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Operator: Good morning, ladies and gentlemen, and welcome to the Colony Bank Third Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 23, 2025. I would now like to turn the conference over to Brantley Collins, Communications Manager. Please go ahead. Brantley Collins: Thanks, Joelle. Before we get started, I would like to go through our standard disclosures. Certain statements that we make on this call could be constituted as forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Current and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance but involve known and unknown risks and uncertainties. Factors that could cause these differences include, but are not limited to, pandemics, variations of the company's assets, businesses, cash flows, financial condition, prospects and other results of operations. I would also like to add that during our call today, we will reference our third quarter earnings release and investor presentation, which were both filed yesterday. So please have those available to reference. And with that, I will turn the call over to our Chief Executive Officer, Heath Fountain. T. Fountain: Thanks, Brantley, and thank you to everyone for joining our third quarter earnings call today. We are pleased to report another quarter of improved operating performance. This is a result of our team members' continued dedication to serve our customers and communities with excellence, and our team's efforts, are driving meaningful results. We continue to see improvement in operating earnings driven by net interest margin expansion for another consecutive quarter. We also saw improvement in our operating pre-provision net revenue, indicating continued improvement in core earnings. This earnings improvement, along with improvements in our unrealized losses led to a strong increase in tangible book value for the quarter. We believe we are going to benefit from the Fed rate cuts on the funding side, and that will help margin, but we do expect the rate of the expansion to be slower than what we saw in the earlier half of this year and to be more in line or slightly more than what we saw during the third quarter. I want to take a moment to reflect on just how much we have improved our margin over the last year. Q3 of 2024 was the low point in our margin. And since then, we've seen our margin expand 53 basis points through disciplined relationship pricing, loan growth and the repricing of assets and deposits. I'm pleased that the majority of this increase after tax has fallen to the bottom line as operating ROA improved from 81 basis points in Q3 of last year to 1.06% this quarter. The team has done a great job of allowing margin improvement to increase our earnings while still making strategic investments for future growth. That will continue to be our plan as we move forward and margin expands. We've been very pleased to see meaningful loan growth throughout the first half of this year. While that pace was exceptionally strong, we're now observing that start to settle into a more normalized and sustainable growth rate, which aligns well with our long-term projections and capital planning. This past quarter was around 9% annualized, which is lower than the first and second quarters of this year, but for the year, still around a 14% annualized loan growth rate. We're seeing customer demand pull back a little, some of which we think is customers being cautious about the economic outlook and some of which is customers waiting for rates to fall further before they borrow more money. Based on the pipeline, we think the fourth quarter loan growth is going to be lower than this past quarter, which for the year should put us right around our long-term target of 8% to 12% a year. Our bankers remain committed to serving our relationship customers and look to deepen our relationships with a consultative approach that can grow core deposits and increase fee opportunities. Noninterest income remained solid despite a little slowdown in our SBSL and mortgage divisions. On an operating basis, noninterest income increased over $1 million from the prior quarter. In the third quarter, we saw a meaningful increase in fee income as well as interchange income. In addition, Colony Financial Advisors, Colony Insurance and Merchant all saw strong increases in revenues as those lines of business continue to grow and scale. Operating expenses were slightly higher this quarter as we expected and mentioned on the call last quarter. As we invest in talent and see more activity in various products and services, we expect to see some expense increase to go along with that. This additional expense was offset by additional noninterest income and our operating net NIE to average assets improved quarter-over-quarter by 4 basis points as we continue to focus on efficiency. While recent headlines have focused on one-off credit events at some larger regional banks, our portfolio continues to perform well. Credit quality remains relatively stable overall. Past due and classified loans both improved quarter-over-quarter, reflecting continued strong credit discipline across our portfolio. While criticized loans and nonperforming assets increased, they remain at manageable levels relative to our overall portfolio. Charge-offs were a little higher this quarter, primarily due to variability in our SBA portfolio, which we've discussed previously. At the bank level, net charge-offs remain at acceptable levels and in line with our expectations. With the federal government currently in a shutdown, we've been closely monitoring potential impacts on our business as well as the impacts to our customers and communities. Our teams are prepared to answer questions and provide guidance and assistance to our customers as needed. We reviewed our portfolio to identify customers who may be affected. And at this time, we do not expect any material adverse impacts or credit concerns as a result of the shutdown. We remain focused on staying proactive, supporting our customers and ensuring business continuity throughout this period. The area of our business that is most impacted by the shutdown is our SBSL group, which does government-guaranteed lending. In anticipation of a potential shutdown, we were able to seek approvals on a number of loans prior to that shutdown. Our team is currently focused on continuing to develop new business and process loans as far along as possible during this time. Our ability to get final approvals and loans sold will be impacted, but we believe that as long as the government gets back open this quarter, the impact should be minimal. Turning to our pending merger with TC Bancshares and TC Federal Bank, I'm pleased to report that everything continues to progress as planned. We filed our regulatory applications in August, and our S-4 registration statement has been declared effective by the SEC. Both companies are well into the process of shareholder approval, which we expect to have at our meetings in November. We continue to expect the transaction to close in the fourth quarter with system conversion planned for the first quarter of next year. Coordination between our 2 organizations has been excellent. The teams are working closely together and integration planning is well underway. We're very excited about bringing our companies together and leveraging the strengths of TC Federal's franchise to expand our market presence and create new opportunities for our combined organization. We have made and communicated employment decisions for the combined company post the merger, and we are on track to achieve the financial metrics of the deal that we laid out at the announcement. As we think about M&A going forward, we are optimistic that there will be opportunities for Colony to participate in further M&A next year. We continue to proactively have conversations with banks that we feel will be a good strategic fit with Colony. We also expect that a smooth integration with TC will be beneficial to those discussions. We are also being very strategic about opportunities to grow our customer base and talent pool from the disruption that is occurring in our footprint with the other bank M&A that we are seeing. In terms of talent, we're very excited to welcome Mitch Watkins, a seasoned and well-respected banker to our Columbus, Georgia team. Mitch brings extensive experience and strong local relationships that will further strengthen our presence in this important market. We remain focused on investing in talent acquisition that supports our growth strategy and helps us solidify and expand our market position across our footprint. We look to make very strategic additions where it makes sense in commercial banking, wealth and mortgage. Lastly, I'd like to take a moment and recognize one of our team members, Hugh Holler, our Director of Homebuilder Finance, who was recently inducted into the Homebuilders Association of Georgia Hall of Fame. This is a tremendous and well-deserved honor that reflects Hugh's deep commitment to this industry and the respect he's earned throughout the homebuilding community. We're fortunate to have Hugh on our team. He exemplifies exceptional customer service, servant leadership and strong relationship banking, and we congratulate him on this outstanding achievement. With that, I'm going to turn it over to Derek to go over the financials in more detail. Derek Shelnutt: Thank you, Heath. Operating net income increased $252,000 from the prior quarter. This increase is attributed to higher net interest income and operating noninterest income, offset some by increased provision and operating noninterest expenses. Operating pre-provision net revenue, shown on Slide 11 and in our earnings release under non-GAAP measures, improved both quarter-over-quarter and year-over-year. This sustained growth highlights the continued momentum and strength of our core earnings power. Net interest income increased $314,000 compared to the prior quarter by continued asset repricing and loan growth. Our cost of funds for the quarter was 2.03% compared with 2.04% in the prior quarter. As mentioned last quarter, we expected our overall funding costs to remain flat. The Fed cut late in the quarter will have more impact in the fourth quarter, and we expect to see that cost of funds number decline. Net interest margin increased 5 basis points from the prior quarter, which was a little slowdown from the increases we saw earlier in the year. We expected this and mentioned it on last quarter's call. Our margin stands to benefit from the September Fed cut and any other cuts we may get in the fourth quarter. With more normalized loan growth expectations, we don't believe it will be a huge jump in margin quarter-over-quarter, and we are anticipating that to be in the single digits going forward. Third quarter operating noninterest income increased just over $1 million. Service charge and fee income increased $425,000 with some of that being activity-based and some being a result of a process we went through late in the second quarter to evaluate and adjust our fees. Other noninterest income increased $788,000, driven by increased interchange fee income, improved income from wealth insurance and merchant services as well as a onetime gain from one of our fintech investment fund partnerships. Slide 20 shows the improvement in third quarter for Wealth, Insurance and Merchant Services. Mortgage and SBSL activity has been a little slower this year, and mortgage was even slower in the third quarter. This is driven by changes in SBA lending guidelines on the SBA side and a slower housing market on the mortgage side. Operating noninterest expenses were up $624,000 quarter-over-quarter, reflecting continued investment in our people and growth initiatives. Compensation and benefit costs were higher in the quarter related to strategic hires to support our growth and business development strategy. A portion of those new hire expenses are short-term salary guarantees for commission-based employees, and those will end in the fourth quarter. Technology and innovation remains a focus for our long-term growth and technology expenses were higher quarter-over-quarter as we continue to invest in ways to improve long-term efficiency and provide for a state-of-the-art customer experience. We remain very disciplined in managing expenses and maintaining our focus on efficiency. We are confident in our ability to balance cost control with the strategic investments that position us for long-term organic growth. On an operating basis, the increase in noninterest income more than offset the increase in noninterest expense. Our operating net noninterest expense to average assets improved 4 basis points from the prior quarter to 1.48%. On a go-forward basis, we still target a net NIE to assets of around 1.45%. Fourth quarter expenses will likely include at least 1 month of TC Federal expenses post merger. Our systems conversion is planned for the first quarter, and we plan to achieve our targeted cost saves in the second quarter and beyond. Onetime merger-related costs during the quarter were $732,000, and that was an adjustment to operating income. Also during the quarter, in our 10-Q last quarter, we disclosed a wire fraud incident where the company was the target and losses totaled $2.9 million. Upon recent new information, a portion of that loss that we believe to have been fully covered by insurance has become disputed. And in accordance with accounting standards, this quarter, we recognized a $1.25 million loss related to the disputed coverage. This is reflected in our adjusted income. All other coverages remain undisputed. We do not expect any other losses related to this matter, and we'll continue to pursue all avenues for recovery. Any recovery will be recognized as nonoperating income in future periods. Provision expense totaled $900,000 for the quarter, an increase from the prior quarter, driven by loan growth and charge-offs in our SBSL division. As we've mentioned before, SBSL charge-offs can have some variability, and that's what we experienced this quarter. Many of these SBSL charge-offs are related to older loans before we tighten credit requirements and often involve lower SBA guarantee percentages. This quarter represents the peak for charge-offs at SBSL. We do not expect them to increase from here. These are primarily variable rate loans, so a declining rate environment should provide some relief going forward. On the bank side, charge-offs remain low and past dues improved quarter-over-quarter. We've seen more activity in loans moving in and out of classified and criticized, and our team has done a good job of working these loans. There's been a lot of recent media attention on credit challenges at some regional banks, particularly related to shared national credits. I want to note that we do not participate in any shared national credits and our exposure to participation loans is very limited. Our lending strategy remains focused on relationship-based locally originated credits where we know our customers and markets well. Loans held for investment increased $43.5 million from the prior quarter. As Heath mentioned, we are seeing that growth rate moderate some from the early half of the year, and that will put us near our long-term targeted growth rate. Slide 34 shows our weighted average rate on new and renewed loans of 7.83% during the quarter. And when you compare that to our repricing schedule on Slide 36, we still have opportunity to gain yield on maturing fixed rate loans as well as investments cash flow even if rates move down some from here. Total deposits increased $28.1 million during the quarter. Part of that growth reflects our strategic use of brokered funding to replace seasonal municipal deposit runoff. We expect those municipal funds to return in the fourth quarter as tax revenues are collected, which is consistent with the historical seasonality we've typically experienced. We remain focused on building and deepening customer relationships that bring in high-quality, lower-cost deposits, which continue to be a core priority for our growth strategy. During the quarter, we sold securities for a pretax loss of around $1 million that netted close to $75 million in proceeds. Under the assumption of using half of those proceeds to fund loans and half to increase liquidity, our modeling indicated an earn-back of less than 1 year. The book yield sold on those investments was close to 3.16%. So there's opportunity to pick up meaningful yield there and increase interest income. We will continue to evaluate the need for future sales as well as consider a larger transaction as part of those evaluations. We did not repurchase any shares during the quarter, but continue to review the need for any repurchases based on capital needs and market conditions. This week, the Board also declared a quarterly dividend to shareholders of $0.115 per share. We're still in the process of filing a new shelf registration as part of our capital management strategy and expect that to be filed very soon. Our TCE ratio at the end of the quarter was 8% compared to 7.43% for the same quarter last year. Tangible book value per share increased to $14.20 from $12.76 a year ago, reflecting consistent growth in tangible capital and our continued success in building long-term shareholder value. Slide 20 highlights our quarter-over-quarter pretax profit for our complementary business lines. Mortgage had a slower quarter with production being down slightly compared to the second quarter. Expenses were a little higher due to some strategic hires of mortgage lending officers and the upfront cost and short-term salary guarantees associated with those hires. We believe these new MLOs will drive profitable growth for our mortgage division. The housing market and volatile interest rates have also caused some headwinds that contributed to the lower production during the quarter. SBSL was flat compared to pretax income in the prior quarter. The increased charge-offs were offset with decreased expenses. And as we see prime rate move lower, that should reduce some of the stress on the charge-off side. Marine and RV lending has had a good year and continues to improve. Pretax income is up $100,000 quarter-over-quarter. Loan balances are now around $90 million and have increased $45 million year-over-year. We are looking into the potential for pool loan sales, which could provide a good source of noninterest income. Pretax income for both the Merchant Services and Colony Wealth Advisors increased meaningfully from the prior quarter as those business lines continue to grow and perform well. We are excited about the performance and the outlook of these 2 lines of business. Colony Insurance closed on the OE acquisition in May and the second quarter was a focus on integration. The team is now focused on growth, referrals and sales targets with income increasing in the third quarter and continuing to scale. And that concludes my overview. And now I'll turn it back over to Heath before we take questions. T. Fountain: Thanks, Derek. And again, thanks to everyone for being on the call today. We're very pleased with our performance this quarter. That's all of our prepared remarks. And with that, I'll call on Joelle to open up the line for questions. Operator: [Operator Instructions] Your first question comes from Dave Bishop at Hovde. How about given the disruption in D.C. seeing any trickle down to your borrowers and local economy? T. Fountain: All right. Well, I appreciate Dave getting that question in. As I mentioned earlier, we are on the lookout for that. We really don't see a lot at this time. We have provided our team and our customers with resources to help out as we see things, and we scrub the portfolio to see if we have any exposures that we're concerned about. But at this time, we don't think there will be a material impact. We don't see any issues arising. Of course, I did mention the SBSL team and the government guaranteed loans and what -- that there could be a potential impact there just as if it drags out longer. But we think if we get a resolution within the next little bit, it shouldn't have too much of an impact on Q4. So we feel pretty good about where that is overall at this time. Operator: Related to loan pricing, what is the average roll-on versus roll rate this quarter and how NIM outlook looks? Derek Shelnutt: Yes, absolutely. I'll take that one. Great question. So when you look at the roll-off yields from our previous repricing schedule or our previous released investor presentation for the prior quarter, we had fourth quarter roll-off yields in the 5% range. And so our put-on yield for the new quarter is also in our investor presentation, and it was -- the new and renewed rate was 7.83% for this quarter. So you can see there we have some meaningful pickup in yield. And even with rates moving down a little bit, we'll continue to see that. That will drive some net interest margin growth. We expect that net interest margin growth to be both on the cost of fund side and the asset repricing side. But ultimately, going forward, we expect a modest growth in the single-digit range, but a little bit higher than what we saw this past quarter as we take advantage of some of those Fed rate cuts. Operator: Any NDFI loan exposure as well? T. Fountain: No, that's a great question. I appreciate Dave getting that question in, and we do not have any meaningful exposure to that. And I know that's been another area that we've seen a lot of concerns about and seen some situations as some other banks, larger banks have reported. And back to our comments that we made earlier, our real focus in our organic growth strategy has been to bank customers that we know, that are in our footprint, that we have a relationship with or even that our bankers have maybe had relationships with at other banks in the past. So we really focus on the customers we know and the kinds of business that we think we can understand and adequately assess the credit risk. Operator: There are no further questions at this time. I will now turn the call over to Heath for closing remarks. T. Fountain: Okay. Well, thanks again, everyone, for being on the call today. We're really pleased with how the quarter went and excited about the things happened in Q4 with TC and continued improvement in our margins. So we're very excited about where Colony is headed, and we appreciate you being on the call today. Thank you. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good day, everyone. My name is Leila, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Third Quarter 2025 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Chief Investor Relations Officer. Lynn Tyson: Thank you, Leila, and welcome to the Ford Motor Company's Third Quarter 2025 Earnings Call. With me today are Jim Farley, President and CEO; Sherry House, CFO; Andrew Frick, President, Ford Blue and Model e; and Kumar Galhotra, Chief Operating Officer. Joining us for Q&A will be Cathy O'Callaghan, CEO of Ford Credit; and Steve Croley, Chief Policy Officer and General Counsel. Also with us is Alicia Boler Davis, President of Ford Pro. Jim will give a high-level overview, followed by Kumar on industrial progress, Andrew on market dynamics and Sherry on our financial review and guidance. We'll be referencing non-GAAP measures today. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck at shareholder.ford.com. Our discussion also includes forward-looking statements. Our actual results may differ. The most significant risk factors are included on Page 20 of our deck. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS and free cash flow are on an adjusted basis. Upcoming IR engagements include Andrew Frick at the Scotiabank Conference in Toronto on November 18 and Sherry House at the Barclays Conference in New York on November 19. Now I'd like to turn the call over to Jim. James Farley: Thanks, Lynn. Before I get started on earnings, I wanted to welcome Alicia Boler Davis to our team and to all of you. Her leadership is critical as we build our incredible powerhouse, Ford Pro into a durable product software services powerhouse. Alicia will cover Pro starting on our fourth quarter earnings call. I'd like to thank the Ford team as well as our suppliers and all of our dealers for delivering a very strong quarter. We not only solidly beat expectations, but our underlying performance has us on track to raise our full year 2025 EBIT guidance if it weren't for the impact of the Novelis fire in Oswego, New York. Sherry will provide details of the financial impact of the Novelis fire, and I'm very pleased with our team's swift and decisive response to this challenge. We immediately mobilized a dedicated crisis team worked around the clock with Novelis to secure alternative aluminum sources for our operational lines and accelerate the plant's recovery. Several top leaders and I personally visited the site to support all of these efforts. In addition, we are adding up to 1,000 new jobs to increase F-Series production to recover lost volume and fulfill strong customer demand. We have made substantial progress in a very short time frame in both reducing the 2025 impact and putting in place an exciting recovery plan for next year. Turning to our results. Our Ford+ plan delivered a record $50.5 billion in revenue and $2.6 billion in adjusted EBIT. Once again, we made meaningful progress in cost and quality, thanks to the disciplined execution of our industrial team. Kumar will share more details. I'd like to thank President Trump and his team for the recent tariff policy developments, which are favorable to Ford as the most American auto manufacturer. Credit based on our large U.S. manufacturing volume will allow us to offset tariffs on imported auto parts we need for our strong American production and manufacturing base. In addition, tariffs leveling the playing field for those imported medium and heavy-duty trucks is a positive for Ford because we are no longer disadvantaged for building every single one of our Super Duties here in the United States. We also continue to watch for relief from tailpipe emissions, which may come as soon as the end of this year. Federal legislation has already scaled back California ZEV rules, and we anticipate a meaningful reduction in federal requirements next year. We are adjusting our product mix accordingly. Our Ford+ plan is designed to win in the market among 4 key trends. Markets are more regional now. We all need tailored strategies. Customers are more fragmented between retail and commercial. This requires unique services and digital solutions for both. The competition is getting tougher, namely the Chinese OEMs are expanding globally. And the industry faces lower returns due to the EV overcapacity and global pressures. Thankfully, our strategy plays to our strengths at Ford, iconic work vehicles, passion products like Mustang and the off-road franchises like Bronco and Raptor. We're also prioritizing hybrids across our lineup, including the development of extended range hybrid options. In the near term, I believe EV adoption will now only be about 5% of the U.S. market, but this is going to grow, especially for affordable EV vehicles. We are well positioned for this with the universal EV platform, which underpins digitally advanced, very spacious and appealing products that start at around $30,000. This is not a distant plan. It's right around the corner for us at Ford. Sourcing is at 95% complete now. We are testing vehicles. We'll begin installing equipment in Louisville for the UEV later this year, and we are on track to start production of our LFP cells at Marshall, Michigan plant later this year. To compete, we need innovation and hyper cost efficiency. In this capital-intensive environment, smart partnerships will be essential to us. And our largest near-term opportunity is closing that cost gap and achieving world-class quality. Kumar? Kumar Galhotra: Thank you, Jim. Our industrial platform is delivering tangible progress in quality, cost and modernization. Improving quality is the single biggest driver to close our cost gap. Better quality lowers warranty expense and reduces recalls. Four key elements are essential for sustainable warranty cost reduction, seamless launch execution, minimal defects, greater reliability and durability and time. You need time to clear the car part of old issues. It all starts with a clean launch. A bad launch creates years of warranty and recall problems. Over the past 2 years, we have radically improved our launch quality. We are on track for best-in-class performance across 6 nameplates with 3 more nameplates in the top quartile. This is based on J.D. Power Warranty Analytics Data. Also, Ford was the most awarded brand in J.D. Power 2025 U.S. initial quality study. We're also catching defects earlier in the process through rigorous engineering reviews where leaders sign off to ensure accountability and fixes happen in real time. Our next focus is on long-term reliability and durability. We've identified the specific parts and systems needed to achieve industry-leading reliability. To get there, we've implemented a new powertrain testing regimen that is up to 7x longer than before. It includes extreme use cases that help us find issues we previously only found years after the vehicle was in the field. Now it takes time for these improvements to improve our recall numbers as older models have to work their way out of the system. But we're already seeing our recall costs shift towards more aged vehicles. And since the peak recall period is in years 3 to 5, we expect a meaningful improvement soon. On cost, we delivered another quarter of year-over-year improvement and are on track for a net $1 billion improvement this year, excluding the impact of tariffs. Lower material costs, freight and duty efficiency and lower warranty contributed to this. This is the result of a fundamental change in our team's operational DNA. We have dedicated work streams, reducing the cost of parts, optimizing repair times and transforming how we negotiate with our suppliers. We're also modernizing our facilities and IT to unlock the next level of efficiency. We are systemically deploying AI across the entire industrial system. For example, we have significantly improved CAD loading times to less than a minute. And we have added 900 AI-powered cameras across our plants to detect quality issues at the source and help us mitigate supply disruptions. Thank you. And now over to Andrew. Andrew Frick: Thank you, Kumar. I will start with Ford Pro, which is thriving due to our diverse vehicle lineup, service parts penetration and growth in our integrated software and services. Our specialized dealer network is a significant competitive advantage that is difficult to replicate. Dealers recognize the importance of customer uptime, and they continue to invest, adding another 1,700 service bays and 500 mobile service fans over this past year. This makes Ford the largest mobile fleet in the U.S., providing a structural advantage and brand differentiation for both Pro and retail customers. We have intentionally diversified our revenue streams for more durable profits. For example, softness in government sales this year was offset by strength in small to medium businesses or SMB. Our channel mix is now well balanced across large corporations, SMBs and government and rental fleets. In software, Pro's paid subscriptions grew 8% to 818,000 subscribers, and we're also seeing growth in our ARPU and attach rates. This is producing a flywheel effect. For example, customers who subscribe to our fleet software have a service parts capture rate up to 20 points higher, which also helps us win sales from new competitors in multi-make fleets. There is upside to software via strategic partnerships. Our new partnership with ServiceTitan, the largest software provider to the trades is a notable example of this. We are embedding our real-time vehicle data directly into their workflow, combining the insights from Ford Pro's data services with ServiceTitan's Fleet Pro software for a real-time view of fleet vehicle data. Customers will be able to manage vehicle maintenance, streamline services and simplify repairs. Now in our home market, industry conditions were strong this quarter with a SAAR of $17 million in positive pricing. Our total U.S. share grew to 12.8% with growth outpacing the industry despite our phaseout of the edge, driven by key products like F-150, Bronco, Explore and Expedition. In fact, the all-new Expedition is red hot, gaining over 3 points of segment share with 75% of customers choosing high-end trims like Tremor. And we continue to lead the hybrid truck market with about 70% share. Lastly, our ample inventory does position us for a strong fourth quarter and helps to insulate our retail sales from the near-term impact of Novelis. We will end this year with leaner retail stock levels between 55 to 59 days supply, with gross stock down 11%. As we look at 2026, even with our net recovery, we forecast being down roughly another 6% to about 520,000 units of gross stock, a disciplined approach yet still leaving us headroom to look for more market opportunities. Now I'd like to turn it over to Sherry. Sherry House: Thank you, Andrew. Ford continues to make great strides in our journey to build a higher growth, higher margin, more capital-efficient and durable business, and that progress is evident in our ongoing performance. In the third quarter, our strong product lineup drove global revenue growth of over 9%, roughly 1.5x faster than our growth in wholesales. And we delivered adjusted EBIT of $2.6 billion, flat with the prior year despite absorbing a net tariff headwind of $700 million. The durability of our business is strengthening. Over the past 3 years, total company EBIT from software and physical services has grown by over 20%, and our revenue growth has diversified across regions, segments, channels and software and physical services. Furthermore, our industrial system has delivered on their commitment to consistently deliver cost improvements, excluding the impact of tariffs. Total company adjusted free cash flow was strong at $4.3 billion in the third quarter with $5.7 billion year-to-date. We ended the quarter with nearly $33 billion in cash and $54 billion in liquidity. Our balance sheet is a competitive advantage. We are disciplined in our capital allocation strategy, and we are focused on the areas driving expected profitable growth such as our UAV platform launching in 2027. We remain committed to our investment-grade rating and returning capital to shareholders. Today, we announced the declaration of our fourth quarter regular dividend of $0.15 per share payable on December 1 to shareholders of record on November 7. Now turning to the segments. Ford Pro delivered another solid quarter. Revenue was $17.4 billion and EBIT was $2 billion with a robust double-digit margin. Revenue and volume grew by 11% and 9%, respectively. Growth in EBIT was driven by volume and continued improvement in warranty and material cost, partially offset by tariff impacts and pricing normalization in Europe and North America. Ford Model e delivered both revenue and volume growth, driven by new product introductions in Europe. EBIT losses increased due to lower net pricing and an increase in spending on our next-generation vehicles. Let me give you additional color on Model e. Year-to-date, Model e is at a $3.6 billion loss. Roughly $3 billion of this is from our first-generation products, Mach-E, Lightning, Puma, Explore and Capri. The balance is investment in our next-generation vehicles, including our UEB platform. The only practical way to improve the profitability of our Gen 1 vehicles is through one of the more of the following: pricing, new cost reductions and improved fixed cost leverage. Given current industry trends, it's clear scaling fixed costs is a challenge for most of the industry. You can see this in a multitude of recent program cancellations and charges globally. We've been proactive. Over 2 years ago, we reduced our planned battery capacity by 35%. And last year, we canceled our 3-row program, making room for additional commercial vehicle volume. Clearly, near-term U.S. customer and market realities for EVs continue to evolve. We will have more to share about how we are adapting to these changes at a later date. Ford Blue achieved EBIT of $1.5 billion, with revenue growth exceeding the rate of wholesale unit growth, highlighting the strength of our diverse product lineup. Higher costs were driven by tariffs, which muted progress in warranty. Adverse exchange was also a headwind driven by a weaker U.S. dollar against the euro and Thai baht. Ford Credit delivered over $600 million of EBT, up 16%, reflecting improved financing margin. Ford Credit also made a $350 million distribution. We continue to originate a high-quality book with U.S. retail and lease FICO scores again exceeding 750 for the quarter. So let me turn to our 2025 outlook. Excluding Novelis, our underlying business continues to perform well. In fact, we are tracking at the high end of the adjusted EBIT guidance range we provided in February of between $7 billion and $8.5 billion. This original guidance was provided before tariffs, which we have fully absorbed. Additionally, adjusted free cash flow is trending better than the guidance we provided in July of between $3.5 billion and $4.5 billion. Between 2025 and 2026, we expect Novelis to be a headwind of $1 billion or less. For 2025, we expect an adjusted EBIT headwind of $1.5 billion to $2 billion in the fourth quarter for Novelis, and we currently have line of sight to mitigate at least $1 billion in 2026, and we are working to improve the situation further. We also expect an adjusted free cash flow headwind of $2 billion to $3 billion in the fourth quarter. Keep in mind, the production disruptions result in an oversized short-term impact on our working capital, which will reverse next year. Given the recent announcements by the administration, we now expect tariffs will be a $1 billion net headwind for 2025, down from $2 billion. This brings our updated adjusted EBIT guidance for 2025 to between $6 billion to $6.5 billion with adjusted free cash flow of between $2 billion and $3 billion. Our full year outlook also assumes U.S. industry SAAR of about 16.8 million units, U.S. industry pricing of about 0.5%, a net cost improvement of $1 billion, excluding the impact of tariffs; and lastly, capital expenditures of about $9 billion. Turning to 2026. While it's premature to give guidance, I want to share some puts and takes as you think about the industry and Ford. First, we have line of sight to recover at least $1 billion related to Novelis. For tariffs, we expect a net full year impact similar to 2025. For compliance, the evolving global emissions landscape is expected to eliminate 2026 compliance headwinds, thereby unlocking opportunities to optimize our mix of ICE, hybrids and EVs and reduce reliance on credits. And for cost, we plan to deliver another $1 billion of cost improvements across our industrial system, which will be redeployed to strategic accretive ICE and hybrid cycle plan actions. Additionally, UAV platform spending will continue to increase as we ramp our Marshall LFP battery plant and change over to the Louisville assembly plant ahead of the 2027 launch. Before we go to Q&A, let me end with this. Our underlying business is strong. And importantly, we are starting to more consistently execute and deliver our Ford+ plan. I'll now turn the call over to the operator. Operator: [Operator Instructions] Your first question will come from the line of Joseph Spak with UBS. Joseph Spak: Maybe just a couple of points of clarification. I guess I want to understand why, as of now, you only think you could recover about $1 billion of the impact from Novelis. And then also just in some maybe breaking news, there was a journal article which said Novelis plans to have the plant back up by the end of the year. So is that sort of in line with your thinking and then considered in your outlook? Kumar Galhotra: Yes. Thanks, Joe. This is Kumar. Thanks for the question. And thank you for your very thoughtful paper on this earlier. Yes, that is in line with our