadly, if you can discuss hiring plans, it seems like a lot of banks are out there trying to hire lenders. Just wanted to see if there's been any shift in your strategy at this point and how that could maybe translate into an early read on expenses for next year. Gregory Robertson: Yes. I would say in the first part of the question, Michael. We just -- for the -- as Jude mentioned in his comments or opening remarks, I think this year, we really made a concerted effort as a company to really evaluate our expense base. And the largest part of that in this business is personnel. And so just being thoughtful about those positions, I think, is something we've done all year. And I think the third quarter was really just a continuation of that of being mindful in when we talk about employees and roles and efficiency in those roles. I think the fourth quarter will be slightly increase. The fourth quarter is typically noisy anyway. But I do think that we'll continue to look at investments in ways to continue to bolster production. I will say as far as '26 goes with the disruption in the markets, mainly in Texas, I think it would be easy to understand that if the opportunity presented itself, we would want to hire good bankers. David Melville: Yes. And I think having discipline along the way, does two things. One, it means that hopefully, we don't ever reach a point where we have to think of expenses as being on the edge of the cliff. And if we can kind of make good decisions along the way, whether it be not hiring as much or just automatically replacing people or it means thinking about the life cycle of branches, we've shown a pretty good record of closing branches over time even outside the time frame of an acquisition, if we can keep doing that, then we don't have to make drastic cuts. But also on the flip side, it gives us the opportunity to be poised to be able to take advantage of opportunities, as Greg alluded to, when they show up. And we have had a lot of disruption and particularly in the Texas markets where we now have a solid footprint and foundation. Dallas is actually our largest market. And so we feel that we'll get our fair shot at opportunities in some of the aftermath of M&A that's taken place there. And so we'll be ready for that, but it won't be -- because we're exercising discipline along the way, and we'll continue to do that. And those kind of decisions won't be kind of [ at the ] year decisions, so to speak, normal taking care of business type investments. But we certainly want to position ourselves to take advantage of the organic opportunities that will be out there in the next few years, and we think they are. Matthew Sealy: Michael, one other thing that I'd add, as you know, there's a bit of a correlation just between the balance sheet dynamics and the kind of the overall expense investments. And I think we were expecting a little bit more of a balance sheet growth during the third quarter that didn't quite come through on a net basis. So part of that kind of speaks to the -- to just a lower overall expense build in the third quarter. And then the other thing is I think that we started seeing a little bit more in the way of the Oakwood cost saves coming through. So a combination of those things helped in expenses being flat, down just very slightly in the third quarter. And then there's, lastly, a little bit of timing in certain IT investments that just didn't necessarily hit in the third quarter, which could come around in the fourth quarter. Michael Rose: Really appreciate all that color, really frames it out. Maybe just a follow-up. It did look like some of the paydown activity did happen in Dallas and Houston, if I look at the -- one of the beginning slides versus last quarter. Obviously, loan production was up a little bit Q-on-Q, about 4.5%. But any sort of competitive dynamics there that maybe drove those paydowns just being [indiscernible] or just trying to get more color on this quarter's paydowns. Gregory Robertson: I think, Michael, the biggest driver of the paydowns in the quarter or a big portion of the paydowns, it also had a corollary to past dues at the end of the second quarter, was a fairly large relationship that was past due that we commented on last time we talked. That did effectively pay down during the quarter. So that was an outsized example of things like that. But I don't know that... David Melville: And we had a couple of strong C&I relationships that -- the company was sold to another company. So I don't think -- I wouldn't say that we've lost much in either of those markets or any of our markets through competitive pressures. I think it's been more of the kind of natural life cycle of the good credits, you often want them to pay off eventually because that means they've been successful, and the bad credits you want to pay off because it means we don't have to deal with it anymore. So it's more of that than it was than any kind of material competitive posture, I would say. Operator: And your next question comes from the line of -- again, with Matt Olney with Stephens Inc. Matt Olney: Greg, I think it was your comment around the SBA sales that could potentially slow in the fourth quarter, should this government shutdown be extended. I'm looking at that slide deck, and it looks like the SBA sales has been around just over $3 million so far this year. So call it, $1 million per quarter. Is that the right way to think about the risk under the scenario of government shutdown for most of the quarter? And then if that's the case, help us appreciate, is it -- does this just delay the SBA sales, so it's more of a delayed income into the first quarter? Or is that not the right way to think about that? Gregory Robertson: No, you're exactly right. That just delays the income stream into -- potentially into the first quarter. Those are loans that are closed that are really waiting to be sold. So it just delays the revenue opportunity. Unknown Executive: And Matt, we've got a pretty good pipeline of loans that can't get approved until they open back up, right? So there's some kind of demand for sure. Matthew Sealy: And then one other thing to point out on the slide, that $3.3 million is annualized through 9 months, through the 3 quarters. So it's a little bit -- it's not exactly $1 million per quarter. That's just the annualized figure. Matt Olney: Okay. I see that now. Okay. And then also, I just want to ask about Progressive Bank. Any updates on recent trends you're seeing or hearing there? And then just update on the M&A application process and expectations of deal closing. David Melville: Yes. I think all positive, and they've been doing what they said they would do in terms of continuing to incrementally improve profitability over the course of the year, in line with their budgets and our projections. And so I feel very good about that. We feel really good about the people interaction. We've had the opportunity to spend a lot of time with them and I'm more excited today than we were originally, and that's all going well. They did achieve a positive shareholder vote last week. So that's one of the hurdles that you have to get over to get a deal. So we were excited about the positive reception [ afforded ] the opportunity by the shareholders of Progressive and excited about the trust in the management team and Board's judgment. So it's a big step. We're in the process of having our regulatory application reviewed and feel really good about that and confident about the positive outcome there in the next few weeks as well. So we feel like we're still on pace to close early January as we've been projecting. So excited about that. Okay. Thanks, Matt. We also -- I think I mentioned in my opening remarks, that we have a conversion date of August for the Progressive bank. So as we think about projecting out the economic benefits, that might be valuable information to you as well. Operator: There is no further questions at this time. I will now turn the call back over to Jude Melville for closing remarks. Jude? David Melville: Okay. We appreciate all the questions, and we appreciate everybody's time. As I started off by saying it's just a good solid kind of grinded out quarter. And a lot of ways, those are the ones that you're proudest of and most excited about. We're taking care of business on a daily basis. And love to see the -- one of our core values is built around incremental improvement. And so we certainly are doing that and look to continue that and believe we have a clear track to significantly increase profitability over the next few quarters as we capitalize and optimize some of the opportunities that we have in front of us. So thanks again to all of you, and thanks to all of our partners. Look forward to seeing you and talking to you in a few months. Operator: This concludes today's call. You may now disconnect.
Operator: " Christianne Ibañez: " Marco Sparvieri: " Antonio Zamora Galland: " Alejandro Fuchs: " Itaú Corretora de Valores S.A., Research Division Alvaro Garcia: " Banco BTG Pactual S.A., Research Division Axel Giesecke: " Actinver Fernando Froylan Mendez Solther: " JPMorgan Chase & Co, Research Division Operator: Good day, ladies and gentlemen. Thank you for joining Genomma Lab's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this meeting is being recorded and will be available for replay from the Investor Relations section of Genomma's website following the call. I'll now turn the call over to Christianne Ibáñez, Genomma's Head of Investor Relations. Please go ahead. Christianne Ibañez: Thank you, Daniel, and welcome, everyone. On today's call are Marco Sparvieri, Chief Executive Officer; and Antonio Zamora, Chief Financial Officer. Before we get started, I'd like to remind you that the remarks today will include forward-looking statements such as the company's financial guidance and expectations, including long-term objectives and forecasts as well as expectations regarding Genomma's business, assets, products, strategies, demand and markets. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today, and the company undertakes no obligation to update them as a result of new information or future events. Let me now turn the call over to Mr. Marco Sparvieri. Marco Sparvieri: Good morning, everyone, and thank you, Chris. I would like to begin today by addressing a clear reality. The company is going through a challenging period, and the results I will present today are not the ones I wish to report nor the ones we are used to delivering as a company. However, I hope that by the end of today's presentation, I can convey the same confidence and reassurance I personally have that our plan to reignite growth is solid, well-structured and entirely focused on rebuilding our top line. My expectation is that after reviewing the next slides, you will share the same confidence that I have. Let me begin with a message of strength. Over the past few years, Genomma Lab has achieved remarkable progress. Sales have grown nearly 70%. EBITDA has more than doubled. Free cash flow has surged 152% and EPS is up 46%. I don't mention this growth only to highlight results, but to demonstrate that we have successfully transformed the company from a deep restructuring phase into high growth, more profitable and more capable organization. We are better than ever positioned to emerge stronger from the current slowdown. This performance is underpinned by 6 strategic assets that we have built over time. Assets that every few -- very few companies possess and which would take any new entrant, decades and hundreds of millions of dollars to replicate. The first is our powerful brand portfolio of over 40 brands, many of which were built during a period when television played a dominant role in influencing consumer purchasing decisions. Today, these brands enjoy exceptionally high awareness and strong positioning in consumers' mind. Brands such as Cicatricure with its medical heritage, Asepxia with its strong dermatological credentials, Goicoechea in leg treatments and OTC leaders like Next, XL-3 and Tukol in Mexico as well as Tafirol in Argentina, where we hold a 40% market share. All these brands form part of this invaluable portfolio. Equally important is our team. Building this leadership structure has taken time and effort of years. Having spent over 20 years at P&G, I can confidently say that our executive and managerial team match and in many cases, exceed those of our multinational competitors. We have also developed an extraordinary distribution network in the highly resilient traditional channel and all the channels across, reaching over 890,000 points of sale across Mexico and Latin America every week. This is a core capability that would take any pharma or personal care competitor decades and a massive capital to replicate. We can launch a product and have it distributed to all the channels and nearly 890,000 points of sales across Latin America simultaneously. This is not only a true competitive advantage, but also a clear growth avenue for the company. In addition, our decision to integrate our own manufacturing facility has proven highly strategic. Despite the complexity of regulatory and operational integration, it now provides us with stronger cost control and greater product quality assurance while allowing for further productivity in the company. Our company culture rooted in speed and agility is also a major asset. While many of our competitors operate with more bureaucracy and slower decision-making, we have a structure that allow us to move faster and respond quicker to consumer needs. Finally, we have established a solid foothold in two key markets with profitable operation, the U.S. Hispanic segment and Brazil. Although current results in the U.S. market warrant review, our presence there represents a valuable long-term asset. Today, our products reach more than 50 million Hispanic households with distribution in major retailers such as Walmart, Walgreens and Amazon, generating close to $100 million in annual sales. Establishing this level of penetration and relationships from scratch would take any company years and significant investment and the same holds true for our footprint in Brazil. All-in-all, this company has penetrated high barriers of entry and is positioned to continue consolidating its position to increase market share in a $3 trillion size industry, the largest in the world, $13 trillion. Let me now turn to the current environment and our plan to return the company to growth. We are operating in a complex consumption environment and navigating a difficult situation, particularly in Mexico, driven by two consecutive failed seasons. A weaker winter season due to unfavorable weather conditions and a summer season that practically did not materialize. These dynamics have affected roughly 50% of our Mexican portfolio, primarily our OTC products during the past winter season and roughly 20% of our portfolio with Suerox during the summer season. Despite these top line headwinds, our EBITDA margin remains resilient with stability around 24%, underscoring the strength of our cost discipline and efficiency programs. I am fully confident that this EBITDA margin level is both solid and sustainable going forward. So what we're doing to offset this slowdown? At a certain point, we were facing two possible path, either we sacrifice margin to invest more aggressively in the business and accelerate the top line or we preserve margins and identify additional resources to fund our growth strategies without compromising profitability. We initially set a productivity target of MXN 1.8 billion in savings by 2027. Given the current top line environment, we challenge ourselves to find additional resources to invest in growth without compromising margins. As a result, we have identified and already secured an additional MXN 1.1 billion in efficiencies, bringing our total accumulated savings to MXN 3 billion by 2026. These resources have been secured and are reinvesting MXN 1.1 billion directly into the business to drive top line growth. Our 2026 investment plan focuses on three pillars: product innovation, go-to-market and distribution and emerging channels. Altogether, we estimate these initiatives could generate up to MXN 5 billion in incremental sales opportunities between 2026 and 2027. While some cannibalization is expected, these projects represent our North Star, a clear road map to reignite growth starting in the first half of 2026. With these actions, I am confident we can restore top line growth to prior levels while maintaining a healthier margin and cash flow structure than ever. Now moving to the third quarter results. On a like-for-like basis, sales declined 2.9%, which is translated to a 12.8% decrease in reported Mexican pesos. Approximately 80% of the impact stems from accumulated noncash hyperinflationary accounting effects in Argentina, following a 53% depreciation of the Argentine peso during the quarter. Our real operating indicator like-for-like performance reflects a 2.9% decline, while EBITDA margins remained strong at 23.7%, consistent with our 24% average target. Adjusted net income, excluding noncash hyperinflation effects declined 3% to MXN 632 million. Free cash flow reached nearly MXN 1.6 billion, down 35%, mainly due to lower net income and three days increase in the cash conversion cycle also related to hyperinflationary accounting effects. As mentioned, we have accelerated our productivity program, delivering the initial MXN 1.8 billion savings by 2025 and adding another MXN 1.1 billion for 2026. These resources are already identified and in execution, not a plan, but a reality. We have already secured resources for our investment projects. We will reinvest MXN 1.1 billion across five strategic areas: product innovation, go-to-market and distribution, communication, e-commerce and pricing. These initiatives represent approximately MXN 5 billion in growth opportunities for 2026 and 2027. While some may overlap and cannibalization is expected, a significant portion will translate into incremental sales and long-term top line expansion. Let me provide a few examples. In innovation, we have a robust pipeline across all key categories. In skin care, we are reformulating and relaunching products with cleaner formulations and more accessible price points. For example, a consumer who today pays MXN 350 in Mexico for a premium hyaluronic acid serum will soon be able to purchase the same product from Teatrical for around MXN 90. In hair care, we are fully relaunching Tio Nacho, strengthening its treatment positioning with second and third routine steps while revitalizing the entire product line with clean formulas, improved packaging, and competitive pricing. In beverages, Suerox will devote a renewed image and expand into new consumption occasions. In OTC, we expect 25 new pharma registration approvals to be launched between 2026 and 2027, allowing us to enter new segments. All of this innovation will be supported by a renewed communication strategy. We are shifting from functional frequency-driven advertising to more emotional storytelling that resonates and engage consumers emotionally. Let me show you an example. [Presentation] The company is entering a completely new communication strategy. We are investing in mass micro influencers, partnerships and brand ambassadors on TikTok and Instagram while driving traffic to e-commerce and direct conversion. Let me show you some user-generated content examples for our Asepxia relaunch. [Presentation] We are also leveraging artificial intelligence to produce high-quality, cost-efficient content. Let me show you an example of advertising spots produced by one person with no actors, no cameras for as little as USD 500 investment. [Presentation] This slide illustrates the depth of our product innovation pipeline, entering new categories, introducing new packaging sizes and formulations, all with clear and ambitious relaunch time lines. On the distribution front, we currently have nearly 3 billion sales operations in the traditional channel, where we plan to expand our coverage from 730,000 to over 1 million points of sales, targeting almost MXN 2 billion in incremental sales over the next two years. Our e-commerce business is set to reach MXN 1.2 billion in sales by 2025. We plan to add MXN 500 million in 2026 and another MXN 500 million in 2027, bringing the channel to MXN 2 billion by 2027, supported by strong communication investments to drive traffic and conversion. In hard discounters and convenience stores, two of the fastest-growing channels in Mexico and Latin America, our MXN 420 million operation is set to coverage from 35,000 to 57,000 points of sales and reaching roughly MXN 1 billion in annual sales by 2027. In summary, Genomma Lab is facing a challenging environment, particularly in Mexico, driven by two consecutive weak consumption seasons. Nevertheless, our EBITDA margin remains resilient. Our resources are secured and our growth plan is clear and fully actionable. We are confident that after weathering the next quarters and by executing this plan, the company will return to growth by the first half of 2026, reaching and potentially exceeding its historical growth rates supported by a stronger, more efficient and more profitable structure. Before turning the call over to Tonio, I would like to thank our investors for their continued trust and the entire Genomma Lab team for their unwavering commitment to driving the company towards its next stage of growth. Tonio, please go ahead. Antonio Zamora Galland: Thank you, Marco, and thank you, everyone, for joining us today. As Marco mentioned, third quarter net sales decreased 12.8%. Results were mainly impacted by ForEx headwinds from a stronger Mexican peso as well as hyperinflationary accounting effects following the Argentine peso depreciation during the quarter. On a like-for-like basis, sales declined only 2.9%, primarily due to the impact of a cooler and rainer summer season in Central Mexico and a softer consumption environment in our country. These effects were partially offset by strong sales growth in Brazil, Chile, Central America and the Andean cluster. Genomma's third quarter EBITDA margin closed at 23.7%, representing a 2 basis point increase year-over-year and reflecting the ongoing benefits from manufacturing cost efficiencies as we deliver our targeted EBITDA margin of around 24%. Pro forma net income for the quarter, excluding noncash FX-related effects decreased 3%, reflecting the strong EBITDA margin performance and lower net interest expenses during the period. Moving on to our regional results, third quarter net sales in Mexico declined 6.4%, mainly due to a weaker summer season that impacted sales performance. This decline was partially offset by strong OTC performance, driven by market share gains in the cough and cold and infant nutrition categories. As you can see in this chart, there is a high correlation between climate and beverage sales in Mexico. Besides this headwind, competition significantly lowered their prices during the quarter, adding more pressure to this particular category. On the right side are the growth initiatives that Marco described earlier. We'll increase our geographical presence to other areas of the country next year, and this effort is expected to drive renewed momentum in 2026. EBITDA margin for Mexico improved by nearly 300 basis points, reaching 27% despite the consumption headwinds and deleveraging pressures previously mentioned. This strong performance reflects the accelerated impact of our company-wide productivity initiatives. Moving on to the U.S. business, the U.S. dollar declined 1.6% versus the Mexican peso compared to the same quarter last year. U.S. sell-in net sales decreased 24% in U.S. dollar terms, reflecting ongoing disruption in the U.S. Hispanic retail market, which continues to weight on sell-in performance. However, sell-out declined only 8%, showing early signs of recovery led by Suerox and Haircare, both of them gaining market share despite the challenging environment. The difference in this quarter between sell-in and sell-out comes from customer returns of some cough and cold products due to the past weak winter season of 2024, 2025, as Marco described earlier. EBITDA margin for the region was 13.6%, down 150 basis points, mainly to the operational deleverage and higher advertising investments during the quarter. Going to Latin America, net sales, excluding Argentina, increased 10.6% for the quarter, driven by strong performance in Brazil, Chile, Central America and the Andean cluster. EBITDA margin, including Argentina, was 21.7%, down approximately 360 basis points, mainly reflecting the impact of hyperinflationary accounting adjustments. However, if we exclude Argentina, EBITDA margin increased by 90 basis points during the quarter. Net sales for Argentina, obviously because of all the hyperinflationary accounting effects, declined 49% in Mexican peso terms, and this is a reflection of a 53% depreciation in the Argentine pesos. However, and this is very important for everybody to know that in local currency terms, sales grew 35% during the quarter in Argentina. This is in line with inflation, actually above inflation and driven by strong unit sales share gains in some of our key brands like IBU 400, Treg, Suerox and among other brands. Just as a reminder of what happened with hyperinflationary accounting, the depreciation of the Argentine peso versus the Mexican peso needs to be taken into account when we report figures in our reporting currency, which is the Mexican peso. Likewise, we also take into account inflation. And while inflation in Argentina has been declining, hyperinflationary accounting is mandatory when cumulative inflation exceeds 100% in the previous 36 months. So we'll have to deal with it for a while. So just to help us understand a little bit better of these IFRS rules, the company's performance in the region has to be reevaluated every quarter. When the difference between accumulated inflation and FX depreciation is negative, this will result in a noncash decrease in accordance with hyperinflationary accounting rules. Last year, however, the effect was a positive 13% difference. But this quarter, we had to cope with a 47% negative delta. Thus, a huge 60% impact on our Argentine results for the quarter and Q1 and Q2. That is what explains, again, what we are reporting. The good news for the future is that historically, high levels of --of inflation tends to follow significant currency devaluations. So we expect this positive effect in the short-term future. Turning back to our financials, cash conversion cycle reached 120 days. And Mexico DSO has been in line with historic averages despite the tough consumer environment that we are facing in 2025. Genomma ended the quarter with a leverage ratio of 1.2x net debt to EBITDA, which is in line with the same quarter last year, and this is notably a historical low in financial leverage, not only for Genomma, but for most companies in the industries where we participate. Free cash flow totaled approximately MXN 1.8 billion over the trailing 12 months, representing a 31% decline, mainly due to lower net income and higher capital expenditures related to our growth projects. It's worth mentioning that during the quarter, we converted 9% of our net sales into free cash flow. Capital allocation during the quarter included our 13th consecutive quarterly dividend payment of MXN 200 million, which is $0.20 per share, and we also repurchased --1.4 million shares. In closing, this quarter highlighted both the challenges and the resilience within Genomma's portfolio as well as our company's strong fundamentals. Over many years, Genomma has been built on a foundation of sustainable growth, and we continue to advance with a long-term perspective. We remain encouraged by the solid fundamentals across our core markets and the traction of our strategic projects that Marco described, and we look forward to capitalizing on opportunities once these challenging conditions ease. With that, let's now turn on to Q&A. Operator: Thank you Marco, Antonio. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Alejandro Fuchs from Itaú. Alejandro please turn on your microphone and proceed with the question. Alejandro Fuchs: Thank you operator. I have 2 very quick ones. First for Marco. I want to see, Marco, if you can maybe walk us through your expectations for next year, right? Maybe a little bit better consumption in Mexico, but we also have some headwinds in terms of now it seems that we have more color on potential taxes for beverage companies. So maybe if you can tell us what do you see and expect for next year in Mexico, that would be very helpful. And then the second one is for Tonio very quickly. In terms of working capital, I saw a big decrease in accounts of days payables -- in days payables this quarter and then an increase in receivables in Mexico. I wanted to see maybe, Tonio, if you can walk us through if there is something unusual that is occurring this quarter, we should expect this to normalize? Or is this just business as usual? Thank you. Marco Sparvieri: Thank you, Alejandro. On Mexico, I would say that my expectation, although I don't have the crystal ball, but I do expect a few more quarters -- difficult few more quarters in a very difficult environment from a consumption point of view. But as I said, regarding of the overall context in the market, categories and competitors, I am very, very confident that the plans that we are currently putting in place, I am presenting the whole plan today, but we have started working and implementing many of these strategies several months ago. So I am very confident that we are going to see a gradual recuperation of the top line at some point in the first half of 2026. And I am very confident that with the investments that we are making in the business, the additional resources that we have secured, the MXN 1.1 billion that I just mentioned, reinvesting that money thoroughly and intentionally in the business to reignite the top line growth. I am very confident that we are going to put this company to grow again at least at the same levels that we have been growing over the past 6, 7, 8 years. You asked also about the EPS. Look, the EPS right now, the way it stands based on all the public information that you all have access to, it's impacting both our competitors, okay, and ourselves. And when I say competitors, I mean all the competitors, isotonic beverages and electrolyte beverages in the same category, okay? But we have an advantage right now because we don't sell our product Suerox with sugar. So the current situation as it stands today based on the public information that we know is that the EPS that will be applicable to Suerox is half of what will be applicable to our competitors in isotonics and electrolytes. So that put us in an advantage. There's two scenarios here that we have fully accounted in the plans for next year is -- one is if our competitors increase prices and do not absorb the EPS, we will follow and the EPS will have no impact in our margins. But if our competitors do not increase prices, we will have to absorb and that impact, it's already in the financials and the plans for 2026. Alejandro Fuchs: Thank you very much Marco. Antonio Zamora Galland: Alejandro, this is Antonio. Thank you for your question regarding working capital. So in terms of days payables, the 93 days that we presented for the Q3 are pretty much in line with the 96 for Q2 or the 94 for Q4 2024. As we all know, when you transition from third-party contracting, the [indiscernible] to our own facilities, the kind of suppliers that we have are different. We are now buying raw materials directly. And so it's a new game. And I would say that this range of around 90-something days for payables at this moment, that's going to be the new normal. Obviously, we are working with suppliers. We're negotiating as they get to know us better and as we can get to better negotiations, we hope that in the future, this is going to improve. But that's part of the reason why in the past, when we were buying finished products, we have better terms. But those products were costlier. I mean that's why the COGS was higher, significantly higher. So I think it's a lot better to have productivity, the kind of productivity in terms of COGS, while we have to work -- we still have to work on payables. But this is going to be around the new normal. And if you see Q4, Q2, Q3, you will see that the numbers are pretty much around mid-90s in terms of DPO. In terms of DSO in Mexico, that's why I presented a chart with the historical DSOs. Yes, in 2024, we were improving our DSO. Obviously, last year, it was a different year. Everything was more optimistic. This year has been more challenging. So there's two reason. One is, obviously, the market is a little bit slower for everybody, and you can see this in most companies in the consumer landscape in Mexico. But also, it's a little bit tricky because it's part of the accounting formula of DSO because you divide the ending balance of receivables by a denominator, which is the past sales from a certain period, whether it's 90 days or 360 days. So if sales have been declining, lately, unfortunately, in the case of Mexico. From a mathematical point of view, that increases artificially the number of days in DSO. If sales start growing faster, it's going to be the opposite. So you will see that effect. So what I can tell you in terms of DSO, I think that considering the very tough consumer environment that we are facing, we are pretty much in line with average and what we should expect this year. Obviously, if for 2026, as you very well pointed out, the expectations for the consumer market is a little bit better. We obviously are going to work to improve that ratio. I don't know if I was able to answer your question, Alex. Alejandro Fuchs: Thank you very much. Operator: Our next question will now be from Álvaro García with BTG Pactual. Alvaro Garcia: One question we've gotten quite a bit is how is it that your EBITDA margin is so stable considering pretty significant sales decline we saw this quarter. So I was wondering if you could kick it off with that one. Marco Sparvieri: Yes. Thank you, Alvaro. This is Marco. It's really the -- a huge amount of efficiencies and productivity that we are generating behind the plan we put in place a few years ago. Most of the impact of the efficiencies we are seeing today of the plans that we implemented like 2 years ago with CapEx, like integrating our packaging, manufacturing and so on. So -- but short answer is its basically that. Alvaro Garcia: Great. And two more. One, bigger