communication with Novelis. The hot mill which is down now will be operational in late November, early December. It will then go through a quick ramp up through December. Between now and end of the year, we'll probably lose 90,000 to 100,000 units in fourth quarter. We announced today that we will add a third shift at Dearborn truck plant and higher line speed at Kentucky Truck. So through those actions, we expect to make up roughly 50,000 of those 100,000 units in 2026. James Farley: I would just add, it's important to realize that the makeup capacity next year will largely depend on Ford's capacity makeup. If we have more availability of aluminum, the real lever for us is going to be our own upside. And we're working through that. This is still early days. We'll have a lot more to update through this quarter and into next year's guidance. But please understand that's not Novelis restriction. Kumar Galhotra: Yes. Thanks, Jim. All F-Series plants were already running 3 crew and Dearborn wasn't and now it will run 3 crew as well. So the factories are basically flat out. Joseph Spak: Okay. Maybe just one more, and I guess it's unfortunately, we keep on having to bring these things up. But maybe you could just update us on how you're viewing any potential disruption from [ Nexperia ] chip impact and what kind of supply you have or alternative supply and whether there's anything considered for that as well? James Farley: We see this as a political issue. We're working with U.S. and Chinese administrations. I was in D.C. yesterday actually, and this issue is top of mind for every official we met in the U.S. government. They're very well aware of it, working to resolve it. These are fairly common parts, mature node semi components like diodes and transistors. We're maximizing our buy of these components. We got really good at doing that during the chip crisis. I think all the OEMs are doing the same thing. At the moment, the runout dates look very close to the date when we may see a resolution. It's an industry-wide issue. A quick breakthrough is really necessary to avoid fourth quarter production losses for the entire industry. That's all I'm willing to say at this point. Operator: Our next question will come from Dan Levy with Barclays. Dan Levy: Kumar or Jim, I wanted to actually just go to the topic of warranty. And thank you, Kumar, I think you unpacked some of it. But it looks like your warranty expense was better year-over-year. You're talking about $1 billion of better cost next year as well. And I'm wondering if you could just update us where we are on the path to breaking that cost curve on warranty. I know this is sort of the question that keeps on coming up, but we've heard about the improvements in the J.D. Power survey and the efforts you're taking. But when do we start to see this finally show up materially in the numbers? Kumar Galhotra: Thanks for the question. Let me make 2 points. First, the warranty is obviously made up of coverage and FSA costs. FSA costs are not simply a function of number of units. For example, software, OTA repairs and other repairs like that are significantly cheaper. And as you mentioned, our initial quality has improved substantially. And the reduction in those coverage costs is expected to offset any potential increase in FSA. And I use the word potential increase intentionally because given the large car part, it is somewhat difficult to precisely forecast the FSA number and the FSA cost. But next year, we expect the total cost coverage plus FSAs to also go down. James Farley: And I also want to highlight our Q3 warranty costs were down year-over-year. Kumar Galhotra: Correct. Sherry House: $450 million. James Farley: Yes. It was a big -- a really big achievement by the team, really seeing that coverages flow through one of the reasons why we were able to offset the tariffs. Dan Levy: Great. As a follow-up, I wanted to ask a question about industry competitive dynamics. And I know that the incremental 50,000 units of capacity is really just to make up for some of the lost volume from '25 here from the fire. But you're raising your capacity. We know that your other competitors in trucks are taking some capacity actions as well. What is your comfort that the industry price discipline that we've seen can be maintained even with this incremental capacity coming online? Andrew Frick: Yes, Dan, it's Andrew. Thank you for the question. As we look at the industry pricing this year, it's up about 0.5 point, and we expect that to remain strong. And when you look at the strength of some of the segmentation out there like full-size pickups, it also remains very strong within the industry itself. So we see strength as we move forward in those key segments, which are very important to us. James Farley: And the reason why we feel comfortable is when you look at the underlying segment drivers, fuel price, construction, they're very strong for those segments. And as well, our competitors and Ford have a relatively new lineup. We have a new Expedition Navigator. We have a very still new F-150. We are -- the Super Duty is basically still brand new, and we have hybrid lineup that others don't have. So I think it's a combination of our optimism about the freshness of our lineup as well as the underlying drivers of the segmentation. Operator: Your next question will come from Mark Delaney with Goldman Sachs. Mark Delaney: I want to start on emissions. Jim, you mentioned last quarter that the new emissions rules could be a multibillion-dollar opportunity for Ford over a 2-year period. And Sherry, you said today about the company having opportunities to optimize on mix for next year. So is that multibillion-dollar figure still the right metric for investors? And should investors think about that as being all additive to current EBIT? Or is some of this about avoiding future compliance costs that will no longer come into effect? James Farley: There's 2 -- thank you for your question. There's 2 principal drivers for investors for emissions in the U.S. to think about. The first is a different regime, if it's confirmed in December, whenever it will be, will allow us to minimize the cost of credits that we would buy. We had those as optionality and we don't have to use them. Sherry House: That's right. James Farley: That's a really big advantage. The second one is the monetization of that is very much centered around mix, mix of powertrains, mix of series, mix of vehicles. So even if we have basically maxed out industrial manufacturing capacity, we still have lots of levers to sell what customers really want. And we'll put a finer point on all that in the year-end when we look at next year's guidance. Anything to add, Sherry? Sherry House: Yes. Just that we have purchase obligations about $2.5 billion, and we think a lot of that may go away with Q4. And we're already 40% lower from where we started the year with the purchase obligations because the ZEV-related credits went away. We had no obligation any longer to those contracts. So that's a big part of what is being reduced. Mark Delaney: My other question was about better understanding what's happened with profits in the business this year, excluding tariffs and the aluminum issue. If I walk from the midpoint of the EBIT guidance given with the July call, I add in the $1 billion lower tariff headwind and then subtract the Novelis cost, you end up right at the midpoint of your new EBIT guidance for 2025. So it doesn't appear on the surface that the 3Q strength is continuing into 4Q and maybe there's some timing that's happening in 3Q and goes away. But maybe that's the wrong interpretation and really, you're tracking more to the high end of the outlook for the year. So any more color you can share around how to think about profit trends in the core business would be helpful. Sherry House: Yes. So let me just start by saying our business has been performing exceptionally well. And as a result, we would have guided $8 billion plus. With that, you take out the Novelis EBIT impact of $1.5 billion to $2 billion, and that's how you get to the $6.5 billion. If you would have taken our prior guidance of $6.5 billion to $7.5 billion and took out the $1.5 billion to $2 billion, we would have been guiding at 5% to 5.5%. So indeed, we do have progress in the business. It is partially because of the improvements in the tariffs, and that's going to be $1 billion. But before we even got to that, we've had material cost improvements. The credit business has been performing well and pricing and volume has also been strong. Operator: Our next question will come from Doug Karson with BofA. For our next question, we'll go to Edison Yu with Deutsche Bank Research. Xin Yu: Can you hear me? Operator: We can. Please go ahead. Xin Yu: First one, I think you mentioned that looking at next year, the tariff impact should be similar. Can you just walk us through some of the assumptions around that? I would have thought some of maybe the changes in policy could help. Sherry House: Yes. So the changes in policy, the proclamation that happened last Friday gave us $1 billion of benefit. And that's now allowing us to offset more of our parts tariffs expense. So that's going to be the primary improvement that we saw that was driving the $1 billion that I just talked about, leading to just a $1 billion net impact for this year and enabling us to have a similar impact on tariffs and costs for next year. So basically, what's going to be left is you're going to be left with the -- with auto parts tariffs that don't have offset steel and aluminum, in particular, and that's going to be both the tariffs of steel and aluminum as well as any of the pricing impacts that come through and then any of the vehicle import tariffs that are not offset by the U.S. content offset that we're allowed. James Farley: And the time frame is different. This year was a partial year, next year is a full year. Sherry House: That's right. But when you look at the impacts, we're expecting it to be very similar this year. Xin Yu: Understood. And then just a follow-up on, I think, some of the comments you made about Model e investment. I guess how are we thinking about the Skunkworks efforts now? Obviously, you talked a lot about the emissions being a huge potential tailwind. But obviously, there's -- you spent all this effort on the next-gen EV platform. Are there -- just high level, are there kind of changes we're thinking about related to that? How does one kind of move forward? James Farley: Great question. The EV North America market we're seeing now in the fourth quarter of this year, I believe will be -- we believe will be very different in '27 through '35 when that vehicle is out in the market. And so 2 things to think about. First of all, the UEV was designed for 2 priorities: the lowest possible cost platform with multiple top hats in one facility and designed to really compete in the heart of what we believe is the new EV market in North America, which is affordable commuter vehicles. We expect adoption will increase over time and the market continue to evolve and maybe even regulations evolve. We think this product is literally at the center of the future of the EV market in the U.S. Operator: Our next question will come from Ryan Brinkman with JPMorgan. Ryan Brinkman: Regarding Novelis impact, clearly, there's some shifting here of production and wholesales impacting the cadence of earnings and cash flows that matters to investors. Maybe with regard, though, to the impact on retail sales and the customer, what are you expecting there? It looks like at the end of September, you were fortunately sitting on an 88-day supply of F-Series more than GM at 70 days, full-size pickup segment average, I think it's 78 days. And of course, you operate with far less during the chip shortage. So how do you think about that impact or about managing that impact from a customer perspective? Andrew Frick: Yes. I think -- this is Andrew. Thanks for the question, Ryan. We believe we have enough stock to insulate us from the impact of Novelis in the fourth quarter given where we started the quarter. And that's why I wanted to make the comment on where we expect to end the quarter in the midpoint of our range just to give you confidence in how we're managing the Novelis impact. Operator: For our next question, we'll return to Doug Karson with BofA. Douglas Karson: I'm not sure if you could hear me. Operator: We can. Please go ahead. Douglas Karson: Ford and Ford Credit both have very strong balance sheets. It's a true asset, certainly for bondholders and I think equity alike. The leverage has been very low. The cash balance is very high. And in late September, [ Gordon ] Ford Credit rolled out what appeared to be a successful plan to offer subvented financing the F-150 to subprime customers, kind of providing them an opportunity to enjoy a lower loan rate kind of reserve for higher FICO scores, perhaps easing some affordability issues. So maybe you can kind of explore what opportunities you could maybe provide your customers through creative strategies around loans and rates given the strong balance sheet. Sherry House: Thank you for the question. Yes, we ran at the last few weeks of September, what we call a no tier upgrade marketing program, and it really was to generate news for the F-150. We haven't changed our purchasing policy or our risk appetite, but we're really focused on ensuring that we use these sort of incentives to structure deals for customers that they can afford their monthly payments on a sustainable basis. So I think this program -- this program proved to be very effective. Overall, it didn't change our average FICO scores. In fact, it went up. But these are sort of opportunities that we can look at on an ongoing basis. Douglas Karson: Just so I'm clear, I believe your subprime is a very small part of the overall book... Sherry House: Very small. Yes, it's very small. In fact, our high-risk portfolio mix is just 3%, and it's been very sustainable at that 3% for quite some time now. Douglas Karson: Okay. I think that's comforting for people, but also maybe an opportunity to expand some loans to more subprime and potentially get more sales done wouldn't be a terrible thing also. So I appreciate the question and the answer. I appreciate it. Sherry House: Yes. Thanks. We are concentrated on helping sell more products. So we're very open to new ideas. Douglas Karson: You must have some dealer friends. James Farley: I wish. Operator: Our next question will come from Itay Michaeli with TD Cowen. Itay Michaeli: Just wanted to go back to the powertrain and segment mix opportunity next year, maybe trim mix as well with the compliance costs. To what extent would that optimization end up pushing up your ATPs? And if so, how confident are you, given some of the affordability constraints that you can kind of pass that mix optimization through to the consumer? Andrew Frick: It's Andrew. Thank you for the question. Well, our ATPs are really strong right now, as you know, and we are among the leaders and above segment average. But I think at the core of what it allows us to do is build the customer demand and give us the flexibility to manage our mix, as Jim mentioned earlier, on certain vehicles, especially as we look at some of our off-road derivatives like Tremor and Raptor, it gives us some headroom in that to actually manage the mix within selected vehicles. Itay Michaeli: Terrific. That's helpful. And as a quick follow-up, maybe on the quarter, if you could talk through the drivers behind Blue's improved pricing, I think $400 million was better than what we did last quarter as well as any additional color on fleet pricing in the quarter? Andrew Frick: Well, I think in general, as I mentioned earlier, the industry pricing is up 0.5 point. Retail is up more. It's very strong right now, up 1.7 points. It's driven by a lot of the tariff pricing through the year. If you look at the counterbalance of that fleet has been down a bit. It's primarily in the van business. And fortunately, for us in our portfolio and what plays to our strength, our Super Duty pricing and full-size pickup has remained very strong for us throughout the entire year. James Farley: And one of the great offsets that we've been able to manage this year with Ford Pro is not rely on the traditional fleet business. Andrew, maybe you want to talk about the changing mix of our Pro business. Andrew Frick: Yes. We continue to increase our overall services as a percent of EBIT. Just a couple of years ago, we were around 13%, and we are now well on our way to hit our 20% total EBIT. Across the channels, we've also been able to diversify. We're roughly 1/3 of our channel mix now amongst large corporations, 1/3 with small, medium businesses and 1/3 with government and daily rental. So we are very well balanced, very diversified, both on the vehicle side and also with the services. James Farley: But our -- that strength in small, medium business, SMB, we call it, is really a key accomplishment by the team. We heavily focus on that group. We're continuing to try to grow that mix of that group, and that helps us a lot derisk any kind of pricing risk on the fleet. Andrew Frick: Yes. We've been able to grow. Operator: Your next question will come from Tom Narayan with RBC Capital Markets. Gautam Narayan: Just one quick clarification. So the net impact on tariffs on '25 $1 billion and the '26 to be similar, do you mean to say that the '26 net tariff, assuming everything we know now is also $1 billion? Sherry House: Let me clarify. So for Q4 of this year, we expect an EBIT impact of $1.5 billion to $2 billion due to Novelis. And due to tariffs, we're expecting to see a positive in the Q4 because we are going to get the receivable for the $1 billion. So that's going to be a positive in Q4. I wasn't sure if you were originally talking about the Novelis because the numbers. Gautam Narayan: No, no, no. The tariffs because I remember in 2Q, it was like negative $800 million, 3Q, negative $700 million. So it's like a plus $500 million for Q4 to get to that $1 billion. I'm just understanding how to think about '26. Sherry House: What's going to happen is you would have tariff costs, and it will be offset by this $1 billion that is retroactive that's coming in, in Q4. So to date, we're at like $1 and then you'll be able to take the $1 billion off, you'll encounter a little bit more next quarter, but you'll be positive for Q4. Gautam Narayan: Got it. Got it. And a quick follow-up. As you pivot, let's say, from EV to ICE, just understanding how that works. Clearly, there's stranded costs. We saw the EV losses worsened sequentially. I know some of that was investment. But how should we think about EV losses going forward like into next year as -- if volumes come down? I know some of the plants are flexible, some of them are dedicated, but how should we think about that? James Farley: We'll be excited to give you an update after the fourth quarter as we look into next year. Very big decisions for the company. Operator: Your next question will come from Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: Great. I wanted to ask you just a little bit more how to think about the mix optimization opportunity into next year as a result of some of these lower compliance hurdles. I think you mentioned the ability to maybe maximize some of the off-road offering, Raptor, et cetera. Is there a sense that those were supply constrained -- like you were constraining supply of those and that there's a large amount of like unmet demand in there? Like any sort of way to frame this in terms of how you had been managing the business before as a result of these compliance rules? And what -- essentially, what is the size of the opportunity here? Andrew Frick: Well, Emmanuel, it's Andrew again. Yes. So in -- when you're compliance constrained or under certain regulatory policy, we were having to restrain some of the mix because some of the off-road vehicles, like I mentioned before, Tremor and Raptor are actually very negative against compliance. So we would suppress some of the natural demand within that. So as we look at next year and our overall build mix, we'll obviously match that to customer demand. We don't want to overproduce against that, so we can remain disciplined. And we'll take a look vehicle by vehicle like we always do to maximize our mix within. James Farley: One of the big opportunities to complement what Andrew said on the series mix nameplate is the hybrid mix. And obviously, we can change the pricing in hybrid and change the demand curve for the vehicle. We've had to be very aggressive with hybrid pricing to make sure we cover the right mix. And that obviously is a big opportunity for us because F-150 is a huge volume vehicle for us and the hybrid F-150 is so popular, we have opportunity there to maximize the company's results. Sherry House: The only other thing that I would add, I just want to make sure everybody understands is that with the EPA changes that are likely, that is removing a compliance headwind that would have been going into next year. And so it's just really important that everyone understands that we were facing a headwind. And so that's going to help to eliminate a year-over-year impact. Emmanuel Rosner: Great. And then just one additional question on guidance, comparing it to just the most recent one that you had provided last quarter. So if I basically take the current guidance adjusted for the Novelis fire, but also the $1 billion benefit from lower tariff outlook, it seems like it's essentially an unchanged guidance versus last quarter. And that's despite essentially assuming now, I guess, expecting now for the industry, better SAAR as well as better pricing. So are there at the same time, some industry or company factors that are playing out maybe a little bit less favorably than 3 months ago? Sherry House: No, none to no. I mean, as I said, I mean, we were going to be $8 billion plus. When you take that $1.5 billion to $2 billion off, that gets you to the $6 billion to $6.5 billion, you add the $1 billion of tariffs. But we also are performing at the higher end of the guidance that we had put out there at the beginning of the year. And the reason for that is credit has been doing good, material costs have been doing good. The pricing and volume have been solid. And so that's why we were at the higher end of the guidance. Emmanuel Rosner: I take it offline on the sell side call. Operator: Our final question will come from Colin Langan with Wells Fargo. Colin Langan: Just wanted to follow up. I'm actually -- I guess I'm getting a little confused with some of the puts and takes. If I look at the midpoint of guidance, Q4 is like $550 million. I thought you just said that tariffs would be a refund of $1 billion. And then the Novelis -- so it just would imply almost like negative if it wasn't for the tariff refund. And then just even if I add Novelis, then it would still imply a pretty big drop underlying from Q3 at $2.6 billion to Q4. Am I misunderstanding the commentary there? Sherry House: We would have been at $8 billion plus -- you take out the Novelis impact in Q4. So that's going to be $1.5 billion to $2 billion, which gets you to the $6 billion to $6.5 billion for 2025. Now when I talk about makeup, that's in 2026. So that's where you get the $1 billion back in EBIT not in '25. Colin Langan: So I guess I'm just -- on the prior question, so year-to-date, you have like, what was it, $1.7 billion of tariff costs. The guide for the year is $1 billion. What -- how are we getting there for Q4? I thought that was the refund or maybe I misunderstood that, sorry. Sherry House: Yes, that's right. So as of last Friday when the proclamation was signed, we now can apply a greater percentage of the MSRP tariff offset to our parts. And now that we can do that as of last Friday, we're going to get $1 billion of benefit. We couldn't record that in the Q3 numbers because our books were already closed and this just happened last Friday. So now you're going to see a receivable in Q4 that's more than going to offset what the tariff cost would be in Q4. And then when you add Q1, Q2, Q3, Q4 together with that positive receivable, you'll reach $1 billion net for the full year. Colin Langan: Okay. Got it. And then just, I guess, a follow-up on your color on 2026. You highlighted cost is $1 billion positive, Novelis, it would be $1 billion help into next year. Any color? I think in the past, you've talked about around $600 million of sort of the regulatory costs just structurally going away as a tailwind. And did I catch the commentary on inventory, it will be actually down again next year. So we should kind of have a little bit of destocking factor that we should be thinking about, too? Sherry House: Well, Colin, there's a lot of texture we want to take you through as we position 2026 and beyond. And we're going to do that properly at Q4 earnings. And so for now, I just said we've got some tailwinds and headwinds that I wanted you to know, tariffs roughly the same, tailwinds make up Novelis, likely removal of the EPA compliance headwind, continued cost savings. But then the headwinds are going to be investments in our launches in Marshall and Louisville and investments in the cycle plan. So that's what we're able to share at this time, and we look forward to sharing more with you in our Q4 earnings. Operator: That was your final question. I'll now turn the call over... James Farley: I just want to say one thing. We appreciate all of our investors and the people that analyze our industry very carefully. I just want to note that I know Adam Jonas is moving on to another segment, and I wanted to thank you for your activist investor point of view. It certainly helped us be better managers and stewards of the company. And I think we just wanted to say thank you as a management team for all of you for what you do. But when someone moves on like Adam, we want to highlight that. Thanks. Okay. Well, thank you, operator, again. To summarize, Ford is addressing the key issues affecting our industry head on. Our improved industrial system is driving consistent results on cost and quality. Ford Pro is making Total Ford a more durable company and business. We have and will continue to take decisive actions to improve and grow our company, and I'm confident in a stronger Ford as we head into an exciting 2026. Thank you today. Operator: This concludes the Ford Motor Company Third Quarter 2025 Earnings Call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the West Fraser Third Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 23, 2025. During this conference call, West Fraser's representatives will be making certain statements about West Fraser's future financial and operational performance, business outlook and capital plans. These statements may constitute forward-looking information or forward-looking statements within the meaning of Canadian and United States securities laws. Such statements involve certain risks, uncertainties and assumptions, which may cause the West Fraser's actual or future results and performance to be materially different from those expressed or implied in these statements. Additional information about these risk factors and assumptions is included both in the accompanying webcast presentation and in our 2024 annual MD&A and annual information form as updated in our quarterly MD&A, which can be accessed on West Fraser's website or through SEDAR+ for Canadian investors and EDGAR for United States investors. I would like to turn the conference over to Mr. Sean McLaren. Thank you. Please go ahead. Sean McLaren: Thank you, Inna. Good morning, and thank you for joining our third quarter 2025 Earnings Call. I am Sean McLaren, President and CEO of West Fraser. And joining me on the call today are Chris Virostek, Executive Vice President and Chief Financial Officer; Matt Tobin, Senior Vice President of Sales and Marketing; and other members of our leadership team. On the earnings call this morning, I will begin with a brief overview of West Fraser's Q3 2025 financial results and then pass the call to Chris for additional comments before I share some thoughts on our outlook and offer concluding remarks. West Fraser posted negative $144 million of adjusted EBITDA in the third quarter of 2025 as we continue to operate within an extended cycle trough. Of note, this quarter included a $67 million out-of-period duty expense related to the finalization of Administrative Review 6 or AR6. New home construction remained relatively stable during the period, albeit at uninspiring levels, with annualized U.S. housing starts averaging just 1.31 million units through August on a rolling 3-month seasonally-adjusted basis as mortgage and interest rates continue to present headwinds to U.S. housing demand and affordability. And as we've noted for several quarters, repair and remodeling demand was subdued once again this quarter. Despite the tough Q3, our balance sheet continues to demonstrate strength as we exited the quarter with nearly $1.6 billion of available liquidity and a healthy cash position that remains positive net of debt. A strong balance sheet and liquidity profile, along with our investment-grade rating remain key elements of our defensive capital allocation strategy, which allows us to invest in our business countercyclically and take advantage of investment opportunities if and when they arise. With that brief overview, I'll now turn the call to Chris for additional detail and comments. Christopher Virostek: Thank you, Sean. And a reminder that we report in U.S. dollars and all my references are to U.S. dollar amounts, unless otherwise indicated. The lumber segment posted adjusted EBITDA of negative $123 million in the third quarter, inclusive of the previously mentioned $67 million out-of-period duty expense. This is in comparison to $15 million of adjusted EBITDA reported in the second quarter with the sequential change driven largely by lower pricing and the AR6 duty expense. Of note, operations at our old Henderson site are winding down and the new mill is entering its commissioning phase. Our North America EWP segment posted negative $15 million of adjusted EBITDA in the third quarter, down from $68 million in the second quarter, with the sequential change largely driven by lower OSB pricing. The Pulp and Paper segment posted negative $6 million of adjusted EBITDA in the third quarter compared to negative $1 million in the second quarter, with the sequential change largely attributable to Cariboo Pulp's annual maintenance shut that occurred in the third quarter. Prior to and following the maintenance outage, we are seeing improved operating performance from Cariboo Pulp in terms of daily output. Finally, our Europe business generated $1 million of adjusted EBITDA in the third quarter similar to the $2 million reported in the second quarter. In terms of our overall Q3 results, lower product prices for our lumber and North American OSB products were the largest contributing to tractors as compared to Q2. We were also buffeted by a number of major maintenance activities during the quarter, most significantly the Cariboo maintenance shut. Cash flow from operations was $58 million in the third quarter with our net cash balance at $212 million, down from $310 million in the prior quarter. The relative decrease in our net cash balance reflects lower earnings offset by -- in part by a reduction of working capital plus the impact of $90 million of capital expenditures and approximately $65 million of cash deployed towards share buybacks and dividends. In terms of our 2025 shipments guidance, with the demand softness, we continue to experience across our lumber product portfolio, we are narrowing our outlook by reducing the top end of the guidance range for both SPF and SYP 2025 shipments, while maintaining the North American OSB and EU OSB shipment guides for 2025. We are also confirming our 2025 CapEx guidance range of $400 million to $450 million. All updated views on our 2025 outlook are presented on Slide 8. Regarding softwood lumber duties. Earlier in the third quarter, the U.S. Department of Commerce released final CVD and ADD rates for AR6 which are based on the year 2023. These rates were largely as we had anticipated and at a combined rate of 26.5%. West Fraser has the lowest duty rate in the Canadian industry. More recently, the U.S. administration issued a proclamation that imposed Section 232 tariffs of 10% on imported softwood timber and lumber into the U.S., which came into effect on October 14, 2025. This tariff is in addition to the existing softwood lumber duties. With that financial overview, I'll pass the call back to Sean. Sean McLaren: Thank you, Chris. Looking forward, we continue to monitor macroeconomic conditions complicated by shifting trade policies. Despite such a backdrop, the company remains well positioned to navigate the dynamic and difficult business environment we face today, backstopped by a strong financial position. As a reminder, we acted early in this down cycle, optimizing our portfolio of assets to create a more resilient company. This included permanently removing 170 million board feet of capacity in our Canadian lumber business in 2022 and 650 million board feet of capacity in 2023 and 2024, through the permanent or indefinite closure of 5 of our leased economic lumber mills in the U.S. and Canada. Combined, these capacity removals account for 820 million board feet, representing approximately 12% of the company's lumber capacity prior to the actions taken. Considering our shipment guidance for 2025, our implied Q4 operating rate reflects the curtailment of approximately 20% to 25% of that capacity. Furthermore, we divested 3 pulp mills for $124 million in 2024 and acquired high-quality lumber and OSB assets. In the aggregate all these actions to high-grade the portfolio have made us better at the bottom of the cycle. Going forward, we will continue to take this approach of managing our asset portfolio to do what is both prudent for the long term and necessary in the short term. Also expect us to continue to be flexible in our operating strategy, meeting the needs of our customers and operationalizing the benefits of our strategic capital to drive down costs, all while keeping our focus on a safe working environment for our employees. We are wrapping up a number of capital projects that have been in progress during the current market and expect the start of these projects will continue to lower cost as they are operationalized. We will also continue to pursue a balanced capital allocation strategy that includes investment in value-enhancing projects, pursuit of opportunistic investments in growth, and the return of capital to shareholders as we leverage the competitive advantage of our balance sheet strength and available liquidity. In terms of our more general medium- to longer-term outlook, we will continue to lean on our industry knowledge and experience to make the decisions that we believe will not only keep the company resilient in the trough of the cycle, but will also allow the company to be better prepared for the next industry demand recovery whenever that may be. North American support lumber supply has been trending lower in recent years, with a material proportion of that capacity closed permanently due to factors including high-cost fiber supply, legacy technology, shrinking residual markets and now more recently, increased duties and tariffs. When lumber supply demand dynamics eventually find balance and demand cyclically improves, we expect our ability to add material new supply will face the same significant obstacles, access to economically viable fiber, high capital costs that challenge returns on investment and long-term viable outlets for residual products. Shifting briefly to tariffs. Regardless of what may happen on this front, as we have said before, we continue to monitor the Canada-U.S. trade situation closely and remain agile and ready to respond as needed, and we will continue to work closely with our federal and provincial governments to support discussions when called upon as they relate to softwood lumber. In closing, at West Fraser, we aim to deliver strong financial results through the business cycle. We achieved this leveraging our product and geographic diversity, modern, well-capitalized assets and the dedication of our people and culture rooted in cost discipline and a commitment to operate responsibly and sustainably. We remain steadfast in the strategy. Although we continue to have a challenged near-term outlook, we are optimistic about the longer-term prospects for our industry and for West Fraser, and we look forward to continuing to build one of the world's leading sustainable buildings products companies. Thank you. And with that, we'll turn the call back to the operator for questions. Operator: [Operator Instructions] And your first question comes from the line of Ketan Mamtora from BMO Capital Markets. Ketan Mamtora: Maybe to start with and recognizing that this is a pretty tough backdrop right now. I'm just curious sort of your approach to managing production in both lumber and North America OSB, particularly in this environment, which increasingly looks like that demand is likely to remain soft here in the near term. Can you sort of just give us some part on sort of how do you approach sort of managing production, particularly as we are looking at sort of another year where EBITDA could be kind of negative in lumber? Sean McLaren: Ketan, happy to touch on that. And maybe I'll just start with -- by reinforcing a few things that -- the actions we took early in the cycle, which we're closing permanently or indefinitely a number of our mills adjusting our shift configurations. And we have remained nimble in our lumber portfolio against after those actions. And as sort of -- you have seen in our guidance as the year has unfolded. So we maintain in both of our main -- all of our product lines, but in particular, lumber and OSB, a variable kind of operating strategy that first runs to our economics and our customer demand needs. So that's how we manage that, and we make those decisions all the time within our platform. Ketan Mamtora: Understood. And then on OSB, what was sort of the implied Q4 operating rate looked like based on what you all have discussed. You talked about sort of 25% temporary curtailment in lumber. How does that look like in... Sean McLaren: Yes. I'll let Chris touch on that one. Christopher Virostek: Yes. I think, Ketan, as you'll recall, I think when we've discussed this before, right, Q4 is always very heavy for us on maintenance shuts. We strategically take that maintenance downtime in Q4 because it is a weaker seasonal period. So I think our -- with the shipment guide that is out there, that would imply an operating rate of somewhere around 80% in the fourth quarter. Ketan Mamtora: Understood. And then just last one from me. On the balance sheet side, clearly, the balance sheet is very strong. You've got a net cash position. Curious about sort of how you think about M&A opportunity in this kind of down cycle at the moment? And where do you think you've got the most opportunity for inorganic growth? Christopher Virostek: Yes. Sure. I'll jump in there, and then Sean, you can add if you like. I think we're very consistent the last several years in how we've talked about M&A. And for us, it's quality first, right? And I think clearly, an environment like we're in today necessitates that -- it just shows how important that quality-first approach is around all those things that Sean mentioned that are challenges, whether that's residual supply or asset quality or workforce availability or timber availability. So I think the way that we have the balance sheet we have flexibility to pursue our -- the strategy that we've always had, and growth has always been part -- inorganic growth has always been part of the company's DNA going back decades. So -- but we're going to be guided first and foremost by quality and things that make the company stronger. And I think you can see that certainly in the actions that we've taken over the last several years where we've added to the portfolio, it's been very selective and high quality, and we've also removed things from the portfolio that we don't think make us stronger at the bottom of the cycle. So I think that will be the guide as to what we consider as opportunities is there's got to be -- we got to be satisfied with the quality that's out there. Sean? Mark Wilde: No, that's perfect, Chris, all quality and enhancing our strength at the bottom of the cycle. Those are the priorities as we think about what might be next for West Fraser. Operator: And your next question comes from the line of Ben Isaacson from Scotiabank. Ben Isaacson: Just two questions for me. Sean, I think last conference call, so 3 months ago, the federal government was starting to talk about a possible support and conversations around that when it comes to lumber. So it's been 3 months and things have not really improved in terms of the macro backdrop. Can you talk about what you're willing to share in terms of how those conversations are going and how federal support for lumber is starting to stack up. Sean McLaren: I can't remember, I don't have the exact date in front of me. I believe it was in early August, and it was in British Columbia, which was encouraging at a small business in -- a small lumber business for the premier rolled out some different support measures. I don't have all the details are all in the public domain, but they were providing some level of support for the industry, some level of funding for exploring different markets. But that would all be in the public domain. I think we, as a mandatory responded, we continue to and frankly, with a balance sheet that we -- that remains strong. We continue to support those measures for the industry with the government. And at the same time, are kind of maintaining our own balance sheets, which is reinforcing our operations. So I probably wouldn't add more than that Ben. Ben Isaacson: Okay. That's fair. And then just a second question is perhaps for you or for Matt. With respect to your own customers that you talk to regularly, can you give some kind of sense in terms of how many months or days or weeks of inventory is in the U.S. channel, again, when it comes to your customers only relative to normal conditions for mid-October. Sean McLaren: Go ahead there, Matt. Matt Tobin: Sure. I can answer that. I would say we don't really have visibility into our customer supply chain or their inventory levels. What I can speak to is our inventory levels and they're lean in both SYP and SPF which has been intentional in this uncertain market to run our inventories lean. Ben Isaacson: Okay. So just to be clear, I mean, from the rate of reorder, you don't have a sense as to -- in terms of planning when your customers are going to come back and what their needs will be in the next kind of 2 to 3 months. Matt Tobin: No, I'd say they're buying as their needs come to them, and we're ready to service them in whatever regions they're in. But I would say no fundamental change or visibility to their inventory levels. Sean McLaren: One thing I might add to that, Ben, is our customers are -- products readily available. So they're buying what they need as they need it. And I think our guidance would -- we're maintaining our inventories in a below average position. And so our guidance would -- things are flowing through based on that guidance. Operator: Your next question comes from the line of Sean Steuart from TD Cowen. Sean Steuart: Sean, I want to follow up on the M&A question, and I appreciate your comments around all the assets and building strength at the bottom of the cycle. I guess the follow-on is, we're 3 years into this lumber downturn in North America. Have you seen more opportunities coming to the surface. And if so, would those opportunities include the types of assets you're looking for? I guess I'm trying to gauge what the opportunity set looks like now and how that's changed over the last 3 to 6 months. Sean McLaren: Sean, probably not -- I think we maybe had this question on a prior call. Probably not a lot of change this year. I think there -- what you typically see is early in an upswing as people are thinking about if a quality asset to sell, people would then maybe look to market that. And then I would say in the pipeline, I don't think there's anything any more than normal and for sure, higher quality assets typically are being held to a better time to market them. So all those things saying that we wouldn't be -- there wouldn't be anything that is jumping out today, that is high quality and available that fit. Sean Steuart: And I also wanted to follow up with your comments on North American supply management on the lumber side and appreciating you've done a lot of work on permanent and indefinite closures over the last 3 years. Is a part of the decision making for you at this point in the cycle, we're arguably closer to the end of this downturn than the start at this point, hopefully. Is there reluctance to take more permanent or indefinite shuts at this point when maybe we can see the light at the end of the tunnel as affordability headwinds start to ease. Is that part of the thinking and the thought process when you're gauging sort of rolling downtime versus further definite or permanent closures. Sean McLaren: Yes. No, it's a good question. I think we always look at it against the backdrop of how is that asset holding up during the current down cycle, and do we have a clear path for the next down cycle. And we make kind of decisions against that backdrop, it's really hard to predict. I mean, I agree with your comments that hopefully, we're here closer to the end than in the middle or the beginning, but we really don't know that. So I think we always have to really challenge ourselves, especially in this environment. Is there a a better operating model that lowers our cost here at the -- and makes us more competitive at the bottom of the cycle. And I would look across our SPF business, Southern Yellow Pine, OSB major business lines and volume is coming out of those businesses and costs are lower. So that's really the way we look at all those decisions and -- but they really -- every asset gets pressure tested in this environment. Operator: And your next question comes from the line of Matthew McKellar from RBC Capital Markets. . Matthew McKellar: I appreciate all the details so far. First from me, could you maybe just share with us how conditions in the Canadian markets have evolved in the last few months, is there anything to call out in terms of differences with the band between the U.S. and Canada? And then are you seeing any of your competitors behave any differently in the Canadian market since higher U.S. duties or the tariffs took effect? Matt Tobin: Yes, I can take that. I would say that the Canadian market remains competitive. It's a much smaller market than the U.S. market. So while it's an important market for us and we service those customers, it generally doesn't drive demand. And I would say it remains competitive just with where we are in the cycle and all the other things you've mentioned going on, but I would say nothing unusual, just having to compete every day to service our customers in that market. Matthew McKellar: And then just a couple of cleanups. If we're in an improved, but still, relatively soft wood products market next year, how should we be thinking about CapEx? I appreciate that Henderson will fade year-over-year. How does that evolve into '26 in your view? And second would be just the fire of the Cowie facility, can you help us understand what the state of that facility is today? Christopher Virostek: Sure. Yes. Thanks. So on CapEx, as we look forward, I think as we said in the comments, right, like we've spent a lot of capital. And I think that's one of the advantages of our strong balance sheet is we've been able to be durable with our capital allocation strategy and invest for the future in what have been pretty difficult market in the last couple of years, considering that, as Sean said, we're wrapping up a lot of fairly major projects here, and our focus is shifting to operationalizing those. So I think you can sort of think about what that means relative to 2026. We'll be out in February with our 2026 CapEx guidance. We have had 2 pretty busy years with with big projects going on. With respect to Cowie, I think, flagged in the materials, right, that incident happened about 5 weeks before the end of the quarter. Facility has been repaired back up and running, and I think we're pretty pleased with what we're starting to see in the European segment in terms of maybe some green shoots of things starting to turn around there. Operator: [Operator Instructions] And your next question comes from the line of Hamir Patel from CIBC Capital Markets. Hamir Patel: Sean, we don't have access to the U.S. trade data at the moment during the shutdown. But on the ground, are you seeing any signs of European lumber imports increasing just given that their competitive position has improved relative to Canada with all the duty and tariff changes since August. Sean McLaren: Ask Matt, if there's -- I don't think we have a lot of visibility to that, Hamir, without the data coming in. But Matt, would you add anything to that? Matt Tobin: No, I'd say like you said, not a lot of visibility and no meaningful change that we can see in them. Hamir Patel: Okay. Fair enough. And I just want to ask in Europe, if you have any comments on -- with respect to OSB demand, how things are faring on both the new res and R&R side? Sean McLaren: Yes. And Chris sort of touched on that as unfortunate incident at Cowie, our team did an excellent job of making the repairs and getting the mill back up and running and it kind of shadowed that event really did shadow some progress in Europe, and we are seeing -- hard to say how much is kind of demand driven, some of it still may be supply driven, but kind of sequentially quarter-over-quarter, we are seeing some price improvement in OSB and seeing some demand improvement there. So we're looking more optimistically in Europe over the next few quarters, and we'll see how all that unfolds. Operator: And we have a follow-up question from Mr. Sean Steuart from TD Cowen. Sean Steuart: Chris, you guys have done a good job on working capital management. And yes, I appreciate the seasonality in Q1 you'll update big log deck builds in Canada. Can you speak generally though, to, I guess, the changes you've made in terms of how you're managing working capital, over the mid- to long-term room for more reductions there, ability to pull more cash out of that, just broader perspective on how you're thinking about that item. Christopher Virostek: Yes. Look, I got to give a lot of kudos to the operations teams across the company on this front, right? I think it spans all elements of the working capital, we manage our credit and receivables very tightly, while still maintaining good relationships with our customers. The cycle there is pretty short. I think as Matt indicated in his comments, in many of our businesses were at or below target levels and operating with fairly lean inventories, which, look, presents some challenges from time to time in terms of filling orders. But the teams are doing a remarkable job of managing through that and learning how to operate with lower inventories. And then lots of work, I'll say, going on in terms of on the procurement side as well as vendors and vendor selection and things like that. So say it spans all aspects of this. And I'd say it's not just something that because of the environment that we're in, that it's getting any more focus than it ordinarily does, think the teams work hard on this stuff all the time. They're probably tired of hearing me talk about working capital. But it's really been, I think, a source of strength for us here in the last while, really releasing on, frankly, all aspects of the balance sheet, and it helps run a more efficient and effective business. So what does that translate into going forward? Hard to say on the way out, but I think some great learnings across the business and a deep focus on strong execution. Operator: And there are no further questions at this time. I will now hand the call back to Mr. Sean McLaren for any closing remarks. Mark Wilde: Thank you, Inna. As always, Chris and I are available to respond to further questions as is Robert Winslow, our Director of Investor Relations and Corporate Development. Thank you for participation today. Stay well, and we look forward to reporting on our progress next quarter. Operator: And this concludes today's call. Thank you for participating. You may all disconnect.
Operator: Hello, everyone, and a warm welcome to the Heritage Financial 2025 Q3 Earnings Call. My name is Emily, and I'll be moderating your call today. [Operator Instructions]. I would now like to turn the call over to Bryan McDonald, President and Chief Executive Officer, to begin. Please go ahead. Bryan McDonald: Thank you, Emily. Welcome and good morning to everyone who called in and those who may listen later. This is Bryan McDonald, CEO of Heritage Financial. Attending with me are Don Hinson, Chief Financial Officer; and Tony Chalfant, Chief Credit Officer. Our third quarter earnings release went out this morning premarket, and hopefully, you have had the opportunity to review it prior to the call. In addition to the earnings release, we have also posted an updated third quarter investor presentation on the Investor Relations portion of our corporate website, which includes more detail on our deposits, loan portfolio, liquidity and credit quality. We will reference this presentation during the call. As a reminder, during this call, we may make forward-looking statements, which are subject to economic and other factors. Important factors that could cause our actual results to differ materially from those indicated in the forward-looking statements are disclosed within the earnings release and the investor presentation. Improving net interest margin and tight controls on noninterest expense growth continue to incrementally drive earnings higher in the third quarter. On an adjusted basis, earnings per share was up 5.7% versus last quarter and up 24.4% versus the third quarter of 2024. And on the same adjusted basis, our ROAA improved to 1.11% versus 0.87% in the third quarter of 2024. We are excited about the pending merger with Olympic Bancorp. Their addition to the Heritage franchise will add to the profitability of our operations and better position our company for growth in the Puget Sound market. We'll now move to Don, who will take a few minutes to cover our financial results. Donald Hinson: Thank you, Bryan. I will be reviewing some of the main drivers of our performance for Q3. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the second quarter of 2025. Starting with the balance sheet. Total loan balances were relatively flat in Q3, decreasing by $5.7 million. Although loan originations increased from Q2 levels, payoffs and prepayments also increased in Q3, while utilization rates decreased. Yields in our loan portfolio were 5.53%, which was 3 basis points higher than Q2. This was due primarily to new loans being originated at higher rates and adjustable rate loans repricing higher. Bryan McDonald will have an update on loan production and yields in a few minutes. Total deposits increased $73 million in Q3 and noninterest-bearing deposits increased $33.7 million. The increase in total deposits was net of a $31.4 million decrease in certificates of deposit accounts, most of which was the result of a decrease of $25 million in brokered CDs. The cost of interest-bearing deposits decreased to 1.89% from 1.94% in the prior quarter. As a result of the rate cut in September, we expect to see continued decreases in the cost of deposits. Investment balances decreased $33 million due primarily to expected principal cash flows on the portfolio. Due to the desire to preserve capital for the pending acquisition, we halted loss trade activity in Q3. We also did not purchase any securities in Q3. Moving on to the income statement. Net interest income increased $2.4 million or 4.3% from the prior quarter due primarily to a higher net interest margin. The net interest margin increased to 3.64% from 3.51% in the prior quarter and from 3.30% in the third quarter of 2024. We recognized the provision for credit losses in the amount of $1.8 million, up from $956,000 in the prior quarter due primarily to an increase in the weighted average life of the loan -- construction loan portfolio. New construction loans increased the average life of the portfolio as well as reduced portfolio utilization rates. Net charge-offs remain at very low levels. Tony will have additional information on credit quality metrics in a few moments. Noninterest expense increased $530,000 from the prior quarter due mostly to increased comp and benefits expense as well as professional services. We recognized 535 -- sorry, $635,000 of merger-related expenses in Q3, most of which was included in the professional services category. Comp and benefits expense was higher, primarily due to increased incentive compensation accrual. And finally, moving on to capital. All of our regulatory capital ratios remain comfortably above well-capitalized thresholds and our TCE ratio was 9.8%, up from 9.4% in the prior quarter. Similar to our inactivity and loss trades on investments, we were also inactive in stock buybacks in Q3 and are unlikely to resume stock buybacks this calendar year. I will now pass the call to Tony, who will have an update on our credit quality. Tony Chalfant: Thank you, Don. Through the first 3 quarters of the year, I'm pleased to report that credit quality remains strong and stable. Nonaccrual loans totaled $17.6 million at quarter end, and we do not hold any OREO. This represents 0.37% of total loans and compares to 0.21% at the end of the second quarter. The largest addition during the quarter came from 2 loans totaling $6.7 million that are primarily secured by a townhome construction project. That project is nearly complete and the unit should be listed for sale before year-end. There is currently no loss expected on these loans and the nonaccrual decision was primarily tied to the delinquency status. Also within our nonaccrual loan portfolio, we have just over $2.8 million in government guarantees. Nonperforming loans increased modestly from 0.39% of total loans at the end of the second quarter to the current level of 0.44%. This increase was primarily tied to the previously mentioned increase to nonaccrual loans. Criticized loans moved lower during the quarter. These loans rated special mention or substandard totaled just under $194.5 million at quarter end, declining by just over $19 million during the quarter. Substandard and special mention loans were down by 5% and 12%, respectively, during the quarter from a combination of payoffs and upgrades. At 2% of total loans, substandard loans remain at a manageable level and in line with our longer-term historical performance. Page 19 in our investor presentation provides more detail on the composition of our criticized loans and reflects the stability we've seen in this portfolio over the past 2 years. During the quarter, we experienced total charge-offs of $374,000 that were split evenly between consumer and commercial loans. The losses were partially offset by $256,000 in recoveries leading to net charge-offs of $118,000 for the quarter. For the first 9 months of the year, net charge-offs remained low at $911,000. This represents 0.03% of total loans on an annualized basis and compares favorably to the 0.06% we reported for the full year 2024. Page 20 of the investor presentation shows our history of low credit losses and how we compare favorably to our peer group. We are pleased with the strength and stability of our credit metrics for both the quarter and through the first 9 months of the year. While we are closely watching the increase in our nonperforming loans, it is important to note they remain at a low level when compared to our historical trends. While there has been some economic volatility this year, we have yet to see any material impact on our credit quality. We remain confident that our consistent and disciplined approach to credit underwriting will serve us well should the economy show any material deterioration in the coming quarters. I'll now turn the call over to Bryan for an update on our production. Bryan McDonald: Thanks, Tony. I'm going to provide detail on our third quarter production results, starting with our commercial lending group. For the quarter, our commercial teams closed $317 million in new loan commitments, up from $248 million last quarter and up from $253 million closed in the third quarter of 2024. Please refer to Page 13 in the investor presentation for additional detail on new originated loans over the past 5 quarters. The commercial loan pipeline ended the third quarter at $511 million up from $473 million last quarter and up modestly from $491 million at the end of the third quarter of 2024. As we look ahead to the fourth quarter, we are estimating new commercial team loan commitments of $320 million, which is very similar to Q3 levels. As anticipated, loan balances were fairly flat quarter-over-quarter with a $6 million decline in the quarter. Although total loan production was up $81 million or 30% versus last quarter, we continue to see elevated payoffs and prepaids. And similar to last quarter, the mix of loans closed during the quarter resulted in lower outstanding balances. Looking year-over-year, prepayments and payoffs are $124 million higher than last year, and net advances on loans have swung from a positive $142 million last year, to a negative $75 million year-to-date in 2025. Please see Slides 14 and 16 of the investor presentation for further detail on the change in loans during the quarter. Looking ahead to the fourth quarter, we expect loan balances to remain near Q3 levels then resume growth to more normal levels in 2026 as loan payoffs moderate, and the net advances moved back to a positive position. Deposits increased $73 million during the quarter and are up $173 million year-to-date. The deposit pipeline ended the quarter at $149 million compared to $132 million in the second quarter. And average balances on new accounts opened during the quarter are estimated at $40 million compared to $72 million in the second quarter. Moving to interest rates. Our average third quarter interest rate for new commercial loans was 6.67%, which is up 12 basis points from the 6.55% average for last quarter. In addition, the third quarter rate for all new loans was 6.71%, up 13 basis points from 6.58% last quarter. In closing, as mentioned earlier, we are pleased with our solid performance in the third quarter. Deposit growth has allowed us to pay down borrowings and broker deposits while our loans have continued to reprice upward. These factors drove our net interest income up $2.4 million versus last quarter and $4.4 million versus the third quarter of 2024. The combination with Olympic Bancorp and its subsidiary, Kitsap Bank, will add to this positive momentum in a significant way. We look forward to having the exceptional bankers of Kitsap join the Heritage Bank family and are excited about what we can accomplish together. Overall, we believe we are well positioned to navigate what is ahead and to take advantage of various opportunities to continue to grow the bank. With that said, Emily, we can now open the line for questions from call attendees. Operator: [Operator Instructions] Our first question today comes from Matthew Clark with Piper Sandler. Adam Kroll: This is Adam Kroll on for Matthew Clark. Yes. So maybe just starting off on the margin. I was wondering if you had the spot cost of deposits at September 30 and maybe the NIM for the month of September? Donald Hinson: Sure, Adam. Yes, spot rate on cost deposits was -- the interest-bearing was 1.87%. And that, of course, compared to 1.89% for the quarter and for total cost deposits of 1.35%. The NIM for September was 3.66% compared to 3.64% for the quarter. Adam Kroll: Got it. That's super helpful. And then just on deposit costs. I guess how much opportunity do you still see to reduce rates on the nonmaturity side? Tony Chalfant: Well, we have close to -- I think where it comes into play is mostly close -- is approximately $1 billion we have in exception price as it's -- that are costing us currently close to 3%. And so we will continue to, as rates are cut to work those down over time. It's a process, and it doesn't happen all at once. But we have been working them down some. I will say also, a lot of the new -- if we bring on new accounts, so they tend to be at the higher than the overall portfolio rate. So that mitigates some of the help of the rate cuts, but I do expect that we will continue to be able to work that down over time. Adam Kroll: Got it. I appreciate the color there. And then maybe just one last one for me is I was wondering if you could just expand on how you're thinking about organic loan growth in '26? And do you have any visibility into payoffs and when they might normalize lower? Bryan McDonald: Sure, Adam. We're expecting to move back to more of our traditional range, mid- to high single digits next year. On the second quarter call, I had mentioned, anticipated growth hitting in the fourth quarter, and we have several additional larger payoffs we're now expecting here in the fourth quarter. So we're expecting to be flat again. So there's kind of 2 things going on. One is the cycling of some construction loans we've booked over the last few years that are reaching perm and paying off. And you can see that on Page 14 in the investor presentation just with the utilization rates on the construction loans as those go to perm and pay off. And then we've -- a lot of the new bookings over the last couple of quarters have been in that construction bucket, and so our fundings have been lower. If you look at the detail on the change in loans during the quarter, you can see our net advances on construction loans or actually on all of our lines is down this year versus up last year. So we expect, as we get into 2026, work our way through the rest of these payoffs that we'll have positive net advances on those loans, so a bit of a tailwind versus the headwind that we had this year. And then the productions continue to be strong at over $300 million this last quarter and expecting, again, $300 million in Q4, over $300 million in Q4. It's a little harder for me to see out into 2026 because our pipeline is really accurate out 90 days. It's hard to anticipate loan demand in 2026, although I would say things have been strengthening since the summer. And so based on that, I'm not seeing anything at this point that would cause those -- cause loan demand to dip and the pipeline to shrink beyond all the obvious things that could drive that. We're just -- we're seeing the trend move in the other direction right now. Operator: Our next question comes from Jeff Rulis with D.A. Davidson. Jeff Rulis: Maybe staying on the payoff front, just a follow-up. Any of that kind of managed by you or encouraged balance reductions for credit-related reasons? Bryan McDonald: Yes, Jeff, I would say the kind of the change in the fourth quarter is some several larger payoffs that are for adversely classified credits, not necessarily a circumstance where we're working them out of the bank, but ones where the customers have decided to sell the assets and pay it off. So that's the difference versus last quarter. We've got a few in that bucket and then one additional construction loan that's going to pay off in Q4. We're expecting Q4 versus previously we thought it push into '26. So that's the change for Q3. Not a huge number of loans, but a couple of chunky ones in there. Jeff Rulis: Sure. No, that's helpful. Just to kind of get the whole picture that on the edges, maybe some of that activity is positive. I wanted to talk about the deposit success in the quarter, a pretty good core deposit growth. Is that a bit of seasonal factors in play? Or is this just execution with the team, a bit of both? Just trying to see -- unpack that a little bit. Bryan McDonald: Yes, it is a bit of both. Third quarter, traditionally our strongest deposit growth quarter during the year, and that was the case last year, and we saw it this year, the years previously was hard to see it, of course, because of all the rate changes and the outflow of excess deposits. But yes, seasonal increase. And then we've had good additions from the new account activity side. And so those are driving the balances as well as some accumulation in customer accounts, again, more related to that seasonality. Jeff Rulis: Got you. And then connected maybe, Don, on the margin, I guess, it sounds as if that -- those deposit costs or spot rate and margin trending well. Is there a bit of a carryover or a declining benefit from the loss trades. I guess anything you give puts and takes on margin, particularly in light of cuts as well, rate cuts? Where would you sort of position the margin ahead? Donald Hinson: Yes. I don't think we're going to get the margin growth based off the rate cut we had in mid-September, which we didn't feel the full effect of or experience full effect of and kind of expecting one next week. I think we're going to continue to get, again, help on the deposit side. But I think the loan yields are going to be fairly flattish this quarter. We're going to continue to be able to reprice adjustable rate loans higher and new loans going on will be higher. But those rate cuts when we have, I think, it's 22%, 23% fully floating that also impacts it. So having a flattish loan yields for the quarter and maybe some help on the deposit side, I think we might continue to see some NIM improvement, but it will be muted compared to last quarter. Operator: Our next question comes from Liam Coohill with Raymond James. Liam Coohill: Liam On for David. So we've talked a lot about the deposit success in the quarter and I was curious, how has competition been trending in your markets, especially with a lot of banks targeting high levels of loan growth. Where are you seeing the most opportunity for gathering those deposits even in a seasonally stronger quarter? Bryan McDonald: Yes, Liam, really, it's same strategy we've deployed in the past going after the operating relationships, accounts that look for strong servicing. Don mentioned in his deposit comments that some of the new relationships we're bringing on have a little higher average cost than the bank's average. And that's because for those excess deposits to the extent that customers are shopping between a few banks, we're having to pay up on those excess deposits, maybe a little bit more so than we are within the portfolio on average. But then, of course, we're getting strong demand balances along the way. So we still see competition in our market, strong pricing competition on deposits. It's kind of varied from local -- one local geography to another in terms of who the players are that are being particularly aggressive with deposits. So that continues to be a factor. But if you're going after the operating relationships, it's a different driver than price on that piece. So that's the key. Liam Coohill: I appreciate that. And on the acquisition of Olympic, how has progress in the pending deal been trending? And what are the most pressing priorities from your view post deal approval and integration? Bryan McDonald: Yes, Liam, everything is progressing right as planned. We have a project plan and time line and everything is going smoothly. Not seeing anything at this point that, that would change kind of our estimated closing date beginning of Q1, we're on track for that. And then, of course, coordinating closely with the Olympic team to make sure everything goes smoothly and that's also been going very well. So nothing at this point of concern, just going just as we had anticipated. Liam Coohill: Great. And then last one for me. I mean asset quality remains pretty strong broadly, and it's great to hear that, that credit migration is likely going to be resolved without loss in 4Q. With classified down quarter-over-quarter. Is there anything you're watching more closely moving forward? Or is all seemingly quiet? Bryan McDonald: Tony, I'll let you pick that one up. Tony Chalfant: Yes, Liam, it's a good question. I think what we're seeing is that the impact from some of the economic volatility has been sort of spotty through the portfolio, nothing really systemic. So we'll have -- we have a few loans that were relationships that we're looking at that have been impacted somewhat by that. But generally speaking, it's just kind of the normal, ins and outs of -- into the classified criticized buckets that we typically see. So no real particular trends we're watching. And as Bryan mentioned, we do have some positive momentum in the substandard category that may play out in the fourth quarter or should play out in the fourth quarter. And that -- the loans that are in our nonperforming bucket right now, we're just not seeing a lot of material loss potential there as of right now. Operator: Our next question comes from Jackson Laurent with Stephens. Jackson Laurent: This is Jackson on for Andrew Terrell. If I could just hit on expenses first, and I apologize if I missed it. Adjusting for like the merger costs in the quarter, expenses were right at the bottom end of like the previously guided $41 million to $42 million expense guide. Just wondering if that's a good run rate that we should be looking for going forward? Donald Hinson: Sure, I'll take that, Bryan. The one impact to this quarter that we haven't had is the state raised their revenue tax rate and that's going to impact us by about $300,000 per quarter. So other than that, I expect it to be pretty similar. It fluctuates some, right? But still I would say in the low 41s core, and then we also have this $300,000 that we'll be dealing with. So it may pump up more into the mid-41s as a result. But that I think it still is a pretty good run rate overall. And we'll still have some acquisition-related costs, which I'm not sure exactly when they're all going to hit. We're going to have some again this quarter, but there will also be some next quarter and of course, over the conversion post acquisition. Jackson Laurent: Got it. That's helpful. And then just last one for me. I know the primary focus has been on closing the current pending deal, integrating the franchise, but it seems like the M&A space has been heating up a little bit. Just wondering how you guys are thinking about M&A post deal close? And just honestly, how conversations have been trending recently? Bryan McDonald: Yes. Obviously, our first priority is to work through the transaction with Olympic and get that closed. We're anticipating early Q1 for the closure. We're continuing our discussions just like we always have. And if there was an opportunity that came up, we would consider it. So again, focuses on the Olympic deal and getting it closed. But looking ahead to next year, if the right opportunity came along, we'd certainly be open to taking a look. Operator: Our next question comes from Kelly Motta with KBW. Unknown Analyst: This is Charlie on for Kelly Motta. I guess just kind of piggyback on that last question. Just wondering how you're thinking about capital from here. You mentioned you're likely to pause the buybacks for the remainder of the year. once the Kitsap deal is closed and integrated successfully, do you expect capital priorities to change in any meaningful way going forward as a combined bank? Bryan McDonald: Don, do you want to comment on that one? Donald Hinson: Sure. It's kind of hard to comment on this until we get through it and see exactly what -- where we're coming out, obviously, we modeled certain things but we'll probably hold -- we'll probably be preserving some capital as we're experiencing the transaction costs associated with it in addition to the upfront dilution. So we do expect to be earning quite a bit of capital back over time. But it's kind of hard to comment if we're going to be involved in any sort of buybacks at this point. I really have a hard time commenting on that. We're just kind of wait and see. I wouldn't plan on anything in your model at this point. Unknown Analyst: Understood. And then in terms of how you're thinking about the loan-to-deposit ratio, it came down a bit this quarter. And I know you expect some liquidity from the Olympic deal. Just wondering high level, how you're thinking about managing that ratio moving forward? Bryan McDonald: Yes. High level, we like to get it back up to 85% and we'd be comfortable a bit above that as well. So we're continuing to look for loan opportunities to deploy more of our assets into loans. So certainly, our goal is to move it up to 85% and certainly be comfortable a bit higher than that. Operator: [Operator Instructions] With that, we have not received any further questions. And so I will turn the call back over to Bryan McDonald for any closing comments. Bryan McDonald: Thanks, Emily. If there are no more questions, then we'll wrap up this quarter's earnings call. We thank you for your time, your support and your interest in our ongoing performance. We look forward to talking to many of you in the coming weeks. Goodbye. Operator: Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.