picture, just I can't remember a time with so many sort of relaunches sort of renewed images across all your different brands. So I was curious, Marco, how your clients are taking this, especially maybe the larger retailers? How are they sort of digesting all of this? And sort of what's the prospect or what's the outlook for the uplift in sales you'd expect from all of these relaunches? Marco Sparvieri: No, clients, they are like fascinated. I mean they like innovation, and that's what the categories where we compete actually need, not just to drive our growth, but to drive the total category growth. So like the Walmart skin care buyer is really fascinated with all the things that we are doing. And -- so -- and also, you have to remember that this is not just for one distribution channel. When you see like this, all the new sizes and all that, it doesn't necessarily impact just one channel all at the same time. Many of the things that we are doing are some for the traditional channels, some from the modern retail channel, clubs, hard discounters, e-commerce. So it's not that one single customer is going to have to absorb 50 different changes. I don't know if that makes sense. Alvaro Garcia: Yes. That's helpful. And the last one, maybe for Tonio on CapEx. I have seen the uptick sort of year-to-date. I was wondering if you can maybe provide guidance for maybe this year and next year on what that is and what we should expect going forward in the context of free cash flow. Thank you. Marco Sparvieri: Yes. I'm going to take that one, Tonio. I have the numbers pressure. The -- so we have this quarter, the quarter 3, quarter 4 and quarter 1 with some heavy CapEx investments there. We are paying for the new distribution center, which is spectacular. We are taking our levels from $7 million to $10 million and the distribution center is going to bring us savings of around $12 million per year. We are still paying for the second line of Suerox and several other CapEx investments in the plastic plant, okay? So I expect the next 2 quarters to be a little bit heavy on CapEx. But 2026, like overall, based on the current forecast that we have, both in terms of CapEx and operational cash flow, we expect that we are going to return to the levels of free cash flow that we have been reporting in the past few quarters, which is in the round of MXN 2.7 billion, MXN 3 billion per year annually. Operator: Our next question will be from Axel Giesecke from Actinver. Axel Giesecke: Just a quick one regarding the resilience of OTC in Mexico. I just want to know what share gains are you achieving in these categories? And how sustainable are they as we move into 2026 and looking forward? Marco Sparvieri: Thank you, Axel. So first, I mean, OTC in general is very resilient, okay, a lot more resilient than personal care or even beverages, okay? And that is true for not only for Mexico, but also for all the markets. And basically, all the categories or subcategories within OTC. What we are seeing is that, first, from a total sell-out standpoint, regardless of the very difficult environment that we are seeing in general in Mexico from a consumption point of view, we were able to navigate in these categories with a lot more strength, okay? And just to provide a little bit of color in terms of numbers, we are -- recently, it's very early to say, but I think it's important that you guys know that the early signs that we have from the -- both execution and incidents of the cold and flu season for 2025 and 2026, the early signs that we are seeing are very encouraging. We are growing double digits in several of the brands that have to do with cough and cold. And so it remains to be seen what happens. But normally, when a season starts strong, it remains strong, hopefully. But yes. Operator: Our next question will now be from Froylan Mendes from JPMorgan. Fernando Froylan Mendez Solther: Thank you for taking my question. I was hoping you could illustrate on where are the MXN 1.1 billion productivity measures the incremental ones coming from? I'm just curious, I mean, if the weakness in the market is clearly a top-down and even weather-driven, why do you feel the need to invest more in growth levers today if the market is supposed to stabilize at some point? Or am I missing something in any of your markets that will require an extra boost of growth beyond this -- to offset this macro slowdown, maybe some change in competitive dynamics? That's my first question. And secondly, I wanted to understand better the performance in the U.S., the decline of almost 24%. You mentioned something about some returns from -- I guess, from the different channels. But what do you expect these productivity gains being invested in growth to translate into the United States? Should the U.S. react before other countries? Where does the U.S. stand in the recovery path that you foresee? Marco Sparvieri: Yes. Thank you, Froylan. Let me address one by one. Productivity is mainly coming from four key interventions. Number one is a very strong implementation of artificial intelligence across different functions and processes that before required a lot of headcount and now it doesn't. So that's one piece. Second is the strengthening of our COGS reduction original plan. So we had a plan -- a very aggressive plan to reduce COGS, and we strengthened that plan even further. So we stretched all the interventions that we are making even further to get more productivity there. So we expect the COGS to continue to go down. Third, we are eliminating a massive amount of administrative cost that was previously in the P&L. So we are cutting administrative costs by around 30%. And fourth, the fourth pillar is go-to-market spending. And with that, I mean, unproductive spending, okay? So like we made a very thorough analysis of all the money that we were spending in pricing and promotions, point-of-sale execution. We are closing distribution routes that are not profitable. So we made like a very thorough analysis of every spending that we have in that bucket, and we are cutting a huge amount of spending that was unproductive. All that adds up to $1.1 billion. The second question is why investing in the business? And the answer is, well, first, I don't know what's going to happen with the consumption market or environment or context in 2026, and I don't want to wait until the context saves us and we start growing the top line again. So we are deciding to invest a massive amount of money to reignite growth regardless of what's happening out there. And second, we want to be aggressive because we have a very strong portfolio of brands with very strong positioning. We have a very strong pipeline of innovation. And importantly, we have a very strong capabilities to execute, okay? So -- and we have the resources. So we have the pipeline, we have the capabilities, we have the resources, and we want to put this company back to growth. So that's basically the reason. And in terms of the U.S. decline, it's fairly simple. I mean, we -- we -- the sell-out is declining 8%. It's not great, but it's not a massive crisis. We have brands that are relatively healthy in the U.S. like Suerox and Tio Nacho and some of our OTC brands. But unfortunately, we had a very bad winter season across the U.S. as well as in Mexico last year. And what we are seeing now is that we loaded a huge amount of inventory of our winter season brands because we want to play big in the seasons. And the same we did in Mexico with Suerox this year, we loaded big time because who wins is the one with more inventory out there in the stores, and we want to play big and we play big in the U.S. And now after a season that didn't go so well, we are receiving customer returns in those brands that is impacting the top line in sell-in, but the sell-out is not declining as much as the sell-in. I don't know if that provides perspective on the question you asked. Fernando Froylan Mendez Solther: Yes, Mark. Do you think that the channels are, let's say, more balanced today in terms of inventory so that the next season will be, let's say, more correlated to the actual demand? Or how do you see the inventory levels? Marco Sparvieri: It's like moving pieces all the time because it's -- we play a lot in seasons. We play in the winter seasons with OTC and then we play big time in summer with beverages and some of our OTC categories for the summer. So the strategy we follow and has worked really well in the past is that we play very aggressive in terms of both point of sale execution, communication, innovation and also huge inventory at the stores, okay? So we -- it's a bet all the time, it's a bet, okay? And that's how it works. So you load big time upfront and then you expect for the best. And if it works, it's fantastic. And if it doesn't work, then you have to deal with the inventories and the product that you put out there. So for example, you are seeing a strong decline in Suerox this quarter in Mexico, in particular, in sell-in, that doesn't align with the sell-out numbers for the quarter because we had big inventories for the summer season. The summer season didn't work. Now we are not selling a lot of Suerox because customers still have inventory. But at the same time, we are we are playing a big bet for the winter season. And this quarter, we loaded a massive amount of OTC here in Mexico. And we're seeing early signs that this is working and that we are growing market share in some of these categories. And if it works well, we're going to have a great next quarters in OTC behind a good season, and we're all going to be happy. If it doesn't work, we're going to see the same dynamic that we are seeing today in the U.S. and in Mexico with beverages. Fernando Froylan Mendez Solther: Marco, lastly, and thank you for the several questions. When you say that you expect growth to recover into the second half of 2026, do you expect beverage Mexico to come first, then cough and cold U.S. second? What's the timing on the different regions and products that you expect this reignited growth to come? Marco Sparvieri: That's a difficult one. Let me think. I think OTC, we are going to see a better performance in OTC first, beverages second, hopefully, because if we -- if we have a better season in terms of weather next year, which we should because this year, we didn't have a summer, then we're going to sell a lot of Suerox, okay? So with a good winter season that we are starting to see for OTC, that's going to come first, second, Suerox. And third, most of the initiatives that I just presented for skin care and personal care are hitting the market in the second half of 2026. So third will come personal care. That's, I think, the order. Operator: [Operator Instructions] This will conclude our third quarter results conference call. Thank you for your attention.
Vesa Sahivirta: Good morning, everyone, and welcome to Elisa's Third Quarter 2025 Analyst Meeting and Conference Call. I'm Vesa Sahivirta, Head of Investor Relations. And here together with me is a very familiar team, CEO, Topi Manner; and now for the last time, CFO, Jari Kinnunen, who will leave us in the end of the year. We have also our incoming CFO, Kristian Pullola here, but now he is in the audience still. Next week, by the way, we are in a roadshow together with Kristian and Jari. But now going through the agenda of the day and following the normal practice, we start the presentation followed by Q&A. And now I give word to Topi. Please go ahead. Topi Manner: Thank you, Vesa, and good day, everybody here in the room. And those of you who are joining remotely. Welcome to this earnings call also on my behalf. I understand that there are quite many quarterly reports today in the Nordics as well as throughout Europe. So let's jump right into business and try to be relatively condensed with the presentation so that there will be time for Q&A. In terms of the highlights of the quarter, the revenue of Elisa increased with 4.6%. That was very much driven by the international software services as well as mobile service revenue. The mobile service revenue landed at 3.3%, that was supported very much by the 5G upselling and also the introduction of security features to our mobile plans. And then pointing to other direction was especially the competition in the 4G category of mobile subscriptions. In international software services, our revenue increased with 53% roughly. The comparable organic growth was 3%, impacted by some project delays related to the tariff-related uncertainties in the global market. EBITDA was up with 3.7%, solid as such. What was very, very good to see is that the comparable cash flow grew with more than 12% from the Q2 level, which was already an all-time high level. This was on the back of the increasing EBITDA, strict CapEx discipline and also the net working capital management. In Finland, the post-paid churn increased to 22% or a bit more than 22%, indicating that the competition was quite intense during the quarter. Post-paid subscriptions decreased by 20,000 a bit more. Of that, close to 6,000 were related to machine-to-machine and IoT subscriptions. There is some quarterly fluctuation in this one. In Q2, we won quite a bit of post-paid subscriptions, especially in the corporate side of the business. And therefore, it is useful to take a little bit longer perspective on this. The fixed broadband subscription base increased by close to 5,000 and the fiber-related revenue starts gradually to pick up. So if we look at our revenue in total, it was indeed supported by the international software services and mobile service revenue. What was also good to see is that the fixed service revenue turned to growth during the quarter. That was impacted by some customer wins in the corporate networks in that side of the business. And then as mentioned, also the fiber-related revenue is starting to pick up and then being visible this quarter. EBITDA landed at EUR 214 million. Mobile service revenue, as mentioned, was 3.3% in terms of growth, supported by the introduction of the mentioned security features. And that particular change, that offering change has been well received by customers. We have now enrolled something like 600,000 customers to this offering, and that was supporting the MSR growth. The churn number was especially, as mentioned, impacted by the competition in the 4G category, especially in the low-speed tiers of the 4G category. And we saw some campaigning basically throughout the quarter in this one. So then looking into the various business areas that we are having. The Consumer business was impacted by the mentioned mobile competition. Revenue up 0.9%, EBITDA up 0.4%. Corporate business on its turn had a strong quarter, revenue increased with 5.6%, especially boosted by the price increases in the corporate side of the mobile business. The mentioned fixed service revenue contributed positively also interconnection and roaming. And EBITDA grew with 3.6% in the Corporate business. So a good quarter for that segment. In International Software Services, our EBITDA during the quarter improved with EUR 5 million. And if we look at the first 9 months of the year, profitability-wise, we are now effectively in breakeven for the first 9 months in that business in terms of EBITDA. And that is ahead of the fourth quarter that typically is the strongest quarter in software business in terms of revenue and in terms of EBITDA. Then this morning, we announced that we are introducing a transformation program to accelerate the implementation of our faster profitable growth strategy. So coming back to our strategy, the one that we communicated in our Capital Markets Day in March, simplicity and productivity is very much a fundamental of that strategy. Simplicity and productivity is enabling the growth in our 4 growth pillars, namely 5G & Fiber, Home Services, Corporate IT & Cyber and International Software Services. We have been working with simplicity and productivity with continuous improvement measures in the past. And now we are accelerating the implementation of that. With the aim to simplify our operations, improve agility and speed of decision-making in the company and with that, enable growth. And at the same time, we are taking swift action to improve the cost competitiveness of our business in the current market environment. With the transformation program, we are aiming for EUR 40 million of annual cost savings during the calendar year of '26. And with these measures, we ensure that we will achieve our midterm revenue and EBITDA targets, the ones that we set for ourselves in the CMD. So when we look at that what the transformation program includes, it will be about organizational streamlining, delayering the organization. It will be very much about process simplification, process optimization, also cross-functionally within the organization. It will be also about scrutinizing our outsourced services, most notably the use of IT consultants in the organization, renewing our software development model. And then we are resetting our procurement effectively and finding efficiencies in the procurement space of the company. In the organizational streamlining, in the changes related to the way of working, we will be utilizing more and more automation and AI, and that is an element that is embedded in the transformation program. But as stated, the bottom line is that this is in line with our communicated strategy, accelerating the implementation of the strategy. When we look at the mobile business in a bit more detail, the 5G upselling continues with the trend that we have seen in the past. I mentioned upgrades related to security features are supportive of the mobile service revenue. As stated, we have now enrolled something like 600,000 customers, and that enrollment rollout process will continue in phases in cohorts during the course of this year but especially going into '26. We have been also launching new types of security features, scam call blocking for foreign numbers being one of the examples, and that has been now well received by customers. And the initial take-up rate is encouraging. We also had a nice opening with private 5G standalone networks with slicing technology in one of the ports in Finland, where we are able to serve our customers with the kind of technology, standalone slicing technology that our local competitors do not have at this point of time. So a good reference case for similar opportunities in the future. When we look at the fiber business, as mentioned, we are starting to see strong revenue momentum in that part of the business. And our accelerated network construction is being continued as we speak, all within the 12% CapEx to sales envelope that we are having. Then just quickly looking into the digital services. In the Home Services space, we introduced a new Elisa original service called Icebreaker and the international distribution actually for that one has started well in a number of European countries. In terms of Home Services, in energy solutions for households, our home battery solution now has a coverage of 70% in Finland. We are very -- in very initial stages of the rollout, but we have clearly proven the product market fit, and therefore, an encouraging outlook for this solution for '26 and onwards. In Corporate IT & Cyber, we are clearly very competitive on the market in terms of our cyber offering. And one of the examples is that in cybersecurity, one of the biggest retailers in Nordics, Kesko chose us as their cybersecurity provider in Finland, Sweden, Denmark, Norway, the Baltic countries as well as Poland. So yet again, a good reference case for the future. In International Software Services, in that side of the business, we -- our aim has been to grow more than 10% organically. There, the tariff-related concerns have resulted in some delays of customer projects that have been impacting especially the license and service revenue part of the business. And therefore, when we look into the Q4, when we look into the likely realization of the project, we expect for full year an organic comparable growth between 5% and 10% in this part of the business. However, an important indicator in software business, of course, is the recurring revenue. And the recurring revenue during the quarter grew with 13%, double digits and the year-to-date number is 15%. The share of recurring revenue is increasing all the time in the total revenue of ISS. An interesting individual reference point is in our energy flexibility solution called Gridle, previously called Distributed Energy Storage. And there, we signed a first grid scale battery solution with energy company City of Vantaa for 10 megawatts. So an interesting reference point opportunity to scale for the future. And then finally, when we look at our outlook and guidance for this year, we will keep our guidance in terms of revenue and EBITDA intact. The bottom line being that with the transformation program, we will be accelerating the implementation of our strategy. And with that, I will be handing over to Jari. Jari Kinnunen: Thank you, Topi. Let's first look at the profit and loss. Q3 continued with good trends, growth trends, solid growth in revenue as well as in EBITDA. Revenue, EUR 25 million increase, 4.6% growth in Q3. If you look at behind the revenue growth levers, overall good development in service revenues, 5.8% growth in service revenues. Mobile services increasing with EUR 9 million, both Consumer and Corporate Customer segment growing 5G customer base increasing and changes in the service offering, security features and price changes in that change all contributing to that 3.3% mobile service revenue in Q3. Fixed services growing EUR 3 million, fixed broadband, especially fiber broadband connections growing also in Corporate segment, corporate networks and related security services contributing to growth. Negative impact in traditional fixed voice services. Domestic digital increase was EUR 2 million. IT services in Corporate segment contributing slight decline in Consumer segment, digital services. International software services increased with EUR 12 million. Acquisitions and sedApta, first consolidation impacting approximately EUR 11 million to acquisitions impact and comparable growth at 3%. Equipment sales flat like was the interconnection and roaming and other. All in all, organic growth totally was at 3%. EBITDA 3.7% growth to EUR 213.5 million. EBITDA margin was strong 38.1%, EBIT 1.9% growth to EUR 138.6 million. EBIT margin was 24.7%. EPS was growing 2.3% to EUR 0.64. In Estonia, improvement both in revenue growth as well as in profitability and revenue was growing 2%. Mobile and fixed services developing positively and negative impact in equipment sales. EBITDA increase was strong 9%, driven by service revenue growth as well as cost efficiency measures. In mobile, post-paid subscriptions, slight decline 1,200, pre-paid base minus 200. Churn came slightly up from Q2, still relatively low at 9.4%. Then CapEx, reported CapEx was EUR 81 million, excluding licenses, lease agreements and acquisitions, the guided CapEx at EUR 65 million and in line both Q3 and year-to-date guided CapEx in line with 12% from sales. Main investments continuing in 5G network as well as fiber network and IT investments. In Q3, cash flow continued good development like has been in the previous quarters. Comparable cash flow was growing 12% as a result of higher EBITDA, lower CapEx as well as lower paid interest. Net working capital change was positive, however, slightly less positive than a year ago. Year-to-date cash flow -- comparable cash flow growth is at 10% through higher EBITDA, positive net working capital change and lower investments and negative impact through financial expenses. Cash flow conversion was improving and EBITDA cash flow conversion at 70% in Q3. Then if you look at the balance sheet and capital structure in line with the medium-term targets, net debt to EBITDA decreased from Q2 to 1.7x. Equity ratio increased from Q2 to 35.7%, and return ratios continue to improve. Return on equity was at 30.7%. Return on investments improved to 18.6%. And in terms of financing, average interest for interest-bearing debt continues same level as was in the previous quarter at 2.5%. And now I give word to Vesa, please. Vesa Sahivirta: Thank you, Jari. Now we move on to Q&A part. And first, we ask if there is any questions from the audience? No, we don't have. So we go to the conference call lines and ask first question from the lines, please. Operator: [Operator Instructions] The next question comes from Andrew Lee from Goldman Sachs. Andrew Lee: I had 2 questions. The first one was just on your adjustments in guidance on the cost-cutting side of things. So 2 incremental things you said today is one that you're raising your cost-cutting expectations to offset mobile service revenue growth weakness and also macro uncertainty weakness. But at the same time, I think what you're saying is that you're seeing a macro improvement in your fixed business. So with your cost savings to offset macro weakness, are you being conservative in your outlook on macro weakness, i.e., assuming it goes -- gets worse again or doesn't continue to improve? Or is there something else going on there? Just a little bit of help in terms of what's changing versus where you're adopting a conservative approach would be helpful. And then second question is just on your mobile service revenue growth, which is, I guess, the big negative surprise today. Could you just give us a bit of a sense of the mobile service revenue growth trend in Q4, just so we can get a sense as to how badly things have deteriorated in terms of the competitive environment versus what you were saying by sticking to the guidance at Q2? Topi Manner: Thank you, Andrew. If I start on the first one, yes, the transformation program that we introduced aims to have EUR 40 million of annual savings during the calendar year of '26. And when we come back to the macro and especially the impact of macro to fixed service revenue. During the quarter in the Corporate business, we had a handful of very good customer wins that contributed to the fixed service revenue growth. And also the fiber pickup starts to be visible there. I think that these are more micro examples in a sense that they are telling about our competitiveness in terms of fixed service revenue. If I look at the sort of near term for the next couple of quarters in fixed service revenue, I think that we will be seeing some quarterly fluctuations still. And I wouldn't yet say that there has been a macro trend change in this one. But when we look further to late '26 and 2027, we do see that in the fixed service business, there is a possibility for additional growth, revenue and profitability growth in terms of data center connectivity, data center fiber connectivity. So I just want to check whether that addresses at least part of your question? Or did you have something else on mind on that? Andrew Lee: Yes. No. Thanks, Topi. That was great. Can I just -- just as a follow-up, can I just check that EUR 40 million, is that a net benefit that we can just add on to the EBITDA line? Or is that a gross benefit? Topi Manner: Yes. Related to the cost? Andrew Lee: Exactly, yes. Topi Manner: So the bottom line with the transformation program and with the annual cost savings is that with this transformation program, given all the changes in our business, we aim to achieve our midterm targets, the ones that we communicated in CMD last March. Andrew Lee: Okay. I thought you said that you're accelerating it earlier on in the call. Maybe I misunderstood that comment on the... Topi Manner: Yes. We aim to achieve the midterm targets, like I stated, we are accelerating the implementation of the strategy, accelerating the implementation of the enablers for [ growth ]. And then the second part of your question, I guess, was related to the mobile service revenue and the competitive landscape that we are seeing on the market. So on that one, the outlook that we have for mobile service revenue development as of now is that during this calendar year, it will be low to mid-single-digit MSR growth. And as stated, what we have seen now lately is intense competition, more intense competition in the -- especially in the 4G category of things. At the same time, when we look at the total market, the 5G upselling continues. Our bundled offering related to security features has been well received on the market, and we will continue that rollout, and that will be supportive of mobile service revenue. So you need to look at both high end and the low end of the market in order to understand the full dynamic. Andrew Lee: And how should that play out in Q4? Should we see any kind of material difference to the growth trend you saw in Q3 and Q4? Topi Manner: When -- I mean when we look at now the competitive situation, Q4 is a bit more challenging before the cost savings kick in at the start of the year from Q1 onwards. Operator: The next question comes from Owen McGiveron from Bank of America. Owen McGiveron: It's Owen McGiveron from Bank of America here. On the elevated post-paid churn in Finland, could you just give us a few more details on the moving parts there? How much is hard bundling contributed to the churn? And is it all or the majority from this more competition in the 4G offerings? Topi Manner: Yes. I think that what we are seeing is that the market is more diverse than it has been in the past. So if we look at the high end of the market, 5G category of business and especially if we look at those cohorts of customers to whom we have been rolling out the new offering with the security features. I think that, that has proceeded well. As stated, we have now rolled out 600,000 customers approximately to the new offering. And when we look at the churn of those customers isolated, that has met our expectations or actually has been a little bit below our expectations. So that means that we do see that customers understand the value and there's a possibility for us to continue expanding that offering. At the same time, at the other end of the market, where consumers are more price sensitive and more prone to be attracted by 4G offerings, then there we see price competition and campaigning. And that has been one of the drivers or the main driver behind the increased churn number from Q2. Owen McGiveron: Okay. That makes sense. And just a very quick one on the high bundling cohort rollout. In seasonally more competitive Q4, should we expect a slowdown in the rollout of your security offerings to customers? Or do you think you can continue at a steady pace? Topi Manner: I mean if we look at the rollout schedule for the remainder of the year, the original plan was already that Q4 will be calmer in terms of that rollout. So the rollout pace will pick up in '26. Operator: The next question comes from Andreas Joelsson from DNB Carnegie. Andreas Joelsson: Just 2 questions from my side as well. First of all, the delayed projects in the International Software business, how should we view that? Is it more cancellations of orders? Or do we expect that to come back in the near term? And secondly, the cost reduction program usually come with a cost. So what kind of restructuring costs should we expect from that and when? Topi Manner: Absolutely. So if I take the first one and Jari, you take the second one. So on the first one, in the International Software Services, this is really a delay. So no cancellation of projects. It is a timing issue as such. I mean, typically, in a customer project, when a project starts, there's a license element in terms of revenue, then there is a certain service revenue element related to installing the software, configuring the software. And then there's a significant recurring revenue element on this one. And we are proceeding according to plans in terms of the recurring revenue part in ISS, but the delay of some projects is impacting the license and especially the service revenue part of these projects. Jari Kinnunen: And the program -- cost reduction program and restructuring charge question. So we -- at the moment, we estimate that there will be a restructuring charge, approximately EUR 20 million, and that will be booked in Q4. Operator: The next question comes from Paul Sidney from Berenberg. Paul Sidney: I have 2 questions as well, please. Firstly, on Finnish mobile, if we sort of take a step back and look what you said 3 months ago, you said that Q2 all price increases have landed well, customers have valued the offering of the new services. What's really happened in the past 2, 3 months to change the competitive dynamics so quickly? Just to get a better understanding for that, please? And then secondly, given the competition is mainly at the bottom end, you mentioned 4G. Is there any measures you can take to accelerate the migration to 5G? And also, are you confident that this elevated competition level won't spill over into the 5G market as well? Topi Manner: Yes. So I mean, if we look at what we said about the introduction of the bundled offering with the security features, not that much has changed between Q2 and Q3 on that category of the offering. We have been moving forward with our original rollout schedule and customers understand the value. We see that the take-up rate of those individual security features is increasing among our clientele. And as stated, that whole initiative is supportive of our mobile service revenue growth at this point of time. What we are seeing is in the market is that especially in the lower end of the market, speaking of predominantly 4G, 4G subscriptions. The competition has been tighter as the churn figure indicates during Q3, there has been campaigning ongoing. When we sort of slice and dice that a bit, one new mobile virtual network operator started during the quarter, Giga mobile in September. That individual player has not impacted the market that much. So the competition in the 4G category is very much between the traditional 3 big players on the market. For us, our stance in this one is very, very clear. We will keep our market #1 position. We will keep our market share in mobile subscriptions. And with the transformation program, we are improving our cost competitiveness on the market. Paul Sidney: That's great. Can I have a quick follow-up, Topi? Would you consider cutting price at any stage looking forward if the competition levels remain? Topi Manner: Sorry, Paul. Now I missed some of it. So could you please repeat? Paul Sidney: Apologies. It was just a follow-up. Would you potentially consider cutting price looking forward? Or is that not an option? You want to continue to compete on quality? Topi Manner: Yes. We