Operator: Good morning all, and thank you for joining us for the Expro Q3 2025 Earnings Presentation. My name is Carly, and I'll be coordinating the call today. [Operator Instructions] I'd now like to hand over to our host, Sergio Maiworm, Chief Financial Officer. Please go ahead. Sergio Maiworm: Thank you, operator. Good morning, everyone, and welcome to Expro's Third Quarter 2025 Call. I'm joined today by Expro's CEO, Mike Jardon. First, Mike and I will have some prepared remarks, then we will open it up for questions. We have an accompanying presentation on the third quarter results that is posted on the Expro website, expro.com, under the Investors section. In addition, supplemental financial information for the third quarter results is downloadable on Expro website, likewise under the Investors section. I'd like to remind everyone that some of today's comments may refer to or contain forward-looking statements. Such remarks are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such statements speak only as of today's date, and the company assumes no responsibility to update forward-looking statements as of any future date. The company has included in its SEC filings cautionary language identifying important factors that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in the company's SEC filings, which may be accessed on the SEC website, sec.gov, or on our website, again at expro.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measure in our third quarter 2025 earnings release, which can also be found on our website. With that, I'd like to turn the call over to Mike. Michael Jardon: Thank you, Sergio. Good morning, everyone, and welcome to Expro's third quarter call. I'll begin by reviewing the third quarter 2025 financial results from today's press release. Expro achieved its highest quarterly free cash flow ever and continued to improve its EBITDA margin. We expect a strong fourth quarter and have raised our annual guidance. Next, I'll cover operational highlights, macro trends, a preliminary 2026 outlook and key strategic themes. Sergio will provide further details on financials, updated 2025 guidance and our overall capital allocation framework. Let's begin on Slide 1. Expro reported quarterly revenue of $411 million and EBITDA of $94 million, representing a 22.8% margin. Adjusted free cash flow was $46 million or 11% of revenue, which was the highest recorded by the company to date. The financial results reflect ongoing operational efficiency gains relating to margins and free cash flow. This record-breaking free cash flow generation marks a significant milestone for Expro, highlighting the company's successful strategy in improving operational efficiency and maximizing cash conversion. Achieving the highest adjusted free cash flow in the company's history underscores our commitment to financial discipline, creating and returning value to shareholders. Such performance sets a new benchmark and demonstrates our focus on increasing performance amidst dynamic market conditions. In the third quarter, Expro also repurchased around 2 million shares for roughly $25 million, achieving our annual target of $40 million ahead of schedule. We are also raising the 2025 annual guidance for EBITDA and free cash flow to reflect anticipated performance to date and for the rest of the year. Further details will be provided by Sergio later in the call. Moving to Slide 2. Expro's $2.3 billion backlog provides solid revenue visibility and demonstrates the company's diverse portfolio and operations across regions. Securing long-term contracts and delivering cost-effective solutions strengthens customer trust and underpins ongoing growth. Maintaining safety, service quality and performance highlights Expro's strengths. As we look to the future, the strong backlog and steady customer relationships help guide our planning for 2026. It's also important to note that while the backlog is encouraging and supports our strategic planning and visibility on revenue, it isn't a guarantee of future outcomes. Primarily, the backlog acts as a valuable health check for our business, offering insight into its current strength and helping guide informed decisions amid changing market conditions. As we look ahead, it's important to consider the broader market context shaping our industry and our outlook. Despite the current softer commodity price environment, the outlook for Expro's core markets remains constructive. We fundamentally believe that oil and gas investments will remain resilient with continued investment in offshore and international projects, supporting demand for our services in Expro's core regions. Long-term demand for hydrocarbons remains resilient, particularly in non-OECD markets and offshore developments. Upstream investment is expected to remain largely flat globally in 2026. We do, however, see pockets of growth in some international markets. We expect upstream investments to recover later in 2026 and into 2027 and beyond, with growth led by offshore projects in Latin America, the Middle East and West Africa, regions where Expro is very well positioned. Natural gas fundamentals have temporarily softened, but gas remains critical to the global energy mix, and therefore, supporting long-term demand for Expro's services and technology. As operators prioritize capital discipline and production optimization, we see sustained demand for our brownfield-focused offerings and digital solutions. The ongoing shift towards decarbonization and increased investment in geothermal and carbon capture, or CCS projects, particularly in Asia Pacific, ESSA and North America, positions Expro's sustainable energy business for continued growth. While macroeconomic risks persist, Expro's diversified portfolio, strategic offshore and international exposure enables us to navigate near-term headwinds and capitalize on emerging opportunities across the full asset life cycle. Turning to Slide 3. At this stage, it is a bit too soon to provide definitive guidance for 2026. However, our current outlook for Expro suggests that activity levels in 2026 will be largely consistent, if not slightly lower than those anticipated than those projected in 2025. Preliminary assessments indicate that operational activity will likely increase in the second half of the year following a slower start during the first quarter where we will have the typical winter season effect from operations in the Northern Hemisphere and the NOC planning effect early in the year. Although revenue expectations remain relatively flat to slightly down for next year, Expro remains strongly committed to further expanding EBITDA margins and free cash flow generation. Based on our activity outlook and our position today, I am confident in our ability to achieve these objectives. It should be noted that this outlook is informed by initial discussions with our customers and our historical experience across various market cycles. As we are in the early stages of developing the 2026 budget, numerous factors, including continued customer engagement and geopolitical developments could influence our perspective prior to releasing formal guidance in February alongside our fourth quarter earnings report. Before turning to our operational update, I wanted to discuss a few things that make Expro unique and we think are important attributes for investors to consider beyond the broader macro dynamics. That is also on Slide 4. We believe Expro's future stock performance will also be driven by several company-specific factors that set us apart from peers and position us for sustained value creation. One of our most powerful differentiators is our ability to expand our wallet share with existing customers. By providing additional or enhanced services to customers we already serve, while leveraging the existing cost base, we are able to significantly expand our margins with new technology deployments. This approach, not only deepens our customer relationships, but also drives incremental profitability and efficiency without the need for increased personnel on board. Another unique driver is the transformation of our production solutions business. Historically, as a consumer of capital, this segment is maturing into a generator of free cash flow. This evolution reflects both operational discipline and the successful execution of our strategy to optimize asset utilization and drive higher returns from our installed base. As production solutions continues to scale, we expect it to be a meaningful contributor to our overall financial strength and flexibility. In addition, Expro's commitment to technology leadership remains a core pillar of our differentiation. Our ongoing investments in technologies, digitalization and artificial intelligence enable us to deliver innovative, high-value solutions to our customers. This, not only enhances our competitive positioning, but also supports margin expansion and operational efficiency enhancements across our portfolio. Finally, our disciplined approach to margin expansion and free cash flow generation, combined with a track record of integrating value-accretive acquisitions further distinguishes Expro. By focusing on international and offshore markets and executing on cost efficiency programs like our Drive 25 initiative and others, we can deliver superior returns and create long-term shareholder value independent of broader market dynamics. Moving to our operational performance on Slide 5. During this quarter, Expro has consistently demonstrated strong operational performance. We continue to secure new business and remain dedicated to delivering our services safely and efficiently in the field, a commitment validated by our customers and recognized within the industry. Expro was recently honored with ENI's Best Contractor HSE Performance award for our contributions to the Congo OPT project. This accolade coincided with the first anniversary of our OPT plant operating without a single lost time incident with over 2 million man hours of activity, underscoring our team's success and highlighting our exemplary standards in safety and operational excellence. We received the OTC Brasil Spotlight on New Technology award for both the QPulse multiphase flow meter and the ELITE Composition solution with the official presentation scheduled at next week's OTC Brasil event. At the Gulf Energy Awards here in Houston, Expro was shortlisted for a record 10 technologies across 7 categories, further affirming our leadership and innovative capabilities in the sector. Notably, Expro earned the Best Health, Safety and Environmental Contribution and Upstream award for our VIGILANCE intelligence safety and surveillance solution. Our purposeful approach to innovation ensures we address client requirements directly, contributing to industry progress and delivering measurable value. In addition to these achievements, Expro successfully completed the inaugural deployment of Velonix, an optimized pipeline pig control technology for a U.S. midstream client. This implementation results in a reduction of approximately 7 million pounds of carbon dioxide emissions, generated cost savings for the customer and improved data quality to support accelerated decision-making, further exemplifying Expro's commitment to operational excellence and sustainability. As detailed in our September 8 press release, Expro has established a new offshore world record for the heaviest casing string deployment, utilizing the advanced Blackhawk Gen 3 wireless top drive cement head with SKYHOOK technology. Conducted in the Gulf of America, this milestone sets a benchmark for safe and reliable offshore cementing operations in ultra-deep high-pressure environments. These achievements demonstrate how Expro's technology portfolio delivers a competitive edge, unlocks future revenue opportunities and supports margin expansion through scalable, differentiated solutions. Building on these technology milestones, our regional performance this quarter further underscores our commitment to efficient, effective innovation across our global operations. This quarter, we secured a 5-year extension with Chevron for subsea services in the Gulf of America. This long-term contract reflects the trust Chevron places in Expro and reinforces our reputation for high-quality service. In Alaska, we won a significant contract with ConocoPhillips, expanding our well testing leadership and creating new opportunities to deploy our multiphase flow meters and fluid analysis services. In Congo, we secured a multiyear slickline services contract with Perenco. This contract significantly strengthens our intervention services in West Africa and demonstrates our technical expertise. In the Middle East and North Africa, we secured key well flow management contracts for ADNOC and PETRONAS. The first contract is for well test services for 4 packages over 2 years, while the second contract involves 6 well test packages and a multiphase pump that will be used as a zero flaring solution for the well test activities. These wins enhance our reputation as a trusted partner in unconventional well development and reinforces our commitment to innovative sustainable solutions. Turning to the Asia Pacific region. In the second quarter, we reported that Expro completed the first rigless conductor driving operation on a client's platform in over a decade, delivered ahead of schedule, demonstrating our commitment to innovative solutions in the region. I'm also pleased to share that in the third quarter, the Bass Straight campaign received highly positive feedback from NOPSEMA, Australia's offshore safety regulator and was formally recognized for achieving ALARP, As Low As Reasonably Practicable, safety standards. This recognition reaffirms our dedication to operational excellence and the highest safety protocols. Across every phase, we champion safety through best practices, strict procedures and continuous improvement, underscoring our robust safety culture and commitment to protecting our workforce and partners. Across all regions, Expro's operational and technology achievements this quarter demonstrate our ability to deliver value-driven innovation and maintain the highest standards for safety and efficiency. These results position us strongly for continued growth and margin expansion in the quarters ahead. Before turning over to Sergio, I'd like to remind everyone of Expro's value proposition that we've highlighted on Slide 6. Expro's long-term strategy is anchored in building a large, diversified and compelling business mix company with clear market leadership positions. Our overarching goal is to maximize and sustainably generate free cash flow through industry cycles, ensuring resilience and value creation for our shareholders. First, we are committed to continuously improving our financial results. This means, driving margin expansion and robust free cash flow generation, underpinned by disciplined cost efficiencies through initiatives like our Drive 25 campaign. We are also focused on reducing the capital intensity of the business and consistently delivering top quartile performance across our operations. Second, we see significant opportunity to grow Expro through inorganic, scalable acquisitions. Our approach is to target international and offshore opportunities with adjacent offerings that present strong industrial logic and accretive financial profiles. We have developed a proven blueprint for integrating businesses efficiently and in a timely manner, and our track record demonstrates our ability to create shareholder value through disciplined M&A. Third, we are high-grading our business by leveraging technical leadership. We continue to invest in technologies across our core business segments and are actively scaling our digital capabilities, including artificial intelligence and digitalization. Importantly, we are globalizing the technology platforms acquired through recent M&A, ensuring that innovation and technical excellence remain at the heart of our value proposition. In summary, Expro's strategy is designed to deliver sustainable growth, operational excellence and superior returns. By maintaining a disciplined focus on financial performance, pursuing targeted acquisitions and investing in technology leadership, we are well positioned to lead our industry and deliver long-term value for our shareholders. With that, I'd like to turn the call over to Sergio to review our financial results in detail. Sergio Maiworm: Thank you, Mike, and good morning again to everybody on the call. As Mike noted, Expro continues to deliver consistent and above expectations financial results. In the third quarter, we reported revenue of $411 million. EBITDA for Q3 reached $94 million with a margin of 22.8%, up about 50 basis points from last quarter and 270 basis points year-over-year. Slide 7 illustrates our quarterly and annual margin growth. We are confident in further margin expansions in 2025 and 2026, with the latter being driven by the full impact of Drive 25, increased customer wallet share at higher margins, international growth from acquisitions like Coretrax and ongoing cost optimization and efficiency improvements. EBITDA margin expansion is not the goal in itself on Slide 8, but a means to increase free cash flow generation. And in the third quarter, Expro posted its highest quarterly free cash flow in the company's history, generating over $46 million on an adjusted basis. We aim to further reduce the capital intensity of the business and expect even stronger free cash flow in 2026, both as a percentage of revenue and in absolute terms. We have increased our 2025 guidance for free cash flow, though we're cautious about Q4 due to potential working capital effects. The Q4 guidance is conservative and already accounts for these factors. Expro also bought back $25 million in shares in the third quarter, achieving our $40 million goal ahead of time, and we still have another $36 million available under the current $100 million repurchase plan. Turning to liquidity. The company closed the quarter with $532 million in total liquidity. That includes $199 million in cash on the balance sheet after accounting for the revolving credit facility repayments and the share repurchases during the quarter. During the third quarter, the company completed a $22 million voluntary prepayment of its revolving credit facility. The voluntary prepayment reduced the outstanding draw balance on the RCF from $121 million to $99 million as of September 30. As mentioned before, we're raising our EBITDA and free cash flow guidance for 2025. The details are on Slide 9. We now expect our adjusted EBITDA to be between $350 million and $360 million compared to a notional $350 million plus before. We're lowering our CapEx guidance. We now expect our capital expenditures for the year to be between $110 million and $120 million, whereas before, we had approximately $120 million. Lastly, we're also increasing our free cash flow guidance. We now expect our adjusted free cash flow to be between $110 million and $120 million compared to the approximately $110 million we were estimating before. As mentioned, the free cash flow guidance is somewhat conservative given the possibility of working capital use in the quarter. We certainly have some upside potential from here. Now, I'd like to quickly address our segment performance this quarter before finalizing with our capital allocation framework. A reminder that details around our segment's performance can also be found in the appendix of the presentation. Turning to regional results. The North and Latin America, or NLA, third quarter revenue was $151 million or up $8 million quarter-over-quarter, reflecting higher well construction and well flow management revenue in the Gulf of America, partially offset by lower well intervention and integrity revenue in Argentina. For Europe and Sub-Saharan Africa, or ESSA, third quarter revenue decreased $7 million to $126 million sequentially, primarily driven by lower well flow management and subsea well access revenue in the U.K. and Norway. Segment EBITDA margin at 32% was up 200 basis points sequentially, reflecting higher activity and a favorable product mix. The Middle East and North Africa, or MENA, delivered another solid quarter, but slightly lower compared to Q2 with revenues at $86 million, driven by lower well construction and well intervention and integrity revenue in the Kingdom of Saudi Arabia, the UAE and Qatar. MENA segment EBITDA margin was 35% of revenues, a decrease of about 100 basis points from the prior quarter, reflecting the lower well construction activity. Finally, in Asia Pacific, or APAC, third quarter revenue was $49 million, a decrease of $8 million relative to the second quarter, primarily reflecting the lower well flow management, well intervention and integrity and well construction revenue in Malaysia and lower well construction and subsea well access revenue in Australia, partially offset by higher well construction and well flow management revenue in Indonesia. Asia Pacific segment EBITDA margin at 21% of revenues decreased about 500 basis points from the prior quarter, reflecting decreased activity and mix. Now I'd like to briefly discuss our capital allocation framework on Slide 10. Expro's capital allocation framework is designed to maximize long-term value creation by maintaining a disciplined and balanced approach across 4 equally important priorities. Our philosophy is that, every dollar of capital must be deployed where it can generate the highest risk-adjusted returns. And as such, each of these 4 areas continuously competes for capital on an ongoing basis. First, we're committed to investing in our business to drive organic growth with superior return profiles. This includes funding projects and initiatives that enhance our core capabilities, improve efficiency and support innovation across our service lines. Every investment is rigorously evaluated to ensure it meets our standards for superior returns throughout the business cycle. As a reminder, the vast majority of our capital expenditures are geared towards specific projects with known return profiles. These are not speculative investments. Second, we pursue selective, highly accretive mergers and acquisitions that complement our existing capabilities and customer relationships. Our M&A strategy is focused on opportunities that offer clear industrial logic, scalable technologies and synergies and the potential to expand our presence in attractive markets. We apply the same disciplined capital allocation criteria to acquisitions as we do to organic investments, ensuring that only the most compelling opportunities receive funding. Third, we're committing to returning capital to shareholders. Our framework targets the return of at least 1/3 of free cash flow to shareholders annually, primarily through share repurchases. This commitment reflects our confidence in the company's ability to generate sustainable free cash flow and our focus on delivering direct value to our investors. Finally, we maintain a fortress balance sheet to ensure financial flexibility and resilience. Preserving a strong balance sheet enables us to navigate market cycles, invest in growth opportunities as they arise and protect the company's long-term stability. Importantly, these 4 pillars, organic investments, M&A, shareholder returns and balance sheet strength are not ranked in order of priority. Instead, they are managed dynamically with each area continuously competing for capital based on the quality of opportunities available. This disciplined balanced approach ensures that Expro remains agile, resilient and focused on maximizing value for all shareholders. With that, I'll turn the call back to Mike for a few closing comments. Michael Jardon: Sergio, thank you. As we conclude our prepared remarks and before opening up for questions, I'd like to conclude with the following thoughts. Despite the softer commodity market backdrop in the near-term, we continue to see resilient, if not robust, investment in upstream oil and gas in the international markets. We also expect the offshore sector to further recover starting in the second half of 2026 and into 2027 and beyond. Looking ahead, we remain confident in Expro's ability to deliver resilient performance even as we navigate softer market backdrops. Our diversified business mix, disciplined capital allocation and relentless focus on operational excellence position us to weather industry cycles and continue creating value for our stakeholders. We expect to finish 2025 on a strong note with a robust fourth quarter that reflects both the strength of our customer relationships and the successful execution of our strategic initiatives. As we move into 2026, we are well positioned to further expand our EBITDA margin driven by ongoing cost efficiencies, margin-accretive growth and the maturation of our production solutions business into a significant free cash flow generator. Moreover, we anticipate continued growth in our free cash flow generation in 2026, supported by our balanced approach to capital allocation and our commitment to maximizing returns across all areas of the business. We believe these strengths will enable Expro to deliver sustainable long-term value for our shareholders regardless of the broader market environment. We thank our employees, customers and shareholders for their continued support and look forward to building on our momentum in the quarters and years ahead. With that, I'd like to open up the call for questions. Operator: [Operator Instructions] Our first question comes from Ati Modak from Goldman Sachs. Ati Modak: Just a quick question on the margin expansion comment for '26 on flat to slightly lower revenue. Can you help us understand what the drivers there are? Is it largely the Drive 25 initiative? Are there other factors that are driving that expectation? Michael Jardon: So, Ati, thanks for the question. Thanks for joining us today. I guess a couple of things I try to highlight is, yes, it will be the full year effect of our Drive 25 initiative. If you recall, although we've changed the total target throughout the year as we've expanded and increased it, we've really targeted taking out about 50% of that benefit in 2025. So we'll have the natural margin expansion from that in 2026, which will help us offset some of the inflationary cost pressures and those kind of things. Additionally, we'll continue to internationalize some of the M&As that we've made, Coretrax in particular. And then the third element really is, as we continue to roll out new technologies, and I think I've highlighted this to you and to others before, but just keep an eye on the number of new technologies you see us continue to roll out. We'll continue to get market uptake that helps us expand our wallet share, really helps us position ourselves. It's really a combination of all those. And frankly, what we have the organization focused on today is, we can't control the activity, the overall activity. We're going to continue to get our fair share. We're going to continue to position ourselves with customers globally. But we're going to stay focused on the things that we can really affect, which is operational efficiency, execution, rolling out new technology, those type of things. Ati Modak: And then on the comment that offshore activity could pick up in the second half, what are you keeping an eye on? And can you give us any additional sort of regional color in terms of how you're seeing activity play out at the moment? Michael Jardon: Sure. And I'll start with the one that I think is going to be the laggard. And I think the laggard is probably going to be Asia Pacific. I think it's the one in 2026 that is -- we're seeing some softness here in Q3 and even in Q4 in Asia Pacific. So I think it's going to be the one that's going to be a little bit of a laggard. That's not altogether different than how we foresaw 2025 overall. We kind of highlighted early in the year that we felt like Australia was going to be a bit soft overall. But I do think going into '26, and I think we'll start to see some activity ramp up in the second half is really it's going to be the Golden Triangle. It's going to be West Africa. It's going to be Gulf of Mexico, those type areas. I also think that 2 others to keep in mind is, we're starting to see some positive sentiments and some positive commentary in Saudi, in particular, with the jack-up activity. Although we don't generate a lot of activity in the jack-up market in Saudi, I think it kind of goes to the tone and the tenor that's going on in the Kingdom, I think that's going to be more constructive. And then I think some of the things we're starting to see out of Mexico is going to be helpful for us as an industry overall. So those are the ones I would really highlight. Sergio, anything I missed? Sergio Maiworm: No, Mike, I think that's it. Ati Modak: Maybe if I can squeeze in one more. The share repurchases, you mentioned you reached ahead of schedule. What does that mean for repurchase for the rest of the year? Will you not do anything? And then what's reasonable to think for '26? Sergio Maiworm: Yes, Ati, that's a great question. We'll continue to evaluate, as we always do in line with the capital allocation framework that we laid out on this call as well. We'll continue to look for opportunities to return more capital to shareholders. We adjusted our free cash flow guidance to $110 million to $120 million. So the $40 million that we've already repurchased represent at least 1/3 of that already. So as we continue to see more free cash flow generation, we will continue to evaluate opportunities to repurchase shares. So that is a continuous effort for us. So we'll continue to do that. Michael Jardon: And we still have plenty of room in the -- still have plenty of headroom in the preauthorized amount. So we'll continue to be thoughtful about that here just as we kind of see what are the market dynamics and how we see things playing out for Q4. Operator: Our next question comes from Eddie Kim from Barclays. Edward Kim: Just wanted to circle back on your comments on '26 activity levels being consistent, if not slightly lower than '25 levels. You mentioned activity is likely going to increase in the second half of next year, which implies that first half of next year could be a little softer than normal, even considering typical seasonality. So could you talk about maybe what's driving that softness in the first half of next year? Is it all being driven by Asia Pac? Or is there something else going on there? Michael Jardon: Sure. No, Eddie, thanks for joining us. I appreciate the question. I guess how I would frame it up is, this is -- we're just now in the early stages. We're kind of in the first, maybe the -- if not the top, maybe the bottom of the first inning right now in terms of our budget preparation process. So we're going out to kind of start that bottoms-up exercise with our customers and literally look at kind of project by project. Fundamentally, this is my sense from customer conversations and customer discussions that I've had with kind of trying to understand how do they see their spend for the rest of '25 and how it goes into 2026. I think they are thoughtful and mindful of some of the things going on today, commodity pricing, what's happening in the geopolitical sphere, does the peace agreement in the Middle East hold? Something happen more meaningfully with Russia and Ukraine. All those kind of things, I think, are kind of causing a little bit of a cautious sentiment for them to kind of wait and see how this is. And then fundamentally, how we see kind of going into next year, yes, you're right, there's some softness in Asia Pacific. And we -- as much as I would like to wish it away, we always have a Q1 effect. Northern Hemisphere is slow because of the winter season. Our NOC customers are always historically over the last 30-plus years in my career, they're always a little bit slow getting out of the gate in Q1. That's really kind of what we're seeing. But as we -- we'll get a better sense here over the next 8 weeks or so as we go through the budget process. But my sense is, we're probably talking about a flattish to slightly down 2026. And fundamentally, as I said in the earlier question, what we've got the organization focused on is, we're going to control what we can control, and we can't control how much activity there is, but we can control our service delivery, our agency performance, the rollout of our technology, continue to enhance efficiencies. That's what I want the team really focused on. And if we see a ramp-up in activity in the middle of Q2, we'll take it and we'll be ready to be positioned. If it's more like the end of Q2, then we'll deal with it that way as well. Edward Kim: Understood. My follow-up, just tailing on those comments. I understand you'll provide more detailed guidance during the fourth quarter earnings call. But yes, you mentioned activity levels flat or slightly lower next year. At the same time, you said you expect continued margin expansion. So just putting those 2 things together, is it fair to assume that EBITDA for next year should be at least similar to '25 levels? Or how should we think about that just directionally? Michael Jardon: Yes, I think that's a good way to think about it directionally. We will -- I will be very disappointed if we don't expand EBITDA margins in 2026. And what is the overall activity set look like to determine an absolute number, but kind of in the range where I think flat to slightly down going into next year, I would think we'd see similar EBITDA numbers. And quite frankly, what we're -- I would say, we're more focused on, but what we have a real sense of urgency around is better conversion of that into cash generation. Operator: [Operator Instructions] Our next question comes from Derek Podhaizer from Piper Sandler. Derek Podhaizer: I just have a couple of education questions. Maybe we could first start on the production solutions opportunity that you mentioned a number of times on the call. Can you help us understand what types of services you're talking about the technologies and maybe which regions are best suited for production solutions? Michael Jardon: Sure. Derek, thanks for joining us, and thanks for the question. So it is -- fundamentally, these are -- a great example of it is the early pretreatment facility that we put together that we collaborated with ENI on in the Congo. And that really was a facility that helped treat gas to ensure it met the export spec, which meant they could actually load it on an FLNG vessel. So that was an enhancement to an existing facility. We can also have production optimization or production enhancement where we're actually providing some places like Algeria, where we're providing gas recompression, gas reinjection, helping to reduce the flaring opportunities that those things have. So really it is existing infrastructure. It can be production facility type things. We don't pursue the big massive [ epic ] type projects. What we're really focused on is smaller modular kind of accelerated monetization of existing assets. And those are predominantly for us, very strong presence in the Middle East, strong opportunities for us in in West Africa and then also some that we see here in South America as well. So a good geographic spread that's more brownfield-type activity than it is greenfield activity. Derek Podhaizer: And then I know you mentioned those were big consumers of cash, but now you believe this is going to flip to cash generation. So can you maybe help us frame the magnitude of these projects that were consuming cash, but now what it can be when it's generating cash? Sergio Maiworm: Yes, Derek. No, that's a good question. So we actually embarked on a bunch of these projects over the last few years. So this is just the construction of those facilities, as Mike pointed out, and the investments that we had to make, and we had a few of those projects back to back. So we consumed a bit of capital. But now that a lot of these projects are already online, like the OPT project for ENI and the Congo, basically, that just becomes an annuity for us. There's a very low operating cost to continue to operate those facilities. And there's just a consistent stream of cash. It's very visible. It's very predictable for us. So as we stack up some of these projects that have been concluded and as those projects go from the construction phase into the operations and maintain phase of that, it just becomes an annuity and you just start stacking one on top of the other. So that actually contributes a lot for the free cash flow generation of the business. Does that make sense? Derek Podhaizer: No, it does. That's very helpful. And then just kind of a follow-up to the follow-up. Back to 2026, what Ati and Eddie were talking about on the margin expansion story, maybe could you help us provide a little bit more color on where we'll see the most impact, whether that's from a region line perspective or a product line perspective? Just want to start thinking about kind of the shape of '26 from either the product lines or the regions how you report it. Michael Jardon: Yes. I mean it's -- and again, it's kind of early for me to give too much granularity on what 2026 is going to look like. I think we're going to -- Gulf of Mexico, Gulf of America, I guess, I'm supposed to call it now, is probably going to be similar, flattish kind of year-on-year. We don't see a massive change and kind of what's going to happen with the rig count, those type of things. I think they'll continue to move from magically on Wednesday, the rig frees up, it's going to move to another operator on Thursday, so to speak. So I think the Gulf is going to be pretty consistent. I think South America will have some -- can have some particular strength. I think MENA is going to, again, be solid and probably have a little bit of upside in there. There has been some softness here for us in the last couple of months just because of some of the Saudi activity. They had some operational issues with a vendor that created some slowness there. So I think it will be solid. And I think West Africa will be kind of consistent year-on-year. I don't think we'll start to see some of the impact of some of the new FIDs, that's what we'll start to see in kind of the second half of 2026. That's kind of how I would frame it up. And then Asia Pacific is the one in which I think it's going to continue to be a little bit softer than what we would like to see it, but I think that's just kind of how the customer activity sets are going to be really until Australia, in particular, kind of gets kicked back off into more of a drilling phase. Operator: Our next question comes from Joshua Jayne from Daniel Energy Partners. Joshua Jayne: I just wanted to dig into the margin question that Derek just asked a little bit incrementally. So when I think about looking into '26, one of the regions you highlighted is for potential strength is the Middle East. And just when we think about the margin difference between that region and something like Asia Pac, for example, which you expect to be, I guess, a bit on the softer side in '26. Is that part of what's ultimately driving the margin uplift? Or could that -- or if you have a higher contribution there moving into '26, is that -- could that lead margins to expand further than what you're projecting outside of Drive 25? Michael Jardon: No, Josh, it's a really good question. It's a perceptive question. It really is going to be -- so for us, a lot of the driver is going to be the mix. And the mix can be what's the geographic mix. If we actually see a -- what's the impact of the Middle East? Is it flat year-on-year? Is there -- historically, we've kind of had some single-digit growth in the Middle East. And obviously, when there's growth in the Middle East for us, it really moves the needle because it has such a high margin profile. But also what's the impact of -- as we roll out new technologies or we continue to expand our customer wallet, those generally come with higher margins or more accretive. It really is the mix that has an impact on us that it is a little bit more difficult for us at this point in time to really kind of predict what's going to happen there. And then the other element, I know we've kind of been cautious on Mexico activity because we don't have a massive amount of Mexico activity. With Pemex, we're actually going to see some -- we'll start to see some activity in 2026 with non-Pemex operations, and that will be a positive as well. So long answer to say, it depends -- a lot of it depends on the mix, and we'll try to continue to accelerate technology rollout and those types of things, and we'll try to continue to expand our presence in places like the Middle East. Joshua Jayne: Okay. And then one technology question, one release that I thought was pretty interesting over the course of Q3. You highlighted the launch of your Remote Clamp Installation System. So it was deployed in Q4 of last year and then deployed again in Q2 of '25. Maybe just use that as an example of like when I think about a technology like that, how ultimately scalable do you see something like that and when you could really see acceleration of a product like that taking hold in the market? Is that something that happens in '26, more in '27? Maybe just a time line when we see announcements of successful deployment once and then a second one and just moving forward. Michael Jardon: And again, Josh, it's a good perception question. The Remote Clamp Installation simplistically, this allows us to robotically install clamps on completions. When you're running completion stream, you don't -- you have no hands on. You have no personnel, nobody is in the red zone, no hands are in there. And as we have moved from concept to field trials to commercial installations, our operators are extremely pleased with this. We increase the speed at which we can run completions and install control lines and [ install ] clamps on those. More importantly, if you don't have people with their hands in the red zone or their physically in the red zone, it reduces or almost completely eliminates the risk of having an HSE incident. So I think this is one that we'll continue to get more and more uptake from customers on it. We've had really, really good support in the North Sea. I think it's one we'll be able to continue to accelerate. So we'll start to see that more installations in 2026 and really ramp up as we go into 2027. Operator: Thank you very much. We currently have no further questions, and this will conclude the Q&A, and this will conclude today's call. We'd like to thank everyone for joining. You may now disconnect your lines.