will be a responsible market leader. So we are not fueling the price competition on the market. So we will be a responsible market leader. At the same time, we will keep our market share. I repeat, we will keep our market share. So we will be responding to the price competition if needs be. Operator: The next question comes from Ajay Soni from JPMorgan. Ajay Soni: The first one is just around that this 4G low-speed area where you're seeing more competition. I was wondering if you could give us an indication of what portion of your customer base is within that. Obviously, you highlight within the slides, it's around 37%. I think that's for the market, which is below 200 megabits. But what about for you guys specifically within your customer base? And the second question was just a quick clarification. The workforce reductions of -- or the EUR 40 million savings that you expect in '26, do you expect that full run rate to come from Q1 '26? Topi Manner: Good. So if -- Jari, you take the last one. So I mean, when we look at the various segments of the market, and now, of course, I'm simplifying quite a bit. But our -- we are not disclosing the number of 5G penetration. We are disclosing the number of high-speed penetration, more than 200-megabit penetration where we have all of our 5G customers and then we have some 4G customers. But if we look at the high end of the market and we include all of the 5G subscriptions to that one, we are closing in on 50% of the market in that one. And then the sort of most price-sensitive customer group is not half of the customer base, it's less than that. We are probably talking about roughly 30% plus/minus of the client deal. Jari Kinnunen: And regarding EUR 40 million cost savings, majority of that comes through personnel reductions. There are other parts, however, on that. And we estimate that from the beginning of the year in Q1, we have a majority of the savings already coming in. Topi Manner: And still coming back to the mobile competition and the overall dynamics of the market. I think that it is worthwhile to say that we have been seeing times of a bit more intense competition also in the past. If you look at the past 10 years, there have been quarters -- individual quarters when the churn has been on 22% level like now. So the competition comes and goes as such and is of volatile nature. And I think that if we take sort of a mid- to long-term perspective to our market, this is an effectively a 3-player market in terms of mobile services. And we don't think that the underlying rational nature of the market has changed. Operator: The next question comes from Abhilash Mohapatra from BNP Paribas. Abhilash Mohapatra: Sorry to come back to the transformation program, please. But it's just interesting that you've put a very explicit number around the cost saving of EUR 40 million linked to the headcount reduction. Just trying to understand, is that -- I mean, is it -- should we be reading something into that, that -- that's the sort of headwind that you're expecting in your business elsewhere due to a combination of all those things you talked about, like sort of mobile competition, macro pressures, and that's why you're looking to do this? Or was this always a part of the Capital Markets Day sort of strategy and you've just now taken this moment to announce this program. How should we be thinking about that, please? Topi Manner: If I start on this one, and Jari will continue. So it's more the latter of what you have stated. So if you come back to our strategy in Capital Markets Day, simplicity and productivity has always been part of our plans. We have factored that into our midterm targets in terms of EBITDA. We have been working with simplicity and productivity for long with continuous improvement measures. If you look at what we did during '24, there were some productivity measures visible during the calendar year of '24. Now since the Capital Markets Day, we have been working with issues like finding efficiencies from procurement. We have been looking into automation and AI possibilities, cross-functional synergies within our organization, possibilities to delayer in the organization. And now the time has come to accelerate the strategy implementation. And at the same time, there is an element of taking swift action to improve the cost competitiveness in the current market environment, but in this order. Jari Kinnunen: Yes, I can literally repeat the -- the accelerated growth strategy that we presented besides the concrete growth levers for revenue, important part of that strategy is and also as we presented in the Capital Markets Day, is the productivity cost efficiency development. So it's an elemental part of that strategy. And we will continue also beyond this program to build productivity. Operator: The next question comes from Artem Beletski from SEB. Artem Beletski: So I joined the call a bit later. So maybe those have been answered but still coming back to competition situation and the increased intensity during Q3. Could you maybe comment on churn profile, what you have seen during this quarter? So has there been a gradual pickup? Or did it really increase during September months? And maybe how do you see the development in early part of Q4? And the second question is relating to EUR 40 million program. So in the past, you have been doing this type of efficiency actions, but you haven't really been quantifying those ones. So could you maybe provide some color how this EUR 40 million program could be compared to what you have been doing over past years? And maybe just in terms of cost inflation. So could you maybe comment what you see on that front? Just trying to extract what could be the net figure in terms of these actions? Topi Manner: Okay. So if I quickly start on the churn profile. So looking into Q3, I think that we saw the 4G category competition to pick up in July and basically continue throughout the quarter. And then, of course, there was some campaigning also in September. So basically something that was across the quarter as such. Now looking into Q4, typically, we see campaigning in Q4 during the Black Friday weeks of November and then a calmer period before that. So if we look at sort of very tactically the sort of short-term sort of patterns in terms of churn, I think that, that is playing out as of now. And then remains to be seen that what happens in November related to Black Friday weeks. Jari Kinnunen: And to cost efficiency development plan and this program. Yes, it's true that we've been doing that also, of course, in the past, increasing productivity, cost efficiency. We did some reductions also last year in employee numbers. And in different times, these opportunities mature, and there are several levers below that automation, AI among the others. And like mentioned already, this is part of the -- a very central part of the strategy that we introduced earlier this year, and we will continue with the productivity development also going forward and beyond this. Topi Manner: And if you look at this transformation program, I guess that in the nature of things that we will be implementing, if we look at the things that we did during '24, we basically did continuous improvement within the verticals of the organization. In this transformation, there will be also horizontal end-to-end process optimizations and streamlining of those processes, also seeking synergies between business areas, business areas and the tech ops part of the organization. And with that, there's a bit more transformational element to what we are doing right now to give you a bit of flavor of the nature of things. Operator: The next question comes from Siyi He from Citi. Siyi He: I have 2, please. The first one is following up your comments on the cost cutting earlier. I think looking at the past, it's probably one of the rare times we see that you announce a major staff reduction. Just wondering if you could comment on the current negotiation progress with the unions. And if you could -- in what areas if mobile, ISS, we see most of the staff reduction from your program? And the second question is if you could talk about the market position in B2B. I think in mobile; you showed some decline in mobile ads in B2B. But I think last quarter, you mentioned that have won some contracts. Just wondering how should we square your comments from last quarter and this quarter's performance? Topi Manner: Okay. Thank you for that. So if I take the staff implications first and how they will be divided and distributed within the organization. I mean, the overall estimated number of job reductions within the company will be 450 of that, 400 will be associated with our businesses and functions in Finland, namely Consumer business, Corporate business, corporate functions and the tech ops part of the organization. And then that also means that in Finland, the union dialogue is important that has been initiated. We have a good tradition for collaboration in that space, and then we will be proceeding with that when we implement these changes during the weeks to come during the remainder of this year. And then coming back to your other question about the B2B and the customer wins. Yes, during Q2, we won significant new customers, especially for our IT business and sort of all-around customers in B2B in a sense that they would be having connectivity services like corporate networks, cybersecurity and IT services. And the sort of takeover of those services has partially commenced and will continue during Q4, but it is not in any material fashion impacting the Q3 numbers yet. Operator: The next question comes from Terence Tsui from Morgan Stanley. Terence Tsui: My question was just again on this cost-saving program. Just wondering why you haven't been a bit more ambitious. I think some of your Nordic peers have been a bit more aggressive in taking out their headcount. From my calculation, it's roughly about 7% of the headcount. So just wondering why didn't you see scope for maybe a bit more aggressive cost cutting, please? Topi Manner: I mean if you look back a bit and include the sort of continuous improvement measures that we did during the '24 -- calendar year of '24. During that year, we reduced some 300 people in terms of staff. And then when you calculate the impact of the transformation program now into it, then that total number is quite equivalent to what we have been seeing some of the other players doing. Then I think that there's a difference in terms of how we have been doing it. We have been doing it predominantly with continuous improvement measures and now also figures of the cross-functional sense of this -- or cross-functional nature of these initiatives, introducing this transformation program to accelerate the implementation of the strategy. So we have been implementing it in and designing it in a little bit different way. And then, of course, there has been this strong culture of continuous improvement in the company for a long time. And therefore, we have been cost efficient previously as well. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Vesa Sahivirta: Thank you for your questions and participating in this call. And now I give the closing remarks to Topi, please. Topi Manner: Thank you for all of you for participating this earnings call. And before we close, I would just like to acknowledge Jari and his great contributions to the company during the 25 years that you have been serving as the CFO. So I don't know whether it's 100 quarters or even more than that, but many, many quarters. So your contribution has been invaluable. So thank you for that and all the best for the future. Jari Kinnunen: Thank you, Topi, for kind words and small correction. Of course, CFO knows the numbers. So it's been 20 years as CFO. Topi Manner: Yes, 25 years in the company. Jari Kinnunen: 25 years in the company. Topi Manner: That's correct. Jari Kinnunen: It's been -- yes, great journey and of course, a great development over the years. And I'm very privileged and grateful that I've been part of that journey and worked with great colleagues in the finance team, in the management team all over the Elisa and of course, with you, Topi, and before that long years with Veli-Matti. And with this audience as well, there has been great cooperation and interactions over the years and big thank you for all for that. And I'm very please -- pleased that I can hand over this responsibility to Kristian going forward and the company is in a great position to continue value to customers and especially also to the shareholders going forward with the strategy in place, with the culture in place and great people in the company. So thank you very much. Topi Manner: Thank you for participation. Vesa Sahivirta: Thank you and until the next time. And next week, we are on the road with Jari and Kristian, so we'll meet you where we are. So until next week. Thank you. Topi Manner: Thank you.
Operator: Good morning, ladies and gentlemen. Welcome to the Wyndham Hotels & Resorts Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Now at this time, I would like to turn the call over to Mr. Matt Capuzzi, Senior Vice President of Investor Relations. Please go ahead, sir. Matt Capuzzi: Good morning, and thank you for joining us. With me today are Geoff Ballotti, our CEO; and Michele Allen, our CFO and Head of Strategy. Before we get started, I want to remind you that our remarks today will contain forward-looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission and any subsequent reports filed with the SEC. We'll also be referring to a number of non-GAAP measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP metrics are provided in our earnings release and investor presentation, which are available on our Investor Relations website at investor.wyndhamhotels.com. We are providing certain measures discussing future impact on a non-GAAP basis only because without unreasonable efforts, we are unable to provide the comparable GAAP metric. In addition, last evening, we posted an investor presentation containing supplemental information on our Investor Relations website. We may continue to provide supplemental information on our website and on our social media channels in the future. Accordingly, we encourage investors to monitor our website and our social media channels in addition to our press releases, filings submitted with the SEC and any public conference calls or webcast. With that, I will turn the call over to Geoff. Geoffrey Ballotti: Good morning, everyone, and thanks for joining us today. Our Q3 results illustrate yet another quarter of resilience and execution by our teams around the world. Despite a challenging macro environment, we delivered a 21% increase in room openings, signed 24% more deals in the quarter and grew our global pipeline by 4% to 257,000 rooms and nearly 2,200 hotels. We drove an 18% increase in ancillary fee streams and year-to-date, our resilient, highly cash-generative business has produced over $260 million of adjusted free cash flow and returned $320 million to our shareholders. As we continue to focus our development on higher FeePAR brands and geographies and expand our direct franchising in regions that previously relied on master licensees. We're adding hotels with stronger long-term economics. As of September 30, our global pipeline carried a FeePAR premium of over 30% domestically and 25% internationally compared to our existing system. Here in the United States, we grew our mid-scale and above system by over 200 basis points, led by solid conversion activity and some great new construction additions, including another 4 ECHO Suites opening in strong markets like Reno, Nevada and Sterling, Virginia. Earlier this month, we also introduced Dazzler Select by Wyndham, a domestic extension of our Latin America Dazzler by Wyndham brand into the economy lifestyle space here in the United States. Targeting hoteliers seeking flexibility without sacrificing the power of scale, we're attracting owners of high-quality economy hotels who want to preserve their properties' individuality while tapping into Wyndham's global distribution, loyalty, technology and marketing platforms. Internationally, we grew net rooms by 9%. EMEA grew its net rooms by 8% with several new construction additions like the stunning new Wyndham Grand Udaipur in India, where we now have 88 direct franchise hotels open across that important country and another 50 in our development pipeline. Along with spectacular new conversions like the Dolce by Wyndham, Comwell, an iconic upscale edition with 5-star meeting facilities in the heart of historic Aalborg Denmark. Latin America and the Caribbean grew net rooms by 4% with 5-star additions like the new Wyndham Grand Costa del Soul located inside of Lima, Peru's new Jorge Chavéz International Airport, as well as several exceptional conversions like the Isla Verde, a trademark collection by Wyndham Hotel near some of the most beautiful beaches in the Caribbean. In China, we grew our direct franchising system 16% with many outstanding new construction additions like the Wyndham Grand in the port city of Yucheng on the Yangtze River, our 50th Wyndham Grand in China, along with the La Quinta Turpan in the hub of the world famous Silk Road, our 10th La Quinta in the Asia Pacific region. In Southeast Asia and the Pacific Rim, net rooms increased 13% with several exceptional additions like the Hotel Traveltine, our first trademark collection hotel in Downtown Singapore. And in July, we announced a strategic partnership with the Ovolo Group, bringing 4 Design Forward Ovolo hotels and resorts into our system later this quarter and strengthening Wyndham's upscale offerings in Sydney, Brisbane, Canberra and Melbourne. RevPAR declined 5% in constant currency, both globally and domestically, reflecting continued consumer caution in an uncertain economic environment, especially within the select service segments here in the United States, where our guests are more price sensitive. While we saw continued outperformance across parts of the Midwest in states like Oklahoma, Michigan, Illinois, in Missouri, Minnesota and in Ohio, which collectively grew RevPAR 4% versus prior year, continued softness in the Sunbelt states where Wyndham over-indexes from a room count standpoint more than offset that strength. Internationally, RevPAR declined 2%, driven primarily by Asia Pacific, which was down 8%, led by China down 10% and Latin America, which declined 5%. Elsewhere internationally, performance remained strong. Both Europe and the Middle East grew 4% with considerable strength in Spain, Turkey and Greece. And in Canada, which continued to impact U.S. leisure drive-to markets, RevPAR increased 8% as Canadian travel domestically remained strong. Beyond RevPAR, our focus on growing our ancillary fees again delivered impressive results. New strategic partnerships, new technology initiatives and growth in our co-branded credit card program, where new accounts increased 11% and average spend grew 7%, fueled an 18% growth in third quarter ancillary fees, raising our year-to-date growth to 14%. A key contributor to this growth is the continued strength of Wyndham Rewards, which achieved a record 53% share of occupancy contribution for our domestic hotels and an 8% increase in our global membership enrollments. And earlier this week, we introduced Wyndham Rewards Insider, a travel rewards annual subscription program and a first of its kind among our branded peer set in the hotel loyalty space. As the $500 billion subscription economy is projected to grow to over $2 trillion, Wyndham wants to be a part of that, and Wyndham Rewards Insider offers unmatched value to our 121 million Wyndham Rewards members for an annual subscription of $95 per year. Members subscribing to these upgraded lifestyle benefits will enjoy savings of up to 30% and earn opportunities across flights, hotels, car rentals, cruises and so much more. They'll be granted annual Wyndham Rewards Gold status, exclusive concierge services, Ticketmaster, earn and burn access, expansive bonus earning opportunities on hotel stays and many additional exciting benefits. Capturing the essence and generosity that defines Wyndham Rewards as the fastest way to earn a free night, Wyndham Insider will further enhance the program's appeal and reinforce the strength that has kept Wyndham Rewards ranked the #1 hotel loyalty program by the readers of USA Today for the eighth consecutive year. Last quarter, we talked about the success of Wyndham Connect and Wyndham Connect PLUS, a suite of supercharge technology innovations that we're promoting to our owners as Wyndham AI. This quarter, over 230 AI agents with encyclopedic knowledge on each of our 8,300 hotels began leveraging the power of Salesforce, Oracle and Canary Technologies to generate and modify direct bookings while also answering questions and providing tailored travel recommendations by utilizing large language model AI and first-in-industry Agentic AI voice assistance. These new Wyndham AI Agentic Assistants are delivering seamless and complete natural language conversations with full guest service support while also handling live messaging through WhatsApp and Apple messaging. Wyndham AI is driving more direct bookings, introducing front desk workloads that's accelerating significant ancillary revenues for thousands of our hotel owners through automatic upsell opportunities like early check-ins, late checkouts and in-room amenity upgrades. To date, Wyndham AI has already handled more than 0.5 million customer interactions, delivering faster service, higher booking conversion and a 25% reduction in average handle time, all contributing to nearly 300 basis points of improvement in direct contribution for hotels leveraging Wyndham AI to its fullest potential. And with only 7% of our 8,300 hotels now live with this new Agentic AI by Wyndham component and adoption ramping quickly, we're only beginning to unlock what Wyndham AI can deliver. Before Michele takes us through the financials, we as always want to extend our sincere appreciation to our team members and franchisees worldwide without whose passion and collaboration, our solid performance and execution would not be possible. Their conviction in the opportunities ahead of us, coupled with their commitment to our strategic initiatives to deliver exceptional value, continues to be the cornerstone of our success. And with that, I'll now turn the call over to Michele. Michele Allen: Thanks, Jeff, and good morning, everyone. I'll begin my remarks today with a detailed review of our third quarter results. I'll then review our cash flows and balance sheet, followed by an update to our outlook. Before we begin, let me remind everyone that the comparability of our financial results continues to be impacted by the timing of our marketing fund spend. In the third quarter of this year, marketing fund revenues exceeded expenses by $18 million compared to revenues exceeding expenses by $12 million in the third quarter of last year. To enhance transparency and provide a better understanding of the results of our ongoing operations, I will be highlighting our results on a comparable basis, which neutralizes the marketing fund impact. In the third quarter, we generated $382 million of fee-related and other revenues and $213 million of adjusted EBITDA. Fee-related and other revenues declined 3% year-over-year, primarily reflecting a 5% decrease in global RevPAR, as Jeff mentioned, as well as lower other franchise fees. These headwinds were partially offset by an 18% increase in ancillary revenues, a larger global system and royalty rate expansion, both domestically and internationally. Despite $12 million of lower fee-related and other revenue, adjusted EBITDA was flat year-over-year on a comparable basis as the revenue decline and elevated costs related to insurance, litigation defense and employee health-care programs, all of which are reflective of the broader operating environment were more than offset by operational efficiencies and onetime cost containment measures. Adjusted diluted EPS for the quarter was $1.46, up 1% on a comparable basis as the benefit of share repurchases was partially offset by higher interest expense. Adjusted free cash flow was $97 million in the third quarter and $265 million year-to-date with a conversion rate from adjusted EBITDA of 48%. Development advance spend totaled $22 million in the third quarter, bringing our year-to-date investment to $73 million. These investments support high-quality FeePAR accretive additions that strengthen our system and future earnings power. Year-to-date, about 30% of our openings have included development advances, and these hotels are entering our system at a FeePAR premium roughly 40% above our current system. We returned $101 million to our shareholders during the third quarter through $70 million of share repurchases and $31 million of common stock dividends. Year-to-date, we have now repurchased 2.5 million shares of our stock for $223 million. We closed the quarter with approximately $540 million in total liquidity, and our net leverage ratio of 3.5x remained as expected at the midpoint of our target range. Last week, we completed the refinancing of our revolving credit facility, increasing total capacity to $1 billion, a more than 30% increase in potential liquidity while reducing the borrowing cost of the facility by 35 basis points and extending maturity to 2030. Turning to outlook. With RevPAR trends softening throughout the third quarter, we now expect full year constant currency global RevPAR to range between down 3% to down 2%. This represents a reduction of 100 to 300 basis points from our prior outlook and implies fourth quarter global RevPAR of down 7% to down 4%. At the low end, this assumes roughly 200 basis points of additional softening beyond third quarter results, while the high end assumes slightly better performance than the 5% decline experienced in Q3. This outlook also assumes that U.S. performance continues to lag meaningfully behind our international regions and that international trends moderate modestly from recent levels. There are no changes to our net room growth outlook of 4% to 4.6%. Fee-related and other revenues are now expected to be $1.43 billion to $1.45 billion, down $20 million to $40 million from our prior outlook of $1.45 billion to $1.49 billion. Since our initial outlook in February, RevPAR has come in about 500 basis points softer and our revenue forecast has decreased by approximately $60 million. Through cost containment measures, including both operational efficiencies and onetime variable reductions, we have been able to offset approximately $30 million of that revenue shortfall as well as $15 million of incremental costs primarily related to litigation defense and employee health-care programs. As a result, adjusted EBITDA is now expected to be between $715 million and $725 million, down $15 million to $20 million, or approximately 2% from our prior outlook of $730 million to $745 million. Our marketing fund expenses are now expected to exceed marketing fund revenues by approximately $5 million, which reflects a modest investment to support in-flight initiatives that strengthen the long-term health of our franchise system. As a reminder, we do not adjust the performance of our marketing funds out of our reported results and we have a strong track record of recovering these investments and fully intend to do so here as well. Adjusted net income is projected to be $347 million to $358 million and adjusted diluted EPS is projected at $4.48 to $4.62, which is based on a diluted share count of 77.5 million and as usual, does not assume future share repurchase activity or incremental interest expense associated with any potential new borrowings. There are no changes to our outlook for development advance spend or free cash flow conversion. In closing, we remain focused on executing our plan in this challenging economic environment. We're maintaining cost discipline across controllable expenses, delivering strong ancillary revenue growth returning capital to shareholders and investing in our business to attract high-quality additions to our system, all while continuing to expand our royalty rate and grow our pipeline. With that, Geoff and I will be happy to take your questions. Operator: [Operator Instructions] We'll go first this morning to Dan Politzer with JPMorgan. Daniel Politzer: This is dual-pronged, but as you think about this challenging RevPAR environment that we're currently in, especially in the economy segment, can you talk about, I guess, what's in your control and what you're doing, and what's out of your control and kind of the active things that you're doing? And then similarly, how do we gain comfort that there isn't something structurally wrong with the economy segment, just given the recent RevPAR trends are obviously pretty concerning? Geoffrey Ballotti: The structural piece, I'll take first. I mean we're moving into our slowest quarter of the year. And despite the softness that we talked about in Texas, California, Florida, we are seeing nothing structural that concerns us in any of the leading indicators that we look at daily. Our booking lead times, they're up 2% to prior year. Our length of stay are consistent with last year, something that if we thought something structural was happening would not be the case. And our cancellation rates have actually improved over last year by 160 basis points in Q3 versus prior year. So on those indicators, we feel good. Slide 11 is an interesting slide that we've -- because we know you're getting a lot of questions, we're getting a lot of questions on this structural question. And we're looking at demand and occupancy. And this year, if you look at that slide, we're seeing occupancy down across all chain scales year-over-year with the divergence of RevPAR really being driven by ADR with the upscale segments taking rate, while the economy and the mid-scale where we're concentrated are not. Occupancy, as we all know, has not recovered to pre-COVID levels in any segment, but it has more so in economy and mid-scale. If we look versus 2019, STR mid-scale is down 5% to 2019 versus upper upscale and luxury, both down 8% to 2019, 100 basis points worse than economy and 300 basis points worse than mid-scale. So the question you ask in terms of is there anything structural that we're seeing out there aside from persistent inflation and consumer uncertainty and immigration in some of those states that we mentioned that aren't helping is the upscale hotels are able to price more aggressively to inflation than the lower chain scales are where the guest is obviously more price sensitive. STR ADR for economy is up 11% to 2019 versus up 29% in the luxury segment. And luxury is the only segment, as we know, that's been able to outpace inflation growth at 26%, which is very good news for economy and mid-scale segments from a pricing power standpoint moving longer term, especially as wage growth continues to outpace inflation, providing upside when that consumer confidence stabilizes and we get back to that 2% to 3% CAGR. In terms of the first part of the question, what we're doing to help our franchisees, franchisees in the lower chain scales are beginning to discount. We're seeing that in the rates, more so to try to capture demand right now. And we're helping franchisees where we can and urging franchisees to hold rate where it makes sense, especially on leisure versus the corporate contracted pricing and discounting where appropriate, but not playing heavily in that last-minute discounting on those all channel sales. We're trying not to discount last minute because of the long-term value dilution. And we're seeing our brands, they gained the most share in the mid-scale. We saw 160 basis points of RevPAR index, and it's being driven by the weekday, which was up 180 basis points for our mid-scale brands. And we're gaining with more rate index, which our revenue management teams really want to see continue for franchisee profitability. Operator: We'll go next now to Brandt Montour of Barclays. Brandt Montour: So just a follow-on to that. We'll stick on the demand side for a minute. And maybe just talk about business and infrastructure-related travel demand, specifically to what extent the new administration's curtailment of government spending and that sort of program has slowed down the pipeline of projects that I know that you guys have been excited about that was driving a tailwind late last year. And maybe data centers have been a bit of a positive offset, but if you could sort of frame that up for us. Geoffrey Ballotti: Thanks for the question, Brandt. Yes, look, we continue to view the $1.2 trillion of infrastructure as a multiyear tailwind for our franchisees. That's going to drive over $3 billion of revenue to our hotels. And the 150 basis points of growth that drove for us in the Q4 of last year is now more on par with the rest of our portfolio. Obviously, there's a lot of headlines out there that allocated monies have potentially been frozen as the federal government looks to possibly reallocate among states. And we're seeing some projects being paused as project priorities are certainly shifting. For example, EV-related spending is more shifting to energy spending or modernizing highways and bridges and air traffic control we read a lot about. But we're optimistic that the infrastructure spending, again, over 80% of which is not spend, is going to resume at some point. Infrastructure room nights contracted this year are up 2x versus consumed, and they're pacing well ahead of same time last year. And to the back part of your question, we're also very confident that private investment in reshoring and manufacturing will continue to boom as it has specifically with data centers, as you mentioned, where our hotels in those markets outperform the hotels from a RevPAR standpoint and have gained 500 to 600 basis points. Many of the states that we called out in our script are certainly benefiting from that. We're spending a lot of time with our teams. We've identified over 150 planned data centers. And the Wyndham hotels in those markets that we're tracking and targeting from the $1.6 billion Amazon Web data center in Canton, Mississippi to the $800 million Meta data center in Graniteville. They're seeing traction, and we're contracting with the surveyors from a GSO global sales standpoint and the design firms on the data centers that haven't even begun. There's so much early site development. Our teams, we met recently with the Mississippi Governor, Kate Reeves. And the $1.4 billion AWS data center in Richland, Mississippi is the