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: Good day, and thank you for standing by. Welcome to the Dime Community Bancshares, Inc. Third Quarter Earnings Conference Call. Before we begin, the company would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in today's press release and the company's filings with the U.S. Securities and Exchange Commission to which we refer you. During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and for reconciliation to GAAP, please refer to today's earnings release. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Stuart Lubow, President and CEO. Please go ahead. Stuart Lubow: Thank you, Diane, and thank you all for joining us this morning for our quarterly earnings call. With me today, as usual, is Avi Reddy, our CFO; and also Tom Geisel, who we hired earlier this year to continue growing our commercial bank. In my prepared remarks, I will touch upon key highlights for the third quarter of 2025. Avi will then provide some details on the quarter and thoughts for the remainder of 2025. Our core earnings power continues its significant upward trajectory. Core pretax pre-provision income was $54.4 million for the third quarter of 2025 compared to $49.4 million in the second quarter of '25 and $29.8 million a year ago. We had an increase in loan loss provision in the third quarter, primarily tied to charge-offs on loans in the owner-occupied and nonowner-occupied real estate segments. While NPAs were up slightly on a linked quarter basis, they are up off a very small base and represent only 50 basis points of total assets, which compares favorably to commercial bank peers. On a linked-quarter basis, we did see a decline in criticized loans in the third quarter of approximately $30 million and also saw a 33% decline in 30 to 89 days past due. Core deposits were up $1 billion on a year-over-year basis. The deposit teams hired since 2023 have grown their deposit portfolios to approximately $2.6 billion. We have a core deposit funded balance sheet with ample liquidity to take advantage of lending opportunities as they arise. Our cost of total deposits was 2.09% in the third quarter, which was unchanged versus the second quarter. By maintaining a strong focus on cost of funds, our NIM has now increased for the sixth consecutive quarter and has surpassed the 3% mark. Following the Fed rate cut in September, we were able to meaningfully lower deposit costs while maintaining loan yields. As mentioned in the press release, since the Fed rate cut, the spread between loan and deposits has increased approximately 10 basis points, and this will continue to drive NIM expansion in the fourth quarter. Outside of rate cuts, we continue to have several additional catalysts to continue to grow our NIM over the medium to long term, including a significant back book loan repricing opportunity. Avi will get into more details on the margin in his prepared remarks. On the loan front, we continue to execute our stated plan of growing business loans and managing our CRE concentration ratio, which is now 401. Business loans grew over $160 million in the third quarter compared to $110 million of business loan growth in the second. On a year-over-year basis, business loan growth was in excess of $400 million. Loan originations, including new lines of credit increased to $535 million. The weighted average rate on new originations and lines was approximately 6.95%. Our loan pipelines continue to be strong and currently stand at $1.2 billion. The weighted average rate on the pipeline is between 6.50% and 6.75%. Next, I will touch on our recruiting efforts. Disruption in our local marketplace remains very high, and we continue to execute on our goals of building out our C&I businesses. As outlined in the press release, we hired a number of talented bankers in the third quarter. Once they settle in, we expect them to meaningfully contribute to our business loan growth. In addition, we recently opened a branch location in Manhattan. The grand opening was actually yesterday, and we are on track to open our New Jersey location in Lakewood in the first quarter of 2026. Additionally, we have identified a new location in North Shore of Long Island that we expect to open in early 2026. In conclusion, the momentum in our business continues to be very strong, and we are executing our business plan of growing business loans and core deposits. We have clearly differentiated our franchise from our local competitors as it relates to our growth trajectory, our ability to attract talented bankers. We have an outstanding deposit franchise, strong liquidity -- and a strong liquidity position and a robust capital base. We expect more meaningful NIM expansion in the fourth quarter and significant opportunities in 2026 based on loan pricing opportunities, organic growth across deposits and loans. I'm looking forward to closing out the year strong. I want to again thank all our dedicated employees for their efforts in positioning Dime as the best commercial bank in Europe. With that, I will turn the call over to Avi. Avinash Reddy: Thank you, Stu. Core EPS for the third quarter was $0.61 per share. This represents 110% year-over-year increase. Core pretax pre-provision net revenue of $54 million represents approximately 1.5% of average assets. The reported third quarter NIM increased to 3.01%. We had around 2 basis points of prepayment fees in the third quarter NIM. Excluding prepayment fees and purchase accounting, the third quarter NIM would have been 2.98% -- as a reminder, the second quarter NIM, excluding prepayment fees and purchase accounting was 2.95%. Total deposits were up approximately $320 million at September 30 versus the prior quarter. We continue to see strong inflows across our branch network and across the Private and Commercial Bank. Core cash operating expenses, excluding intangible amortization, was $61.9 million, which was marginally above our prior guidance for the third quarter of $61.5 million. The variance versus the prior guidance was due to the additional hires we made in the third quarter. Noninterest income of $12.2 million was inclusive of a $1.5 million positive benefit tied to a fraud recovery that dates back to Legacy Bridge. We had a $13.3 million credit loss provision for the quarter, and the allowance to loans increased to 88 basis points. As Stu mentioned, criticized loans were down approximately $30 million linked quarter and loans 30 to 89 days past due were down approximately 33% on a linked-quarter basis. We continue to grow and our common equity Tier 1 ratio grew to over 11.5% and our total capital ratio grew to over 16%. Having best-in-class capital ratios versus our local peer group is a competitive advantage and will allow us to take advantage of opportunities as they arise and speaks to our strength and ability to service our growing customer base. Next, I'll provide some thoughts on the fourth quarter. As I mentioned previously, excluding prepayment fees and purchase accounting, the NIM for the third quarter would have been 2.98%. We would use this as a starting point for modeling purposes going forward. As Stu mentioned, we expect more substantial NIM expansion in the fourth quarter as we have been successful in reducing deposit costs and maintaining our loan yield, which has been helped by the pace of new originations. The spread between loans and deposits is approximately 10 basis points higher currently than what it was at September 15. While we have a larger cash position than we did in prior quarters that will eat into some of the NIM benefit from the spread differential between loans and deposits, we do expect more pronounced NIM expansion in the fourth quarter compared to the second and third quarters. In addition, we expect the asset repricing story that we've been talking about for a while to unfold with more vigor in 2026 and 2027. To give you a sense of the significant back book repricing opportunity in our adjustable and fixed rate loan portfolios, in the full year 2026, we have approximately $1.35 billion of adjustable and fixed rate loans across the loan portfolio at a weighted average rate of 4% that either reprice or mature in that time frame. Assuming a 250 basis point spread on those loans over the forward 5-year treasury, we could see a 20 basis point increase in NIM by the end of 2026 from the repricing of these loans alone. As we look into the back book for 2027, we have another $1.7 billion of loans at a weighted average rate of 4.25% that will lead to continued NIM expansion in 2027. In summary, assuming the market consensus forward curve plays out, we continue to have a path to a structurally higher NIM and enhanced earnings power over time. Now that we've crossed 3% on the margin, the next marker in front of us is 3.25% and after that, 3.50%. With respect to the balance sheet, we expect a relatively flat balance sheet for the remainder of this year as planned attrition in transactional CRE and multifamily masks the growth in our business loan portfolio. As we've typically done, we will only provide guidance for 2026 once we get into the new year. Next, I'll turn to expenses. As you are aware, we've added a significant amount of talented individuals to the organization, and we continue to have opportunities to selectively add more. We expect fourth quarter core cash operating expenses to be around $63 million. We don't expect any more wholesale additions of production staff until bonuses are paid in the first quarter, so we can treat the new fourth quarter expense run rate of $63 million as a good placeholder for now. Turning to noninterest income. For the fourth quarter, we do not expect a repeat of the fraud recovery item that we saw this quarter, meaning the run rate for noninterest income would be around $10 million to $10.5 million. Factors that will determine the eventual outcome will be swap fee income, which can be hard to predict as well as SBA fees, which are being impacted by the government shutdown. As has been our typical practice, we won't be providing guidance on 2026 until we report earnings in January. Suffice to say, we are very positive on the NIM trajectory as we exit 2025. Our efficiency ratio continues to improve, and we expect to continue driving that down with NIM improvement. With that, I'll turn the call back to Diane, and we'll be happy to take your questions. Operator: [Operator Instructions]. And our first question comes from Steve Moss of Raymond James. Stephen Moss: Maybe just starting off on credit here. Just curious with regard to the NPA formations and the charge-offs. Were the charge-offs related to this quarter's new nonperforming loans? And then was it weighted more towards owner-occupied CRE or nonowner-occupied CRE? And maybe if any of it was multifamily related? Avinash Reddy: Yes. So none of it was multifamily related, Steve. It was owner-occupied and nonowner-occupied. The split was around 20% owner-occupied, around 80% nonowner occupied over there. Like Stu said, criticized were down around $30 billion linked quarter. The 30- to 89-day bucket got better. And we're pretty confident that we should see some resolution of legacy NPAs in the fourth quarter, probably amounting to around $15 million to $17 million that we have a good line of sight into. So I wouldn't characterize the formation as anything out of the ordinary course of business. We're operating at 50 basis points of NPAs. We probably could be range bound around that between now and the end of the year. And we're seeing a very strong credit overall on the multifamily side. Stephen Moss: Okay. Appreciate that. And then maybe on the multifamily payoffs this quarter, those accelerated here. It kind of sounds like you're going to expect that similar pace into the fourth quarter. Is that kind of maybe how you guys are thinking about 2026 as you guys just have greater repricing and we're going to see just a continued step-up in the multifamily paydowns? Stuart Lubow: I think that I can see a continued paydowns in the multifamily. I think this quarter was a bit outsized, and we knew that we had some big prepayments or payoffs coming in. But I wouldn't expect it to be at this level of prepayment going forward, more normalized. But we are seeing maturities. When we do have maturities, there is a relatively high percentage that is refinancing out. Operator: Our next question comes from Matthew Breese of Stephens Inc. Matthew Breese: Avi, Stu, I wanted to follow up on the credit question just for a moment. On charge-offs specifically, Avi, I think in the past, you've discussed kind of, hey, look, we're building out a business bank. There's going to be some more normalized, call it, charge-offs than historical Dime, especially in the higher rate environment. Could you just reframe for us what you define as normalized? And I'm trying to kind of triangulate the comments. Is there a path back to normalized over the next couple of quarters? Avinash Reddy: Yes. No problem, Matt. I appreciate the question. So I think at the start of the year, our guidance for charge-offs was around 20 to 30 basis points. That's what we said before we start building out the specialty verticals, really. That was my comments back in January, right? So you look at on a year-to-date basis right now, we're basically at 31 basis points. So we're basically within the range of what we have. The new businesses that we're building out, fund finance, for example, we expect 0 losses in those new businesses, right? So I don't think the new businesses per se are going to add to the level of future charge-offs because we're making good loans and we're being very conservative in what we do. What it may change, though, is the reserving methodology because for C&I loans, we are reserving somewhere between 125 and 150. So if you think about the model going forward, we do expect the reserve to build and us to be in that 90% to 1% area, and that could gradually build over time. It will be a function of what we're putting on. But in terms of charge-offs, I mean, we're in probably the late cycles of a high rate environment. And it's our goal with increased earnings power to exit some criticized assets here and there. So that's probably a couple more quarters of that probably that we see. But I would expect as we get into '26 to get to more of a historical Dime level, if that's what you're asking on the charge-off level. But I think on the provision level, it's going to be a function of the new business, right? And we're reserving at a higher level for the new business. Matthew Breese: Great. And then going back to the multifamily reduction, I am curious, within that, was there any selection bias? -- stuff that's rolling off the book, was it more market rate multifamily versus rent regulated? And I would love just to hear what the market appetite is for those products refined away. Is it nondiscriminate and both are being refined away? Or are you seeing more of the market rate stuff get refined away than rent regulated? Avinash Reddy: Yes. So I think we're setting our new rates slightly above market, Matt. I think at a reprice, some of the customers are staying with us. But at maturities, we're not seeing any delineation between free market and historical rent-regulated items just because the LTVs are so low, and we've been pretty conservative in the underwriting. So I think there's a difference at the reprice. If something is repricing and still has 5 years left, you probably would see more of the rent-regulated stuff staying on with the books. But at maturity, we're seeing the same 80% to 90% of the loans are basically going away at this point. And there's really no delineation between that at this point in time, at least. Matthew Breese: Okay. And then 2 others for me. Just one, we may be in the process of getting some short order successive rate cuts. It feels like 2 by the end of the year and then maybe 1 earlier next year, so call it, 3 or 4 -- another 3 or 4 25 bps cuts. Can you give us some idea for expectations on deposit betas as a lot has changed on year-end than previous cycles? Avinash Reddy: Yes. I'll start with this cut, Matt. So I think you asked the question last quarter, I mean, rate cuts obviously help us and gradual rate cuts help us more than probably big rate cuts because that's sometimes it's hard to cut depositors by the full amount. So we kept the deposit cost at 2.09% this quarter, consistent with the last quarter, but we continue to grow deposits, right? So we're bringing on new deposits in the low 2s. Right now, our cost of deposits is in the low 190s. Prior to this rate cut, it was 2.09%. And so we were pretty much able to pass the full 100% on. I mean we do have 30% DDA. So that is what it is. So I'd say for this 25 basis points, we're very happy with where we ended up. So we started at 2.09%. We're at 1.90% right now. So we were able to cut and that's on total deposits. We're able to cut by 19 basis points. So I think for anything going forward for the next 2, we'd expect something similar, but it's going to depend on the competition. And look, the luxury that we have is we have a lot of new deposits coming in with -- from our branch network, from our municipal deposit bankers, from our private banking teams and from some of the commercial lending teams that we've built on. So we can be more aggressive with the existing deposit base that we have. And I don't think that's a luxury that a lot of other peers in our geography have. So while I think the models would say 50%, 60% beta, I mean, we're trying to pass everything on going forward on the way down. And if you remember, when rates were at 0, our cost of deposits was 7 basis points back then, right? We're not getting back there, but we did pay up on the way up, and there was industry events with Signature and some of the other stuff that happened where there was a bit of retention going on. But I think on the way down, our goal is to benefit from that. And again, the NIM guidance that we gave going forward, I mean, that's absent any rate cuts, right? I mean -- so for every rate cut, we should have 5 basis points plus or minus over there, and that's kind of primarily from cutting the deposit side of the business. Matthew Breese: Great. I appreciate all that. And then just my last one. There's been some larger banks that have identified Long Island as a market folks want to be in. And I know in prior calls, we've asked you about M&A as a buyer. And I'm curious your thoughts there. But I'm also curious to what extent you've thought about all strategic alternatives, including a potential sale if bids were to come in and some of these larger banks were to make a more pronounced effort in Long Island. That's all I had. Stuart Lubow: Yes. Thanks, Matt. Look, we're focused on organic growth. We have -- we've just brought on all these talented bankers and these teams on the loan side. We had already done that on the deposit side. We think we're really well positioned to deploy the excess liquidity that we have over the next 6 months to a year with all these teams coming on board. Our pipeline is very strong with very good yields. So I'm excited about the fact that we're going to start to see NIMs in the mid- to high 3s in a relatively mid- to long term, which is going to benefit the bottom line and our shareholder value. So really focused on that. As far as the other, look, everyone knows me. I've been around a long time. I'm always interested in maximizing shareholder value. But for now, we're really focused on organic growth. Operator: And our next question comes from Mark Fitzgibbon of Piper Sandler. Mark Fitzgibbon: I was wondering, with the capital ratios building nicely, and it sounds like no balance sheet growth in the fourth quarter. What are your thoughts on stock repurchases? Avinash Reddy: Yes, Mark, so we've started having those conversations in earnest at this point. I think last couple of quarters, we said early 2026, we will revisit it. I mean the common equity Tier 1 is over 11.5%. Total capital is over 16%. I mean the one thing we were trying to do is to get the CRE concentration ratio down to the low 400s, and we are there, right, at this point in time. I will say when you look at the peer groups, Mark, and more nationally because I mean, we've really broken out of the local peer group here. Our business model is completely different from a lot of the other banks here. And you look at TCE ratios or you look at common equity Tier 1 ratios, it's gone up industry-wide. And so I don't think we're an outlier when you compare us to the rest of the industry. We obviously have a lot more capital than historical Dime used to run the balance sheet. So I think the first and best use of capital, obviously, is putting into work on all of the existing lending teams that we have, a lot of the new teams that Tom has hired and putting that to work. I mean you've seen in the press release a number of new verticals that we've brought on board. And each one of them should be a $0.5 billion business for us over 2 to 3 years, right? So we'd like to deploy that. At the same time, the CRE runoff, the multifamily runoff is going to stop at some point relatively soon, and we'll be back in that market in a bigger way. So I think we're trying to balance a lot of those items, Mark. From a corporate finance perspective, obviously, we see the stock is very undervalued, especially as you start projecting out NIMs in '26 and '27. So from that perspective, we do want to be back in the market for that. If you remember, after the merger, we returned around $100 million of capital to shareholders. So we have been aggressive on that. But I think the limiting factor was the CRE ratio more from an optics perspective. And I think as we get below $400 million, that will go away, and it will probably help us be back in the market. So hopefully, that provides you a bit of perspective on the different dynamics there. Mark Fitzgibbon: It does. And also, I was curious, Avi, you mentioned there was a fraud recovery in the quarter. I guess I'm curious how much was that? And was that in other -- the other income line? Avinash Reddy: Yes, yes. So that was in other income, Mark. If you remember, this probably dating back to 2018 or 2019, Legacy Bridge had a fraud with a bus company. It was around an $8 million noninterest expense hit that they had more of an operational item. So we've been going through the legal process, and we were able to recover $1.5 million this quarter, and that's in the other -- other noninterest income line. Mark Fitzgibbon: Okay. Great. And then I guess just sort of a bigger picture and maybe not even necessarily relating to Dime, but just industry-wide. Stu, you and I have been through a few credit cycles. I guess I'm curious where you feel like we are and what inning are we in? How does the cycle play out? Does it get markedly worse? Does it sort of just muddle along? Are we -- have we seen the worst of it? I guess I'm curious of high-level thoughts. And again, not specific to Dime per se. Stuart Lubow: Yes. No, I think we're kind of in the later innings at this point. I think we're going to muddle along a little bit going forward. Look, we -- the issues of 2023 and the 2 years thereafter kind of exacerbated some of the situations with the higher rate environment. So I think overall, the industry has done very well. And I think we're at the point now where you got a lower rate environment coming. And I think generally, at least locally, the economy remains relatively strong. So I think that the industry has kind of worked through the process and managed the credit issues very well. I think as some of the issues come up with improved earnings, there might be a little bit more aggressive approach to resolving items. But I think generally, I think the industry has done well. And I don't see us entering a significant stress environment in terms of credit. Operator: I'm showing no further questions at this time. I'd like to turn it back to Stuart Lubow for closing remarks. Stuart Lubow: Thank you, operator, and Diane, and thank you all for -- thank all our dedicated employees and our shareholders for their continued support. We look forward to speaking to you in early 2026 after our fourth quarter. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kerry Group Third Quarter 2025 Results Webcast. [Operator Instructions] I would now like to turn the conference over to William Lynch, Head of Investor Relations. Please go ahead. William Lynch: Thank you, operator. Good morning, and welcome to our Q3 2025 trading update call. I'm joined on the call by our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. As usual, Edmond and Marguerite will take you through our presentation, and we will then open the lines up for your questions. Before we begin, please note the usual disclaimer on our presentation regarding forward-looking statements. I will now hand over to Edmond. Edmond Scanlon: Thanks, William, and good morning, everyone, and thank you for joining our call. So moving first to Slide 4 and my overview comments. We delivered a good performance across the first 9 months of the year with volume growth well ahead of our markets, combined with strong EBITDA margin expansion. Beginning with revenue, volume growth for Q3 and year-to-date was 3%, which represented a strong end market outperformance. Looking at this firstly by region, we achieved good growth in the Americas, supported by new product launch activity with both Europe and APMEA delivering sequential volume growth improvements in the third quarter. From a channel perspective, foodservice growth of 4.1% was driven by good innovation activity across new menu items, seasonal launches and LTOs. Growth in the retail channel was supported by increased retailer brand innovation and nutritional enhancement renovation. And by technology, we had strong performances across savory taste and Tastesense Salt and sugar reduction technologies as well as enzymes, natural extracts and proactive health technologies. Moving to margins. We delivered strong EBITDA margin expansion of 90 basis points in the period, primarily driven by Accelerate Operational Excellence, and we continue to see good margin expansion opportunity in front of us. On guidance, we remain on track to deliver our full year guidance. And finally, before we move to the performance review, I'd just like to update you on a few key strategic developments during the period. In recent weeks, we opened our new state-of-the-art Biotechnology Centre in Leipzig, Germany, which will play an important role in supporting future, fermentation and biotransformation innovation for the food and beverage industry. In the period, we initiated our Accelerate 2.0 program, which will focus on footprint optimization and enabling digital excellence across the organization. And we also continued to invest and develop our footprints, capacity and capabilities across our regions through the period. I'll now hand you over to Marguerite for the business review. Marguerite Larkin: Thanks, Edmond, and good morning, everyone. Moving to Slide 5 and the business review. Firstly, volume growth in the period of 3% represented continued strong end market outperformance, as Edmond mentioned. Pricing of 0.2% reflected overall input cost inflation. On the EBITDA margins, we delivered strong margin progression of 90 basis points in the period and 80 basis points in the quarter, primarily driven by cost efficiency, operating leverage and product mix, along with the contribution from acquisitions and disposals. Growth in our end-use markets was led by the Bakery, Snacks and Dairy end markets. Foodservice delivered growth of 4.1% despite soft traffic in places. Retail performed well overall, given increased customer focus on improving the nutritional profiles of their products. And volumes in emerging markets increased by 5.3% in the period, led by a strong performance in Southeast Asia. Turning to Slide 6 now and our performance by region. Firstly, in the Americas, where we had good performance across the region with volume growth of 3.6% year-to-date and 3.5% in the third quarter. Within North America, growth was led by snacks through Kerry's range of savory taste profiles and Tastesense Salt reduction technology. Growth in the retail channel was supported by renovation activity across global, regional and retailer brands with growth in foodservice led by good innovation activity with quick service and fast casual restaurants. And in LatAm, we had strong growth in Brazil and Central America, led by snacks. In Europe, volume growth was 0.7% in the third quarter, 0.4% year-to-date. This included a good performance in foodservice through seasonal and new launch activity with retail volumes reflecting soft market dynamics in Western Europe. Growth in the region was led by beverage through Kerry's integrated taste technologies and proactive health ingredients. Turning to APMEA, where our volume growth was 4.1% in the third quarter. This was primarily driven by strong growth in Southeast Asia with solid growth in the Middle East and Africa and volumes in China remaining challenged. Foodservice delivered strong volume growth with coffee chains and quick service restaurants and retail channel volume growth was driven by Kerry's authentic savory taste profile. Growth in our end market was led by bakery through food protection and preservation systems as well as reformulation activity in areas, including cocoa. Turning to the components of our reported year-to-date revenue bridge on Slide 7. Volume growth, as I mentioned, was 3%, with pricing up 0.2%. Transaction currency was favorable 0.2%. Translation currency was adverse 3.6% given the movements in the U.S. dollar and emerging market currencies versus the euro. And the acquisitions net of disposals was a net decrease of 0.8% in the period. Finally, to cover off a number of other matters on Slide 8. Net debt at the end of the period was EUR 2.2 billion, reflecting cash generation, capital investments and the share buyback program. We initiated Accelerate 2.0 as planned during the period, and we are pleased with the progress made. Firstly, in executing the footprint optimization strategy across Europe and North America, including the commencement of some site closures and the disposal of some associated business activities. And secondly, we have started the rollout of a number of digital initiatives we have been piloting over the last 18 months within our manufacturing operations and commercial activities. On input costs, while there is overall variation within our input cost basket, we are currently looking at limited input cost inflation for the full year. On currency, our outlook remains unchanged for a 4% to 5% translation currency headwind in the full year. To summarize, we delivered a good overall financial performance in the period with volume growth combined with strong margin expansion. And with that, I'll pass you back to Edmond. Edmond Scanlon: Thanks, Marguerite. So moving to our full year outlook on Slide 9. Our strong end market volume outperformance in the period demonstrates the strength of our strategic positioning across our markets, channels and customer base. And looking to the remainder of the year, while recognizing a heightened level of market uncertainty, we remain well positioned for volume growth and strong margin expansion as we continue to support our customers as an innovation and renovation partner. As I noted earlier, we're maintaining our full year adjusted earnings per share guidance of 7% to 11% constant currency growth. And with that, I'll now hand you back to the operator, and we look forward to taking your questions. Operator: [Operator Instructions] Your first question comes from the line of Patrick Higgins with Goodbody. Patrick Higgins: A couple of questions, if that's okay. Firstly, just in terms of, I guess, guidance, obviously, you reiterated the 7% to 11% on EPS. But just in terms of volumes, I think at H1, you said around 3%. Is that kind of reiterated as well? And I guess following on from that, at the H1 point, you noted end markets were broadly expected to be broadly flat this year. How has that developed since then? Could you maybe talk through the moving parts by region? And then my next question is just around the innovation pipeline. Obviously, you've been pretty consistent about the strength of that through this year. How has that developed since H1? Have you seen any delays or kind of smaller-than-expected launches just given the challenging kind of consumer backdrop? I'll leave it there. Edmond Scanlon: Thanks, Patrick. Firstly, on the volume outlook for the remaining of the year, no change to what we said at the half year. So we're expecting volume growth to be circa 3% in the full year. In terms of, let's say, market kind of, let's say, conditions or kind of what we're seeing by region maybe. The reality is there is a lot of variability out there at the moment. North America, the consumer backdrop has remained challenging. And I think we can all see that from different kind of market data out there or traffic data on the foodservice channel being slightly back year-on-year. In LatAm, the market in Brazil has improved versus last year, but we've seen the opposite in Mexico. And in the APMEA region, market demand in Southeast Asia has been healthy for us. I think it's fair to say Indonesia has been the standout performer for us. But when we look right across Southeast Asia, it's been quite strong, maybe the only exception being Vietnam. And I think what's really important for us is our ability to be able to pivot resources at pace and at scale. Then in terms of innovation, I guess, look, we called out a year ago that penetration opportunity and the scale of that penetration opportunity is quite significant. And as we look at the progression of our project pipeline between then and now, we've seen the impact of that penetration opportunity really, I suppose, contributing to our pipeline and contributing to the increase in scale in our pipeline over the course of the last 12 months. There has been quite a bit of launch activity in Q3, that will continue into Q4. Some of the performance of that launch activity in the market has been mixed in places. But overall, I would say the level of innovation that we have seen come through both on the retail channel and the foodservice channel is quite strong overall. The main driver being the penetration opportunity, but we've also seen customers, let's say, for instance in foodservice, be it the larger players or the smaller players step up the level of innovation with the larger players more focused on protecting market share and securing market share and bringing innovation to the menu to do that, whereas the smaller players have been, let's say, more into the zone of scaling their businesses and expanding their businesses through store openings. And on the retail side, we've seen significant step-up in activity on private label, which drives, I guess, the local and regional customer segment within our customer segmentation overall. Operator: Your next question comes from the line of Alex Sloane with Barclays. Alexander Sloane: Two questions from me, if that's okay. Clearly, it's too early to talk about '26 precisely. But relative to where we are today, would it be fair to assume that APMEA growth next year can be closer to the medium-term target if China improves? And perhaps you could give a bit more color on the trends and outlook that you're seeing in China, obviously, still challenged in quarter 3. The second one, in quarter 3, you had sort of more balanced growth between foodservice, which obviously slowed a touch on the traffic, but improved growth in retail. Would you expect that sort of balance to remain the case for the remainder of the year and into '26? Or should we expect foodservice to resume its historical outperformance? Edmond Scanlon: Maybe taking the second part of your question first. As you say, let's say, the performance across foodservice and retail has been, let's say, foodservice is slightly ahead of retail as we sit here at the moment. But as we look out, we would feel that foodservice will still continue to outperform retail like it has in the past. I guess the headlines that we're seeing maybe coming from the larger players or the traffic doesn't reflect the level of activity that's going on within the channel. I would say, from an innovation perspective, whether it's LTO, seasonal offerings, whether it's new taste profiles being launched onto the menus, a lot of innovation around chicken and pork, let's say, the whole poultry category, beverage continuing to be quite strong. Yes, the message really on foodservice is the headlines probably doesn't just capture the level of activity that's going on right across the channel. Then maybe on APMEA for a minute. Look, our expectations here going forward over the coming, let's say, quarters and over the medium term is that the APMEA region will continue -- our expectation is that the APMEA region will continue to be in that high single-digit volume growth zone. Obviously, we're not there at the moment but we do remain very positive on the region. We have developed our business significantly there in recent years, particularly in the Middle East and Africa. We continue to invest in that region with new capacity coming on in Jeddah. We brought new ground in the manufacturing facility in Turkey. We're opening a new state-of-the-art technology and innovation center in Dubai. And that's really our expected standout performer here going out into the future in the Middle East and Africa. China has been more challenging in recent times. Absolutely no doubt about that. We have, let's say, slightly adjusted our strategy in China in that we have seen some of our customer base in China look more to regions outside of China to grow their business. So we have made a slight pivot there from a personnel perspective and from a strategic customer engagement perspective, bringing them proactive concepts whereby they can target regions outside of China to grow their business and specifically develop products for, let's say, Southeast Asia and the Middle East and Africa, albeit these products will be produced in China. So a slight pivot there. We're not sitting back waiting for the market to change in China. We're being very proactive really to try and drive our business forward there and to get as proactive as we possibly can with our customer base. Operator: [Operator Instructions] Our next question comes from the line of Ed Hockin with JPMorgan. Edward Hockin: I've got 2, please. My first one is on Europe. So you saw a bit of an improvement in volumes growth in Q3, whether you could outline what drove that uptick and how durable it is as we think about Q4 and next year? And also with the appointment of Marcelo as the Head of that region, what is it do you think needs to be changed or developed or fixed within the region to get it on a more sustainable growth footing, after a couple of years that have been close to flat? And my second question, at the group level, as we think about 2026, and obviously, it's early days to be talking about. But in the absence of an end market improvement, supposing end markets remain flat, what kind of levers do you see or what kind of areas to draw our attention to that could drive growth improvement versus this year? Or is it your view that in a flat market then a circa 3% is the right level for 2026 volumes as well? Edmond Scanlon: Yes. Maybe first on the Europe question. I would say, look, our expectations for Europe and bear in mind, when we talk about Europe, we're talking about the developed Europe situation. Basically, our expectation is to be in that 1% to 2% volume growth range. And we are -- and we will progress towards that range in the, let's say, upcoming quarters. It's going to be a slow burn in Europe, though, nonetheless. I mean the market is, let's say, fairly challenged. It is a market that we're expecting to have a more proactive approach in that market. We've always been proactive in Europe, but we're expecting Marcelo to bring that level of pro-activity that we would typically have in emerging markets into Europe and to build on the good work that's already been going on in Europe. We're not calling out any change in strategy in Europe. It's a continuation of the strategy. We believe we have absolutely the right strategy for our customer base in Europe and to grow our business in Europe. It's about, let's say, doing a refresh in terms of our approach to the market, bringing that emerging market mindset of intense productivity to the customer base. Then in terms of maybe the outlook, I would go back to the point, Ed of, let's say, the market is going to do what the market is going to do. I guess we're really focused on driving our business forward. When I look at the scale of our pipeline versus where it was a year ago, it is significantly ahead of where it was a year ago. And I would call out maybe 3 big areas. The penetration opportunity that I've talked about many times in the past, that reformulation from a nutrition perspective, from a cost perspective and even from a sustainability perspective, these are all factors that are driving our business forward. There are challenges around availability of raw materials, et cetera, et cetera. All these things are driving our business forward, driving penetration, contributing to the growth that we're getting in the business. And the major, I suppose, reformulation opportunities, specifically in North America are in front of us. The entire discussion around, I would say, the [ maha ] or the potential front-to-pack labeling or let's see how things play out in North America. But that's still very much in front of us. States are doing their own things, but there hasn't been a federal intervention yet in North America in terms of exactly the direction of travel. If and when that happens, we feel that's a further underpin of growth and a further underpin of opportunity for us going forward into the future. Foodservice, there's -- we've seen a significant step-up in the level of value offerings and value meals and just our customer base being hyper focused and they're doing that through the lens of new launches, be it LTOs or seasonal offerings, but they've also stepped up their value offerings. And we expect that to continue over the coming quarters, and we're extremely well positioned as it relates to that channel. And the third area I'd call out is, let's say, that private label opportunity, whereby retailers are being quite aggressive in terms of trying to bring new products to the market that are not just national brand equivalents. They are trying to bring high-quality products to the market to grow categories. So I guess as we look out into the future, we feel that despite the challenging market, there are several factors there that we feel quite good about as we look out into the quarters in front of us. Operator: Your next question comes from the line of Fulvio Cazzol with Berenberg. Fulvio Cazzol: My question is really on the EBITDA margin, which is up 90 basis points in the first 9 months, up 80 basis points for the third quarter. So my question around that is, well clearly, it's developing probably better than what you would have anticipated at the start of the year, whether you can confirm that? And if that's the case, could you maybe just highlight for us what's driving this? Is it that you're seeing incremental cost-saving opportunities that you're unlocking? Or are you just executing faster some of the efficiencies? In other words, the 19% to 20% target that you've got for 2028, are you likely to achieve that earlier? Or is there going to be a bigger potential upside on the EBITDA margins? Marguerite Larkin: Maybe I'll take that question. So firstly, we are pleased with the strong margin expansion of 80 basis points in the quarter. In terms of the stronger performance in the quarter, it's mainly due to the phasing of benefits from Accelerate Operational Excellence and portfolio developments, so slightly ahead of our expectation. I would say, though, there is no change to the full year expectation for margin expansion of 70 basis points or greater. We are well on track to deliver that margin expansion in the current year. And then in terms of the -- looking forward to the margin expansion over the next number of years, we are happy that we have outlined a clear margin target of 19% to 20% by 2028. We have a clear pathway in terms of delivery of that target, and we're pleased with the progress that we've made in terms of commencing the Accelerate 2.0 program, which will be a strong underpin of delivery of that margin expansion over the next couple of years as well as continued expansion from mix and operating leverage. Operator: Our final question comes from the line of Cathal Kenny with Davy, Research. Cathal Kenny: Two questions from my side. Firstly, just going back to private label, Edmond. Just want to delve into that a little bit more. Which region are you seeing most activity on innovation? And which region are you best placed to execute on that opportunity? And then the second one is just on enzymes. I see it comes up in the press release a couple of times. Just wondering in terms of the end market applications you're focused on in terms of bringing that technology to bear. Edmond Scanlon: Maybe talking about enzymes first. I mean I think the 2 end-use markets that we are seeing, I would say, performance that is maybe even slightly ahead of expectations is on dairy and bakery. Firstly, on dairy, we have quite a strong offering into the dairy channel, let's say, historically, but lactose intolerance is a growing kind of need out there in the market, and we are extremely well positioned to be able to take advantage of that opportunity, and that opportunity is quite global. The second area is in bakery, whereby enzymes and our enzyme capability is a key tool to the toolbox, in our toolbox in terms of freshness and food protection and preservation. And again, that is a demand from our customer base across both foodservice and retail channels. And that is about basically bringing freshness and food protection and preservation in a clean label way to the bakery end-use market. And yes, we recently announced a new Biotechnology Centre in Leipzig, Germany, and we're expanding our footprint in Ireland as it relates to manufacturing enzymes, both on the fermentation side and on the packaging side. Then on private label. Private label is not new to us here in Europe or, let's say, in Ireland and the U.K. We have, let's say, a strong track record in private label, let's say, emanating from this region. And we have, I suppose, with that level of experience we have and expertise that we have in private label, we've deployed those capabilities into North America. It is in North America that we have seen a step change in terms of engagement with retailers around targeting certain categories where actually they want to take a leadership position in certain categories where they feel there's been a lack of innovation in recent years and they feel that there's, let's say, plenty of scope from a pricing perspective to bring really high-quality clean label, more nutritious food and beverage products into categories that they want to lead, and we're very well positioned to be able to actually enable them. From an overall, I suppose, business model perspective, it is quite similar in terms of approach as we take for foodservice. So we feel well positioned to be able to take advantage of this opportunity and expect that private label performance and private label, I suppose, market expansion will continue in North America. And yes, we feel good about that as we look forward into the coming quarters. Operator: And that concludes the question-and-answer session. I would like to turn the call back over to Kerry for closing remarks. William Lynch: Thank you, everyone, for joining us on the call today. If you do have any follow-ups, please do reach out, and we just want to wish you a good day.
Operator: Good day, everyone, and welcome to the Arca Continental Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this call is being recorded. I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Melanie Carpenter of IDEAL Advisors. Please go ahead. Melanie Carpenter: Thanks, Nicky. Good morning, everyone. Thanks for joining the senior management team of Arca Continental to review their results for the third quarter and the first 9 months of 2025. Their earnings release went out this morning, and it's available on the company website at arcacontal.com in the Investor Relations section. It's now my pleasure to introduce our speakers. Joining us from Monterrey is the CEO, Mr. Arturo Gutierrez; the CFO, Mr. Emilio Marcos; and the Executive Director of Planning, Mr. Jesus Garcia. They're going to be making some forward-looking statements, and we just ask that you refer to the disclaimer and the conditions surrounding those statements in the earnings release for guidance. And with that, I'm going to go ahead and turn the call over to the CEO, Mr. Arturo Gutierrez, who is going to begin the presentation. So please go ahead, Arturo. Arturo Hernandez: Thanks, Melanie. Good morning, everyone, and thank you for joining us today to review our results for the third quarter and to share some important recent developments. Let's begin with our consolidated results. I'm pleased to report another quarter of solid execution and sequential progress across our territories, even as the broader economic environment remains challenging. Our teams continue to navigate market headwinds with agility and discipline, driving robust profitability. Total consolidated volume declined 1.8% in the quarter, while consolidated revenues grew 0.5%, supported by effective portfolio mix and revenue management, partially offset by unfavorable FX impacts. Consolidated EBITDA grew 1.2% in the quarter, reaching a margin of 20.4%. This achievement marks a significant milestone with third quarter EBITDA margin at its strongest point since the acquisition of our U.S. operation in 2017. These results underscore our relentless execution, the strength of our portfolio and our continued focus on driving profitable growth. Let me expand on the results across our geographies. In Mexico, unit case volume, excluding jug water, declined 2.9%, largely reflecting the impact of heavy rains and below-average temperatures across much of our territory. Despite this temporary weather-related pressures, still beverages grew 2.2%, led by tea, juices and nectars and energy drinks, capitalizing on the positive momentum in the supermarket channel. Coca-Cola Zero continued to outperform delivering sequential double-digit growth, supported by the introduction of the new 450-milliliter format, which continues to resonate with consumers seeking convenient and affordable options. Santa Clara brand continues to deliver strong performance in Mexico, achieving double-digit volume growth rates, supported by robust momentum in flavored and specialized milk. We continue to gain value share in the value-added dairy category, reflecting the strength of our innovation and disciplined execution. Net sales grew 2.8%, with average price per case, excluding jug water, up 6.4%, underscoring our strong revenue management capabilities. EBITDA decreased 3% in the quarter, resulting in 23.9% margin, reflecting our disciplined commercial execution and solid revenue management capabilities in a softer demand environment. In South America, total volume declined 0.6% in the quarter, primarily due to softer performances in Ecuador and Argentina. This was partially offset by growth in Peru. Total revenue declined 13.6% and EBITDA was down 1% with a margin of 18%. This quarter reflects a steady though cautious progression of the recovery that began in the first half of the year with meaningful variation across countries. Collectively, our South American operations are advancing through a period of disciplined stabilization, setting the stage for more balanced and sustainable growth ahead. In Peru, total volume increased 2% in the quarter, supported by a stable economic environment and resilient consumer demand. Growth was broad-based across categories, led by sparkling up 1.7%, stills up 1.9% and water at 4.8%. Our core brands, Coca-Cola, Inca Kola and Sprite delivered strong growth, up 1.2%, 1.6% and 8%, respectively. Volume recovery remained consistent across channels with convenience stores leading the way up 22%. Supermarkets showed a sustained rebound while traditional trade maintained solid momentum, supported by our effective price pack and cross-category strategies, further enhanced by our digital capabilities. Turning to Ecuador. Volume declined 1.2%, reflecting softer market conditions and a fragile yet gradually improving macro environment. Even so, our team remained focused on executing our fundamentals and driving performance in the areas within our control. We sustained our value share in NARTD beverages, driven by continued growth momentum in still beverages, up 3.6%. In the sparkling category, Coca-Cola Zero once again delivered solid growth of 2.2%, while Fanta and Fioravanti grew 6.2% and 3.6%, respectively. The water segment rose 3%, showcasing the strength of our diversified portfolio. We also continue to refine our price pack and channel strategies, drive the adoption of returnable packages and invest in targeted market initiatives to strengthen our long-term position. Year-to-date, we have installed more than 17,000 cold drink units, further enhancing our market coverage and reinforcing execution at the point of sale. In Argentina, volume declined 5.6% in the quarter, reflecting the near-term effects of the country's economic adjustment. Nevertheless, we gained value share across NARTD categories, supported by our sparkling portfolio and our continued focus on affordability and returnable packaging initiatives. While volatility remains, our disciplined execution and agile commercial approach positions us well to capture growth as conditions normalize. Our beverage business in the United States delivered another strong quarter, sustaining solid momentum and achieving robust operating results. This marks our 30th consecutive quarter of EBITDA growth. Adding to this momentum, our U.S. team was recognized as the best Coca-Cola bottler in the world, receiving the prestigious Candler Cup. We are proud to be the only bottler to have earned this award twice, underscoring our operational excellence and market leadership. These impressive milestones reflect our team's consistent execution and the strength of our business model. Solid performance this quarter was driven by effective management of our price pack architecture, disciplined cost controls and continued focus on maximizing the value of our most profitable packages. Net revenues rose 3.5% this quarter, with the average price per case up 4.8%, supported by our strategic focus on boosting promotional efficiency through our trade promotion optimization digital platform. Volume for the quarter declined 1.3% and transactions grew 0.1%. Key performance highlights included a 5.9% increase in our low-calorie portfolio led by Coca-Cola Zero, Diet Coke and both Diet Dr. Pepper and Dr. Pepper Zero. In the stills portfolio, Monster, Fairlife, Core Power and Smartwater continued to post sequential growth, supported by robust brand execution. Notably, EBITDA increased an outstanding 9.7%, representing a margin of 17.2%. And an important update on our digital agenda, our e-commerce business continued to deliver strong results, driven by enhancement in our eB2B capabilities and outstanding execution in the e-retailer space. I'd like to close our U.S. update by sharing our excitement for the 2026 FIFA World Cup and our role as whole city supporters for the Dallas and Houston venues. Through this partnership with the World Cup Organizing Committee, we will actively support the city's legacy programs and showcase our brand through targeted initiatives that engage fans and local communities. Our Food and Snacks business delivered a resilient performance posting a low single-digit sales decline for the quarter. While facing top line challenges, our team remained focused on profitability through effective price management, portfolio optimization and operational efficiencies. In line with our broader sustainability objectives, we continue to advance the clean label initiative across our U.S. Snacks portfolio. This includes the removal of artificial colors, flavors and preservatives as well as the simplification of ingredients lists. These efforts exemplify our commitment to transparency, product integrity and long-term consumer trust. And with that, I will now turn the call over to Emilio. Please, Emilio? Emilio Marcos Charur: Thank you, Arturo. Good morning, everyone, and thank you for joining our call. As Arturo highlighted, the same factor that influenced our performance in the first half of the year continued to play a significant role in the third quarter. Macroeconomic environment remained challenging and weather conditions were still unfavorable. Even so, we have a sequential improvement in volume for most of our operations, demonstrating strong team performance despite challenges. The improvement in volume, together with our solid revenue growth management capabilities and disciplined approach to expense control resulted in an expansion of our consolidated EBITDA margin. Let me offer further insight into our financial results. In the third quarter, consolidated revenues increased 0.5%, reaching MXN 62.9 billion. Revenues for the 9 months of the year rose 6.6% to MXN 183.4 billion, mainly driven by an effective pricing strategy. On a currency-neutral basis, revenue rose 3.8% in the quarter and 3% year-to-date. During the quarter, SG&A expenses rose 1%, reaching MXN 19.4 billion. Despite the contraction in volume, SG&A to sales ratio was fairly in line with third quarter '24 at 30.8%, reflecting our continued commitment to operational discipline. In the quarter, gross profit increased 1.2% to MXN 29.5 billion, while gross margin expanded by 30 basis points due to a solid price pack architecture and solid hedging strategy. For the quarter, consolidated EBITDA increased 1.2% to MXN 12.8 billion with a 10 basis point margin expansion reaching 20.4%. In the 9-month period, EBITDA grew 6.1%, reaching MXN 36.6 billion, while EBITDA margin decreased by 10 basis points to 20%. On a currency-neutral basis, EBITDA rose 2.6% in the quarter and 2.2% as of September. Net income in the third quarter reached MXN 5.3 billion for an increase of 3.5%. Net profit margin increased 20 basis points to 8.4%. Now moving on to the balance sheet. As of September, cash and equivalents totaled MXN 32.3 billion, while total debt stood at MXN 63.9 billion, resulting in a net debt-to-EBITDA ratio of 0.62x. In our most recent Board meeting, it was approved to distribute an additional dividend of MXN 1 per share to be paid on November 5. Combined with the ordinary dividend of MXN 4.12 distributed in April and the extraordinary dividend of MXN 3.50 paid in June, we will reach a total dividend of MXN 8.62 per share. This reflects a payout ratio of 75% of retained earnings and a dividend yield of 4.3%. Total CapEx reached MXN 11.8 billion, representing 6.4% of sales. Investments were primarily directed towards expanding our production capacity, ensuring that we are well positioned and sustained future growth. We also continue to enhance our distribution and commercial capabilities, which are key enablers for our long-term strategic plan. Looking ahead, we expect market volatility to continue throughout the rest of the year. We remain confident in our business strength and ability to create value despite challenging conditions. We will continue managing expenses carefully to drive profit and sustainable growth. That concludes my remarks. I will turn it back to Arturo. Please, Arturo. Arturo Hernandez: Thank you, Emilio. As we reflect on this quarter, our disciplined execution enabled us to protect volumes, sustain market share and maintain profitability even in challenging conditions. Furthermore, as we marked the third year of our collaboration agreement with the Coca-Cola Company, this partnership continues to deliver on its core objectives while unlocking new opportunities through a broader portfolio. At the same time, we are staying proactive on regulatory developments and pursuing strategic initiatives, ensuring our readiness to capture growth when market conditions improve. By balancing resilience with agility, we're positioned to deliver a strong and sustainable performance across cycles and continue creating long-term value for our shareholders. We are focused, ready and energized to capture the opportunities ahead. Thank you for your continued trust and support. Operator, please open the line for questions. Operator: [Operator Instructions] We'll take our first question from Ulises Argote with Santander. Ulises Argote Bolio: My question is related to the margins in the U.S., right? So another quarter with positive surprises there. I was just wondering if you could give us some color on what continued to be the main drivers there and the main levers despite that slowdown in top line that we're seeing. And maybe just to pick your brain on how sustainable do you think these trends are going forward? Arturo Hernandez: Thank you, Ulises. Well, first of all, we have to say that we're very satisfied with the profitability in our U.S. business, considering also that we faced many challenges in that market. As you know, third quarter, we grew EBITDA, in dollar terms, close to 10%. And our margin is above 17%, which we -- again, we're very pleased with that. The drivers behind it, as we've said before, our pricing capabilities and also the management of promotions. We're looking forward to combine this premiumization of our portfolio with also a price architecture that would cover all segments, considering, again, the economic dynamics. We've also worked on efficiency projects. And I would say that our OpEx ratio has shown this operational discipline. We expect that also to be sustained. There's some efficiency projects underway. And in fact, one of the most important ones will not be fully captured in '26, the Wild West project that we call, which is the restructuring of supply chain in some of our plants and warehouses in the U.S. We also are looking at input costs in '26. They're expected to rise due to inflation, but we do have also a strong hedging strategy. I will ask Emilio to expand on that part. But in general, I would say that we are very confident for '26 to sustain our current margins. Emilio, why don't you expand on our raw materials and hedging situation? Emilio Marcos Charur: Yes. Thank you for your question, Ulises. Yes, for this year, as we have mentioned, we have over 97% of our LME needs in U.S. and 48% Midwest premium portion for this year and 79% of high fructose needs. And we started to hedge for next year. For 2026, we have 95% of our LME needs next year and 20% of Midwest premium. So that will allow us to together with what Arturo already mentioned, to consolidate the levels -- the margin levels that we have this year, and we expect it to reach those levels -- at least those levels for next year. Operator: Our next question comes from Thiago Bortoluci with Goldman Sachs. Thiago Bortoluci: Arturo, question on you for Mexico, right? How should we read the combination of negative sparkling volumes with returnables losing participation in your mix? And if I may expand, the reason I'm asking this is because the big debate today in the space is clearly how much of the drag is structural versus temporary issues, namely comps, weather and another few. So it would be very helpful to hear your perceptions on how you're seeing underlying elasticity, affordability, price pack performance and overall performance by channel. And again, if we can read anything between your volume print and your packaging performance in the quarter, especially in the context where weather conditions didn't help. Arturo Hernandez: Thank you, Thiago. Let me start by giving the context of the consumer environment in the third quarter in Mexico. As you said, this is a combination of not very favorable weather, increased rainfall, cooler temperatures. It was very, very unusual. Rainfall was probably 40% higher than usual in the North of Mexico, even more than that, maybe in some cases, just doubled and tripled in the West regions for us. So temperature has also affected volumes and consumption and traffic throughout the quarter. There was also the economic dynamics where activity slowed down and any activity really was driven by exports rather than domestic demand. So internal consumption has been reduced and special retail activity and traffic weakened. I would like to think that, that is also temporary, not only weather, which would naturally be different as we think about next year. But in terms of the economic weakness, we believe that as we gain greater clarity around trade rules and tariffs and the relationship with Mexico and the bilateral trade with the U.S. that will enhance Mexico's competitiveness and will provide even formal job creation and with that, domestic consumption. If you look at returnable packages, well, the main reason is that supermarkets were basically the only channel that grew volume in the third quarter, and that was driven mostly by intensified promotion, considering the current situation. But we're going to be pursuing our strategy of affordability going forward in Mexico, which means entry-level packages, both returnable and nonreturnable packages. And the 235-milliliter, 12-ounce 250 ml one-way packages. The 450 milliliter that probably you've seen in the market, one-way, very important for us. The multi-server fillable format, what we call the universal model. All those strategies will continue to move forward as we face these challenges. So that is -- it's hard to isolate the effect of weather and the economic situation, but we are convinced that those are the main factors. Our execution in the market continues to improve and our leadership in the market as well, which we believe that's the most important part. Operator: Our next question comes from Ben Theurer with Barclays. Benjamin Theurer: I wanted to get a little bit of how you think about pricing going forward. I mean, obviously, we know about what's in the proposal in terms of taxes for the different categories. But as we think about raw material inflation you face and what you usually pass on, what is your strategy going to be towards the end of the year and then into next year? How should we think about pricing? How much is needed for the taxes? How much would you do on top of that? And what are kind of like the sensitivities you're looking at as it relates to your volume if you were to raise those prices? Arturo Hernandez: Yes. Thank you, Ben. First, let me talk in general about our pricing strategy, which really has not changed. And I think under this market conditions, it's demonstrated that these capabilities do work very effectively of increasing prices in line or above inflation in every business unit. This requires not only this very advanced pricing tools that we have designed jointly with the Coca-Cola Company, but also leveraging the trade promotion models, which operate at a local level. So I think, for years, we have demonstrated these capabilities, which, as I've said, if there is one fundamental capability that consumer goods companies need to get right now or the future is precisely revenue management. So for us, it's combining affordability and also a premiumization strategy, as I said before. We will continue to monitor those pricing dynamics and make sure that we are competitive in the marketplace. And then going specifically to your point about taxes and Mexico. Well, this tax that we are expecting to be implemented for '26 would require us to pass through the impact via prices. And as you know, we've done that before, actually 12 years ago. And we have estimated that, that increase would be in the range of 8% to 10% probably. And that we would have to add inflation after that, considering that we want to remain competitive in terms of margins in '26. So we don't know exactly what the elasticity would be, but there's certainly going to be an impact in volume for next year. We have some of the learnings of past elasticity patterns following similar adjustments in 2014. But at the same time, we have so many things that work in our favor in the Mexico market going forward. I mean there are reasons to believe that we're going to be able to mitigate part of that impact. And there are many factors. I mentioned before, the impact of unfavorable weather this year. We also face this difficult economic situation. We expect normalization next year, considering the challenges we faced with brand retaliation that you know about some product constraints in our supply chain, particularly Topo Chico in '25 and the opportunities to keep deploying our digital capabilities that are still going to be rolled out, some of the new features and very particularly, the incremental demand that would be driven by the major events in Mexico and the U.S., the FIFA World Cup. In Mexico, we're also going to have the 100th anniversary of Coca-Cola in Mexico. So there are so many things that will work in our favor considering that certainly, it's going to be a challenging volume situation as we pass along these -- the tax that has been imposed, but that's going to be imposed. Operator: Our next question comes from Felipe Ucros with Scotiabank. Felipe Ucros Nunez: A quick question on the taxes in Mexico. Of course, not great news getting this tax increase. I was wondering if you can comment on a couple of things. The first one is the differences between this tax and the one that we saw 12 years ago. No tax for beer were changed. So the gap between soft drinks and beer, I guess, is changing. And I'm wondering if you can comment on what type of impact you would expect through that differential. And whether it's material for us to monitor it or you think the occasions are so different that it's really not a concern. And then the second question related to this is, it looks like there's more serious incentives in place to move the consumer towards no-low options. So I'm wondering if you can talk about how this may change profitability and returns for the business in the long run, if at all. And I'm talking about there's differences on the price per unit of sweetening from sucralose and sugar, perhaps there's a margin differential between the different presentations and concentrating price -- concentrate pricing might also be different. So just wondering if there's going to be like a change on the profitability of the business in the future from the change to no-low categories. Arturo Hernandez: Thank you, Felipe. Well, to the first part, we really don't anticipate an impact from any difference in the tax treatment of other categories really. We're looking at the dynamics within our own industry for sure. And in this case, as you saw, we really have a commitment to reduce the calories in our portfolio going forward. And this is not something that is new or that is improvised by the system. We've been, for years, developing and promoting options with less sugar and with no sugar in Mexico and in other markets. So now what we intend to do is to offer more proactively our broader portfolio, a more balanced and lower-calorie portfolio. And those are part of the commitments we've made with the government as we discussed the implementation of the tax. So as part of that, we also want to promote competitive prices and affordable Coca-Cola Zero packages, particularly. This, as you know, has been a great innovation in our portfolio. Coca-Cola Zero continues to grow, and we will connect that also even to the FIFA World Cup next year. Coke Zero will take center stage in many of the campaigns connected to the World Cup. In terms of profitability, we don't think that, that will really affect overall profitability going forward. Felipe Ucros Nunez: Great. That's very clear. And if I can do a second one on sales in Mexico, they did very well. And it's another quarter with the same categories, tea, energy and juice doing very well. So I was wondering if you could talk a little bit about what you're doing there and why the category is behaving differently from others during adverse weather. Is it that the elasticity for this category is a little different? Or it's more a case of things that you're doing at the micro level? Arturo Hernandez: I think it shows the opportunity that we have to grow these categories. As I said before, energy and juices and sports drinks and tea, they're underdeveloped really in the Mexican market. So we have proved that we can be successful in those categories as well. I think that's very important as you look at the story of Powerade in the last 15 years. And now you see Santa Clara, which I mentioned, also, it's a great success story. Tea grew 22%. Juices grew 6%. Monster continues to grow. So I think it's interesting to see them grow even under very challenging conditions, which means the great opportunity that we have to increase the per capitas of these categories that they don't compare very favorably to more developed markets like our own U.S. market. So it's very promising to see them grow even under a more challenging conditions. So we're excited about those possibilities and especially that we can be leaders in those categories as well as we've also demonstrated. Operator: Our next question comes from Rodrigo Alcantara with UBS. Rodrigo Alcantara: Arturo, Emilio, nice to hear from you. I want to go deeper into some of the comments about the commitments regarding -- with the government, right, ahead of the tax discussion, right, in the conference, the government and the Coke system hosted a couple of days ago. As you mentioned, there were some commitments in relation to this trend of increasing low-carb categories, et cetera, et cetera, right, like namely the reduction of commitment to reduce by 30% caloric needs of your products in a period of, if I'm not mistaken, 1 year or something like that, right, in addition to other commitments, right? So the question here would be how much of a challenge or deal in your view is implementing this, right? How are you implementing this? And possibly linked to the previous question is as a result of implementing this, we may see some impact on margins or profitability, which I think you already said no, right? But I mean just to confirm that, that would be the main question. And the other one, just because this is the one that we're receiving from investors as we speak. We have seen macro numbers in Mexico at the margin not looking as good as we may decide, right? Retail sales in September quite weak. So I mean how would you think 4Q would be shaping up in terms of volumes looking from a consumer demand perspective in Mexico? That would be my question. Arturo Hernandez: Thank you, Rodrigo. Talking about the taxes and also the commitments, as I said, this is really not new for us in terms of the commitments that we made with the government, with Congress. This is part of this plan to strengthen our caloric reduction innovation. And this has been around for years. So plan builds on the calorie content that we've actually been testing in the market for a long time in the Coke portfolio. So here, what we're going to do is just continue the migration. So those commitments are actually part of our own strategy in the last few years and also part of the promotion of Coke Zero that has been our strategy as well. But I think the most important takeaway of those commitments is how we remain committed to be part of the solution and how we've been able to have a dialogue with the government and stakeholders and how this collaboration really highlights our ability to engage constructively with the government and adapt to the frameworks and advance really our journey towards a more sustainable and health-focused portfolio because we really share with the government the need to advance in reducing obesity rates in the country. So we want to be, again, part of that solution. So I think that's main takeaway that we are -- that all this story about tax implementation concluded with a very constructive dialogue and conversation with government. And then talking about volumes and profitability, there is -- our concern is not really that this transition to low-calorie or no-calorie version is going to impact our profitability. Obviously, the impact will come from the volume decline that will be the result of the elasticity in these categories. But again, as I mentioned, looking forward in 2026, we have many things to be positive about as we compare with '25, where we've had so many negative factors combined with -- for the performance that we are seeing so far and that we expect to continue to see throughout the end of the year. So that is why, aside from our ability to pass through the tax and pricing in a smarter way, promoting the packages that we believe are important to protect, I think also we have these mitigating effects that I mentioned before, including our promotional activities, the FIFA World Cup and also the uplift we've seen from the deployment of our capabilities that we've been talking about before. So all in all, I think we're good positioned to mitigate that impact. Operator: We will move next with Lucas Ferreira with JPMorgan. Lucas Ferreira: Sorry to insist on the [indiscernible] topic. And just comparing and contrasting 2014 with the situation guys you will face in 2026, what sort of the tools do you think the company has now enhanced to mitigate the impact and mainly talking about price pack architecture, but also the sort of more developed relationship with Coca-Cola company, better partnership, I would put it this way. And if you can speak about -- generally about your, let's say, market share expectations for next year. If you think this is a situation, obviously, a challenging situation, but at the end of the day, could help you even expand your share. So how to think about that? And also, if I may, a quick follow-up on the very short term, obviously, second quarter for Mexico was already better in -- sorry, third quarter better than second. If you expect to end the year at a better note, how sort of the latest news are coming regarding consumer demand and traffic on the floor, et cetera? Arturo Hernandez: Thank you, Lucas. Well, first of all, talking about the tax and the learnings from 2014, increased prices double digit at the time plus inflation. I guess it was around 12%. We had a 3% volume decline approx, a little less than 3% in 2014 and -- but the volume decline was sequentially better throughout the year. I mean we started with a strong decline in volume in first quarter. By the end of the year, there were -- volumes were pretty flat that year, which means there's kind of a psychological impact as well in that elasticity. Now I think to your point about how are we better prepared. I think we've developed our RGM capabilities in this last 12 years quite a lot. We have a stronger leadership in the marketplace. And as you mentioned, we have a stronger partnership with the Coca-Cola company to jointly navigate through this situation, which is not only about passing along the prices, but also what are we going to do in the market to sustain leadership and increase our presence. So what are the things that works in our favor is that the price -- the tax is designed as a peso per liter. So that means for more premium-priced products, it's going to be a less percentage increase as compared to, let's say, value products out there, brands in the market. And thinking about the fourth quarter, well, the environment will remain very challenging. Again, we are continuing to focus on things that we can control, which are basically 3 pillars: disciplined execution with very targeted campaigns. We have very well-designed campaigns to be implemented in this final part of the year. We're launching especially higher impact marketing campaigns for the Gen Z consumers and also Share a Coke and Christmas that kind of deepens the connection of our brands with consumers as well. We continue to double down on our affordability initiatives, as I mentioned before, with entry packages and with single-serve packages that also provide affordability. And we'll start also deploying all of our efficiency initiatives and playbook in this next quarter and throughout' '26, which means reducing cost to serve as we have redesigned new service models. And a number of other projects like lightweighting, improvement in distribution logistics as well. We have an organizational restructuring that mostly addresses agility and clarifying roles, but also it's going to bring more efficiency. So there are a number of things that