biggest investment that's ever seen. So our hotels within the radius, and we've got a lot of them, are seeing improvement in Q3 market share, which gives us a lot of optimism compared to the other sites and markets outside of those radius that are under pressure for all the reasons we mentioned. So it's a really big deal and something that we're very excited about. Operator: We go next now to Dany Asad of Bank of America. Dany Asad: Michele, in your prepared remarks, you mentioned that you expect U.S. RevPAR in Q4 to be in line with Q3. Look, we're obviously still early in the quarter, but any early reads you can share with us as to where we're trending today relative to that domestic down 5% expectation? Michele Allen: I'd say from an October perspective, we are encouraged by some of the early trends in our 3 largest states, California, Texas and Florida, we're seeing RevPAR track about 100 basis points above September performance. We've also seen stabilization in U.S. booking pace month-to-date in October and a really strong Oktoberfest in Germany. So those are some of the green shoots that we're tracking. The rest of the portfolio appears to be performing more in line with third quarter results. So our fourth quarter implied RevPAR is at the midpoint anchored to those third quarter results and also includes, I'd say, the headwinds from last year's hurricane. And then the high end would assume some modest improvement from those trends, not a sharp rebound at all. And again, it's supported by those things that I just mentioned. And then, of course, the low end would allow for some further softening. But we believe -- certainly believe it is potentially achievable if booking trends hold and some of that strength I mentioned continues through the end of the year. Operator: We'll go next now to David Katz of Jefferies... David Katz: With respect to net unit growth, right, presumably, the bigger it gets, the easier it is to weather RevPAR volatility. Geoff, can you -- or Michele, can you talk about what kinds of momentum we can expect to see from you in terms of net unit growth, and what the gating factors or puts and takes would be toward next year being the same or better than what we have in terms of total net unit growth in geographies, et cetera, a lot to talk about there. Geoffrey Ballotti: Yes, there is, David, and our favorite David Katz quote, "Nothing lasts for a lifetime." We need RevPAR to get back. But we're feeling very good about our NRG outlook. Accelerating in the higher fee segments, it's continued. And as you've seen, we've opened a record 48,000 organic rooms year-to-date. which is up 9% to prior year. It's up 29% to 2019. And what we're really happy about and confident about looking forward is that openings are pacing ahead of prior year. And net room growth sequentially is pacing ahead each quarter throughout the year. So Q1, we added net 4,800 rooms. Q2, 6,800 net rooms were added and Q3, 8,700 net rooms were added in the quarter. So as of September 30, we have opened 9% more rooms versus where we were same time last year. So we're feeling again very good about our outlook. And 70% of those rooms are in the mid-scale and the above segments. We're -- in terms of next year, given just how strong the pipeline is, we're feeling very, very good. This was our 21st consecutive quarter of pipeline growth. and it's up sequentially and it's up 4% versus year-over-year with, again, a concentration in higher RevPAR segments in markets not only across the U.S., but obviously internationally as well. 60% of our pipeline is international with really steady growth across Europe, the Middle East, Eurasia, Latin America, which have grown 140% since spin and 170% in Latin America's case since spin. So with that type of continued growth in net rooms, we're feeling confident about the rest of the year, obviously, and more importantly, next year in '27. Operator: We'll go next now to Michael Bellisario of Baird. Michael Bellisario: Two-parter for you, probably for Michele here. Just first on the franchise fees in the third quarter. Can you maybe give us a little more detail on what's in that other bucket that you mentioned? And maybe also why were they down more than you thought? Any color there would be helpful. And then second part is just as we think about the bridge into next year, maybe help us put some of the moving pieces with G&A, the cuts this year and maybe any step-ups that you expect next year? Michele Allen: With respect to franchise fees, Mike, that line item captures a number of items that aren't tied directly to rooms or RevPAR. So those are things like termination fees, transfer fees, application fees, transactional revenue that's subject to varying revenue recognition policies. These items are event-driven. So the level of activity can vary quarter-to-quarter. For example, the number of transfers in any given quarter can shift based on deal timing and obviously, transaction volume, which is down quite meaningfully this year industry-wide 24% for the select service space. So I think when we look at these fees, they're healthy. It's a high-margin part of our business, but naturally variable. And that's why occasionally, you're going to see some movement year-over-year in this line item. This quarter, we saw a $7 million decline versus last year third quarter. But in terms of our internal expectations, we were only short about $3 million to our forecast. And year-to-date, I think these fees are just roughly maybe $2 million ahead of last year. So we're really -- we really look at the Q3 decline as timing related. I think the second part of your question was with respect to next year. And I'd say it's still too early to talk about our 2026 expectations. We're just beginning our planning process now. We are, of course, approaching the budget the same way we always do. We're staying very focused on what we can control. From an expense perspective, we did have some variable reductions this year. About half of those we expect will be permanent to the margin and the other half are more temporary for 2025. Operator: We'll go next now to Steve Pizzella with Deutsche Bank. Steven Pizzella: Maybe we could pivot to ancillary revenue. Can you talk about your expectations for ancillary fee growth to accelerate from low teens this year to mid-teens in 2026? What are the drivers of that, specifically from a credit card perspective? How should we think about lapping the tough compares for most of this year? And do you expect the procurement business to also accelerate next year? Michele Allen: Okay. Yes. There's a lot in there. I'm going to try to remember your 6-part question. We're really pleased with how ancillary revenues are performing, up 18%, I think, in the quarter. Year-to-date, we're tracking 14%, pretty much in line with maybe modestly ahead of our low teens expectation. On the credit card side, we saw a 10% increase in new accounts. We saw a 7% lift in average spend per cardholder. That's an acceleration from the Q2 metrics, which were 5% and 2%, so 5% in new accounts and 2% in average spend. For ancillary revenues, we've got several initiatives driving this multiyear above algo growth. So Credit card is obviously the largest contributor to growth this year, but we've got the replatforming happening later this year as well as early next year. That's another inflection point from a growth perspective. Then we've got international expansion. We've got the debit card, which is ramping slowly and intentionally slowly. We've got technology like Wyndham Connect. And then we're really excited about Wyndham Insider. It's first of its kind, as Geoff mentioned, to add-on subscription service. It won't drive much in EBITDA this year or even perhaps next year as we focus on ramping the program and testing and proving out the model. But we think there's real opportunity here in future years from an ancillary fee perspective. So at this point in time, like I just mentioned, still a little too early to talk about 2026. We don't consider the forecast or the 2026 period as lapping a tough comparison. We see -- we're growing off of a higher base, obviously, post renewal, but we still think there is a significant growth opportunity, not just in 2026, but like I said, multiyear tailwinds from the number of initiatives we currently have in place. Geoffrey Ballotti: I think the only thing you missed, Steve asked about was sourcing, a team that Michele leads and a team that's making significant strides, Steve. We've got new sourcing categories and global expansion of programs that are really benefiting our franchisees. New sourcing brands that Michele's team are adding like Nestle, Seattle's Best, Starbucks on the coffee side and a great program for franchisees when it comes to sourcing insurance through a program that's driving significant savings on franchisee insurance quotes, which is a big issue for small business owners, resulting in a lot of savings for franchisees. So we're optimistic as well that we've got a lot of upside on the sourcing side. Operator: We'll go next now to Lizzie Dove of Goldman Sachs. Elizabeth Dove: You mentioned in the presentation that your new deals which require key money are coming in at about a 40% FeePAR premium versus the portfolio. But then China is also becoming -- or has become a bigger part of the mix. Curious like how we should think about the kind of balance of that mix shift, the benefit from the key money deals versus China and whether this is kind of accretive or dilutive to RevPAR over time? Michele Allen: So key money is absolutely accretive to RevPAR over time. We are having great success with that strategy, bringing in high-quality product in higher demand, higher RevPAR markets. I think your question more has to do with the mix of net room growth, right? So as we grow faster in international regions that have lower royalty rate, that could wind up looking dilutive to the overall royalty rate and maybe even dilutive to FeePAR on a global basis, but still very accretive to revenue and very accretive to EBITDA. So we have -- from our perspective, the world is a very big place. Nothing -- no market is off limits just because it's a lower RevPAR market. We may not be incentivizing our development team as much to tap into those markets, and we may be adding more feet on the street in higher RevPAR markets, all of those things are very true. But if the deal comes our way and we can support it appropriately and drive the value proposition, we're not going to say no just because the RevPAR market itself is a lower RevPAR market. And again, like I said, I think from a key money perspective, feel highly confident that where we are deploying our money is for higher FeePAR product coming into our system. Geoffrey Ballotti: And I think it's fair to say, Michele, that we're not deploying key money in China today, correct, or very little. Michele Allen: That's right. Geoffrey Ballotti: Yes. I mean -- and we're, Lizzie, just having a great success over there with -- as we've talked a lot about with you when we've been out on the road driving that double-digit net room growth increase in direct FeePAR accretive rooms without key money. And it was just so great to see what happened again this quarter, the team executed 52 new deals in the quarter in China, 30% more than last year and 11% now more than last year year-to-date. And it was great to see that net room growth grow sequentially and the pipeline grow sequentially. Pipeline was up 3% in China without key money. And so many of those contracts awarded are new construction. I mean, just absolutely positively stunning new adds this quarter with Wyndham Grands and just some phenomenal locations competing against our larger peers in so many cities across China without the use of key money. So we're really excited that, that could continue. And congratulations on your recent nuptials. Operator: We'll go next now to Stephen Grambling of Morgan Stanley. Stephen Grambling: Geoff, I appreciate some of the detail you gave on the AI front, but I want to make sure I understood some of what you're doing there. Is that largely an internal AI tool to drive bookings in the direct channels? And if so, how do you think about partnerships or opportunities with indirect channels? For example, what would make partnering with an LLM more or less attractive versus other LLMs or even considering compared to OTAs? Geoffrey Ballotti: Well, a lot to unpack there, Stephen, how we would consider it. I mean, certainly, Chat, Perplexity, Gemini are reshaping how guests book hotels. And it is presenting a unique opportunity for us to continue to reduce our dependency on OTAs. I've heard you asked this question before. We continue to add new capabilities to optimize how our brand.com sites appear in LLM searches, and we're currently experimenting with MCP server, a sort of USB port, if you will. For AI to allow LLMs to plug into us to directly access all of our hotel availability, all of our rates, all of our inventory, making it easier for an LLM to receive fully updated hotel information from a trusted source. What we referenced in the script and that we've not put into the IP is what the last 6 years of investment, the $375 million that we have invested in our industry-leading tech stack with best-in-class providers who all embrace AI. We don't think we could build it better than Oracle or Adobe or any of these great providers we partner with. We were the first to cloud with a very scalable system that is fully optimized right now, 100% optimized to drive down cost. You could read a lot about our tech team's success. Rackspace, a global leader in cloud management recently said that Wyndham's cloud environment is more optimized for AI than most, if not all of its competitors. And that's enabling us to innovate faster and innovate at a lower cost. I mean AI has been helping everyone in the industry for years on the security front, the marketing front, the operations front. But what we're doing with Wyndham AI, which is an industry first is leveraging now that we have the system built Salesforce and Canary, Canary Technologies with the 250 AI agents that we talked about who are handling hundreds of thousands of guest calls. Mrs. Grambling calls and she wants to book the Gramblings on a holiday. And one of our AI agents know everything about whichever one of our 8,300 hotels, the Grambling kids want to visit. And it's able to answer any question, on any question that, that guest might have about any of our hotels and seamlessly book it. And that's what's driving direct bookings. That's what is allowing our franchisees to save on the labor cost. And it's what's driving right now 300 basis points of increased direct contribution for only 600 of our 8,300 hotels have that specific Wyndham AI piece enabled so far. We talked last call on Wyndham Connect, which is allowing us to talk to customers with AI. A lot of our competitors are doing that. We're taking labor-intense tasks away from our franchisees. We're allowing them to make extra money by seamlessly selling an early check-in or late checkout to the Gramblings, or an upgrade or amenities in terms of what the kids want in the refrigerator. But what we're doing right now with Wyndham AI in terms of that direct booking piece is what really excites our franchise sales team and our franchisees. We're told by Oracle, who works with all of our peers that we're doing things really no one else is, and it's something that our franchisees are very, very excited about. Operator: We'll go next now to Ian Zaffino of Oppenheimer. Ian Zaffino: I just wanted to ask kind of a follow-up on the Wyndham Rewards Insider. Michele, I know you said kind of not a lot of EBITDA impact either this year or next year. But how do we kind of frame the opportunity here? Maybe just longer term, like when you conceptualize what it could deliver to you from either a profitability standpoint, et cetera, or maybe point us to kind of a comparable program that you might think your rewards system could deliver? And then also, how do you actually get there? Would that just be on the fees? Would it be on more loyalty? Just any other type of color you could give us there would be helpful. Geoffrey Ballotti: I would frame it, and Michele could add to this, but we're very excited about it. I think it has the potential to deliver engagement on par at some point with our credit card. Wyndham Insider right now, as Michele said, we expect a strong take rate for members over the next 24 months. And over time, it has that type of potential. So long-term fee growth is certainly the goal. But short term, as Michele said, the focus is more on proving out the model and using returns to further grow Wyndham Rewards. Our new co-branded credit card complements it, and with the credit card rewarding everyday spend, and we're really excited about that, but Insider enhancing Wyndham Rewards value proposition. I mean we know, to frame the opportunity that the subscription economy is absolutely booming, the hotel loyalty travel subscriptions are really in their infancy. Of those that have something like this in the hotel space, they're tied and they're limited to select brands or hotel-only benefits. But at $95 a year, we expect the savings for the average Wyndham Rewards member to more than cover the fee after just one trip. Plus members earn a free night, and we hope you subscribe to this, Ian, at thousands of hotels with the 7,500 annual bonus points. It expands our value prop to our most important members and it basically stacks their discount. So if our promo rate to you is 10% off, as an Insider, Ian Zaffino as a Wyndham Insider gets an additional discount on top of that with a 50% acceleration in the points earned. And without impacting our franchise, and that's a very important point, without impacting our franchisees' costs, the program is absorbing the costs. We've had a lot of interest, a lot of excitement from franchisees, a lot of interest, obviously, from the media, upgraded points called quite a lot of value for $95, T+L magazine, no editorial from our friends at T+L, it's completely separate, compares this program well to premium credit card fee programs, which are charging anywhere between $795 to $895 that we see. We're partnering with American, with United, with JetBlue, with Avis, who else? We're partnering with Carnival with up to 30% discounts from some of those providers. And that's really driving the value prop and the affinity to most importantly, increase our Wyndham Rewards members engagement and their share of wallet. So we're super excited about this. Operator: We'll go next now to Alex Brignall of Redburn. Alex Brignall: The first one is on the marketing expense overspend. Could you just talk a little bit about what that specifically is and you talk about getting it back. Does that sort of specifically mean in the next couple of years? And what are the benefits that you're getting and who's sort of sharing them between you and franchisees? And then the second, you talked a lot about the structural dynamics of RevPAR and demand in the U.S. It's obviously something that's a curiosity for a lot of people. In September, it was obviously a very, very hard comp for the economy segment because of the hurricane impact last year. But versus 2019, the gap between luxury and economy was actually -- there was no gap having previously been a very large gap in the months before. I guess what I'm wondering is if that gap is to close and you talked about franchisees cutting rates, are you worried that it will be because the higher segments will have to see price deterioration because you become a better value prop versus them because of the relative cumulative price growth over time? Or do you think that the economy segment can see sort of a big bounce back in pricing in 2026? Michele Allen: I'll take the fund question, Geoff, and then maybe you want to address the second part of Alex's question. I mean, look, it's $5 million overspend to the marketing fund, let's keep it in perspective. The fund is over $0.5 billion, right, so in annual activity. So it's only roughly 1% of total spend. So still a very immaterial amount when we're trying to kind of manage that level of spend. And remember, we're the only large lodging corporation that does not adjust these marketing funds out of our reported earnings. If you look at the peer set, their -- the variability from their marketing funds is much larger than $5 million. So we feel pretty good about how we've been able to manage that level of annual activity in this RevPAR environment. specifically. And I think as RevPAR deteriorated specifically throughout the third quarter, we had to make a conscious decision on whether or not we were going to stop some in-flight initiatives or we were going to continue them. And certainly, there were ones that we decided to pause, but there were a bunch of other ones that we looked at the overall benefits of those investments to our franchisees and to our -- the overall health of our franchise system. things like Wyndham Insider, for example, some of the AI initiatives that Geoff was talking about, a bunch of personalization initiatives that we're doing and some updates we're doing even to our digital platform to our websites. And so we decided that we were going to continue to invest in those programs. They will have benefits not just in 2025, but well beyond 2025. So ultimately, we view this modest overspend as an investment, and we do have a very strong track record of recovering these funds in future periods, and we're really comfortable with that decision. When we recover this $5 million could be as early as 2026. It could be 100% in 2026, it could be 100% in 2027. It could be some in '26 and some in 2027, but certainly more in the nearer term as opposed to the longer term. Geoffrey Ballotti: In the back half, Alex, it's a really good question. I've seen your sort of the answer on it, I think, in your Hitchhiker's Guide. If you think about the rate for economy up whatever it is, 10% to where we were pre-COVID and luxury right now at up 30%. And to your point, what's happening there, it is very good news for our economy and mid-scale segments from a pricing power standpoint. And at some point, we do believe, to your question, that can flip when consumer confidence stabilizes. Remember, both of those segments, economy and mid-scale were the first to recover coming out of COVID. And we know that at some point, domestic RevPAR is going to return to that 2% to 3% long-term CAGR that it's always averaged, and especially given the earlier comments, everything that's out there from a macro setup on the infrastructure and private investment side, the historically low levels of supply and moreover on the leisure side, I mean, we've got a lot to look forward to next year, like America 250, the FIFA World Cup, which is a $20 billion impact in markets like STR says Atlanta's impact is $2.1 billion. We've got a lot of hotels in Atlanta, along with Dallas and Houston, right, which right now, with all of the consumer uncertainty and immigration activity is stressed, but Dallas and Houston are both going to benefit from that next year. L.A. and California, where we're down, is going to benefit. Miami is going to benefit from FIFA World Cup next year, where we've got a lot of hotels in Florida, 300 in Florida, 400 in California, 700 hotels in Texas, our 3 largest states, and we've got half a dozen other cities that this FIFA World Cup is going to play in where we've got collectively about 1,000 hotels. So it's an interesting observation. Operator: We'll go next now to Meredith Jensen with HSBC. Meredith Prichard Jensen: So many questions, I don't know where to start. So I was thinking about something touching upon what Stephen mentioned. So realizing how the lodging sector supply continues to evolve and there's a wider array of options for consumers, including short-term rental and distribution shifting, all these moving parts. Of course, this is nothing new to Wyndham. But it is something we're increasingly fielding questions on given the push from OTAs like Booking and Expedia and Airbnb to get into the lodging sector. So I was really hoping you might be able to speak a little bit about how Wyndham views these opportunities and how you're going up against some of these challenges in nontraditional or as some might label it shadow supply. So that would be really helpful. Geoffrey Ballotti: Yes. It's an interesting question. Our teams think about a lot, Meredith. Agentic AI, the possibility of STRs, short-term rentals coming into the space from a distribution standpoint is they're all certainly bringing a different rhythm to search that's more frequent and more automated. AI is really moving the traditional SEO to GEO, which we talk a lot about that generative engine optimization with these new channels searching for more trust and more contextual relevance. And so how we think about it is all about with our franchisees and our teams and our brand teams is our reputation and the confidence, which is always the top signal in any search. Whenever you go on vacation, you're doing your own research. And we're trying to find ways, and we are finding ways through Wyndham Connect, which we've talked a lot about and Matt put in the deck. It's improving that confidence with guests and more frequent reviews from our guests. We're engaging more frequently and more immediately through so many different ways, SMS messaging, voice and digital to add context to your search. And we're boosting higher online review scores. because immediately, when Meredith Jensen checks out now from one of our hotels, we're asking you for review on TripAdvisor, on Google Reviews, on all of the major OTAs because we want your feedback, and we want to improve that feedback because we know it's the key indicator of quality. And it's the whole point of consistency for overall satisfaction in those large language model searches. Operator: And Mr. Ballotti, it appears we have no further questions this morning. So I'd like to turn things back to you for any closing comments. Geoffrey Ballotti: All right. As always, Leo, thank you very much, and thanks, everybody, for your questions and your interest in Wyndham. Michele, Matt and I look forward to talking to and seeing many of you in the weeks ahead at several of the upcoming investor lodging conferences that we'll be attending. In the meantime, have a great weekend ahead, and happy Halloween, everyone. Thanks again for joining us today. Operator: Thank you, Mr. Ballotti, and thank you, Ms. Allen. Again, ladies and gentlemen, that will bring us to the conclusion of today's Wyndham Hotels & Resorts Third Quarter 2025 Earnings Conference Call. Again, thank you so much for joining us, everyone, and we wish you all a great day. Goodbye.
Niina Ala-Luopa: Hello, and welcome to Vaisala's Third Quarter Results Call. I'm Niina Ala-Luopa from Vaisala's Investor Relations. And today with me in this call are President and CEO, Kai Öistämö; and CFO, Heli Lindfors. And like always, first, Kai will present the results, and then we have time for questions. Kai Öistämö: Hello, and welcome, everybody, from my side as well. Vaisala had a good third quarter, strong sales and profitability as the headline says. So, let's dive a little bit deeper where did it come from and what are the details behind. So, first notion, the net sales growth was strong, 13% in reported currency, which can be characterized really as strong sales in a quarter. The orders received simultaneously declined by 21% and leading into a decline in the order book. Whilst when going back to the financial performance, we maintained a very solid profitability, 18.2% EBITDA margin. And if I exclude extraordinary items due to the restructuring and so on, actually, the EBITDA margin was 20%, which I think is all-time high for us in terms of an EBITDA margin, if I recall right. Really happy on Industrial Measurements on the demand picture and now clearly also broader than earlier. And on demand and on the other hand, Weather and Environment side, more challenging market environment, and I'll talk about both in detail in the coming slides. And really happy on the subscription sales growth continued to be very strong, 57% year-on-year and also the underlying organic growth on a very healthy level. And as I said in the release already, it was great to see also subscription sales now contributing positively also to the profitability of the company. The market environment continued to be challenging. If you think about the entire third quarter within -- inside of the third quarter, we kind of we start -- it started with the tariff changes and kind of fixing the tariffs between Europe and U.S. And then at the same time, during the year, continued in the third quarter, the depreciation of euro vis-a-vis USD and Chinese yuan. So, the environment has many moving parts, and the depreciation of euro, dollar and renminbi really are things that don't often get talked about as much as the tariffs. But actually, if you think about it, like the magnitude of the depreciation of those currencies vis-a-vis euro, the impact actually is equal, if not greater, than what the tariff impacts actually are. So, it's good to remember that as well. And as I will conclude at the end of my presentation, the business outlook for the year 2025 remain unchanged. But before going into the numbers and performance of the company in more detail, good to look at a couple of words on strategy execution inside of the company and this time in terms of a couple, we picked a couple of kind of interesting launches that are reflecting also the strategy and strategy execution of the company. The first one, Vaisala Circular, it's a service product and the emphasis really is on the word product, where the industry measurement probes are recalibrated and provide a reuse service where the customers maintain a dedicated pro pools at our service centers. Essentially, what it means is that we have productized the calibration service in such a way that now we are selling always accurate on uptime and continuous operations in our customers' operations instead of talking about calibration or other technical terms. This is obviously kind of crucial in terms of selling services that how do you productize it, crucial for the customers to understand what's the value and crucial for our sales to actually then be able to communicate what the value is and what the customer should be paying for. So, kind of a great example of the things that we are doing to drive our service sales, both in Industrial Measurements where Vaisala Circular is an example of, but we are doing similar things also in the Weather and Environment side. Then on Xweather, the hail forecasts. Hail actually is one of the more difficult weather phenomena to actually forecast. And it's been really one of these places where -- one of the things that really is -- has been really a challenge for meteorologist for a long, long time. Super happy to report that now we have an Xweather hail forecast. And hail is really important in terms of the damage it causes for various kinds of a property or infrastructure. For us in Finland, the hail sometimes gets to be kind of pea size and even that can kind of cause some damage. But in more southern countries where more extreme weather and extreme thunderstones typically are when hails get to be baseball sized, they really can kind of create quite a bit of damage. And it really is like billions of dollars losses in various kind of places. The example we are showing here where we can apply the kind of capability to forecast and create alerts for hail is solar parks. And if you think about solar parks, there's a whole host of glass facing upwards. And in case of a hail that's really prone for damages. And if you think about solar parks, one of the features is also that in many cases, they actually track sun, i.e., they are turnable. So, in case of hail forecast, you can actually turn them sideways so you can avoid the damages. And there's a kind of a big market and unsolved problem that we are solving for here with hail forecast as an example. And then WindCube, the next generation. Here, this is really, again, a good example of how we push the boundaries of the technology with our own R&D. With this evolution on LiDAR technology, we can actually increase the distance out of which we can read the wind and the wind fields, increased data availability and much, much more robust performance in clean air and complex terrain environment. So significant step-up in terms of our performance, which I believe both demonstrates our capabilities and is important for that business and puts us squarely in the lead also from technology and solution and performance perspective in that business. Then moving on to the financials. So, starting with the group level, strong growth, as I said, with -- in both business areas. Orders received decreased as talked about, and I'll still kind of talk about that a little bit later when I go into the business areas because there's differences in performance side. Order book consequently kind of down from same time last year. And then net sales-wise, a very strong quarter, 13% up year-on-year. And if you take the constant currency side perspective, it would have been 16% up from year-on-year, same time, so third quarter last year. Gross margin, a bit down, and I'll give you -- it's easier to explain when I go through the different business areas. Nothing dramatic about that there. And then on the profitability side, as I said, if you exclude the restructuring side, actually the EBITDA margin being all-time high, at least in my recollection. And cash conversion, no news there remained on a strong level. Now going into Industrial Measurements, yet another strong quarter and really happy to note that now the positive results are coming from all market segments and all geographies. And super happy to see that now Asia performing really well compared to the same time last year, equally so -- almost equally so, Europe and at the same time the U.S. growth continuing. Obviously, in the U.S. and in China, for example, where the local currencies have devalued vis-a-vis euro, that has a negative impact. If you -- like if I take, for example, U.S. in a constant currency, year-on-year growth was 9% in Industrial Measurements in Americas region. And I promised to talk about the gross margin in the business area side. And if I take Industrial Measurement side first. So, first of all, what I forgot to say is the orders received actually increased on the Industrial Measurement side, corresponding to the net sales growth, actually a little bit