will help us mitigate this adverse environment. Operator: Our next question comes from Álvaro Garcia with BTG Pactual. Alvaro Garcia: Arturo, I have a question on Texas. I was wondering if you can comment on potential changes to SNAP benefit in Texas and how that might impact demand for your products. And just general commentary on sort of Hispanic consumer and just the consumer environment in general into next year ex World Cup would be very helpful. Arturo Hernandez: Thank you, Álvaro. Yes. Well, we are currently assessing the potential implications of those SNAP benefit changes in our portfolio. It's not -- we don't anticipate a significant impact, but it's something that certainly we're monitoring and looking at consumer trends and consumer demands and especially paying attention to the segment that this is going to impact the most, which is mostly the take-home segment. So we -- at this point, on the impact, we don't have a specific number to provide. But we continue to believe that's important to give consumers the freedom to choose what groceries they want to purchase for the family with the SNAP benefits, but we're still assessing the implications. What I can tell you about the U.S. market dynamics is that we have seen a sentiment among low mid-income and Hispanic consumers that has declined this year. Rising cost of living or interest rates probably, that's been softening spending. If you look at, for example, our value channel in the U.S., that grew almost 4% year-over-year. It's gained some mix. And also that's related to some of the border tensions we've seen this year, fewer people crossing. And Hispanic traffic has declined more sharply in retailers, even in Walmart Hispanic outlets as compared to the non-Hispanic stores. So total retail traffic did fall in this third quarter convenience stores only. Again, club and value saw traffic growth. So that tells you about how the dynamics are playing out. So what we have adopted is, as I said before, this premium strategy -- this dual strategy of premiumization with brands like Topo Chico or Smartwater for some consumers, for the higher income consumers and the introduction of a packaging architecture that addresses the pressure in that middle and lower-income segments in the U.S. market. And for sure, we're going to capitalize the FIFA World Cup events that are going to start actually this year. These major events include the tournament itself next year, we're going to be hosting 24 of the 104 matches in our 4 cities in Mexico and the U.S. We're the Coke bottler with the highest of matches in the tournament and 16 of those are going to be in our U.S. market. So we'll capitalize on all the activities surrounding the World Cup and also the celebration of the 250 anniversary of the independence of the U.S., we're going to be part of that as well next year. Operator: We will move next with Alejandro Fuchs with Itaú. Alejandro Fuchs: I wanted to shift gears and ask you one about South America, especially Argentina and Ecuador. I know it's a very uncertain scenario, right, but I want to see what your expectations going forward, maybe in the next 12 months. We're seeing volumes coming down, but margins going up. So I want to see how you see the business on the ground talking to the teams and what would be kind of the expectations if we should continue to see volumes being pressured or maybe profitability normalizing a little bit. Arturo Hernandez: Yes. Thank you, Alejandro. Let me start with Argentina. As you've seen, we've been facing a very challenging macro environment in the third quarter, rising uncertainty and some of the indicators deteriorating. And that has impacted the lower income segments of consumers and those provinces with high public employment. Unfortunately, we're in a market with high public employment. So we saw the steepest impact of this situation with consumption falling between 6% and 7% in general as compared to the central regions, which were -- had a less significant impact. So our year-to-date performance was still ahead of last year. But certainly, the trend is not very favorable. What we're doing is we're balancing our pricing discipline and affordability and our operational efficiency to stay competitive in this highly dynamic market. What's been important for that are, again, our pricing tools, our promotional tools to align prices with inflation. Our affordability and our playbook for things like Tapipesos promotions, tactical pricing on nonreturnable formats as well. Returnable is very important in Argentina. As you know, it's the highest mix of returnable in all of our markets. And to protect margins, we've been implementing very strict cost control measures. We are also launching new products and continue to innovate in some of the stills category. So we expect Q4 to outperform the third quarter as we expect a gradual improvement. But certainly, we're going to continue to focus on efficiency initiatives to protect margins. If we look at the context for margins in Argentina, we're going to see some upward pressure in some of the expenses related to payroll, particularly, but we're going to have efficiency in other concepts that will offset these pressures. Raw materials, we expected them to rise, driven by inflation. But we had the acquisition of the second sugar mill in Tucumán that is going to mitigate the impact of input cost for us. And I think that's also going to be very important going forward. If we look at Ecuador, and the dynamics in that market, also a difficult environment, mostly challenged by rising insecurity. The economy actually grew in the third quarter in Ecuador, but declining oil production and increased costs have resulted in some new policies like the elimination of the subsidy on diesel fuel and things like that. So -- but retail remains active despite this complex environment in Ecuador. And I think it's important to see how our business, and this is the same case for, I would say, all of our markets in this very difficult third quarter have demonstrated very strong resilience, improving in the case of Ecuador, profitability in the third quarter and outperforming the industry's volume decline in the year. So here, affordability also is going to be important. The execution of our point of sale with new cold drink equipment. That's also a very important in Ecuador. And how we leverage our new service models to enhance customer experience and also to bring efficiency to our go-to-market strategy. So stills categories is an opportunity and deployment of digital as well in Ecuador. So under this challenging environment, again, we're able to effectively protect the profitability for '26 in Ecuador. We are expecting OpEx to grow above inflation, and this is mainly due to the increased depreciation and diesel costs that I mentioned. And -- but some of the pressures will be partially offset by the optimizations that we have planned for our service models, our go-to-market models and some other adjustments. So PET are expected to rise in '26 with freight cost. Sugar is expected to be in line with the '25. So there's going to be some margin pressure considering all these factors, basically the removal of the subsidy, but our focus will be to protect our '25 margin in '26. Operator: Our next question comes from Renata Cabral with Citi. Renata Fonseca Cabral Sturani: It's a follow-up about Mexico. I would like to ask you if you can give some color in terms of competitiveness and how the brand has been reacting to the current environment for volumes and the company has been sustaining shares? And if you can provide some color on the performance in the channel strategy, the traditional channel versus the modern trade if they are different in terms of one is better than the other in the current environment? Arturo Hernandez: Thank you, Renata. Well, in terms of channels, the traditional channel received part of the impact and the decline in consumption this quarter, also convenience store reduced traffic. The only channel that actually increased volume in the quarter was supermarkets. And as I mentioned, was mostly driven by intensified promotions and more competitive pricing. So I think that's a natural consequence of the economic dynamics. But most importantly, we are strengthening our leadership in the marketplace, even considering that we have a price gap versus our main competitor versus rebrands as well. We did have an impact on our share of market with the first half of the year as a result of the retaliation of our brand that you know about. But that really has been solved, and now we're back to the position of leadership that we've had before. Operator: We will move next with Henrique Morello with Morgan Stanley. Henrique Morello: So I would just like just to explore the margin performance in Mexico. As you saw another quarter of compression on a year-on-year basis and at higher levels if compared to the last quarter, right? So if you could dive deeper on the dynamics behind the margin decline this quarter, perhaps beyond the volume decline? And if anything changed from last quarter? And how do you expect the margin to behave in Mexico going forward when you look at your hedge positions right now? Arturo Hernandez: Thank you, Henrique. I will turn that over to Emilio to respond the question. Go ahead, Emilio, please? Emilio Marcos Charur: Yes. Thank you, Henrique, for your question. Yes. Well, in Mexico, basically, there's several factors that affected the margin -- EBITDA margin being the one, the decline in volume as we have explained already. But there are also some changes that Arturo already mentioned. One is the mix of channels. The traditional trade was more affected by the rainfalls during the quarter compared to supermarkets. So channel mix change and also presentations. The mix of single-serve also declined in the quarter. So that was basically the main impact for the margin -- EBITDA margin in Mexico. . For the rest of the year, we've been working on expense control. You also can see that throughout the year, we've been improving our sales -- OpEx to sales ratio every quarter. So internally, everything that we control, we are looking in every efficiency that we can implement in all the operations. So in Mexico, we've been able to mitigate part of the volume decline impact talking about the margin. So for the full year, we're expecting to maintain -- at least maintain the current levels of EBITDA margins for the region. Operator: We will move next with Axel Giesecke with Actinver. Axel Giesecke: Just a quick one. Given your healthy balance sheet position, are you considering further M&A opportunities? And if so, which regions are you looking forward into? Emilio Marcos Charur: Thank you for the question. Yes. Well, as you know, there's -- talking about capital allocation, that's one of our main priorities. Well, as we have mentioned, number one is investing in our operations, and then we just announced an additional dividend. But yes, M&A, as you know, we continue to evaluate, basically, opportunities in U.S. and Latin America. So we have a very strong balanced position in order to close any opportunities. But in the meantime, we've been able to find another avenues for inorganic growth that we are on line with our core business, such as the recent acquisition that we announced, the Imperial, the vending and micro market business in U.S. But we keep exploring opportunities, basically, within the Americas. Operator: We will move next with Fernando Olvera with Bank of America. Fernando Olvera Espinosa de los Monteros: I just have one, and it's related to Mexico. Arturo or Emilio, how are you thinking about CapEx next year and the potential tax increase? Any insight on this would be helpful. Emilio Marcos Charur: Thank you, Fernando, for your question. Yes, regarding CapEx, well, as I mentioned, as of September, we reached MXN 11.8 billion, representing 6.4% of sales. We were expecting to invest around 7%. That's what we mentioned at the beginning of the year. The [ 6% ] of those CapEx are in Mexico and U.S. But at the beginning of the year, when we saw a slowdown in volume, we have postponed some initiatives this year. So ratio OpEx -- CapEx ratio will be around the same level that we have right now, 6.4%, instead of 7%. So we just adjusted some of the CapEx that we were expecting for this year without compromising our long-term growth strategy. So we remain committed to the strategic investment that we have for our capabilities and expanding our capacity and distribution, but I would say in a slower pace than we expected at the beginning of the year. Fernando Olvera Espinosa de los Monteros: Okay, Emilio. And thinking -- I mean, considering that the increase of the excise tax was just announced, I mean, how do you expect CapEx to behave in Mexico next year? I mean, is it possible that you keep postponing some projects for 2027 or... Emilio Marcos Charur: There are some projects that we started and we need to continue in order to be ready for the volume in the next, let's say, 2, 3 years. So there's some of the CapEx that needed to keep going to be ready in 2, 3 years. But the short-term ones are the ones that we are just postponing and see how the volume behave and then we'll decide if we continue with those next year or if we go and move it to 2027. So we expect around 5% to 6% maybe in Mexico CapEx to sales. Operator: This concludes today's Q&A portion. I would like to now turn the conference back to Arturo Gutierrez for closing remarks. Arturo Hernandez: Thank you. We really appreciate your time today and especially your ongoing commitment for company. So please reach out to our investor relations team for any follow-up questions you might have. Look forward to speaking with you again next quarter. Have a great day. Operator: Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Hello, everyone, and welcome to the Southwest Airlines Third Quarter 2025 Conference Call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. [Operator Instructions] Now Lauren Yett from Investor Relations, will begin the discussion. Please go ahead, Lauren. Lauren Yett: Thank you. Hello, everyone, and welcome to Southwest Airlines Third Quarter 2025 Earnings Call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. I am joined today by our President, CEO and Vice Chairman of the Board, Bob Jordan; Chief Operating Officer, Andrew Watterson; and Chief Financial Officer, Tom Doxey. A quick reminder that we will make forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results which excludes special items that are called out and reconciled to GAAP results in our earnings press release. Our press release for the third quarter 2025 results and supplemental information, including our initiative highlights, were both issued yesterday afternoon and are available on our Investor Relations website. And now I am pleased to turn the call over to you, Bob. Robert Jordan: Thank you, Lauren, and thanks, everyone, for joining us today. Third quarter was another story of continued strong execution across the board. Operational reliability, cost discipline and the delivery of initiatives against our transformational plan. Southwest continues to transform at a faster pace than ever before, and I'm pleased with the results of our strategic transformation that we saw during the third quarter and the quality of the initiatives delivered. Both costs and revenue finished meaningfully ahead of expectations and the rollout and impact of our initiatives remain firmly on track. We began selling assigned an extra legroom seating in July, a major milestone for our customer experience and product changes. The rollout was smooth and while still early, we're right on track with our expectations and we're already seeing a 4-point improvement in customer Net Promoter Score on aircraft with this new configuration. Additionally, we have continued to launch new products and services showing our commitment to meeting the needs of our customers, and our ability to execute quickly. Starting tomorrow, we will be offering free WiFi sponsored by our partner, T-Mobile, for our Rapid Rewards members. We continue to roll out our updated cabins with larger overhead bins, In-seat power, upgraded lighting and more. We expanded our distribution channels, launching a partnership with Priceline. We launched our new in-house vacation product, Getaways by Southwest. We announced a new partnership with EVA Air to provide customers more connection opportunities. We announced new markets, including the additions of Knoxville, Tennessee, St. Maarten, Santa Rosa, California and our first ever flights to Alaska, servicing Anchorage all to start in 2026 and we aren't done. While we don't have specifics to share today, we're actively looking at continued changes to widen our product offering for our customers, provide additional premium revenue opportunities and further enhance our Rapid Rewards loyalty program and co-brand economics, including things like premium seating, airport lounges and long-haul international destinations served by Southwest Airlines. And our customers are responding to these enhancements. Our brand Net Promoter Score has returned to the level seen prior to our policy changes announced in March and we are excited to deliver further enhancements as we improve the customer experience. Our strategic plan continues to progress well, and we're encouraged by the sustained outperformance of bag fee revenue and the momentum across other key revenue and cost initiatives. We saw a clear positive inflection in the demand environment beginning in early July, which continued throughout the quarter, and we are proud to report record third quarter revenue performance. Looking to fourth quarter, we expect to deliver an all-time quarterly record revenue performance. We maintained strong cost discipline across the organization, significantly beating our CASM-X guide for the quarter. We have identified additional cost-saving opportunities in the back half of the year and remain confident in our full year EBIT guidance range of $600 million to $800 million. We are entering the fourth quarter with confidence and anticipate meaningful margin expansion as the benefit from our initiatives continues to mature as we execute our transformational plan. Our people delivered a strong operational performance throughout the quarter. Their dedication, their resilience and the world-class hospitality continue to set Southwest apart. We've made measurable progress across nearly every key operational metrics since January, and we continue to lead the industry as we track our performance against the Wall Street Journal airline's scorecard. These results stand out even more given the hurdles that we faced, including summer weather, ongoing ATC constraints and the full rollout of reduced turn times across many of our stations, and it's a testament to our operational excellence and the heart of our company. While we're not providing 2026 guidance today, we're excited about the opportunities ahead and confident in our strategy. In 2026, we expect to recognize even greater benefits from our portfolio of Southwest specific initiatives, including a full year of revenue from bag fees. We expect to deliver more than $1 billion of incremental EBIT from assigned an extra legroom seating in 2026 and hit full run rate of approximately $1.5 billion in 2027. We will continue to be disciplined in our cost execution across the organization and expect that momentum to continue into 2026. It's just an exciting time at Southwest Airlines. We're transforming faster than ever before and the momentum is real. And with that, I'll turn it over to Andrew to share more on our revenue and operational performance. Andrew Watterson: Thanks, Bob. I want to echo Bob's appreciation for our people. Their hard work and commitment enabled us to deliver an outstanding operation this quarter even in the face of early July weather challenges. We've come a long way over the past couple of years, working to enhance processes and technology and improve daily operations and better managed disruptions. A great example of this was in September when an external telecommunications issue in Dallas, impacted radar, radio and computer systems, triggering FAA ground stops at local airports. . Despite our significant presence at Dallas Love Field Airport, we had just one cancellation, finishing second among all U.S. airlines for the day, including many that weren't directly affected by the issue. Our teams particularly those in the NOC and at the station, responded quickly and effectively, keeping our operation running smoothly and reliably. We know reliability is one of the biggest drivers of customer Net Promoter Scores and a primary driver of loyalty so it's critical that we continue to innovate and invest in both our operations and our people. The demand environment inflected up in early July and sustained momentum throughout the quarter. The improved demand environment and our execution of our initiatives contributed to our record third quarter revenue and to be in the midpoint of our third quarter guide with RASM coming in at up 0.4%. Even with increased capacity from our strong operational results and our ability to prolong the filling of the 6, [ 2 ]be-removed seats on our 737-700 aircraft. We were pleased to see load factor up year-over-year in August, September and so far in October. And corporate travel demand improved sequentially with a particularly strong September where we saw multipoint passenger growth. We're also seeing great traction with our loyalty program and co-brand credit card enhancements, which align with our new product offerings and incentivize everyday spending. Third quarter royalty revenue was up 7% and we saw double-digit growth in co-brand card acquisitions year-over-year. Our recent 100,000 point promotion saw the highest acquisition activity in over 5 years, signaling that these enhancements are resonating with customers and driving increased engagement. Looking ahead to the fourth quarter, we expect RASM to be in the range of up 1% to 3%. This outlook assumes the positive inflection in demand we've seen across the industry since early July remains at current levels through the end of the quarter. It also reflects the planned acceleration from our initiatives, the approximate 2-point year-over-year increase in fourth quarter capacity since July and the recent observed impact of the government shutdown. To the extent the demand strengthens beyond current levels, it will provide upside potential to our full year EBIT guide of $600 million to $800 million. We're planning for fourth quarter year-over-year capacity growth of approximately 6% which compares to a relatively low base in fourth quarter 2024 compared with fourth quarter 2023, plant capacity is up about 1%. This capacity level now contemplates further pushing out the retrofit timing of our entire 737-700 fleet to be completed in January without any impact to the planned operate date for seat assignments and extra legroom seating on January '27. A big shout out goes to our tech ops team for streamlining the time line to complete this work. Allowing us to capture additional revenue in those 6 seats during the entire holiday period at almost no incremental cost. On the product side, we launched the sale of assigned an extra legroom seating on July 29. While early bookings are in line with our expectations. We're seeing strong interest from customers and the trends are encouraging, including demand for our new products, fair product buy-up and ancillary seat sales. These offerings are helping us differentiate and enhance our products and drive incremental revenue. We feel confident in our ability to deliver more than $1 billion of incremental EBIT from assigned and extra legroom seating in 2026 and hit full run rate of $1.5 billion in 2027. We're proud of the progress we've made and excited about what's ahead. With that, I'll turn it over to Tom. Tom Doxey: Thanks, Andrew, and hello, everyone. As you've heard from both Bob and Andrew, our initiatives are on track for this year, and we expect further acceleration in contribution from these initiatives into the fourth quarter and into next year according to our plan. As you know, our continued performance on costs is a key element of our transformation, and I am pleased to once again report that we delivered strong cost performance this quarter, with CASM-X coming in at up 2.5%, beating the midpoint of our guide by 2 points, a strong beat with or without the capacity increase we saw in the quarter. We continue to see broad-based cost discipline across the entire business. I should also emphasize that this is more about spending smartly than it is about simply cutting costs. We're simply pushing costs forward as evidenced by the customer, technology and operational investments being made across Southwest Airlines. This was a company-wide effort, and I want to thank our teams for their focus and execution. Looking to the fourth quarter, we are expecting strong continued cost execution with CASM-X up in the range of 1.5% to 2.5% on capacity of approximately 6%, both on a year-over-year basis. Excluding the impact of expected book gains from fleet transactions in the fourth quarter of both years, which gives a more accurate view of the cost performance of the underlying base business, we expect CASM-X to be in the range of flat to up 1% year-over-year. Turning to fleet. Boeing continues to hit their delivery plan, and we've increased our 2025 delivery assumptions from 47 to 53 Boeing 737-8 aircraft. We received 8 aircraft deliveries in the third quarter and retired 16 aircraft from our fleet, including the sale of one 737-800 aircraft and plan to sell 4 additional 737-800 aircraft in the fourth quarter. We will continue to be opportunistic as we evaluate potential sale transactions from our existing fleet. We continue to expect full year 2025 capital spending to be in the range of $2.5 billion to $3 billion, which includes the additional aircraft deliveries expected this year as well as the expected proceeds from aircraft sales. We finished the quarter with $3 billion in cash, in line with our liquidity target of $4.5 billion, including our revolver and with a gross leverage ratio of 2.1x within our target range of 1 to 2.5x. We also executed an accelerated share repurchase program in the amount of $250 million under the previously announced $2 billion authorization. We intend to continue opportunistically repurchasing shares based on market conditions. This reflects our continued confidence in our strategy and our commitment to returning value to shareholders. Overall, our third quarter performance was ahead of our expectations for cost, revenue and net income which is another key milestone as we execute our transformational plan. We're managing costs well, executing our initiatives, investing in our product and customer experience, running an industry-leading operation, maintaining a strong and efficient investment-grade balance sheet, and we remain confident in our ability to achieve our full year EBIT guide of $600 million to $800 million. And with that, I'll hand it back to Bob. Robert Jordan: Thanks, Tom. As we wrap up, I want to leave you with a few key thoughts. First, the pace of change at Southwest is accelerating and at the same time, our execution has never been stronger. We're transforming our product, enhancing the customer experience and delivering meaningful financial improvement, all thanks to the incredible work of our people. Second, we're confident in our ability to hit our fourth quarter and our full year guide. We built a strong foundation, and our initiatives are ramping as planned. The operational rollout of assigned an extra legroom seating has been smooth, and we're seeing encouraging early results. Third, we're not stopping here. We've continued to evolve our product, expand our network and lean into the customer experience. Free WiFi for Rapid Rewards members starts tomorrow. New markets are launching, and we're building momentum across the business. And while we aren't ready to share specifics just yet, work on the longer-term strategy to meet evolving customer preferences is well underway. Finally, I want to thank our employees once again. Their excellence and hospitality are unmatched, and they are the driving force behind our success. It's a very exciting time at Southwest Airlines. We're executing with urgency and purpose, and we're confident in the future we're building and the benefit it will provide for our shareholders. Thank you all for joining us today. And with that, I'll pass it back to Lauren to start our Q&A. Lauren Woods: Thank you, Bob. This completes our prepared remarks. [Operator Instructions] Operator: Thank you, Lauren. [Operator Instructions] Our first question today comes from Conor Cunningham with Melius Research. Conor Cunningham: I was hoping you could frame up the sequential improvement that you're seeing into the fourth quarter versus what you were messaging in September. I'm just trying to understand the building box there. I realize that capacity is a little bit higher, but I think you knew that, that was going to be happening. And just if you could just talk about specifically around the new initiatives. Is that still 2 points? And does that carry into the first quarter of next year, just thoughts around the moving parts on unit revenue? Robert Jordan: Yes, Conor. It's Bob. I'll give it a start. I think it's pretty simple, and it's a couple of things. We have the 2 points of added capacity that you referenced, and that's just delaying the retrofits of the 700s into January that allows us to fly those extra 6 seats through the holidays and just capture extra revenue and peak demand period. Real proud of our tech ops folks because they can get all those retrofits done now in January. So that's the 2 points of capacity. And then we've got 2 other points and it's -- really, we just chose to not assume that the macro would inflect further from where we are. You heard we had a solid inflection in July that has maintained itself. But we didn't want to assume further macro inflection simply because you've got some uncertainty and in particular, it's uncertainty around the government shutdown its impact and then obviously, it's duration. So we felt it was prudent to guide assuming that things are stable from here, that the demand does not inflect further. And then yes, you've got, on the RASM front, you've got a tailwind as the initiatives continue to kick in. All of the initiatives are on track. They're on track from a benefit perspective, they are on track from a timing of delivery perspective. But it's really just those 2 points of not assuming that the macro would continue to inflect further. Andrew Watterson: Yes. I'd say, Bob, the -- we've seen past government shutdowns, right? And we know what happens when they go on. First, you see government travel -- goes to 0 very quickly. Then it goes to government adjacent than overall business travel then leisure travel as we saw in 2018, 2019. Obviously, like everyone else, we experienced, the government stopping travel very quickly. But last week, we did see government adjacent. This is state and local governments, depending upon government reimbursement. These are defense contractors. These are companies that kind of do business with the government and they held up until last week, and they went down sequentially. So through that more as a canary in coal mine, it's not material numbers that we're talking about between those 2 categories that we observed but we know what happens in the future. So if you're uncertain about when the government shut down ends, that makes you less able to assume an economic inflection. And so it all is tied up, I think, when the government shutdown ends. Robert Jordan: And Conor, just the last kind of maybe connect your tangent to that is either way, whatever happens to the macro or whatever happens with the shutdown, we're committed to hitting our 2025 reaffirmed EBIT guide. We're not sitting around waiting for the macro to show up as an example. We're going to continue to press on other areas, in particular, costs like you saw with press and [ beat ] on CASM-X in Q3 that just add more assurance around meeting that full year guide. So don't -- I wouldn't take that as we're just waiting to see. We're absolutely working proactively put some insurance around the guide irrespective of what the macro does, what the government shutdown does. Conor Cunningham: Am I allowed to follow up? Can I just follow up to that? Just on -- so I guess the pushback that I've heard is that basically, you've added 2 points to incremental capacity. And it's basically -- it's almost like that's almost a 0 revenue contribution. I mean, you're going to get a natural uplift in overall growth. I just like -- maybe you -- could you just frame up like why was it the right decision to add that incremental growth? I understand that there's a cost benefit. I would have thought costs would have moved down a little bit more. So just how you're balancing that in general on that decision? Andrew Watterson: Sure. I mean, first of all, it's an EBIT guide, not a RASM guide. It did imply a RASM, what you're asking about but the decision, because the tech ops team has been much more productive, we will be doing them faster. So when you do it faster, it overall costs less money and then also that lower number shifts into Q1. And then for the seats, there is incremental and the high periods during the holidays. Now we did this late in the curve, so you won't -- the non-holiday portion won't benefit that much. So it is very RASM-dilutive, but it's very EBIT accretive because that little bit of revenue plus the cost going down, make it EBIT positive to do that, which is what our guidance is about and what our objective is about is EBIT even though it will make RASM look on flattering in Q4. And so that was the decision making behind it. Operator: The next question is from Mike Linenberg with Deutsche Bank. Michael Linenberg: Just some questions maybe, Andrew or Tom, just some stats on some of the initiatives, even rough numbers. What we could see in the quarter we did see an inflection on at least connections. It looked like your enplanements outpaced passengers. And presumably, that helped your load factor, which was much better this quarter than where we were in the beginning of the year. And how -- and also on the basic economy rollout, what are you seeing on the buy-up? I think there was a point where maybe the majority of Southwest tickets were sold in the bottom fair bucket. I suspect that -- that's been moving up. Any color or stats that you can provide on some of the initiatives that you put in with respect to those? Andrew Watterson: Yes, I'd be happy to. So yes, as I mentioned in my prepared remarks, we did see, as we had predicted, that load factor would inflect positive post summer. So August, September, October had year-over-year increases in a load factor that came from the enhanced connectivity we talked about. It came from the third-party channels and also I think some of the basic rollout, which allows you to kind of have a more segmented offering, which means your highs get higher and your lows get lower. So that allows for good targeted volume. So we're on track as far as that goes. So switching from yield driving our RASM to load factor driving our RASM, which is kind of what we indicated earlier in the year. As far as the buy-up, the buy-up out of the bottom basic, we need that to inflect really positively with seats. In the interim, we have improvements that go about mid-single-digit points of increase in optional buyout, those who decide to buy-up to the second, third or fourth, we did see a good traction with that. The big step-up will come in Q1. But in the interim, it is a positive move. Tom Doxey: And from a financial standpoint, everything is on track for the initiatives. And so everything that we're seeing for assigned seats and extra legroom is very much on track to -- still relatively early for the late January start for operating that. But all the data that we have so far shows that, that's still on track. And the other suite of initiatives, as Bob said, is also on track. Robert Jordan: And if you look sort of getting into maybe granular, what Tom was saying, again, it's early, there are limited bookings in place post January '26 when the -- when bookings started for travel for the new assigned seating extra legroom. But both volume -- the mix of fair products is what Andrew was referencing -- basic, [ should ] fall further as an example. And then what we're seeing in terms of ancillary seat buy-up, all of those things are encouraging and on track. Again, it's early, but I'm really pleased with that. And then again, while we're not literally selling extra legroom for assigned seating. We're selling it for after January, but we have aircraft out there that have the extra-legroom retrofit configuration and folks flying on those aircraft, we have more than 400 converted, are giving us a 4-point higher NPS score than those without and that's without being able to book yourself into extra leg room. That's just they're flying on an aircraft that has that section reconfigured. So that's very encouraging as well from a customer experience perspective. Andrew Watterson: And I guess to put an exclamation point to that, Bob, we see literally a knife edge on January '27 in our bookings of pre and post assigned seating, we see a knife edge yield improvement. So clearly, customers are voting with their wallet as well as the surveys that they like assigned seating extra legroom. Robert Jordan: And what's great this time around versus bags where we started selling and operating on the same day, and then you were ramping up from then we've been selling the assigned seat and extra legroom since July. So when we hit the end of January will effectively be at that run rate. Operator: The next question is from Savi Syth with Raymond James. Savanthi Syth: If I might, just on the initiatives and kind of the unit revenue trends ask a little bit of a question on how we should think about as you head into 1Q. Just not assuming any kind of demand environment change just based on that initiative ramp-up and capacity plans. Like how should we think about the progression of year-over-year RASM? I'm not looking for a guide, but just trying to understand kind of the magnitude of how that moves from 4Q to 1Q? Robert Jordan: Yes. So what we have talked about is a $1 billion number for the extra legroom and the seat assignments. And as you think about the other initiatives, by and large, by the time you get to 1Q, those will be approaching run rate. There's some of them that still have some ramp that occurs during the first half of the year. The loyalty program, for example, continues to ramp along with the benefits that come with seating. . But I think you can think about it in those terms. We're not guiding 2026 yet, but that $1 billion number that we've talked about for next year and the ability for that to then grow to $1.5 billion as we move to the following year is still very much intact. Andrew Watterson: And if you look at Q1 capacity, that's already published, now we're not saying it's final, but we know that when we published, we don't move it that much. It's a modest year-over-year increase. We have not -- we will still be lapping our load factor initiatives that started really in August and beyond. So that will be -- benefit should still carry on into Q1. And as I mentioned, the knife edge improvement yield starting 127 coming from seat fees and buy-up to extra to higher fare products, those, I think, 3 combinations of low capacity growth, load factor improvements going and still tracking and extra yield mix for interesting Q1. Robert Jordan: Well, just for full year. I know we're going on a long time about this kind of a combination of what both we're talking about. If you just take the midpoint of our guide that was reaffirmed for EBIT for the year, $600 million to $800 million and then you stack on top of that the $1 billion that Tom referenced around the benefit of assigned seating and extra leg room and then you stack on top of that, the incremental value of a full annualized year of bag fees, which