more increased 9% year-on-year here when the net sales grew 6% in reported currencies. But back to the gross margin. So gross margin decreased a little bit. And this really is due to exchange rate impact, but clearly, kind of big part of the impact was the proportional impact on the U.S. tariffs. And here, maybe worthwhile kind of just pausing and explaining the math that we've said that we have been fully mitigating the tariff impacts in our business. And that means that we've raised the prices correspondingly to whatever the tariff costs have been. And if you think about how that math works, it means actually that the -- even if it's fully mitigated in absolute terms, since the divider and the above the line and below the line kind of when you do the division are added the same amount, the relative number actually goes somewhat down. So that's really like if you have time, just play with the math and you'll see what I mean. So that's a big part of the explanation. So, I am not worried. It's within the normal boundaries in terms of what the gross margin changes have been and it's worthwhile saying also that while we are in the Industrial Measurement side, it's obviously easier to kind of mitigate by price changes, extraordinary events like the import duties and such changes in import duty regimes compared to fluctuations in currencies. Since we price and any global company would do the same, price in local currency, you cannot go every time currency exchange rates go back and forth, go change the local pricing. Obviously, long-term, there are kind of pricing means to compensate this. But short-term, you cannot kind of react to all of this, and it would not be constructively taken either from a customer perspective. Then Weather Environment. In net sales, actually a great quarter and subscription sales-wise, equally so. At the same time, the orders received in decreased in Weather Environment, driven by a couple of things. There's a strong decline in renewable energy market, as we have been saying since the first quarter of this year. Nothing has really changed on that. And there was kind of a significant change in the market in the beginning of the year, and it continues to be on a low level, and we do not expect that to change in any time soon. And I'll come back to that in the outlook. And then likewise now in aviation and meteorology markets, there was a very strong comparison period and kind of big orders taken in the comparison period last year. But also this part of the market, when you take aviation and meteorology, there is a fluctuation between kind of natural fluctuation in those markets as well as this year, where there have been a couple of headwinds that we talked about before, one being the China investments due to a large extent, I would argue, to the fact of the cycle in terms of the 5-year plan this year being the last year of the 5-year plan and very often being the least investment in at least in this sector. So that we have seen that in declining order intake and then simultaneously, the administration changes and so on impact on delaying the order intake in this year in the U.S., which obviously is another contributor to this. And then there are kind of gives and takes on the rest of the market, which is within the kind of, I would argue, in the normal boundaries. And good to remember in the comparison period in the aviation and meteorology side on the back of really kind of a very strong now 2 years in terms of an order intake, really driven by the European stimulus fund on the radar networks in Southern Europe, most notably in our case was the big order that we got from Spain, but there were multiple other ones that we benefited from as well during the past year, 1.5 years that are still in our order book, and are being executed. Now on the gross margin side, a decrease of 3 percentage points. Sales mix, a stronger portion of the project revenues being recognized. So that's in plain English, what the sales mix means. And then same things as what I talked about in Industrial Measurement side on exchange rate and the U.S. tariff impacts, albeit somewhat less pronounced in case of Weather and Environment as the sales mix it's not as heavily weighted in euros and dollars or the U.S. business is a little bit less than what Industrial Measurement is. And then EBITDA percentage being on a very healthy level of 14.6%. I mentioned the cash flow continued on a good level. Here you see on the bridge on puts and takes on the cash flow and cash conversion being at excellent level of 1 and free cash flow around EUR 40 million during the period. Now if I look at the year-to-date, both net sales and profitability clearly improved during the first 9 months compared to the same time last year. And orders received did decrease by 13% year-on-year and while net sales grew by 9% year-on-year. And subscription sales, if I take the first 9 months of the year, almost incredible 58% up, obviously boosted by the acquisitions of WeatherDesk and Speedwell Climate, but also a great performance on the underlying organic growth. And then gross margin, slightly negative, again, same explanations that I went through. And then on EBITDA percentage and EBIT percentage up from comparable time or same time last year. And then worthwhile saying on the operating expenses, the restructuring costs, as I said, also in regards of this past quarter have been not insignificant as we have been adjusting our renewable energy business to the new market reality. And that's now behind us, that restructuring. And then acquired businesses and so on other explanations when you look at the year-on-year comparison on operating expenses. Financial position continued on a very good level, low leverage on the balance sheet, and we continue to have asset-light business model, no changes seen or foreseen in that. And on this page, I think it's good to note that the automated logistics center is now in a phase where we are loading it. So, it's actually fully in schedule, and we are putting material into that and starting to use it as scheduled in the fourth quarter of this year. And then also notable thing during the quarter was the acquisition of Quanterra Systems. Think about it this way that it's kind of an interesting team and technologies on monitoring CO2 fluxes, which means question whether individual geographic area, field or piece of land is a carbon zinc or carbon emitter, which a very interesting piece of technology, potential long-term kind of quite a bit of potential on that, and that was announced in September. Market and business outlook. We continue to see growth in industrial, instruments, life sciences and power, we continue to see roads as a stable marketplace. And then renewable energy, meteorology and aviation decline, and this is outlook for the rest of the year. And obviously, the renewable energy being kind of a clear change in the marketplace since the beginning of the year, whereas the meteorology and aviation now suffering a slightly different market conditions, as I explained before, in terms of the government subsidies and government incentives kind of on a lower level than when we compare to last year. And then on the business outlook, no changes to this. We continue to see the net sales to be between EUR 590 million and EUR 605 million and operating result being between EUR 90 million and EUR 100 million. With that, I want to conclude my prepared remarks, and I'll open up for any questions you may have. Operator: [Operator Instructions] The next question comes from Nikko Ruokangas from SEB. Nikko Ruokangas: This is Nikko Ruokangas from SEB. I have 3 questions, and I'll go one by one. Starting with Weather and Environment and orders, which you already discussed, and you told the reasons why they have now declined for a couple of quarters. But should we soon start to see the trend in orders happening there? Or has the demand continued sequentially weakening? And then do you think that the U.S. government shutdown could affect you now in Q4? Kai Öistämö: Yes. So obviously, kind of when we talk about we compare to year-on-year kind of things will obviously, when the comparables change, then that will change. Your question was on a sequential basis especially aviation, meteorology, things kind of come as they come. So even if there would be like numbers improvement or decline from one quarter to another, it would be hard to make a conclusion out of it since it's a lumpy business as a starting point. As I tried to explain on meteorology and aviation, it is more of a -- it's a bit of a cyclical business where now we have enjoyed, I would argue, almost like exceptionally high cycle in it for good almost 2 years. Now it's more on a normal basis, what it looks like. So, I would not be overly worried about it where I'm standing today. Then, on the U.S. government shutdown, it's a great question. And so, 2 comments on that. We've seen the budget proposal, and I would be actually happy, and this is the government's budget proposal, not minority budget proposal. I would be happy if and when that is approved. So, I have no issues with what is proposed. The shutdown itself, obviously, during the shutdown and getting a new order for next year since there's no budget approved nor and then there are a whole host of people furloughed. It's postponing things. If I look at bit on the history, typically, what has happened is that during this kind of U.S. government shutdowns, the orders will just come a little bit later in. But if I take kind of 12 months average or what kind of a little bit longer time series, it will normalize itself post the shutdown. So, it's like a little bit plowing snow in front of a snowplow kind of a thing, at least has been in the past. And we'll see how long it will last, it can stop tomorrow, or it can be continuing for some time. Nikko Ruokangas: Yes, I understand. Then on the guidance, as it indicates for Q4, clearly kind of year-on-year basis, weaker sales and EBITA development than now in Q3. So, is this basically explained by smaller project deliveries expected for Q4? Kai Öistämö: A big part of it is also very high comparable. If I actually go -- and I'm usually not doing this, I'll try to go back in my slides just to illustrate what I'm saying on this slide. And it's not this slide, here. So, if you look at this slide, it's kind of like highlights the unusual nature of the last year in terms of how the order intake kind of behaved and especially net sales behaved that we had a very weak first quarter, very strong second quarter, weak third quarter and a very strong fourth quarter. And if you went back into '23 or earlier years, typically, the second half, both quarters have been stronger. Typically, even the third quarter has been stronger than like second quarter clearly on an average year. So, there's a bit of when you compare to year-on-year kind of numbers, the anomality of last year makes it a bit harder this time around. Heli Lindfors: And I think the second topic is actually the FX that Kai was referring to earlier on. So, in the beginning of the year, the FX was still more similar level to last year, whereas now in the second half of the year, we see more of an impact of the volatility of the FX. So that will definitely be a factor in Q4 as well if the kind of rates remain as they are currently. Kai Öistämö: Correct. And it's again, a good illustration of that. If you go back and look at our second quarter results, we said that there was not really a material impact on FX yet. Nikko Ruokangas: Okay. So, this year, more normal seasonality expected than last. Kai Öistämö: Correct. Correct. Correct. Nikko Ruokangas: Then last one from me, at least at this point on cost side. So, you mentioned the EUR 3 million restructuring expenses. So, if we leave those out, so to me, it seems that your operating expenses were down in weather despite the acquisition or fixed expenses, but then clearly up in Industrial side. So, if you exclude those restructuring expenses, were those including something extraordinary? Or is it kind of describing the trends you are now having? Kai Öistämö: Yes, the extraordinary costs, as I said, was they were related to the restructuring that what I talked about in relation to the energy business and renewable energy business. So, I think your conclusion was exactly right. And like if you look at our numbers, and we have now a good trend also on the Industrial Measurement side, we have been a little bit longer kind of time series again, over the past 2 years where we had more modest growth, we were more conservative in spending and spending increases in Industrial Measurements. And now we see kind of clearly more growth opportunities and a bit more spending, not going wild, but a bit more spending on Industrial Measurement side. Operator: The next question comes from Pauli Lohi from Inderes. Pauli Lohi: It's Pauli from Inderes. I would start with this demand-related question. Have you seen any signs that the increased tariffs could start to dent the good market activity you have seen in the U.S. market or elsewhere compared to what we have seen already this year? Kai Öistämö: So elsewhere, I don’t see it go – it could have – now I understand your question. So okay, no, answer is no. We can't point anything in the U.S. or anywhere else, that would be at all related to tariffs. It's been more positive than what would have speculated pre-tariffs. Pauli Lohi: Well, that's definitely positive. And your scheduled deliveries for the rest of the year in the Industrial Measurements are a bit lower compared to Q3 last year. So, do you think that the current favorable market activity could still offset this? Kai Öistämö: No, Pauli, remember what Heli just said in terms of the exchange rate changes, which is, if you compare to last year, I think we are about 15, 16 points cheaper dollar than it used to be a year ago, and Industrial Measurements and Xweather are highly exposed to dollars. Heli Lindfors: Also, in dollars and renminbi. And especially for the Industrial Measurements, the renminbi is also very important currency. Kai Öistämö: So, it's not [indiscernible] then you can draw your own conclusions. I would not be worried about the demand picture per se. Pauli Lohi: Okay. Then, regarding the cost base, how large savings you expect from the recent restructuring on an annual level? Kai Öistämö: We have not communicated that. I'll put it this way that when we said in earlier quarters, similar calls, we've said that we are going to adjust our operating expenses to the level that matches the market picture on the renewable energy business. We've now done it. Pauli Lohi: All right. Then, regarding the new logistics center, do you expect any short-term cost-base increase or operational extra costs from starting to use the new center? Kai Öistämö: No, no, no. Absolutely not. Pauli Lohi: And do you see that it could provide any material financial benefits next year? Kai Öistämö: Over time, I think it clearly -- I mean, if you think about it now, fully automated material flow, it should yield into kind of a better rotation days, better management of the inventory, multiple benefits in terms of how much capital is tied into an inventory, and different tools also to optimize that inventory. So obviously, we have a business case, and over time, this is an investment where we expect a payback as well. Pauli Lohi: Okay. Finally, on Xweather, do you think that the current roughly double-digit organic growth rate is sustainable going forward? Taking into account the new product launches and maybe potential synergies from the recent acquisitions? Kai Öistämö: Yes. So, short answer, yes. And here also, short-term, we have to take into account the currency exchange rates when we look at the euro reported numbers. But typically, we do the pricing changes at kind of around the year-end in all of the businesses, well, at least Industrial instruments as well. So, we need to then see how those impact kind of going forward as well, depending on how the exchange rates then turn out to be. Operator: The next question comes from Waltteri Rossi from Danske. Waltteri Rossi: A few questions. First, about the Industrial Measurements orders in America. The report said that they grew slightly. I think the wording was a bit softened from the previous. So, have you seen any changes in the activity level in the Americas? Or is this only related to the FX? Kai Öistämö: So, I think I earlier said that it was a 9% on a constant currency level year-on-year. And if you look at the reported currency, it would have been 2%. So here, you see kind of direct impact on the currency exchange rate. I would be very happy with the 9%. I'll offer you that. Waltteri Rossi: Okay. Okay. Perfect. But you don't disclose how much the Americas is of the Industrial Measurements orders. Can you give us... Kai Öistämö: Not on orders and not on a quarterly basis, but it's clearly the biggest market that we have, and it's clearly north of 1/3 of Industrial Measurement sales. Waltteri Rossi: Okay. Okay. Then, about the Xweather business, it said that over the past quarters, it's actually been contributing positively at profitability. So, does that mean that the segment is now making positive operating profit already? And if so, are we talking about a low single-digit margin, or what? Kai Öistämö: We are not reporting that business separately. So, I will decline to answer you. So, we have not quantified. But contributing positively kind of would imply that it actually makes money. Waltteri Rossi: Yes, yes, sure. But I was just making sure that we're talking about EBIT on an operating profit level. But kind of... Kai Öistämö: Remember on the EBIT level, we did the acquisitions last year. And that's obviously kind of the amortizations of those assets raised the hurdle on one hand. But if you look at on an operating profit side, then that's what I'm referring to. Waltteri Rossi: Okay. Okay. So, we should still expect that you are continuing to invest in the growth of that business and shouldn't expect the profitability to kind of start to improve or scale up from now on? Kai Öistämö: Yes. Well, if software business grows 50% year-on-year, one should expect that it scales. Waltteri Rossi: All right. But you are still keeping the view that you are shifting focus from growth to clearly start improving the profitability side only later during this strategy period? Kai Öistämö: No. There's no shift between profitability and growth to be foreseen. It's always -- like when you are scaling a software business, it's always a kind of a trade-off, of how much you invest in the growth. And typically, in this kind of a software business, it really is investments into sales and demand generation rather than increasing the R&D when software businesses are scaling. And then the return on investment should be quite quick. And it's relatively easy to verify as well, kind of from a cost of acquisition side. If you kind of invest in customer acquisition cost, you can actually measure what the return on investment is, and it really should be quite quick. Waltteri Rossi: Okay. Okay. Lastly, as of now, earlier in the year, the expectations were kind of lowered because of the U.S. tariffs and how they will impact, especially the Weather and Environment public side sales. How would you describe the impacts of the tariffs on public sales this year today? Like, has your view changed since at all... Kai Öistämö: I would say no impact so far on the Weather and Environment sales in the U.S. from the tariff side. As you may recall, we did kind of a plan for the tariffs, and we mitigated the tariffs by actually shipping into our own warehouse in the U.S. so kind of that we have a little bit of time to pass the tariff costs into prices. And I think we are executing against that plan very well. Operator: The next question comes from Joonas Ilvonen from Evli. Joonas Ilvonen: It's Joonas from Evli. I have a couple of questions about Industrial Measurements. You already discussed this question of cost, but if I can come back to it. So, I think like R&D costs were down this quarter at a relatively low level. And of course, I think there's always a bit of like a quarterly variation when it comes to that. But then also you say -- and I saw your total OpEx still grew quite a bit, albeit it was still at a rather moderate level. But you mentioned this investment in sales and digital capabilities. So, my question is that how do you see the kind of overall Industrial Measurements investments continues to grow from now on? Like, do you expect it to grow basically at the rate of sales volumes? Kai Öistämö: If I take all kind of that will be a good approximation over time. Obviously, these things change over, like vary over quarters, and the quarters are not equally strong, and so on. So, kind of different quarters are a little bit different. But over time, that's a good proxy. Joonas Ilvonen: Okay. That's clear. And then you mentioned IM APAC growth that was especially strong. So, was this mainly due to China? Or were there any other countries there you would like to highlight, and which specific industry groups, like you mentioned, life science and power in your report? Kai Öistämö: Yes. As I said in the prepared remarks, if I start from the kind of latter side of the question, it came from all segments in the Industrial Measurement side. So, all market segments, grew. And it's both in China and outside of China. China did have a marked change compared to the second quarter, clearly having more market optimism in the third quarter, great to see. But it was not only in China, it clearly was outside of China as well. And if I pick one very interesting market, which continued to be strong is Japan, and where obviously, lots of industrial activity, and we have a great position in Japan in various different segments, but not only those 2 markets. It's broader than that. Joonas Ilvonen: All right. So, there weren't basically any kind of weaknesses in terms of geographic regions or... Kai Öistämö: No, no, not that I can think of. Joonas Ilvonen: Okay. That's clear. And maybe one last question. So, you already discussed this IM gross margin headwind due to exchange rates and tariffs. So, it's going to fade at some point, but did you comment on when exactly is it going to? Does it still continue over Q4 or into next year? I mean, considering how things look right now? Kai Öistämö: Yes. So, 2 things on, if you look at gross margin, and this was a bit on the net sales side as well, what I tried to say earlier, one thing is we -- and then they function differently if you think about FX and then the tariffs. The tariffs, what I said and what we've been saying all along, is that we fully mitigated that by raising prices. And that has kind of by itself a negative relative impact on gross margin. And I'll do you the math, pardon my details here. But if you think about that -- let's imagine that the transfer cost out of which the tariffs are counted would be 100 units. And then you put a 15% tariff on it. Now that cost would be instead of EUR 100 million, that will be EUR 115 million. And you fully move that into the sales price and let's do an easy math and call it like it's EUR 200 million and you put EUR 15 million on top of EUR 200 million. Now you fully mitigated it. And if you do the relative calculation, there is a negative impact on relative number. Joonas Ilvonen: All right. Kai Öistämö: Sorry about that. I think it's good to understand that that's when you -- and then on FX, as I said, you can't manage FX-related changes within a quarter or within a half a year. You cannot like fluctuate your local prices based on exchange rates. But we do try to be smart when we do the annual price increases as we do every year in the beginning of the year. So that's a chance of actually taking the currency exchange rates and our costs and everything else into account. Operator: [Operator Instructions] The next question comes from Matti Riikonen from DNB Carnegie Investment Bank. Matti Riikonen: It's Matti Riikonen. And sorry if I have to ask some questions again because I had to jump to another call for 15 minutes during the presentation. So, some of the questions might have been asked already. So, I start with the math question that Kai you just explained. So is it in rough terms, we are talking about that the price increase that you made, it covers the kind of cost price, but then the margin that comes on top of that doesn't follow. So, you are not getting the compensation for the lost margin compared to the normal situation where you put the kind of markup to the imported price. Kai Öistämö: Yes. And even if you put a markup to it, you can do the math in different scenarios, how much of a markup you need to do in a high gross margin business in order to kind of mitigate the gross margin if you -- and there's obviously a limit how much you can pass on the costs if you think about the tariff a drastic change in the middle of the year, it's what's acceptable from a customer side. So yes, in a way, what you asked for. And then I'll go back to what I just said that beginning of the year, we are going to review our prices anyway, and we are going to look at different kinds of costs and things that where do we put the prices going forward. Matti Riikonen: Yes. But basically, isn't it always so that when the new year begins, you are trying to kind of achieve the same profitability level or higher what it used to here. So, it takes some time for the following price increases to kind of correct the situation into what it was from there. Kai Öistämö: Yes. That being said, when the book-to-bill cycle is 3 weeks in the Industrial Measurement side, that's pretty fast. Matti Riikonen: Right. Then regarding the Weather and Environment, when you talked about received orders and how they were kind of suffering different things, you meant that there's also industrial cyclical fluctuations or I don't remember what the term that you used was. But what does that actually mean in the Weather and Environment business? So, what kind of industries are there on the customer side that are affected if you're not talking about the renewable business, which I would... Kai Öistämö: No, I was not talking about the renewables business. And maybe I'll just explain it a bit more. So, it's not really an industrial activity. Think about it this way that this is -- it's a relatively small market in the end, I mean, in the total market as we are the market leader in terms of an absolute market leader in this. So, you kind of -- it's a relatively small market. And then many of the products are having their natural cycles and sometimes they are quite long cycles. So, if I take the radars that we just sold, I'm not expecting the same kind of a complete renewal of Finnish network until 15 years from now or something like that. And here, relatively small individual things like the COVID-19 fund to renewal, which was used to renew Southern European radar network kind of increased the tide a bit and now the tide is kind of lower as we speak. But that has been a phenomenon, if you go on a longer-term kind of a history in meteorology and aviation that the relatively small 2 big airports get to be built at the same year, kind of increases the size of the market and the years are not exactly the same. So, this market kind of just has a phenomenon where there's a relatively small discrete demand changes change the size of the market somewhat. Matti Riikonen: Yes. Okay. And that clarifies because maybe the wording in the Finnish stock exchange release was about the industry and basically, it means the sector where you operate in the crisis. Kai Öistämö: Correct, correct. That's good. Thank you, Matti, well spotted. Matti Riikonen: If we then think that these sector changes tend to be quite slow and one year is not necessarily enough to make it go away. Are you afraid that this would continue also in 2026? I'm not talking about the order backlog, which you already have or the Indonesian order, which might come sometime next year, but basically new weather orders that you were -- or you are expecting every year. Is there a danger that we would see an even slower 2026 when it comes to new business? And if your order backlog is decreased this year, then, of course, you would have less to kind of deliver in '26 based on old kind of order backlog. Do you think that is a kind of risk that you would like to highlight? Or of course, you have to take a stance on that when you give the guidance for '26. But at least -- I mean, at this point of the year, you probably already know, and you have made some internal plans how it's going to be in the weather business in '26. So, any thoughts on that would be great. Kai Öistämö: Correct. Yes. So let me answer -- well, it's exactly like you said, we're going to give guidance next year when the time comes. But let's think about it this way that there are the product sales, which are selling to existing projects and existing customers and the fluctuation on that business is very small. The fluctuation really comes from the kind of new projects and bigger and smaller and so on. So, there's kind of a level that has been at least relatively stable in the past, and I don't see any changes why that assumption should be different going forward. But then how will individual projects come through and so that obviously will not only impact our sales but actually like if kind of a couple of big orders come -- big projects come in a half a year, that kind of theoretically means also irrespective of who wins that impacts the entire market as well. Matti Riikonen: All right. So we will wait for your guidance for '26 to see that what is your plan that you promise to deliver. Kai Öistämö: Correct. Matti Riikonen: Okay. I'm just saying that it doesn't look so good when this year, of course, the order backlog has been decreasing. And when you have basically negative outlook for all key metrological... Kai Öistämö: For the rest of the year. Remember the outlook. Matti Riikonen: What would need to happen that it would kind of recover to a normalized situation in '26. Do you foresee some positive changes to this current trend, which you have now said that will impact '25, but do you see some positive triggers that would change the situation for '26? Kai Öistämö: Yes. Like I said, so as the market impact -- market size is really individual like bigger orders can swing that different ways. So that's something that is, as you know, historically, it's really, really hard to say when certain things kind of come through. The pipeline remains on a good level on new projects. But kind of a flow through the pipeline continues to be very unpredictable as it has been in the past. So... Matti Riikonen: All right. Fair enough. Final question, you already touched the topic of Industrial Measurement and some investments in digital capabilities. Just out of curiosity, what kind of digital capabilities are you talking about? Kai Öistämö: So online as a sales channel, whether we talk about to our distributors or whether we talk about to the end users, especially on the services side. If you think about -- so today, it's mainly -- we don't have much of a sales through the digital channel. We are doing demand generation, but the actual sales transactions we do very little through digital channels and that capability we are building. And very important, like kind of first it will have an impact on the services delivery side. But longer term, I believe, like in any other business, obviously, kind of -- it will have an impact on our overall sales, I believe, as well. Matti Riikonen: Does that mean that the existing customers would kind of want or need a different approach to maybe order from you? Or does it mean that you are seeking new business through those channels? Kai Öistämö: I think in the end, it will be both. And I don't think any businesses will remain as they have always been, and I'll just use the car analogy here that nobody ever believed that a car can be bought online and look where we are today. Try to buy a Tesla offline, then they will throw you online. Operator: The next question comes from Waltteri Rossi from Danske. Waltteri Rossi: So just to still clarify the Xweather profitability question. I was actually -- I think I was talking about EBITDA and operating profit as a synonym previously. But just let's talk about EBITDA. So, is the Xweather currently contributing positively on EBITDA level? Kai Öistämö: Yes. Subscription sales to be specific. That's what we report today. We don't report separately Xweather. Operator: There are no more questions at this time. So, I hand the conference back to the speakers. Niina Ala-Luopa: Okay. That was our Q3 call. Thank you all for joining. Thank you for the questions. Thank you, Kai. And I would like to mention or remind that we will arrange a virtual investor event for analysts and investors on November 24. And there, Kai and our business area leaders will provide an overview of Vaisala's strategy and business areas. And you will find more information on the event on our investor website, vaisala.com/investors. But now thank you all for joining and have a nice rest of the week.
Operator: Welcome to today's Covenant Logistics Group Q3 2025 Earnings Release and Investor Conference Call. Our host for today's call is Tripp Grant. [Operator Instructions] I would now like to turn the call over to your host, Mr. Grant. You may begin, sir. James Grant: Good morning, everyone, and welcome to the Covenant Logistics Group Third Quarter 2025 Conference Call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subsequent to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. Our prepared comments and additional financial information are available on our website at www.covenantlogistics.com/investors. Joining me today are CEO, David Parker; President, Paul Bunn; and COO, Dustin Koehl. Our business remained resilient in the third quarter, although margins were compressed, particularly in our Asset-Based Truckload segment due to an inflationary cost environment, persistently high claims expense, headwinds from excessive unproductive equipment and continued pressure on volume and yields in our Expedited and Dedicated segments. Year-over-year highlights for the quarter include consolidated freight revenue increased by 4% or approximately $10.2 million to $268.9 million. Consolidated adjusted operating income shrank by 22.5% to $15 million, primarily as a result of year-over-year increases within our combined Truckload segment. Our net indebtedness as of September 30th increased by $48.6 million to $268.3 million compared to December 31st, 2024, yielding an adjusted leverage ratio of approximately 2.1x and debt-to-capital ratio of 38.8%, as a result of executing our share repurchase program and acquisition-related earn-out payments. The average age of our tractors at September 30th increased to 23 months compared to 20 months a year ago. On an adjusted basis, return on average invested capital was 6.9% versus 8.1% in the prior year. Now providing a little more color on the performance of the individual business segments. Our Expedited segment yielded a 93.6% adjusted operating ratio. While this result falls short of our expectations for this segment, we've been pleased with the resilience of this segment over the prolonged downturn. Compared to the prior year, Expedited adjusted operating ratio increased 160 basis points. The average fleet size shrunk by 31 units or 3.4% to 861 average tractors in the period. We expect the size of this fleet to flex up and down modestly based on various market factors. As market conditions improve, our focus will be on improving margins through rate increases, exiting less profitable business and adding more profitable business. Dedicated's 94.7% adjusted operating ratio also fell short of both the prior year and our long-term expectations for this segment. We were successful in growing the dedicated fleet by 136 tractors or approximately 9.6% compared to the prior year as we have continued to win new business in specialized and high service niches within our Dedicated segment. Going forward, we plan to reduce certain of our fleet in this segment that is exposed to more commoditized end markets, where returns are not justified and continue to invest in areas that provide value-added services for customers. Managed Freight exceeded both revenue and adjusted operating income compared to the prior year. but fell backwards sequentially due to the loss of a short-term customer that scaled up in the first half of 2025 and rolled off in Q3. Our team showed resilience through this difficult freight cycle with their ability to bring on new freight, handle overflow freight from Expedited and reduce costs to offset lost business. Over the longer term, our strategy is to grow and diversify this segment. And we know that an operating margin in the mid-single digits generates an acceptable return on capital given the asset-light nature of this segment. Our Warehouse segment experienced freight revenue and adjusted operating income that was slightly below the prior year quarter and yielded an adjusted operating ratio of 92.1%. The adjusted operating profit and adjusted operating ratio in this segment was a solid improvement sequentially. Going forward, we anticipate top line revenue growth and operating income growth, as a result of a large customer start-up scheduled for November. Our minority investment in TEL contributed pretax net income of $3.6 million for the quarter compared to $4 million in the prior year period. The impact of incremental bad debt expense in the quarter compared to the prior year reduced TEL's pretax net income. Although TEL's overall business remains strong, exiting capacity from the general freight environment is expected to impact them again in the fourth quarter and potentially beyond. Regarding our outlook for the future, we anticipate the fourth quarter of the year to remain challenging. with the continuation of the soft freight market, combined with the impact of company-specific factors that will result in what we believe to be an unseasonably soft quarter despite a slight positive impact from peak. Company-specific factors within our line of sight include the negative impact of increased claims accruals, the negative impact the U.S. government shutdown is having on volumes of freight we carry for the Department of Defense and accelerated customer bankruptcies with TEL will all prove to be challenges for the quarter. In addition, as capacity exits accelerate within the general market, we anticipate the cost to procure transportation will likely lead our ability to capture rate increases from our customers in our Managed Freight segment, resulting in constrained margins. Despite both the general market and company-specific challenges over the short term, we are increasingly optimistic about the pace at which the freight market should recover. Recent enforcement of government policies concerning English language and non-domicile drivers have seemed to accelerate the pace of capacity exiting the market. We believe the impact of this trend is being masked by consumer pause and uncertainty as a result of elevated interest rates and volatility of global trade policy. Our belief is that consumer demand will improve with the continuation of monetary easing and the eventual settlement of trade tensions. In addition, the impact of recent tax policy will further facilitate demand. Regardless of when the market environment turns, our team is ready to move quickly to execute with urgency to capture additional market share and the appropriate amount of operational leverage that returns appropriate levels of capital to our shareholders. Thank you for your time, and we will now open the call for any questions. Operator: [Operator Instructions] And our first question comes from Scott Group of Wolfe Research. Scott Group: So I want to start where you wrapped up just talking about the capacity backdrop and maybe just give us some color on what you're actually seeing in the market with respect to capacity exits? How big of a deal do you think this is going to have? And then I don't know maybe just like -- there's certainly more talk in the market about this. Why don't you think we're seeing any impact on like national spot rates? I know there's a lot of talk about local markets getting tighter, but why do you think this isn't showing up necessarily in national spot rate data? David Parker: Scott, it's David. Yes, I mean, this is something that didn't drive me crazy trying to figure out where all this is going. And I would say a couple of things because great first question. From a standpoint, I'm more excited. I've been in this thing 53 years. I'm more excited right now than I've ever been in my entire career for the next 2 to 3 years. I see some things that we've never ever been in a position, where we are starting to get the government that is now starting to get concerned about who's driving trucks and why should they be driving them, and you are sensing that, and I just see an avalanche that's in the process of happening. And as I think about from spot rates, I mean, we have seen compression on margins on our brokerage side in the last 3 weeks when all this stuff started. And it is right now defined to a lot of individual states. And I met yesterday with our brokerage group and California, Texas, Oklahoma, Chicago, those are states and cities that keep coming up over and over. And you have got third parties that are scared to go to those states, right, wrong or indifferent. And that's the reason why you are seeing instead across the board that you are seeing, I believe, spot areas of the country, where it's becoming tighter and rates have gone up in those areas because a lot of these truckers are still going to go. I'm not going to Oklahoma. I heard Oklahoma pulling over 135 trucks and [ sending by the ] jail and all those stories that we're all hearing. I'm not going to Laredo, Texas. They're going to stop everybody that can't speak English. And so that is really leading the effort. Now that said, will it be a red versus blue states, red being aggressive, blue not being as aggressive. But I'm here to tell you that if they continue to have -- if we all continue to wake up every day, with another fatality accident by illegal immigrant, it is going to spread throughout the United States. And as I look at this, as I look at non-domiciled CDLs, as I look at the English-speaking issue, as I look at ELDs, there is more cheating going on and toggling is unbelievable guys to what's going on with ELDs. And so far, the government has suspended 5 or 6 companies. I'm here to tell you there's going to have to be hundreds -- there's about 950 that are approved ELD suppliers, and they need to look at every one of these ELD suppliers. We all thought that when we went to ELDs that everything was going to be legal and you're not going to have log books and everybody is not going to be cheating. Well, I'm here to tell you, us big guys, we love the ELDs. We love not having log books. But when you got toggling going on, it's rampant cheating that is happening. I run a truck 100,000 miles, they're running trucks 140,000 miles. And so the government is just now for the first time ever that it's starting to go down this road And so, I feel very confident that over the next 6 months, 1 year, 2 years, whatever it's going to be, it's going to be a snowballing effect that we are going to have less drivers on the road. We're going to have safer drivers on the road. We're going to have English-speaking people that can have the ability to speak English and understand it. We are going to have ELDs are going to be in much better shape, get rid of the multiple MC numbers. Guys, it's rampant with shutting down this, opening up that one. Today, I shut down tomorrow, I open up another one. We're just now learning about this and just now starting to do anything about it. So as I look at capacity, one of the things that strikes me is this is coming to a head. It's going to be -- it's in the process of exiting. But as good as anything, I'm here to tell you the funnel is stopping coming in. whatever that number is, that's leaving, whether it's 1,000 or 200,000, they're going to leave, but there's not going to be a flood of entries coming in And so, that is extremely encouraging that for the first time in my 53 years, there's actually a constraining of supply that's happening. And there's not going to be a bunch of new drivers from all over the world that's entering the truck driving workforce. I looked at that, Scott, and I'll shut up here in a minute. You asked the first question of what I've been [ alive ] with for the last month. But as I look at this supply, then I start looking at what the Fed is doing on interest rates. They're going to continue to lower interest rates. They're going to continue to pump the economy up. This physical -- the stimulus package that we all hear Trump talk about $17 trillion, $20 trillion [indiscernible] I don't know what the number is. One thing I do know it's gigantic. And there is a lot of freight on these plants that are being built in America, even if it takes 2 years, there is a lot of business that's coming to America that's got a lot of freight in it from these new plants that are going to be coming up. So as I look at supply, I am more excited than I've ever been. There is no doubt. I think we and the industry, we got some jump to go through. What do I mean by that? Brokerage, margin compression is happening now. I see it in our business. All the brokers are going to see it in their business. As I look at used truck market as we speak today, it's less than what I want, but I believe it's going to turn around fairly soon, maybe next year because nobody is going to buy a Class 8 truck. We don't know what we're going to pay for a Class 8 truck. I'm at ATA next week in San Diego, and I can't tell you what a price of a truck is right now or if I'm even going to buy one. So it's going to drive up the used truck prices. So that I'm happy about that. This government shutdown. It hurt me on my Department of Defense business, but I'm a month into it. We'll see what happens there, but it's not helping. Eventually, it will -- eventually will go back to work and everything will be good there. But -- and lastly, I was just telling the guys here before we got on here, one of the things that I'm really excited about, as we all know, our industry has not raised rates in 4 years. I haven't raised rates virtually at all in 4 years. And I was in a meeting in the last couple of days with sales and both on our legacy dedicated and on our expedited, we got 8 or 10 accounts that we have asked for rate increases and actually have been given 2.5% to 4% in the last couple of weeks. That excites me. Is that something that's going to happen on every customer I got? I don't know, but I haven't seen it in 4 years, and I'm starting to see it. I'm starting to see bids at all-time highs. So you're seeing the customers -- our bids are up 17% since August. Well that don't happen. That's a November, December, January, February event, and it started happening in August and September. Why is that? It's because our customers are concerned about capacity, even though we all need freight right now. So Scott, I'll shut up. As I look at it, I'm more excited than I've ever been about '26, '27, '28. If anybody is ever going to buy a trucker, it's now. If they don't buy truckers now, they don't need to be buying truckers. So that's where I'm at. James Grant: Thanks, Scott. Let me give you a couple of things. David talked a lot about the regulation, and there's no doubt that we're sensing it. And then we've given some color on maybe demand freight going forward. I would say there's a couple of words we're using internally right now. One is patience. I think we're all going to have some patience, and I'll get a little bit into that. The other is there's going to be some pain before there's some gain and pain in used truck prices and [ see ] smaller guys go bankrupt and flood the market, pain with some brokerage compression. But every time in history in this business, there has to be pain before there's gain. And I think that's where we're at. On the patient side of things, specific to your spot market question, the week after Secretary Duffy came out and talked about the non-domiciled CDLs, I think you did see spot rates go up and especially in those markets David was talking about. And what happened was a lot of those folks just stayed home. A lot of these non-domiciled CDLs have been issued in a -- they're concentrated in a handful of states. I mean there's some in every state, but there's some West Coast states that had a lot of these non-domiciled CDLs. The reason you hadn't seen the spot rates jump up is that the 2 largest West Coast states that have the non-domiciled CDLs, they have not -- they're in the process of trying to figure out what are they going to do with the people that have the non-domiciled CDLs. And so I think California is supposed to decide in the next 5 days, they're supposed to direct carriers what to do with those drivers. And so the first 5, 6, 10 days, you had some people that maybe had those type licenses stay home. Well, they've had to get back to work. So they're still out there running around. In the next 5 to 10 days, you're going to -- California is going to tell the carriers, here's what we want you to do. Here's the process to do that. And so I think that's when you're going to start seeing some of that capacity exit. And I think on that side, it's probably sooner than later. And then to David's point, the other is you're stopping filling the bucket with new entrants into the market. So I don't know if that helps paint a picture on maybe why the spot rates haven't jumped. But you had some of them stay home right when it came out, then they've gotten back to work. But I think in the next 5 to 10 days, you're going to see some of these states roll out the policies that here's what you do. And I think over 30 days after that is when you'll start seeing some of this capacity exit. Scott Group: Okay. Super helpful. David, at the risk of getting your blood pressure any higher. I'd like to ask a follow-up if I can. How do I think about like how many of these drivers do you have from just your perspective on enforcement, like it's always been easier to enforce large fleets than mom-and-pop truckers. Like how do you change this? And then like -- but is your perspective here that ultimately, like this is going to be a big help for large fleets? And is it a risk to a brokerage model in general? David Parker: Yes. Yes. I mean, we got a $200 million brokerage, and it does concern me because I think led by Duffy at DOT, I think that they're going to -- I think there's going to be enough leading from DOT that is going to go after more of the small carriers that are illegal than it is the big carriers. So yes, I think that I'm concerned about compression on my margins, on my brokerage. But I think after a period of time, whether that's 3 months, 6 months, I don't know, but a period of time that you'll start seeing the asset rates rise very nicely that will offset any of the brokerage compression. James Grant: Yes. I think, Scott, when I was referring to there's going to be some pain before there's gain. I think that, that was probably more on the brokerage side because there will be some pain going through this with a lot of brokerages. And to your point, it should help asset companies more. Brokers make money -- brokers make money when rates are rising hard, when rates are falling hard. And so, where they are getting troubles in the middle and if you got contract rates and hadn't [ reset ]... David Parker: And if the government was not doing nothing, if the government was just going to be on the sidelines, it all go back to the way it's always been for 40 years. But I don't believe that's happening. There's unbelievable amount of pressure, that the government is putting on it, but I think constituents are putting back to the government now saying, am I going to wake up every day to a fatality accident. Scott Group: Okay. And then just last one, if I can, just turning to your business. You talked about near-term pain in Q4. Any way to sort of size sort of what you're thinking about for Q4? And I know you've got a lot of like that linehaul LTL business. How is that performing right now? David Parker: Yes. The LTL is down, and it's interesting because forever, LTL would slow down in November, December, that was typical, to be honest with you, from COVID for 2, 3 years, say, '21, '22, '23, we really didn't see the LTLs really slow down a lot. But the LTL guys are slow. I mean, their business has been hit. And I think overall, the volumes are down, and I don't know when that is necessarily going to come back. It will, but I don't know when it's going to be. So yes, I look at that, that concerns me. I look at how long is the government shutdown going to be on my DoD business because it's only half of what it was. And so, we got to deal with that and then compression on the brokerage side of the business. So I think we got to go through that junk. In our TEL business, I'm happy about a couple of things. They've grown more business, more sales, more leases is what I'm trying to think of. The customers so far in the last 6 weeks, which is a good sign, but they also had to take back more trucks than they've had. So I'm seeing some sloppiness in the TEL business that concerns me. And so, I think all that adds up to fourth quarter that it isn't going to be third quarter. It's going to be less than third quarter, and I'll let [indiscernible]. James Grant: Yes. I think it's too early to put a number on it, Scott, but I would say it's softer than what it seasonably will be for all of the reasons that David talked about, mostly on the truckload side and also on the TEL side. I think from our line of sight and what we have seen, even though it's early in this quarter and then the visibility that we have into the peak, which there's some -- a little bit of good peak in freight in there, but it's not enough to offset some of the negatives that we've seen over the last first 2 or 3 weeks of October. So I do think it's unseasonably softer, but I'd be hesitant to put up. David Parker: That's interesting because I am somewhat optimistic about what I'm seeing about peak business. And some of our customers have already gotten back with us saying that carriers have given back freight to them, which is on the brokerage side. And so that's also interesting to me. So yes, peak is not going to take care of some of the reductions, but I am optimistic that peak seems like it might be a decent peak for us. Scott Group: Guys, I don't know if you can still hear me, but just so we can hear you. James Grant: Okay. Thank you. We're going to put it on mute. Our operator has disappeared. David Parker: Yes, we're trying to see if there's any other questions. Scott Group: Maybe you convince the operator who's busy buying trucking stocks. David Parker: He is busy. The market is open. We're trying to get the operator to see if they can facilitate any questions. So we'll see what happens. Scott Group: Just so there's [indiscernible], do you want me to ask more questions? David Parker: Yes, please. Scott Group: So sure. I mean, let's talk pricing a little bit. You -- I think you said you're starting to have some bid activity. Just what you're seeing from a pricing standpoint, early thoughts on '26 bid season. James Grant: Scott, it's early. As David said, we're going out to some customers. And I think low single digits is kind of the norm. I mean, we need a lot more than that. Inflation has been significant in '22, '23, '24, '25. And I'm betting the price of trucks is going to go up next year and health insurance and casualty insurance is going to go up. And so, we need a lot more. But I think low single digits, there are customers that are willing to have good active discussions around those numbers just from the recent experience we've had. Scott Group: Okay. And you made a comment that no one wants to buy trucks right now. What -- you're going -- and you'll be at ATA next week, but what are you doing from a fleet perspective? What are you thinking about from a CapEx standpoint James Grant: So a couple of things. Yes, I'll speak to it and then let David follow up. First off, nobody's pricing -- most years, most of the large fleets already have pricing by this point. But with all the questions around tariffs and there were some announcements in early -- late September, early October about additional potential big truck tariffs. And is that on the whole truck? Is that on parts of the truck? Is that which vendors? There's a lot that's been up in the air. Hopefully, by next week, we'll know more. We're meeting with all the OEMs while out in San Diego. And so I think nobody has been placing orders because you don't know what the price is, a; b, the order boards at all these OEMs are very slack right now. I mean, in the fourth quarter, going into next year, order boards are very, very slack on truck and trailer equipment. As far as our fleet numbers, I think our total fleet size in total, it's probably be about the same. We may rationalize a little bit of business if we can't get the margin out of it. From a net CapEx standpoint next year, I'll let you give a math. David Parker: Yes. I think, one, it's a big question mark. It is going to be somewhere probably net in the neighborhood between $70 million to $80 million, but I would be hesitant to commit to that. I would say that could be subject to change. We have a number of new trucks that we have financed and are sitting on the fence that are ready to go into service. And so we have quite a bit of unproductive equipment right now, whether it's new or used. We don't want to fire sell it. We don't -- I think we're in the position to kind of sit on it for a little bit longer and take advantage of a market swing. But at the same time, our fleet, although it aged probably 2 or 3 months compared to the prior year, it's a little bit of a misnomer because we've got a lot of new equipment that hasn't gone into service. So our fleet is very, very healthy. Our balance sheet remains very, very healthy, and we're going to buy some equipment. We just -- it's hard to commit to a number when you don't have pricing on it. And I think that gives us a little bit of an advantage over some of the other peers in our group, as we've been pretty consistent about replacement and replacing our fleets in bad times and having a good healthy fleet with the latest and greatest safety equipment on it and the best MPG, if you will, so fuel economy. And so that's what we're going to continue to do. We're going to continue to operate that playbook. And I think we've got a little more flexibility than maybe some of the others in the market to whether it's either delay purchase or reduce purchases next year, but we're just kind of in wait and hold mode in terms of absolute volumes. Scott Group: Have you guys tracked on the operator yet? James Grant: No [indiscernible]. Operator: Our next question comes from Jason Seidl from TD Cowen. Jason Seidl: I appreciate you joining the fray again. David, one of the things I love about you, you're just so calm about the markets and not really ever enthused. So [indiscernible]. I wanted to touch a little more on 2 different things. Can you talk a little bit about the government shutdown in the DoD? You said that business is down about half. Sort of how should we expect that to flow through the P&L? And once the government does reopen, whatever that may be, how quickly do you expect that freight to come back? And then I have a question on sort of capacity. M. Bunn: Yes. So Jason, this is Paul. A couple of things. On the DoD business, I would say about half that business will kind of just be lost. There's kind of the way they move that freight. Some of it is just inventory movements and then some of it is vendor type freight. And so, it's not like the -- some of it will build a backlog that has to be moved eventually and some of it won't. It will just be kind of lost freight. We've moved a lot of those trucks onto a lot of Expedited loads just to keep the trucks moving and keep the drivers getting paid and that kind of stuff. And so I think you'll see a little bit of a spike whenever the government opens back up. But I don't know that it's not going to be a one-for-one makeup. As far as it flowing through the P&L, I think the question is, does if it lasts the whole quarter, it's going to be pretty impactful on Expedited's results. If it's -- if they get something done first week of November, which I guess that's next week at this point, then maybe it will be a little muted. I hate that we've lost the month of October because a lot of these bases shut down around Thanksgiving, a lot of them shut down around Christmas. And so, October is a month that we really, really run hard in that fleet. I mean, really, October 1 to about November 15th is when that fleet is really flowing. And so the government shutdown could come at a less opportune time. I mean it's going to hit us. As David said, it kind of stinks, and that's another one of my -- there's pain before the game, but that business will come back. Jason Seidl: And I guess turning back to capacity, as Scott mentioned, we're really not seeing much of an impact in the spot market. But I think, obviously, you've seen what we've written. I think that eventually comes back as we keep sort of rolling through the months here. But my question is, what could accelerate this? Is there -- we've heard some smattering that some insurance companies have talked about taking some actions and then some customers have talked about taking some actions in terms of exposure to carriers who might have non-domiciled drivers. How should we sort of frame that up? And what are you hearing in the marketplace? David Parker: I think everything you just said there, Jason, is in the process of happening. I think you're going to see insurance companies that are not going to insure non-domiciled CDL license. I think that, that will be happening. And as Paul is saying, of course, California is leading it. We're going to hear next week or so what California is planning on doing about it. But I think you got insurance companies that are in the process of saying, we're not going to insure this. I guarantee they're sitting around in their offices right now, looking at their book of business, saying, what do we have on the books, and they're going to have to get their hands around that. But the process will be that there's going to be a bunch of folks, who aren't going to have no insures. So I think that, that is one thing that is definitely going to be transpiring, but then it's just going to be pressure from the government owned all the stuff. We didn't talk about cabotage. I mean, that's unbelievable how much cheating is going on in cabotage. And these people coming out of Mexico and going to Canada and going to the United States is supposed to go straight back and they sit here for a month going back and forth. The government is under that. That's under [ Christy Dan ] 39:57. They are under that, and that is coming to the top that I think will bring more freight back to us, U.S. carriers. There's just a lot of stuff that whether it takes between now, if I was going to throw one it's April, I don't know, only because fourth quarter is virtually over with here. It is what it is. And first quarter gets into the weather. But with the government's heavy hand, of which I agree with, their heavy hands, you are going to see capacity leaving the market, but better than anything, no new capacity coming. I don't know if you saw this, Jason, but we look at a number that is a plus and minus of MC numbers on a weekly basis. And to give you an idea, for the last few months, that number has been negative 50 to 100 MC -- less MC numbers a week, 50 to 100. Last week, it was over 400 -- 400 less. That was powerful. I look at another number that I keep an eye on. Look at total volume, a report that we look at that has taken all the reports that are coming out on whether it's cash or truck stop this and they accumulate them all and volume is down 17%, but rejections are up almost 2%. What is that saying? This is -- this week volume is down 17%, but rejections are up almost 2%. It's telling you something about capacity. And so that's the kind of stuff that we're looking at as we go forward. Jason Seidl: Well, David, let's say you're right and the recovery is in April with the start of spring shipping season because you finally get the volume back. Bid season, we're going to be well into that already and probably not at exceedingly favorable rates at this stage. What's your ability to go back to the customers and say, "Hey, look, it's June, the market is different, right? David Parker: 100%, not 99%, 100%. I mean, I love my customers. Nobody love my customers like I love my customers. But at the same time, if I've not raised you in 4 years, if I cannot make an argument that says 3 months into a pathetic rate, then I don't have the ability to be able to get a rate increase when the market allows me, then we have no relationship. And I don't want them in my portfolio. And so that, you will -- but it won't be me. It will be the entire industry. So as I look at that on the rates, Jason, that we talked about in DoD, and we got a margin compression on this, and we got to go through some difficult times that I think -- I think it is -- I'm happy with it. I'm very pleased with it because as I step back from this junk that we're having to go through and -- or the negatives or whatever word you want to use, and I look at how much positive demand opportunities, foreign investments, accelerated depreciation, as I look at rate cuts from the Federal Reserve, as I look at all this domestic investment that Trump is bringing, as I look at the Bill Back America Beautiful or whatever they're calling the -- whatever that bill is called. I mean, it is going to be -- and with ISM being down below 50 for 3 years, with what Trump is doing on bringing back plants, I promise you, interest rates going down, it is going to feed the economy with capacity leaving. So that's why I'm excited. A perfect storm. Jason Seidl: [ I can ] certainly see it. And listen, I don't have 50 years in trucking, but I have just over 30 years. So it's -- it's definitely one of the more interesting times I've seen for sure. But listen, gentlemen, I appreciate the time as always, and I want to stay safe out there. Operator: And our next question comes from Reed Seay from Stephens. Reed Seay: You've given a lot of good color, but I wanted to come back and touch on some of this government business. You mentioned like the volume will come back once the government comes back. But here in the fourth quarter, let's say maybe we get a shutdown here at the end of the month. Could we potentially see a catch-up of these volumes in 4Q? Or how would you expect maybe the cadence following a return of these volumes? David Parker: Yes. Reed, here's what I'd say. That's then to go and I speak to that. It won't be a full catch-up. It'd be a partial. There could be a partial catch-up. And part of what handcuffs the catch-up is these bases are -- they're going to shut down around Thanksgiving and they're going to shut down around Christmas. And so just the way the calendar is going to fall, it's going to hamper a full recovery and just some other things just around the nature of the freight. I mean, it's still moving. It won't be a full catch-up. You can have a partial catch-up if the government reopened sooner than later. Reed Seay: And then it looks like during the quarter, costs were moving in the right direction. Can you talk about maybe some actions that you've taken on the cost side here in 3Q? And maybe is there any more to come in 4Q if we have demand continue to be weak in the LTL or in certain parts of the business? M. Bunn: We've continued to try to make sure our headcount matched our -- was matching our freight volumes and tried to make sure we weren't getting frivolous on overhead. We've really shut down any significant growth in overhead. We did that earlier in the year, maybe even the end of last year, knowing this market was continuing to drag out. We saw -- I would say we're happy with maintenance costs, some things we've done on those and to really manage them down. And so I would say it's just more of blocking and tackling Reed and trying to make sure that we're battening down the hatches for the -- we've been in this storm for 36 to 40 months now. You can't be getting that over your skis on costs. James Grant: Yes. Yes, I agree. There were some call-outs. I'll just add on to what Paul was saying. There were some call-outs to some pretty hard cost-cutting decisions in the quarter for which we provided a table in there that kind of reconciled those. But those were difficult decisions. But I would also say that throughout the year, we've been very cost conscious and some of the headwinds that we saw probably earlier in the year, whether it's first quarter or second quarter, were equipment-related costs. And just as we grow certain of our dedicated fleets and we start to expand geographies, and it takes a while to begin to optimize your cost profile in those geographies and within those fleets and -- we're trying to find the sweet spot. We're trying to develop the amount of density needed to efficiently operate that equipment. And there was some cost in the quarter in Q3 related to some start-up costs, I would say, for shops and new hires, shop salaries and things like that, that we think will make us more efficient in the long run. So we continue to invest in the things that are going to return the right capital to our shareholders. It's just clunky. And I will say there was some clunkiness in the quarter. But I think longer term, as we continue to grow that business, you're going to see some efficiencies from it. Operator: And our next question comes from Jeff Kauffman from Vertical Research Partners. Jeffrey Kauffman: Just some quick kind of look ahead here. What are you expecting to hear from the other carriers at ATA that might be a little different than what you were thinking a couple of weeks ago? David Parker: I think it's just going to be an add-on Jeff; of everything we've talked about today. I think you've got motor carriers that are mad at. I think you got motor carriers that are happy with what the government is doing. And I think that, that's going to be the tone at ATA. I really do. Then the side note is going to be OEMs, what are we going to do about trucks. I think that will be -- I think that's going to be the 2 pressing issues. Don't you, Paul? M. Bunn: Yes, truck. I think it's going to be government regulation. It's going to be how bad has inflation been over the last 36 to 42 months that you haven't been able to get in rates and regulation trucks and inflation that has been a recovery in rates. That will be the 3 big talking points. Jeffrey Kauffman: And then just one follow-up question because I know a lot of questions were asked by Scott Group. The shares are about 9x earnings right now, give or take. I know it frustrates you. It just is what it is. I know the balance sheet is in good shape, but what are you thinking in terms of share repurchase here? I mean, you don't want to get over your skis and buying them in a tough environment. On the other hand, shares appear like a bit of a gift at these valuations for a buyback. David Parker: No, I agree with you. I think our shares are highly discounted. And I think there's a lot of potential value there. To your point, the balance sheet is in good shape. Our debt today in terms of EBITDA leverage is just over 2x. We -- for a variety of reasons, we bought back a ton of stock. In the first half of the year, we had an earn-out payment, and we front-loaded to avoid some tariffs on almost all of our equipment. And so I do think our margin -- our debt potentially, just call it, free cash flow, if you will, maintenance CapEx and cash from ops, cash flow from operations will improve in the fourth quarter and will allow us opportunities. And I don't want to commit. We do have some availability under our share repurchase program that was approved by the Board. But I don't want to commit to say that we're going to buy back any of that, but we have a full range of options that we've exercised in the past, whether that's M&A or whether that's share repurchases and continuation of dividends. And we feel like our formula is working, and we're going to stick with that. Operator: At this time, there are no further questions. I'll turn the call back over to Tripp for closing remarks. James Grant: All right. Well, thank you, everybody, for joining us for the third quarter earnings call for Covenant Logistics. We look forward to talking to you next quarter. Thank you very much. Operator: This concludes today's conference call. Thank you for attending.
Operator: Ladies and gentlemen, welcome to the Lonza Q3 2025 Qualitative Update Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Philippe Deecke, CFO. Please go ahead, sir. Philippe Deecke: Good morning, good afternoon, and a very warm welcome to our Q3 qualitative update. Before we go into more details, please let me remind you that we intend to provide you with a general business overview with our qualitative update, but we will not be sharing figures related to our financial performance. We will do so on the 28th of January with our full year update. Let me start with an overview of our group performance before we move to the performance of our business platforms and [ THI ]. Afterwards, I will provide you with an update on our business contracting and our growth projects, followed by the current macroeconomic situation before I close for the Q&A session. Today, we report a strong Q3 performance across our CDMO businesses aligned with our expected full year trajectory. Supported by this strong performance, we are confirming our 2025 outlook for the CDMO business, which we upgraded at half year, with sales growth of 20% to 21% at constant exchange rates compared to the prior year and a core EBITDA margin in the range of 30% to 31%. Excluding Vacaville, which is now expected to contribute at the upper end of the range of around CHF 0.5 billion in sales and a better-than-expected core EBITDA margin in 2025, we expect low teens percentage organic CER growth and a margin improvement in our CDMO business, in line with our CDMO organic growth model. As anticipated at our half year release in July, we confirm our expectation of higher sales in H2 2025 than in H1. We see a healthy progression of our core EBITDA margin in line with the 2025 outlook. Progressing well on its expected recovery path, we also confirm our full year 2025 outlook for the Capsules and Health Ingredients for CHI business at the low to mid-single-digit percentage CER growth and an improved core EBITDA margin in the mid-20s. Based on FX rates at the beginning of October, we can reiterate an anticipated year-over-year headwind of around 2.5% to 3.5% of sales and core EBITDA for full year 2025. However, our margin is well protected due to a strong natural hedge and our hedging program in place. Moving to the performance of our business platforms. Let's start with Integrated Biologics. Integrated Biologics continue to see strong momentum with robust demand for its large-scale mammalian assets. This is further supported by Vacaville, as I just commented on. In our small-scale mammalian assets, we see a high level of utilization, and we have a good level of visibility for the remainder of this year. But let me come back to the early-stage business later to provide further context and outlook. Overall, we are pleased to report a continued good operational execution alongside maturing growth projects and growth and margin drivers in our Integrated Biologics business. Turning to our Advanced Synthesis platform. We continue to see strong commercial demand for our small molecules and bioconjugates capacities as underlined by the deal mentioned in our Q3 release, signing a large multiyear supply agreement in small molecules. Growth is supported by new capacities in small molecules with our new highly potent API plant and bioconjugates. The business platform further benefits from a robust operating execution and the demand for complex products supporting margins as witnessed already with our half year results. Our Specialized Modalities platform improved in Q3 as expected. Also, we expect the full year performance to remain moderate in the context of the softer first half. Deliveries are weighted into Q4 and depending on the progress of key customer projects and decisions, sales may also fall into 2026. Life Science had a good Q3 with robust growth, and we are pleased to report that microbial returned to growth in Q3 after a softer H1 performance. In Cell & Gene, ongoing pipeline variability and complex manufacturing continues to weigh on asset utilization. While we anticipate a gradual recovery in operational performance, it will remain below the strong execution seen in 2024. Cell & Gene is a business with strategic relevance to Lonza and is our aim to increase resilience of the business over time, commercially and operationally. But in the meantime, some business variability may persist. Our CHI business returned to positive CER growth in Q3, in line with the expected full year trajectory for 2025. We are pleased to report that also the pharma capsules business is seeing improved demand trends and returned to positive volume growth in Q3. We can, therefore, confirm that both our nutraceuticals and pharmaceutical capsules business has moved beyond the post-pandemic destocking phase. In the current geopolitical environment, our manufacturing footprint in Greenwood, South Carolina and Puebla, Mexico is continuing to support CHI's customers to navigate the evolving geopolitical environment. In the U.S., recent preliminary affirmative countervailing and antidumping decisions continue to be in place, allowing more balanced competition for pharmaceutical and nutraceutical capsules in the U.S. In Q3, we progressed with the necessary internal carve-out measures to prepare our exit from the CHI business. The good business momentum highlights the attractiveness of the CHI business as a leader in its markets, and we are confident in the business ability to return to historical CER sales growth in the low to mid-single-digit percentage and a core EBITDA margin above 30%. We are, therefore, confident to exit the business in the best interest of our customers, employees and shareholders, and we will do so at the appropriate time. Before turning to our growth projects, let me say a few words on contracting. For 2025, we expect again a healthy level of contract signings across technologies and sites. Recently, we were able to sign several significant contracts, including a further strategic long-term contract for integrated drug substance and drug product supply of bioconjugates. In our small molecules technology platform, we signed a large multiyear commercial supply agreement. And in Integrated Biologics, we were able to secure a fourth significant long-term supply agreement for our Vacaville site. In Vacaville, we expect further contract signings in the coming months, and we continue to see strong customer interest for large-scale U.S. capacity. Let me say a few more words about Vacaville. One year after closing the acquisition, we are very pleased with the site's integration into Lonza's network, which is progressing in line with plan. The site continues to demonstrate robust execution in support of Roche and maintaining excellent quality track record, which is also reflected in our expectations for Vacaville continuing at the high end of our initial estimate for 2025. The site is also preparing new product introductions for 2026 and the first phase of CapEx is progressing as planned to the [indiscernible] system and [indiscernible]. [indiscernible] our new highly potent API facility is progressing well, and we commenced full commercial operation in July 2025. Our large-scale mammalian facility also showed good progress in ramp-up activity in Q3. GMP operations are underway and commercial production is expected to ramp up gradually from 2026 onwards. Ramp-up activities for both facilities are those progressing in line with plan. Before closing my remarks and opening for the Q&A session, let me reiterate our expectations of no material financial impact on Lonza from the currently announced official U.S. trade policies. The so far announced U.S. tariffs do not include tariffs on API, intermediates and raw materials as described in the Annex 2 of the Executive Order. We further remain confident that our well-diversified global manufacturing footprint with large capacities in the U.S., Europe and Singapore will enable us to support our customers' global manufacturing requirements today and in the future. We, of course, remain vigilant to the continued evolution of the situation and potential impact on our businesses. We also continue to closely monitor biotech funding trends and recent fluctuations in funding levels are expected to have only a minimal impact on Lonza's growth momentum in 2025 and beyond, with early-stage activities representing only approximately 10% of the CDMO business and only a portion of that business originating from companies requiring funding. To close, let me provide some final remarks. Lonza is on track to deliver on its full year 2025 outlook. We see strong contracting demand with customers seeking Lonza's services for their strategic projects. Our growth projects are on track and are contributing to our growth this year and will continue to do so also in the years to come. In the current geopolitical environment, our large commercial business provides stability and our global asset positions us well to support our customers in the complex manufacturing needs. With that, I would like to thank you for your time and hand over to Sandra. Operator: [Operator Instructions] Our first question comes from Ebrahim Zain from JPMorgan. Zain Ebrahim: Hopefully, you can hear me okay. This is Zain Ebrahim from JPMorgan. I'll stick to one question, which is on Vacaville. So just on the significant contracts you announced this morning, how should we think about the timing of tech transfer for the contract? And when can it start contributing to revenues? And related to that, just based on this contract, where are you with respect to your target for being able to maintain Vacaville sales stable over the midterm? Philippe Deecke: Thank you very much for the question. So I think as we've stated in the past, I think large commercial contracts are usually not for immediate use of batches. It takes time to tech transfers, as you say. But I think all the contracts we are announcing for Vacaville are part of the plan to offset the reduced need for batches from the initial Roche contract. And so this new contract is part of that plan and reconfirms that our stated trajectory for Vacaville of more or less flat sales in the next few years is exactly on track. So this contract will start working the [indiscernible] site next year [indiscernible] to revenue over the next 2 to 3 years. Operator: The next question comes from Charles Pitman-King from Barclays. Charles Pitman: Charles over here from Barclays. Hopefully, you can hear me okay. Just a question, please, on guidance. Just wondering, given you kind of raised the backfill outlook to the upper end of your around CHF 0.5 billion range this year, but you ran the top line guide. I was just wanting to confirm if there's one portion of your business that you think is kind of deteriorated such that you are just kind of reiterating that top line guide? And just maybe whilst we're on guidance, I was wondering if you were -- if you could provide commentary on your thoughts on FY '26 guidance next year, which is currently looking for low double-digit growth. I know you don't typically comment, but worth asking. Philippe Deecke: Yes. Thank you, Charles. Thank you for offering the answer to your second question. [indiscernible] more seriously. Look, I think on guidance for this year, I think we gave you a range. There's always things that move up and down. So certainly, I think we're pleased with the Vacaville progress this year and continue to be pleased with it. So that's helping us. On the other hand, there are, as we mentioned, some uncertainty on SPM. So I think within that range, this is what the puts and takes are. So that's for 2025. We're 3 months away. So we kind of have good visibility on what's going to happen for the rest of the year. On 2026, as you know, we usually guide in January when we report full year numbers. So we will stick with that. For 2026, I think we talked about early stage, which is not going to have a material impact on our numbers no matter what the funding level is. And I think we're very pleased with the contracting, as we said, for 2025, which will also help in '26. So, I think everything is in line for '26, so far [indiscernible]. Operator: The next question comes from Charles Weston from RBC Europe. Charles Weston: I wanted to stick on 2026, please. So not asking for a number. But since the large mammalian Visp asset will be ramping in '26, which could presumably be a bit dilutive to margin with a relatively high base in Advanced Synthesis in Vacaville, there might be some headwinds to margin improvement year-on-year in 2026, perhaps a bit offset by the Advanced Synthesis improvements. But are there any other moving parts that I haven't mentioned that could drive an improvement next year? Philippe Deecke: Yes, Charles, so again, you summarized very well, which is great to hear. I think, again, yes, we have large growth assets that start dilutive as it is very normal. Vacaville, I think, is probably more of a top line headwind because this is going to be more or less flat for next year. So that's a big block of sales, if you want, that does not contribute to growth next year. Nevertheless, I think our organic growth model is looking at low teens growth and improved margin year-over-year. And that's, I think, for now the new best assumption for next year. Operator: The next question comes from [ Theodora Rowe Beadle ] from Goldman Sachs. Unknown Analyst: So just on the separation of the CHI business, is the process of carving out this business now complete? And are you able to share with us anything in terms of the timing of separation or when you'll be able to communicate the decision? Philippe Deecke: Yes. Thank you for the question on CHI. So I think the progress on the internal separation, which contains of legal entity work, [indiscernible] as I said in my speech before, is progressing well. I think we're nearing completion of that. And I think the rest of the process is really an internal process that is going to be between us and the other parties and we will inform when things are decided. Operator: The next question comes from James Vane-Tempest from Jefferies. James Vane-Tempest: On back of [indiscernible], I mean you've announced you won a new contract and there's potentially some in the coming months. So just to clarify, should we understand that there could be some by year-end, but we're not going to find that out until full year in January if you don't plan to disclose more in real time like your peers? I guess I'm asking this because some of them have been more visible to the market in terms of the number of contracts they've signed, which suggests a much more competitive environment. So perhaps I can also ask what you're seeing on that front? Philippe Deecke: Yes. Thank you, James. So again, we usually do not communicate all the contracts we're signing. This would be issuing a lot of release. I think if you remember, our signing in 2023 was about CHF 12 billion. Last year, it was about CHF 9 billion, if I recollect right. So I think these are a lot of contracts being signed. We do not have a history and we do not mention every single contracts we're signing. I think we decided to do so on Vacaville to provide you, I think, more visibility into our confidence to fill the assets over time. So this is the reason why we're kind of providing you the Vacaville contracts on a more regular basis. And usually, our customers also have no interest for us to publicly announce their contracts. So we don't do so. I think indeed, I think if we were to sign further contracts this year, you'll probably hear about it at the end of January when we report our full year numbers. And I think as stated as well, I think we should get off the rhythm of announcing contracts for a single site. And probably we won't do so in 2026. But let's see, I think the contracting situation is very strong. We're also very pleased with the interest in Vacaville. So we have a lot of concurrent negotiations ongoing. Some will finalize over the next few months. Others may take longer. These are very large contracts. These are usually also complex multiyear contracts that need time to be negotiated. In terms of the competitiveness and what our peers are doing, you would have to ask them. I think for now, we are very pleased to have a very strong footprint in the U.S. with attractive capacities available in the U.S., but also our sites in Europe and Asia see good demand. And you saw that some of the contracts that I mentioned today also include some of our non-U.S. assets. So I think on the contracting side, we're very pleased with the progress and with the interest of companies, large and small to contract with Lonza. Operator: The next question comes from Patrick Rafaisz from UBS. Patrick Rafaisz: Just a follow-up on the large contract wins. For Vacaville, is there any chance you could add a bit of color on size and types of capacities, the amount of capacity required. And the same for the large bioconjugate contracts, for which site was that specifically? And can you add some color on what types of services from your end did this include? Philippe Deecke: Yes. Patrick, happy to take your question. So I think on the Vacaville contract, I'm not going to directly answer your question, but maybe give some more color about the contracts that we have signed so far. I think all of these contracts, including the latest one, are multiyear contracts that are significant for the site as well and which are very important for us to offset the declining revenue coming from Roche. So I think these are very helpful projects because they start contributing very soon, helping us to maintain flat sales for Vacaville. Important also to note that we see great interest for both assets within Vacaville. I think, as you know, we have a 12,000-liter asset and a 25,000-liter asset. And I think also coming from the market, I think there were certainly question marks around the market still requiring such large reactors like the 25,000 liters we have. And we're very pleased to say that, yes, indeed, there is big demand for such large reactors. So we see contracting for both our 12,000-meter reactor and our 25,000-meter reactor. So again, Vacaville for us following a very -- tracking very well along the plan that we had. And this confirms our outlook for kind of flattish sales to 2028 and then increasing sales further on as we ramp up utilization of the site. For the integrated offer contracts that we also mentioned today, I think here, we are offering several services, including producing the protein, the conjugation and the drug product. So again, I think the reason why we mentioned this contract to you is because, again, this shows the interest from pharma companies, large and small, to ask us for integrated business, which cover more than one modality. So more and more we get asked to do not just the protein or not just the conjugation or not just the drug product, but the combination of several modalities across our platforms. And I think we believe that this is, again, something where Lonza can clearly differentiate, of course, in the areas of ADC, but not only. Operator: The next question comes from Thibault Boutherin from Morgan Stanley. Thibault Boutherin: My question is just on tariff and the CapEx announcements in the U.S. by large pharma players. Clearly, there is a push from the U.S. administration to bring more manufacturing to the U.S. So did you have discussion with the administration and confirmation that investing through CDMOs such as Lonza meets the administration goals for locating manufacturing in the U.S.? So it makes sense that it does, but just wondering if you had an explicit confirmation that it would fit what you're looking for? Philippe Deecke: Yes. Thanks, Thibault. So I think there are multiple discussions happening. I think with the U.S. government, certainly, pharma companies are talking directly. The Swiss government is talking directly. We also have contacts that we use. I wouldn't go into more details of what's happening in these discussions until there's a result. I think this would be premature. So I think we'll wait until something is official and is being communicated. But overall, I think I reiterate that also we at Lonza are investing significantly in the U.S. So of course, if you compare this with the numbers of big pharma, this is a different magnitude. But I think as an industry leader, we are investing significantly in the U.S. in multiple sites -- of our investments in Portsmouth, of course, our investment -- of our large investment in California and Vacaville, and there are other sites that are seeing further investments. So I think we feel very confident to also here be very much in line with the intention of the government, but more importantly, the intention of our customers to have capacity and strong capacity in the U.S. So we will continue to offer increased capacity in the U.S. And if our pharma customers can leverage this, then even better. But in any case, having a footprint in the U.S. is helpful to our customers. Operator: The next question comes from Manesiotis Odysseas from BNP Paribas. Odysseas Manesiotis: First one, Philippe, I wanted to follow up on the detail you provided on the contracting between Vacaville bioreactors. Is it fair to interpret your -- the details you provided there as that you've landed in these 4 contracts, at least one of them has to do with the 25,000 liter? And on top of that, within these 4 contracts, you also have contracts for more than one bioreactor? So that's the first one. And secondly, could you remind us the pace of the new Visp mammalian capacity ramp? Is this still expected to run at full utilization by '28, '29? And has there been any plans change given the recent push to reshore capacity in the U.S.? Philippe Deecke: Yes. So let me give you -- maybe reconfirm what I want to say just before on the Vacaville contract. So indeed, I think we have been able to contract for both assets for the 25,000 and the 12,000. So I think there's a different mix in the contracts. I'm not sure I understand what you meant with the contract for more than one reactor. But I think I can confirm that the new contracts that we have signed are involving both 25,000 and 12,000 assets. I think on the Visp, on our large-scale mammalian facility, I think we mentioned a while back how the profile of such large-scale facilities look like. And indeed, it usually takes 2 to 3 years also to ramp. So since we started late this year, you can do the math as to when we would expect utilization to be high and contributing favorably to our bottom line and to our margins. So I think this asset is a typical large-scale asset that will follow this path. Yes. So everything is in line. We started GMP processing this quarter. So progress is in line with our plans. Operator: The next question comes from Max Smock from William Blair. Max Smock: Maybe just a quick one here on Vacaville. I appreciate the fact that revenue is going to be flat next year in 2026. But in the past, you've talked about margins at that facility ramping up as you replace some of that Roche revenue with additional third-party customers. Can you just talk about how you expect Vacaville margins specifically to trend next year? Philippe Deecke: Yes, Max. So I think on Vacaville, again, we said 2 things. One, I think revenue will be more or less flattish through '28 and margins will progress over time to basically be neutral to group by 2028. So I think this continues to hold true. I think margins this year were a bit better or better than we expected, as we mentioned in our first half call. Now of course, this was also an easier year. 2025 was an easier year for Vacaville since they were basically continuing to produce the products that they knew from before for Roche with not a lot of new tech transfers to do, et cetera. So 2026 will be more challenging, if you want, for Vacaville because they have not only the implementation or the execution of the CapEx investments to do, but they also need to start to onboard and tech transfer new programs while still delivering the batches for Roche. So it's a more complex year. Nevertheless, I think we believe that our goal for 2028 is confirmed, and we'll have to see closer to next year how the margin exactly behave versus what they do this year. I think we had before the question from Charles around the dilutive effect in terms of growth for the company. So in terms of growth, yes, this is a dilution. In terms of margin, we'll have to see if we can replicate this year's margin or not. But the progression -- the progression over the next 3 years is confirmed. Operator: The next question comes from Falko Friedrichs from Deutsche Bank. Falko Friedrichs: My question is on your Cell & Gene business. And now that we are in the middle of your fourth quarter, can you speak a little bit more about your level of visibility into this year-end pickup and what exactly is driving that? Philippe Deecke: Yes. So I think if you talk only about the Cell & Gene business, I think there, we met in H1 that we had also operational issues. I think remember this is a much more manual and very complex manufacturing process. So there, I think we see improvement in the second half and that business has certainly improved versus the first half. But I think we're still managing the complexities. And overall, for the year, we don't expect this to be as good of a year as we had in 2024. Now if you talk about SPM as a platform, I think there also, we saw better performance in the third quarter. We remain with several customer decisions and customer projects that are late -- happening late this year in Q4. And so these are the one that could still move between '25 and '26 and this we will only know probably late this year. Microbial, which is the second large business in this platform, is performing well and it's usually a very stable and strong business. We explained the first half in our July call with mainly a very high base and some contract -- some construction in our assets in microbial. But otherwise, this is kind of a stable and nice business. So overall, we see SPM better in the second half, but for the full year, certainly will be difficult to offset what happened in the first half. Operator: The next question comes from Sebastian Bray from Berenberg. Sebastian Bray: It's on the early-stage fraction of the portfolio. It was mentioned earlier in the call that it looks relatively robust, at least on a few months' view. How far does the visibility extend in this area? And if conventional biotech funding measures, which suggest that this business faces a funding squeeze in '26, are no longer a reliable guide, where is the money for these end customers coming from? When they go and sign the contract and if research funding is not there anymore, where is it coming from instead? Philippe Deecke: Sebastian, so let me first reconfirm what you said very quickly. I think the early-stage business is strategic for us because it allows us to look very early into the pipeline of pharma companies as to what services and technologies will be needed in the future and also contributes clearly to our future commercial utilization. So I think this is an important business for us. But again, this is not a very large business for us given the sizable commercial contracts and commercial assets that we have. So this early-stage work is about 10% of our CDMO revenues. And also for us, the funding in biotech is only a portion of what drives this early-stage work for us because many of our customers don't require external funding. This can be large pharma, large biotechs, midsized companies that have their own revenue and own funding. So only a portion of the 10% is actually really relying on external funding being from [indiscernible], follow-ons, venture capital, et cetera, et cetera. So I think what we wanted to make clear is that the funding levels that we're seeing today, and I'll come to this in a second, will not play a major role in the Lonza performance. And we have visibility of roughly 6 to 9 months in that business. That's usually the delta that you see between any movement of funding and then again, these smaller company relying on funding being able to deploy the capital they received or having to reduce their spending because of the lack of funding. So this is usually the visibility that we have. So for now, we would see roughly into the first half of 2026. And for there, I think we see good level of utilization certainly for '25 and early '26. I think the inquiries that we're seeing have reduced slightly throughout 2025, but not dramatically. And on the funding side, actually is good news. Q3 was actually better than Q3 last year. So I think this is not only bad news there. I think we saw a great increase in pipe funding, which is one of the other mechanisms for these companies to get money. [indiscernible], I think, was holding well at similar level as previous quarter. So I think this is still something that's volatile, but the decline that we've seen since early '25, at least has been put on hold for Q3. That's at least what we see, but that's probably the same data that you are all looking at. So I would say we're happy with the progress certainly in '25. We are confident that we can manage '26 and that we will continue to see interest for early-stage work to then be retained within the Lonza network over the years to come. Operator: Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the conference back over to Philippe Deecke for any closing remarks. Philippe Deecke: Yes. Thank you, everybody, for the question and the interest in Lonza. Again, a strong Q3 and confirming our outlook for this year. So I think good news from our end, and I wish you a great end of your day and talk to you in January. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Hello, and welcome to the First BanCorp Third Quarter 2025 Financial Results. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I would now like to hand you over to the Investor Relations Officer, Ramon Rodriguez to begin. Please go ahead, when you're ready. Ramon Rodriguez: Thank you, Carla. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the third quarter of 2025. Joining you today from First BanCorp are Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at fbpinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman. Aurelio Alemán-Bermúdez: Thank you, Ramon, and good morning to everyone, and thanks for joining our call again today. I will begin by briefly discussing our financial performance for the third quarter and then move on to discuss our outlook for the franchise. We're definitely very pleased with the progress on the quarter we delivered another exceptional quarter of financial results that underscore our ability to produce consistent returns to our shareholders and consistent progress in our franchise metrics. We earned $100 million in net income during the quarter, including the benefit of certain nonrecurring special items that Orlando will explain later. However, adjusted for these items, normalized earnings per share grew 13%, when compared to the prior year. Most of the improvement came from record net interest income and well-managed expense base and disciplined loan production. Turning to the balance sheet. Our strong capital position enabled us to continue supporting our clients on the loan production side. We grew total loan by $181 million, of course 5.6% linked quarter annualized surpassing $13 billion in total loans for the first time since 2010. Since the beginning of the second quarter, we do -- we've been experiencing slowdown in consumer credit demand. Especially, I want to comment on the auto industry, which has been below our original expectation for the year. After the sector-specific tariffs were announced in April, industry-wide sales began trading down, which has negatively impacted overall loan origination in this space during the year and loan mix production. For some additional context, total retail sales in our industry are down 7% year-to-date as of September. But when looking at the third quarter sales, they are below 17% compared to the third quarter of the prior year. Thankfully, we've been able to mitigate this slowdown by executing our growth plan within the commercial and construction lending segment, coupled with a steady loan production progress in the residential mortgage business, it's about business diversification and regional diversification contributing to that. In terms of deposit, it was a good quarter. We grew $140 million on core franchise deposits, trends in the market flows remain favorable. Although we're seeing higher competition in just seeking flows, we believe that could be temporary, particularly from affluent customers and government relations. That said, we continue to focus on what is our core deposit franchise, while deploying a measured approach to retaining valuable cost core customer's relationships. In terms of asset quality, credit continues to behave in line with expectations, consumer charge-offs stabilizing, healthy commercial credit trends and a 7% reduction in nonperforming assets. Finally, our earning performance translated into growth across all capital ratios, while expanding our loan book organically and being able to repurchase another $50 million in shares of common stock. Consistent with the strategy of returning 100% of annual earnings to shareholders, as we announced yesterday, our Board authorized an additional $200 million share buyback program that we expect to execute through 2026. Please let's move to Slide 5 for some additional highlights on the macro. In terms of the macro, the operating background remains, as to stay stable with uncertain elements that are surrounding us as we continue to monitor and assess the potential impact that evolving trade dynamics are bringing to the market, any potential impact of federal government shutdown, tariff-related inflationary pressures are having pressure on businesses and consumers across our regions as everybody is realizing. That said, we are encouraged by the resiliency of the labor markets in Puerto Rico, the continued improving trend of the tourism activity and the recently announced investments of manufacturing companies expanding production capacity in Puerto Rico or establishing new facilities. We believe that the ongoing expansion of the manufacturing sector, coupled with the consistent flow of federal disaster funds earmarked for infrastructure will continue to support local economy for the years to come. Our franchise is in a great position to benefit from the tailwinds and we expect to strategically deploy our excess capital to continue growing organically our regions. Year-to-date, total originations other than credit card activities are up by 7% when compared to prior year. We're supported by sales discipline, client outreach, well-managed regional and business line diversification, which is really the strength of our franchise. Based on current commercial lending pipelines, development rate environment and the ongoing normalization of industry-wide auto sales. Our loan growth guide for the year will probably be closer to the 3%, 4% range, depending on commercial credit line uses and any level of unexpected payments that we don't have knowledge today. We will provide an updated guide on our -- for 2026, once we report our fourth quarter in January, and also full year forecast for next year. With that, I would like to thank you for your interest in First Bank, I'm definitely very proud of our team's accomplishments to 2023 -- 2025 and look forward to a strong end of the year. And now I will turn the call to Orlando to go over financial results in more detail before we open the call for questions. Orlando? Orlando Berges-González: Good morning, everyone. As Aurelio mentioned, we had a strong quarter with net income reaching $100 million or $0.63 a share. That compares to $80 million or $0.50 a share in the second quarter. Return on average assets for the quarter was 2.1%, much higher than last quarter. This quarter did include a few things, and I'm going to touch upon. We had a $16.6 million reversal of valuation allowance on deferred tax assets that are related to net operating losses at the holding company. This quarter, a new legislation was enacted in Puerto Rico allowing limited liability companies to be treated as disregarded entities, based on this change, we now expect that NOLs at the holding company will be mostly utilized against revenues from one of its subsidiaries, resulting in the reversal. Also, during the quarter, we collected $2.3 million in payroll taxes related to the employee retention credit. That's been outstanding for a while, but we collected it this quarter and it resulted in a reduction of payroll costs, obviously. We also recorded a $2.8 million valuation allowance for commercial other real estate property in the Virgin Island as a result of an ongoing litigation, which involved potential loss of title of the property. If we were to exclude the DTA valuation allowance and employee retention credit components from results. Non-GAAP adjusted earnings per share were $0.51 and return on average assets was 1.7%. The quarter also had a reduction of $3 million in provision as compared to last quarter. Provision was $17.6 million. This was mostly due to a $2.2 million benefit in the allowance for residential mortgage. We've seen updated -- improved updated loss experience in this portfolio and also the projected macroeconomic for unemployment has an improvement in the trends. In terms of our net interest income, we reached $217.9 million for the quarter, which is $2 million higher than last quarter. That includes a $1.3 million improvement due to an extra day in the quarter. Compared to the third quarter, net interest income the third quarter of 2024, I'm sorry, net interest income, it's 8% higher. Net interest margin for the quarter was 4.57%, 1 basis points higher than last quarter. And over the last 4 quarters, margin has grown 32 basis points. As stated in prior calls, the reinvestment of the cash flows from the investment portfolio resulted in a 16 basis points expansion in the investment portfolio yields. However, the margin ended up growing less than the 5 to 7 basis point guidance we had provided. Aurelio mentioned, we saw a slowdown in consumer lending originations for the quarter, which was below our expectations and ended up reducing the average balance in the portfolio by $12 million. Remember, these are high-yielding portfolios, and they are more accretive to net interest income. Also, we saw increased competitive pricing pressures led to a 15 basis point increase in the cost of government deposits and a 2 basis points increase in the cost of time deposits. The average cost of all other retail and commercial deposits remained flat at 72 basis points as compared to prior quarter. In addition, when we look at the mix of deposits, we see a shift with time deposits growing $166 million at the end of the quarter, while lower cost interest-bearing nonmaturity deposits decreased $45 million. Regarding other loan portfolios, we saw improvements in the quarter with net interest income on commercial loans increasing $3.8 million related to $126 million increase in average balances, 3 basis points increase in yields. And we had an extra day in the quarter, which also improved the net interest income. The average balance on the residential portfolio grew $19 million for the quarter. For the fourth quarter, we will continue to benefit from yield improvements from reinvestment of the cash flows from the investment portfolio, but this will be partially offset by the 2 projected Federal Reserve rate cuts that would result in reduction in yields on the floating commercial loan portfolio as well as the cash balance at the Fed. Remember, we have a floating commercial portfolio, which about half of it is floating with either prime or SOFR, mostly as it's a priced today. In that we have an asset-sensitive position repricing on the asset side will happen faster than on the liability side. We expect that margin for the fourth quarter to be sort of flat with increases in net interest income coming from loan portfolio growth. In terms of other income for the quarter was relatively flat, slight reduction on card processing income due to lower transaction volumes. Expenses for the quarter were $124.9 million, which is $1.6 million higher than last quarter, which is mostly due to the net loss on the OREO operation related to the $2.8 million valuation adjustment I just mentioned. Also, payroll expenses decreased $300,000 due to the $2.3 million employee retention credit that basically compensated for a $1.8 million increase we had from annual marine increases and from an additional payroll day in the quarter. If we were to exclude OREOs and excluding the employee retention credit, expenses were $126.2 million, which compares to $124 million in the second quarter, which is slightly above our guidance, but pretty much in line with the $125 million to $126 million we had provided. The efficiency ratio for the quarter was 50% pretty much unchanged also, when compared to prior -- to the second quarter. The projected expense trend for technology projects and business promotion efforts we plan to do in the fourth quarter. And so we reiterate our guidance expense base of $125 million to $126 million for the next couple of quarters. And still believe our efficiency ratio will be in that range of 50% to 52% considering expenses and income components. In terms of credit quality, it remained fairly stable in the quarter. In the quarter, NPAs decreased $8.6 million basically $3.8 million decrease in nonaccrual loans, mostly residential mortgages and CRE loans and a $5 million reduction in OREO balances. That includes the $2.8 million adjustment on the VI property I mentioned. Inflows to nonaccrual were $32.2 million, which is $2.2 million lower than last quarter. Mostly commercial and residential mortgage inflows of $6.7 million, which are offset by -- I'm sorry, a reduction of $6.7 million in residential and commercial with an offset of $4.5 million increase in consumer inflows. Loans in early delinquency, which we define it as 30 to 89 days past due increased $8.9 million, mostly 1 case in the Florida region, a $6 million commercial case that the payment was not received until later in October. In terms of consumer loans, early delinquency remained relatively flat from the second quarter, increasing only $300,000. Moving on to the allowance. The allowance is down $1.6 million to $247 million. The decrease was mainly in the residential mortgage portfolio as loss severities have continued to improve. On the other hand, the allowance for commercial loans increased based on the portfolio growth and some deterioration that is projected on the CRE price index as part of the macroeconomic over projections. The ratio of the allowance for credit losses to loans decreased 4 basis points to 1.89%, and this was mostly a decrease of 9 basis points in the allowance for credit losses on the residential mortgage portfolio. Net charge-offs for the quarter were $19.9 million, 62 basis points of average loans, which is up about $800,000 from prior quarter or 2 basis points. Last quarter, we had an $800,000 commercial loan recovery. And this quarter, we did not have any of this size to offset some of the charge-offs. As Aurelio mentioned, consumer charge-off levels continue to be normalizing and commercial charge-offs continue to be very low. On the capital front, again, our strong capital base continues to support the actions of share repurchases and dividends. During the quarter, we declared $29 million in dividends and repurchased the $50 million in common stock we had mentioned. Regulatory capital ratios continue to be low, but these capital actions were offset by the earnings generated in the quarter. In addition to all of this, we registered a 6% increase in the tangible book value per share to $11.79 and the tangible common equity ratio expanded to 9.7%. Also due to the $49 million improvement in the fair value of available-for-sale securities. The remaining AOCL still represents $2.42 intangible book value per share and over 177 basis points in the tangible common equity ratio. As we announced yesterday, our Board approved an additional $200 million in share repurchase, our intention is to continue the approach of opportunistically executing on our capital actions based on market circumstances with the base assumption of repurchasing approximately $50 million per quarter through the end of 2026. But again, as we have done so far, we will continue to deploy our excess capital in a thoughtful manner, looking for long-term best interest of our franchise and our shareholders. With that, operator, I would like to open the call for questions. Operator: [Operator Instructions] And our first question comes from Brett Rabatin with Hovde Group. Brett Rabatin: I wanted to start off. I just want to make sure on the tax situation, that's onetime, right? That doesn't continue from here in terms of any benefit? Orlando Berges-González: Well, there will be a benefit in the sense that we won't have reversals of deferred tax asset at these levels. But there is a benefit on the normal operating losses or expenses we have at the holding company. Those are annual expenses that are -- now we're not yielding any tax benefit. And they will be offset also against revenues from this stock. So it's not -- that is a huge amount, but you saw that the effective tax rate came down a bit, and that's reflecting some of that benefit. So not at the level of this reversal of DTA, but there is a little benefit on the effective tax rate going forward. Brett Rabatin: Okay. That's helpful. And then wanted just to talk about -- I've seen the stats, and I know that the auto lending has finally come in as expected for some time, a bit -- any thoughts on the health of the consumer in Puerto Rico and your credit trends seem fairly stable from a consumer perspective. But just wanted to hear any thoughts on how you guys are seeing on the grounds consumer activity? Aurelio Alemán-Bermúdez: Well, I think it's clearly auto sales, we can call it normalizing. We were expecting for the year, a 5% adjustment coming down. It's actually 7% year-to-date. But obviously, it disrupted by there were increased sales in the second quarter because of the tariff and they were coming. Now you see a reduction, some sales were accelerated. So I think we need to see what happened this quarter to normalize those auto sales and see what is a real stable volume. They have fluctuated between 100 to 120 units, 20,000 units per year for some years. So we expect somewhere on that range probably the second half of the year will determine how we project 2026. Yes, credit demand has been lower. It's been -- on the other hand, unsecured credit demand has been a little bit lower. We remember 3 years ago, 2 years ago, we have been doing adjusted policies. We've seen the good performance of the portfolios across the board and some of the higher losses that we experienced in credit cards and unsecured are being leveling. So we expect stability on the consumer, but we don't expect portfolio growth as we achieved for some years. So the portfolio growth will come from resi, which is performing excellent and from the commercial portfolio that we continue to gain some share across the different sectors. So that -- I would say, stability on the consumer. Obviously, working hard to diminish any contraction of the portfolio as we continue to move on with products and services in that segment. Brett Rabatin: Okay. And then 1 last one, if I can. Just around the margin guidance were flattish in the fourth quarter. Does that assume -- in the face of the rate cuts, does that assume you are able to lower funding costs, deposits, even though the beta in Puerto Rico on the way up was obviously a lot slower than maintenance? Are you expecting the beta on deposits to be better on the way down? Aurelio Alemán-Bermúdez: I think 1 element that definitely will come down, we have some index deposits for the government that are -- they move with the rates, and some of that will come down. We don't see the other core retail products coming down yet. Orlando Berges-González: Other than time deposits that we do see some reduction. Aurelio Alemán-Bermúdez: Other than time that they happen -- they move with the market. So there will be some reduction on the cost of deposits. Expected to happen during the quarter. Obviously, how much that can offset the mix of the portfolio. Obviously, the margin is very strong. So having less consumer loans at high yield impact the margin directly as well as which segments of the deposits are growing, which this quarter we have growth on the CD book at market, not necessarily above market. So as an example, so it depends on the whole mix of the balance sheet, which is big, yes. Operator: And the next question comes from Timur Braziler with Wells Fargo. Timur Braziler: Back on the deposits, can you just elaborate a little bit more on the competitive pressures that you're seeing on the government side? I guess, how much economics are you having to give up how much of that is going to potentially lower some of the benefits of being able to reprice those with some of these rate cuts. And then just lastly, you said that you are optimistic that some of these competitive pressures might abate here. Maybe just give us some color as to what gives you that confidence? Aurelio Alemán-Bermúdez: Well, I think the cycle matters. Some of these are contracted deposits that are indexed. So they are already contracted and they're not necessarily up for bid. So they would buy -- if the rates move, they will move. With them either monthly or quarterly. So some of them are, in our case, probably 40% of the government book is on that bucket. I think the others in the CD, whatever matures obviously, move down with rates. I think competitive pressures are really coming from the smaller players, not from the large players. And the way we manage that is we go after operational accounts plus what additional services the government entities need, but we compete in pricing, where we have other type of relationship, not just to get a CD or it really has to add something else to the mix of the products that we sell and the franchise services. Municipalities and other government have a lot of payment services, deposits. So obviously, to complement that, we compare on CDs when they come to the market. Timur Braziler: Okay. And I guess maybe tying that into kind of 4Q, 1Q is the expectation that deposit costs drop with the subsequent rate cuts? Or do some of these, I guess, how much of an offset could some of these competitive pressures be to the planned drop in deposit costs? Aurelio Alemán-Bermúdez: We do expect some reduction in deposit costs coming down from -- as a result of the reduction in rates. The main point is that typically, we have seen the betas on some of these deposit products move at a -- there is a lag as compared to some of the floating asset products. So there is a timing issue in terms of when we see that on the asset side versus the deposit side. But we do expect reductions. It's just the pace at which all of them will come down. Timur Braziler: Okay. And then just on credit, credit results at First Bank in 3Q are really strong. There was a couple, let's say, in-migration inbounds on the NPL side for your competitor banks on the island, including some degradation maybe on Puerto Rico itself. I guess to what extent does credit at the other banks influence your own level of reserving in the way that you're thinking about your own portfolio, if at all? Aurelio Alemán-Bermúdez: Well, we've been telling for some time that we have a firm risk appetite and we have policies that we follow, and we have ticket -- deal size tickets that we have. And so it's really our methodology. It's really the performance of our portfolio. Obviously, if there are things that could impact an industry, we take that into consideration. But from what we have seen so far, we don't see any systemic or industry-wide impactful. Orlando Berges-González: Yes. Other than we tend to look at each of our cases individually. And again, as Aurelio mentioned, unless we see something in the industry, it would be more of what we are seeing on our own customer base and what are the results and the lines of business they have. Timur Braziler: Okay. Great. And then just last for me. I think more recently, First Bank has been open to doing maybe M&A on the Mainland. Can you just remind us what you would be considering in terms of size, location, assets, deposits and kind of just your updated view on capital deployment here? Aurelio Alemán-Bermúdez: Well, capital deployment priorities are obviously #1 organic growth. As said in the Florida market could be an alternative fit for us is a franchise that enhance our current franchise. It's very easy to originate loans in Florida, if you have the right teams and they move from 1 bank to the other and as long as we have a good discipline of credit, it will perform well. And I think we have a history of that. I think it will be -- definitely have to be complementary to our deposit franchise. That would be the profile. We have the capital, so size will depend, yes. Operator: And our next question comes from Kelly Motta with KBW. Kelly Motta: Wanted to circle back to the competitive landscape in Puerto Rico. I appreciate the color on the government deposits. Wondering if there's been any competitor competition from outside the Puerto Rico banks any -- if you've seen any new entrants into the market and just opine on the competitive landscape? Aurelio Alemán-Bermúdez: None of the deposits. It's really -- while we see, it's more aggressive now with the smaller players, as I mentioned. Obviously, in the credit card business, there's always been a lot of entrance and they dominate U.S. banks dominate the card issuance, including the larger bank, so the larger bank so nothing new on that front. Orlando Berges-González: And it's also the credit unions that play in the market, but not coming from the outside. It's entities that have operations in Puerto Rico. Kelly Motta: Okay. Got it. That's helpful. There's some... Orlando Berges-González: I'm sorry. The only caveat. Kelly, I'm sorry, the only caveat is there is 1 player, big player, which is called the U.S. treasury and so the -- you face that with some of the high-end customers that they could move monies into treasuries. Aurelio Alemán-Bermúdez: Yes. Kelly Motta: Got it. That's helpful. There's been a lot of news onshoring early glimmers of that picking up and helping Puerto Rico. Have you seen any notable impacts? And how should we be thinking about that like more from a high level in terms of the potential? Aurelio Alemán-Bermúdez: Yes. I think in the short term, they have announced a few deals, and we will try to put some more detail on that in our investor deck, give you more granular things that have been already approved or negotiated. We're trying to get more data on that. In addition, but we don't see that it's really in the short term. Probably we continue to sustain and improve the construction sector and whatever is related to materials and the labor-related benefit of that. But not necessarily, we see anything that must flow through the economy other than that impact in the short term. As we -- as we see this expansion become operational, then we'll probably see more employment, better compensation and expansion of the workforce, yes. But we don't expect that until probably second half of 2026 or further. But the good thing is a long-term benefit to sustain the economy of the island rather than having a long-term risk by not having this commitment. Yes. Kelly Motta: Got it. That's really helpful. And then I guess circling back to the margin. I know you guys have had -- we saw a nice uplift from on the securities book. Can you remind us about the cash flows on that, 1. And then 2, what the new loan yield originations look like, just so we can kind of get a sense of the potential offset to some of the floating rate dynamics that you already articulated? Orlando Berges-González: So we have about $600 million of cash flows coming in this fourth quarter. The yields on that are around 1.5% on average. So that would be some of the cash flows that we immediately repriced. We also have about $1 billion more in the first half of 2026. That also, on average, are yielding that 1.5% that it's also come due. Obviously, with rates coming down, the reinvestment component, it's a bit lower than what we were -- we're seeing rates somewhere between 50 to 100 basis points lower already in some of the reinvestment options within our policy guidance. And some of it obviously could go into lending, but Aurelio made reference to it would be more on the commercial and residential side. Kelly Motta: Okay. And if your loan book right now is 7 -- 77%, what the new loan origination yields look like, I guess, in Q3? Orlando Berges-González: You're talking about the overall or you're talking about just the -- that's the average yield -- those are average yields, including consumer. If you take a look at the commercial side, mortgages, we're talking about sort of 6%, 6.25% kind of rates, right? It's market as so whatever you see in the market. The commercial portfolio yields are right now overall commercial portfolios, including everything, it's about [ 6.70% ] on average. So that's a combination of what goes into construction or CRE and C&I, obviously. So that -- we are not seeing big changes on spreads. It's a function of the base. The base meaning the base rate, which we either SOFR or Prime, which are the main ones. That would be the 1 the adjustments we'll see, but not necessarily on the spreads, it's a lot more. Consumer yields are going to be similar to what we have now, but it's only an issue of what's the level. We -- consumer on average are about 10.5% that what we have in the blended in the whole portfolio of consumer portfolio. And that stays sort of around those levels, but it's a function of volume more than anything on the consumer. Operator: [Operator Instructions] The next question comes from [ Erin Signaviwith ] Truist Securities. Unknown Analyst: I'm sorry, if you mentioned this, but what's your outlook for loan growth into the fourth quarter? I think you said that NII is expected to be higher despite the kind of flattish NIM just thinking about what you're thinking there on loan growth? Aurelio Alemán-Bermúdez: Yes. We -- I did mention that we -- the guidance that we have for the full year is between 3% and 4%. And I think the original guidance was 5%, mid-single digit. This is actually considering what happened in the auto lending side over the third quarter and actually part of the second quarter. it's the primary driver. Some offset has been provided by mortgage and we do have a fairly strong pipeline in the commercial. Obviously, there's always timing issues on those. But the pipelines continue to help. Unknown Analyst: Okay. And you announced a new share repurchase program, and there's still some remaining authorization from the prior plan. Can you talk about the cadence you're expecting in terms of share repurchases over the next several quarters? Aurelio Alemán-Bermúdez: Well, we've -- we always been opportunistic in the market, and we still have $38 million from this year authorization. We can move back and forth and increase or decrease as we believe is prudent. Again, open market is our approach. No ASRs are on schedule or as part of the strategy. So we'll continue monitoring. Orlando Berges-González: Yes. As I mentioned, were our base assumption continues to be around $50 million a quarter. Obviously, with the flexibility or the optionality of saying a little bit more or a little bit less depending on what are the circumstances on the market. Unknown Analyst: Perfect. All right. And then lastly, just a follow-up on the Mainland M&A question. I mean, it seems like a lot of other Mainland banks are also looking to expand in that geography. Would you say that the environment currently would be somewhat challenging to get a deal done around that area? Aurelio Alemán-Bermúdez: Again, opportunities come and go. So we'll see -- we continue to monitor and see what could happen. I think there's some -- if you see some of the bank reports, obviously, there's a credit side could be more reflected in the U.S., so that could bring opportunities too. Unknown Analyst: Got it. Aurelio Alemán-Bermúdez: These are always a timing opportunity. Thank you. Operator: The next question comes from Steve Moss with Raymond James. Stephen Moss: Orlando, just following up -- and maybe just following up, Orlando, on the margin here in terms of the timing of the cash flows from the securities portfolio. Is that just -- is that throughout the quarter? Or is that kind of late in the quarter to impact the margin? Orlando Berges-González: Well, you saw it's -- it's not really equally spread, but you can assume it's on average, November and December tend to be the highest in terms of the cash flow coming in. You saw that last quarter, we had that 16 basis points pickup. So we had about $500 million for the third quarter that those were the cash flows more or less than we're having the big repricing impact. So we -- and all of it did not benefit the third quarter. Some of it we'll see in the fourth quarter. So it averages out a bit. So we should see a pickup, obviously, with the only difference is what I mentioned that we are seeing rates the options that we have in rates being between 50 to 100 basis points lower based on our policy guidelines of what we put in the portfolio. As you know, we don't put much of credit risk in the portfolio. It's more of an interest rate more than anything. Stephen Moss: Right. Okay. Just I appreciate that color. And then on the loan loss reserve here, you guys have made a number of, I guess, qualitative adjustments, if you will, over probably the last 12 or maybe 18 months -- just kind of curious here kind of as you think about credit performed quite well on the island for an extended period, your consumer credit charge-offs are lower year-over-year, just kind of curious as to where you think that reserve ratio could shake out over the next 6 to 12 months? Orlando Berges-González: It's -- we don't talk about specific guidance like that is specific, but what I can tell you is that -- on the mortgage side, we have seen the trends with the lower charge-offs that our methodology uses historical loss information that is updated all the time. And obviously, as you get more history with better numbers in terms of losses that improves the ratio. So the residential reserves should come down. There is always an uncertainty on the forecast -- the macroeconomic forecast projections. We've seen the stability on the unemployment sector, the unemployment ratios in Puerto Rico reflect on the way the trends are expected on some of the portfolios, especially in when you look at the downside scenarios, we do include in our reserve calculations. So for mortgage, I do expect with the credit expectations we have that it would come down -- continue to come down a bit. The consumer, we're still seeing -- obviously, we had, as you mentioned, the '23 and '24, we saw increases related to those vintages of the older vintages at '22, '23 vintage, we've seen more stability now on the charge-offs, and that includes that affects calculations. So that for now will be sort of stable, I would say, in the meantime. And commercial has been pretty good. So I don't see major changes in commercial. Operator: [Operator Instructions] We have a follow-up from Kelly with KBW. Kelly Motta: Thank you for letting me jump back on. I just wanted to close the loop on the tax rate just given it looks like the FTE adjustment is up a bit and there was some noise in the quarter. Do you have a good like approximation of what the go-forward tax rate looks like here? Is it any materially different after adjusting for some of these onetime time things you had in the quarter? Any help would be appreciated. Orlando Berges-González: The number that we put on the press of effective tax rate of about 22.2%, which is estimated for the full 2025 already reflects some of this expected improvement. So I would say that's a good number to use as a guidance, remember that with a few things here and there. As we reinvest on the investment portfolio, a large chunk of that would have tax benefits. And since we have reinvested our better yields that reflects on the rates, then you have other components of the operations on some of the growth on the commercial lending side that's on a taxable side. So the 22.2%, I think, reflects fairly good number that we should be between that I'm sorry, 22% to 22.5% range. It's what I'm expecting now. Kelly Motta: I apologize. I think it's said in the release. Thank you. Operator: [Operator Instructions] And as we have no further questions in the queue, I will hand back over to Ramon Rodriguez for any final comments. Ramon Rodriguez: Thanks to everyone for participating in today's call. We will be attending Hovde's Financial Services Conference in Naples on November 4. We look forward to seeing a number of you at this event, and we greatly appreciate your continued support. Have a great day. Thank you. Operator: Thank you, everyone, for joining today's call. This conclude the call, please. You may now disconnect. Have a great day.