I think is roughly $700 million. And then we have obviously rewards improvements in a number of other initiatives that are all maturing -- just gives you an idea of kind of the EBIT stack for the -- just sort of the EBIT stack for the year, not trying -- certainly, we're not guiding 2026 today, but it just gives you an idea of how to think basically about that EBIT stack. Operator: The next question is from Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe if I could ask on -- just if you could fill in the details on the corporate growth, how you're thinking about that filtering into your sales numbers and changes on that growth formula going forward given the -- given you're selling forward into January, and you're seeing a knife edge in that yield premium coming through? Andrew Watterson: Yes. The corporate for the new year is extraordinarily low right now. So I wouldn't give a read into that, I will say, for Q3 corporate sales for future travel kind of excluding the government and inflect it up to plus 5% year-over-year. So we're seeing corporates improving. Our trip growth was down, as I said, we shrink trips where our competitors increased. So normally, since corporate is schedule-sensitive, not price sensitive, that should have led to kind of a reduction in share and we didn't necessarily see that. And so we see good solid trends with demand for Southwest business. But we expect, as you hint that in Q1 with assigned seating, that will unlock additional growth. Right now, through various different measures, we think our domestic managed business share is in the mid-teens, which is below our overall capacity share. And we think extra legroom assigned seating should give us tailwinds in our corporate share, and that is not to quantify the numbers that we just gave you. Operator: The next question is from Jamie Baker with JPMorgan. Jamie Baker: So I suppose the definition of sell-side and sanity is asking the same question over and over and expecting a different response, but here it goes. Fourth quarter RASM guide, up 2% at the midpoint. But all of the tactical improvements in the bag fees, royalties and flight credit noise, that's what, 8 points of benefit. So that suggests RASM at your core. . So excluding the good stuff, is down mid-single digits. Why is this not the right way to think about it that the core is deteriorating, but new initiatives are making up for it for now. But of course, that could prove challenging when you begin to anniversary those initiatives. Andrew Watterson: Yes, I don't know where you're getting the 8, Jamie. I apologize not following your math. You did mention the flight credits. The way the flight credit breakage works is that when customers cancel flight or it drops to a residual travel fund than those break prospectively. So the breakage rate changing is not something that you kind of will see changing until next year. So we expect 2026 to have -- to show breakage benefits from the change in policies. So that one is coming. But the bag fees, obviously, are a, let's call it, a 3-point benefit year-over-year. Sequential, it's less than one because most of the policy was already in place for Q3. We do have on a year-over-year basis, if you're doing that our stages engage is growing year-over-year, whereas our competitors, that's going down as they restore regional. So that's about a 2-point headwind for RASM, if you did normal stage length adjusting. So I'm just not getting your 8 -- kind of walk us on it, maybe we can answer it. Jamie Baker: Well, let me ask it differently. In the fourth quarter guide, how much -- what is your initiative RASM then? And if we take -- so whatever your answer is, maybe it's plus 3, maybe plus 11. I mean it's not going to be. But whatever the initiative-related RASM contribution is, shouldn't we think of the difference relative to the 2% midpoint as the core and is that deteriorating? Andrew Watterson: I think if we look at -- I'm not sure maybe Tom can help with the initiative stuff. But if you look at other domestic main cabin, which is clearly not their strongest, our -- you look at us as a proxy for a pure-play domestic main cabin, we see sequential improvement and theirs doesn't necessarily imply that either. And we see -- as far as the core, if you look at our core customers, as we mentioned, we see our credit card applications have accelerated with the new products and the new features. We're seeing Rapid Reward sign-ups accelerate and we're seeing the kind of our road warrior travel also improved. So our core customers are responding back. Our brand -- our Net Promoter Scores from our customers did dip post your conference and kind of went to the bottom in June and now have returned to where they were pre year conferences. So all the kind of tail, tail signs on the micro level show our customers increasingly engage, increasingly using Southwest Airlines, whether it's a credit card or -- are traveling with us. So we see good trends in the core. Robert Jordan: And maybe what I'd add there, Jamie, as well, is as far as where you draw the line between an initiative versus the base business is not always a clear line. We knew as we announced actually at your conference, several of these initiatives, there would be an offset. And so as we guided these things, we guided them and we gave estimates for some of them, we guided those or gave those estimates as a net. And so it's not always a clear line on where you drop between base business or the initiatives. Jamie Baker: And then a quick second one for Bob. And thank you for all that color, by the way. So in that lounge survey that you sent around, Southwest used the word hub for what I think might be the first time in history and correct me if I'm wrong. What do you consider your hubs to be? I mean, I guess I could just look at some base level of departures, but that doesn't necessarily speak to connectivity. Robert Jordan: Yes, I think that -- it's just -- it's more choice rather than intended to imply some kind of strategy change or change the way we think about cities. We have -- depending on how you count them, we have roughly 15 to 17, what we call, mega cities and they do some things that traditional hubs do. They have what we call intentional connections or banking opportunities throughout the day they are not full banks, but they also have a lot of non-banking -- banking of aircraft activity. And again, those additional connections are just to drive connectivity across the network. So I wouldn't confuse that word choice as any change in Southwest Airlines network strategy. Now back to the survey. Obviously, if we were to choose to go forward with lounges and we've been talking about where do we go next strategically to continue to widen our offering for our customers to continue to widen our offering of things that they desire in particular premium and then how do we do all that to impact the economics of the Rapid Rewards program and the co-brand card, we're looking at what would our customers want in a lounge, where would those lounges be located relative to where we have strong passenger strength and demand. So that's really what it was about. And we're hopeful to -- and again, this work is not just thinking about it. There's active work in terms of developing the next strategy. And I'm hopeful to be able to lay parts of that out early in 2026. Andrew Watterson: I think, Bob, to put a point on that. If you -- domestic RASM, if you index that to 2018, we're getting very close to our competitors here in Q3 and Q4 may close the gap. But what we have still a gap is the other revenue -- is our credit card hasn't done as well as others in recent times. . Credit cards, these days, you've probably seen from your own bank and from other newspapers that it's driven by high-end, high fee credit cards that come with lounge access. So our gap and RASM is turning into now more "other revenue" driven by high-end credit cards that is what drives us to look at it as well as the customer desires that Bob talked about. Operator: The next question is from Catherine O'Brien with Goldman Sachs. Catherine O'Brien: Maybe just a quick first one on a shareholder returns. Can you walk us through how you think about the guardrails to shareholder returns? You're within your 1 to 2.5x leverage target, 2.1x at the end of 3Q. How much headroom do you want to leave yourself on the high end of that leverage target, given there's still some uncertainty out there? I do have one quick follow-up. Tom Doxey: Yes. Thanks for the question, Catie. Yes, as we look at that, it is, I think, important to us that we do leave a little bit of headroom there, knowing that there's some uncertainty out there. And so as we look at that range of the 1 to 2 to 2.5, we continue to believe that keeps us squarely in the investment grade and strongly within investment grade. And then we've got the $3 billion plus $1.5 billion revolver liquidity target as well, which we were right on for the quarter. And so as we think of shareholder returns, it's about ensuring that we're staying within those guardrails. And then as we look at the variability that might be there within the guide that we leave room to stay within that under those different scenarios. Catherine O'Brien: Okay. Great. And then I had to laugh at Jamie's cell site insanity, but I'm going to keep going on in the past, so forgive me. But I just -- I think it just may be helpful to understand a little bit more as we think about next year and the initiative ramp this year. And so maybe just a question on the EBIT target rather than RASM super specifically. You reiterated your EBIT target from last quarter, but fuel is down a bit and capacity is a bit higher. Are you able to share the EBIT contribution from the initiatives that you already booked in the third quarter? And then what you're incorporating in fourth quarter? And how much of that fourth quarter figure is already on the books? Tom Doxey: Thanks, Catie. Yes, I don't know that we'll go into that level of detail with it. I think Bob laid it out pretty well as far as the initiatives that we have this year and the increment that we expect to see next year. Robert Jordan: Yes. I think you can think of the -- I believe the bag -- the largest, of course, right now is bag fees and that sequential incremental improvement from third quarter to the fourth quarter's contribution is about one point or maybe a little bit less than one point. Obviously, as you get into 2026, all of the EBIT associated with assigned seating extra legroom is fully -- there's nothing today. It's a fully 2026 value then wraps to $1.5 billion in 2027 as it matures. You've got some smaller things, as Andrew talked about, the Rapid Rewards optimization, flight credits, which that will come home as they break, which tends to be later. But yes, we'll lay all that out as we stack up the EBIT guide for 2026, we're just not ready to do that today. Andrew Watterson: And there's, of course, the continued cost savings as well. I think your question was a little more focused on the revenue-related initiatives, but we've got the cost initiative that will continue to ramp up and is also on track for next year. . Operator: The next question is from Brandon Oglenski with Barclays. Brandon Oglenski: And Tom, maybe I'll just follow up there. You guys did reiterate $4.3 billion, I think, in total initiatives next year, but you guys keep talking about the $1 billion from assigned seat and premium. I get that. So maybe can you talk to the totality of the $4.3 billion, is that still valid? And I want to keep it to one question, but I guess 2 parts here. Can you give us a better understanding of how the buyout process is working today in the fourth quarter? And then how that potentially changes from like a basic fare to plus fair just based on seat assignments and premium availability? Tom Doxey: Thanks, Brandon. I'll start and then Andrew will take the second part of your question. The $4.3 billion is very much still intact. We've talked about $780-or-so million in cost savings. We've talked about $1 billion that would come from bags. We've talked about $1 billion that would come from extra legroom and seat assignments, which will start operating in January. We've got the earn and burn on the frequent flyer. We've got the amendments that we've made and the enhancements that we've made to the Chase program, all of these things stack together. And what's great is we're seeing these continue to be on track as we're ramping through this year and especially as we get into the fourth quarter and into the first quarter of next year, as you see these continue to ramp. So yes, very much still intact for the $4.3 billion. Andrew Watterson: And as far as the bio process goes, right now, the buyout process is mostly about flexibility. Going from basic to choice, the primary differences or flexibility and Rapid Rewards accrual that kind of entice customers to buy up the very highest kind of entry fares are no longer basic. So if you think about a $350 fare as an entry point for flight, that's not basic because it's a pretty high fare to be basic. And so all that to say that about 80% of our tickets were Wanna Get Away last year and a little bit less than 50% are buying basic. A portion of the remainder are people who have choices like a stand-alone, that's the first entry point for them. And then you have, as I mentioned, a mid-single-digit composition increase of those who voluntary who presented with a low fare and can buy up for the additional features, those is a mid-single-digit increase right now. Now we go into next year with seat assignments, that is much bigger. The booking curve is such that people buy early or generally less elastic. As the booking growth go goes along, you have more elastic demand at the end, it's also again inelastic. And so right now, we're seeing strong buy-up in fare products in the kind of Q1 period with seat assignments. We expect, as we get into the mid of the booking curve for Q1 that we have more and more seat only sales that people add in as well. So that composition will mix a little bit. But given the different entry points customers and have into it is all about giving choice as our fair product indicates and that's led to, as I said, a quite strong increase in yields this part of the booking curve. Robert Jordan: Well, I think the other thing to note, I know we've said many, many times, is -- there are so many transformational initiatives that are underway. And between what we laid out in September, a little more than a year ago, what we laid out in March, all of that stuff is complete. The only thing that is still to come home is the operation of assigned seats, but we're selling those, and that huge change has been really, really smooth. So number one, everything that we laid out as a contributing initiative is done. Second, they're done as in high-quality, ready to go and on time and is expected to or already showing signs that is contributing the value that was expected or in the case of bags even greater. So you've got initiatives on time, they'll start as planned, and they are in line right now to deliver the value that we expect as we have high confidence in both the -- in both that total value of EBIT to be delivered through initiatives and then our EBIT guide in the fourth quarter of this year and for the full year and then our -- the EBIT guide that we'll put in front of you in 2026. But the -- I mean, the execution of all this has just been stellar. Operator: The next question is from Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: I'm going to keep it to one, I think we're struggling a little bit with that request. So anyway, I assume some of these initiatives have a learning curve associated with them from a revenue management perspective. And I wonder if you have any anecdotes about early learnings or tweaks you have made since the early rollout? Maybe some of these items were disruptive initially but are settling down as we get more fully baked into the booking curve? Andrew Watterson: Certainly, I think Tom made a good contrast of bags and basic was kind of all at once because you started selling operating right away, whereas assigned seats, we have a long run out to it. So we mentioned last time that we saw a customer reaction to back to basic, which affected the third quarter by one point. That since has been resolved, and that basically comes down to -- you have a much wider set of price points. As an earlier question implied, the number of people who buying just your lowest entry point used to be so high and now it's a lot wider. And so you did see different reactions from customers in June and July as they've learned it, we saw that stabilize by mid-July, and the customers are kind of buying life normal, if you will, for that. For -- so I consider all the revenue management stuff doing very well on that. And then for Q1, we have a long run up. And so the tweaks are small in nature as you're looking at who buys a seat only, who buys the biops, tweaking those, high-demand, low-demand flights. We have a long runway to do that. So we feel very comfortable about how that's going. Now there still is an overall ramp-up in that -- in my prepared remarks, I told you that the '26 number, the '27 number, the difference is an implied ramp-up in and the value. So to the extent we go faster, obviously, the number gets bigger next year. Robert Jordan: Yes. I think that's a really important point is that the -- Andrew, I don't want to -- sorry to just to say the same thing you just did, but I want to make sure everybody hears that, that the $1 billion contribution from assigned seat and extra legroom next year contemplates time to do exactly what you said, which is ramp up the value. Some of these things like seats are dynamically priced, learn, tweak and so the $1 billion contemplates a ramp-up time versus we've got a guide for EBIT for that initiative and there's risk because there's going to be ramp up. We've actually -- that's contemplated in the value that we've given you. Operator: The next question is from Chris Stathoulopoulos with SIG. Christopher Stathoulopoulos: I'm going to be compliant as well here and keep it to one. United gave a CASM-X algo last week over the midterm to help us think about all the moving pieces here as it relates to capacity and their investment here in the product and other areas here. So I realize you're still in your budgeting plan for next year, but any thoughts on how we should frame that, whether you want to describe that as your mid- to long-term algo versus what you've given, I guess, your guide on low single-digit capacity over the midterm. Just wanted to understand the moving pieces around that, and I think we can all do the math on the EBIT side and what that might mean for unit margins and things like RASM? Tom Doxey: You're right that we're still working through the planning process for 2026. So at our next call, we'll have more detail on next year. What you've seen from us is strong cost performance quarter after quarter, a strong beat this last quarter with or without the incremental capacity that came from operating the 700 seats, it was broad-based. There's work that we're doing on small things and discretionary spending. There's things we're doing on large things around supply chain and optimizing our retirement plan and the component maintenance work that goes along with that, the way we're looking at real estate and technology. So we're looking everywhere. And we've talked about being on track this year, next year and to the $1 billion in 2027 for the cost savings initiatives that we have, and that will roll in and again, we'll put that into the context of 2026 at our next call. Operator: The next question is from Scott Group with Wolfe Research. Scott Group: So when I think about the $1.8 billion of initiatives this year. The guide has $300 million of incremental EBIT. So call it, $1.5 billion gap. Like do you think we should contemplate something similar next year with a sizable gap between the initiatives and the actual EBIT? Or I mean, is there a reason to think the gap widen is there -- could the gap potentially go away? I guess you're not ready to give '26 guidance, but just at a high level, like how do you think about like that gap and how that develops into next year? Robert Jordan: Yes, Scott, you're right. We're not ready to guide 2026. The gap is simply the macro and what happens to the macro inflection like we talked in Q2. And we were down sort of from where we thought the beginning of the year, we would be down roughly 6 points. We've seen, obviously, some of that come back. And it's -- I think absent maybe the uncertainty of the shutdown impact, there would be more certainty that continue to macroeconomic inflection would continue. You've heard some others say that macro inflect back is going to be completely back to pre -- before the issues by the end of this year. You've heard others say close. You just don't know. And so I think that's really what the gap is. It is how much is the macro claw back the gap from where we thought we would start to -- where we thought we would be when we started this year. We got down [ 6% ]. We've come back a material piece of that, but we're not all the way back. Tom Doxey: The other piece of it too, Scott, as you think about the initiatives, what we've done is we have put everything into the initiative bucket that we're doing to counter what would be sort of typical increases in cost in the business. As we move into next year, we've talked a lot about moving more to an EPS guided range. Of course, everything nets into that number. We'll still talk about the initiatives and what they are and what they're doing. But as we guide, likely, we move more toward kind of an EPS range where everything is netted. And as we talk about these initiatives, hey, this particular cost savings initiative kind of in a year where we're not so initiative heavy with the transformation that we have, those types of things just find their way into the sort of typical efficiencies that you're -- that you're building into your budget as you're moving forward. And don't confuse my word typical of anything other than just talking about kind of standard budgeting practices. We're going to continue to be really focused on the efficiency coming out on the cost side. Operator: The next question is from David Vernon with Bernstein. David Vernon: So Andrew, I'd love to kind of narrow in on that comment around the knife edge improvement in yields with bookings for the assigned seating in January. Can you get -- is there a way to dimension it and to talk a little bit about how much of the schedule sold at this point in time whether the sell-through rate is being affected by the higher yields? Or any additional commentary you can give us on what that knife edge comment was would be great? Andrew Watterson: Yes. Well, I apologize in advance, I'm going to do my best not to because it's early -- it's early in the curve and so this is our first time doing the assigned seats and stuff like that. So we have studied others. We've scoured for good industry data. We think we have good compares. We have -- our models are trained on how we sell early burn stuff and upgrade boarding. So we think we have good context. And so I'm not going to give you the number because I don't know how long they'll persist in the booking curve. But when you do see a knife edge, it's clearly a change in customer reaction. You really see knife edges. And when you do see a knife edge, something happen. In this case, we see a disproportionate customer reaction to the ability to buy an assigned seat or upgrade to a fair product that includes it. And so that gives us confidence that we will see a revenue positive customer reaction as we go throughout the booking curve. It's just the amount being different than our business case is something where it's just too early for us to hit that. David Vernon: Okay. And then maybe just as a quick follow-up, Tom. I applaud the desire to get out of initiative jail here because the incremental math from the site is really tough to get to. But if you think about the cadence of what you guys have in your initiative plan, can you tell us kind of what quarter we hit peak initiatives, is it Q1, Q2, Q3? Like where in the way you guys have done the math around the initiatives, do we kind of get the max contribution from the initiatives? Tom Doxey: Yes. And of course, the -- and I'm not sure if your question is the quarter where most of the inflection occurs or if it's when you're hitting peak contribution from? Yes, peak from would be -- tell me your time horizon, it should be the last quarter. We should continue to build and build and build on these. The big inflection that we have as we continue to move forward, of course, is what Andrew just described, as we move into first quarter where you have that big positive inflection where we've had a full booking curve to be able to sell into that again, contrasting that to what we did with bags. But from there, it should continue to build. We have structured the amended Chase agreement around the attributes of this new program. And so as we have bags, as we have seat assignments, these are things that then you have entitlements to as you have the card. And we talked about other -- Andrew and Bob both talked about other things that we're looking at around the potential for clubs and what that might mean for the ability to buy up. And so the short answer to your question is tell me your time period, and it's going to be the last quarter of your time period, we're going to keep building. Robert Jordan: I'm going to do exactly what the Andrew and Tom probably don't want me to do. But if you just sort of speculate on that, I think if given that -- if you just know how the booking curve works, and where the meat of the booking curve [indiscernible] the booking curve for folks that are now booking the new products at assigned an extra legroom of seating, I think that would tell you somewhere around early third quarter that peak would be my guess. The only -- and I think you'll have annualized the ramp-up of the new voucher exploration policies, those kinds of things would. The only thing that I can think of that will continue to ramp, obviously, that the policy changes -- well, and then especially the changes in values of the card related to assigned seating benefits, boarding benefits, those should continue to ramp all year as that causes customers want to get the card, engaged with the card, the co-branded card, spend on the card. So I would think that initiative continues to ramp throughout the entire year. But the big one, which is assigned an extra legroom seating based on the booking curve, that would tell me at somewhere around early third quarter, you get to peak value. Operator: The next question is from Andrew Didora with Bank of America. Andrew Didora: So maybe I'll ask a non-initiatives question to close it out here. But your fuel guidance on -- in this environment was a little bit surprising. I know it's been volatile, but also West Coast crack spreads have been high for several weeks now. I guess a quick 2-parter here. I guess one, Tom, just curious if you're able to give us what your exposure is to West Coast crack spreads? And then two, Bob, what levers do you have in your business that you think could help offset potentially higher fuel from your guidance? Tom Doxey: Yes. For us, West Coast is probably somewhere around 30 or so. Gulf Coast were probably more like about half or so of the exposure. Robert Jordan: And then just on levers, and I think not just fuel I think just -- you saw was -- I think, really good work and have what I think for -- is really good cost discipline in the third quarter. And that cost discipline is not -- it's sustainable. It's not just showing cost out to the future. So we're going to work the same way in the fourth quarter and the first quarter and the second quarter to do exactly the same thing. And that is everything from just managing sort of traditional costs and departments. We have some opportunities to continue to work on fuel efficiency which obviously is material given the amount of fuel. We have efficiency work and a lot of departments that are back office, sort of the everybody is throwing AI around, but it is the ability to automate transactions, that kind of thing, and we're seeing good results there. And then we have large efficiency programs in the operation. Some of those take longer. But my point is that this cost work is really -- it's across the board. It's every discipline within the company and we'll just keep working there. To me, that's the best insurance around whether it's fuel or whether it is the macro or it's the government shutdown impact or whatever it is, the best insurance around hitting our EBIT guide is to just keep putting manic pressure on cost and efficiency and continue to beat those numbers. Julia Landrum: That wraps up the analyst portion of today's call. We appreciate everyone joining. Operator: Ladies and gentlemen, we will now transition to our media portion of today's call. Ms. Whitney Eichinger, Chief Communications Officer, will lead us off. Please go ahead, Whitney. Whitney Eichinger: Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, can you please remind us how to queue up for a question? Operator: [Operator Instructions] Our first question comes from Robert Silk with Travel Weekly. Robert Silk: So what I wanted to ask is, during the last quarter, you talked about your check baggage, you made about $300 million -- you were estimating $350 million for this year. Is that number still on course? And in the rate of check bags, how is that weighing in compared to the industry and compared to expectations? Robert Jordan: Yes. The financials are right on top of what we have been giving you a little ahead of what we thought. So it's still -- that's right. And then puts the annualized contribution from check bags at right around $1 billion. And the reduction in lobby bags, so check bags is -- Andrew can give you better -- it's about 30%. We are seeing a modest increase in gate check bags. So gate -- bags that show up at the gates that have to be handled there. But overall, our bags are down and down materially. Robert Silk: So how does it compares to an industry standard? Andrew Watterson: It looks like our check bag revenue per passenger is right along the same lines as the big 3. So it seems like it's a very similar rate that we're getting. Operator: This concludes our question-and-answer session for media. So back over to Whitney now for some closing thoughts. Whitney Eichinger: If you have any further questions, our communications group is standing by. Their contact information and along with today's news release are all available at swamedia.com. Operator: The conference has concluded. Thank you all for attending. We'll meet here again next quarter.
Operator: Greetings, and welcome to the Kaiser Aluminum Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with ADDO Investor Relations. Thank you. You may begin. Kimberly Orlando: Thank you. Hello, everyone, and welcome to Kaiser Aluminum's Third Quarter 2025 Earnings Conference Call. If you have not seen a copy of our earnings release, please visit the Investor Relations page on our website at kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call. Joining me on the call today are Chairman, President and Chief Executive Officer, Keith Harvey; and Executive Vice President and Chief Financial Officer, Neal West. Before we begin, I'd like to refer you to the first 4 slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward-looking statements are based on management's current expectations. For a summary of specific risk factors that could cause results to differ materially from the forward-looking statements, please refer to the company's earnings release and reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the full year ended December 31, 2024. The company undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the company's expectations. In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Reconciliations of certain forward-looking non-GAAP financial measures to comparable GAAP financial measures are not provided because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted or provided without unreasonable effort. Any reference to EBITDA in our discussion today means adjusted EBITDA, which excludes non-run rate items for which we have provided reconciliations in the appendix. Further, Slide 5 contains definitions of terms and measures that will be commonly used throughout today's presentation. At the conclusion of the company's presentation, we will open the call for questions. I would now like to turn the call over to Keith Harvey. Keith? Keith Harvey: Thanks, Kim, and good morning, everyone. I'll begin on Slide 7 for our third quarter update. We're pleased to report another strong quarter, marking our fourth consecutive period of performance ahead of our expectations. As a result, we're once again raising our full year EBITDA outlook. During the quarter, we incurred approximately $20 million in start-up costs tied to our two key strategic investments for aerospace and packaging, offset by the impact of metal pricing on inventory, which continued to provide a favorable tailwind. In total, we delivered 23% EBITDA margins in the third quarter and over 20% year-to-date. Now let's turn to the status of our key investments. At our Trentwood rolling mill, the installation of our Phase 7 plate capacity expansion project for aerospace and general engineering applications is nearly complete. It remains on time and on budget. As expected, the 12-week outage impacted our third quarter sales, reducing conversion revenue for aero and general engineering plate collectively by approximately $15 million to $20 million. The investment timing, however, aligns well with the short- and long-term growth expectations from our aerospace and general engineering customers. At our Warrick packaging rolling mill, the fourth coating line is steadily progressing through its qualification phase. September marked our strongest output to date on the new line with momentum continuing into October. We anticipate reaching full run rate in time to support 2026 shipments. Customer feedback has been overwhelmingly positive regarding product quality and performance, fully aligning with the expectations we set when initiating this investment nearly 3 years ago. This project remains central to our strategy of shifting the majority of the mill's output to coated products, a segment where Warrick already holds a market-leading position. As we approach full run rate, increased throughput will begin to satisfy our customers' demand needs and start-up costs will begin to taper off. Turning to our key end markets. Demand remains solid. Aerospace is trending positively, though not yet fully reflected in our results. Packaging supply remains tight with strong demand expected to continue for the foreseeable future. General engineering continues to outperform the traditional 2% CAGR, reflecting solid demand from our customers. However, month-to-month demand has shown an uneven cadence, which has made it challenging to operate with normal efficiencies. Despite this variability, the overall trajectory remains strong. Automotive rebounded meaningfully late summer after a volatile start to the year. I'll touch more on our markets in a moment when we discuss the outlook. With that market backdrop in mind, as we near the end of our major investment cycle, we have a renewed focus on managing our cost, restoring operating efficiencies and regaining our best-in-class operating metrics that have historically defined Kaiser. With that, I'll turn the call over to Neal to walk through the financials. Neal? Neal West: Thank you, Keith, and good morning, everyone. I'll now turn to Slide 9 for an overview of our shipments and conversion revenue. Conversion revenue for the third quarter was $351 million, a decline of approximately $11 million or 3% compared to the prior year period. Looking at each of our end markets in detail. Aerospace and high-strength conversion revenue totaled $100 million, down $28 million or approximately 22%. This was primarily due to a 30% decline in shipments driven by the planned 12-week partial outage we took at the Trentwood facility to finalize our Phase 7 expansion projects as well as ongoing destocking in commercial aircraft OEM production. We anticipate improved demand conditions ahead as destocking appears to be easing, along with improved shipments as we return to full production following the outage. Demand has remained strong across our other aerospace and high-strength applications, including business jet, defense and space markets. Packaging conversion revenue totaled $138 million, up $9 million or approximately 7% year-over-year on stronger pricing and mix. Shipments for the quarter, while up 2% sequentially, declined 5% over the prior year period, reflecting the mix shift in product deliveries away from bare products as we continue to ramp the new roll coat line and qualify products with customers. As discussed, the underlying demand environment is strong, and we're working closely with our customers as we ramp the new coating line to full run rate levels by year-end 2025. General engineering conversion revenue for the third quarter was $81 million, up $5 million or 6% year-over-year on a 7% increase in shipments. Reshoring activity continues to create a favorable demand backdrop, supporting both volumes and pricing. And finally, automotive conversion revenue of $32 million increased 10% year-over-year on a 5% decrease in shipments, primarily due to tariff-related customer uncertainty affecting the automotive industry. Improved pricing and product mix more than offset the lower shipments. Additional details on conversion revenue and shipments by end market applications can be found in the appendix of this presentation. Now moving to Slide 10. Reported operating income for the third quarter was $49 million, an increase of approximately $36 million from $13 million in the prior year quarter. As a reminder, the third quarter of 2024 included operating non-run rate charges of approximately $4 million, primarily related to an increase in legacy environmental reserves. After adjusting for these charges, our third quarter 2025 adjusted operating income was up $32 million from the prior year quarter, reflecting a $35 million year-over-year improvement in EBITDA, partially offset by a $3 million of higher depreciation expense, primarily associated with the commissioning of our new coating line at Warrick. Our effective tax rate for the third quarter was 17% compared to 21% in the third quarter of 2024. For the full year 2025, we expect our effective tax rate before discrete items to be in the low to mid-20% range, including the impacts related to the new tax bill recently signed into law. Additionally, we anticipate that the 2025 cash tax payments for federal, state and foreign taxes will be in the $5 million to $7 million range. Reported net income for the third quarter was $40 million or $2.38 net income per diluted share compared to net income of $9 million or $0.54 net income per diluted share in the prior year quarter. After adjusting for net pre-tax non-run rate income of approximately $11 million, primarily related to legacy land sales and insurance settlements associated with prior year claims, adjusted net income for the third quarter of 2025 was $31 million or $1.86 adjusted net income per diluted share, and this compares to adjusted net income of $5 million or $0.31 adjusted net income per diluted share in the prior year period, which excludes a net pre-tax non-run rate income of $4 million. Now turning to Slide 11. Adjusted EBITDA for the third quarter was $81 million, up approximately $35 million from the prior year period. Importantly, this result was achieved despite the 8% year-over-year reduction in our shipments. The true momentum in the business earnings power is becoming increasingly clear, driven by the stronger mix of higher value-added products and strong underlying fundamentals across our business and end markets. Additionally, during the quarter, we incurred approximately $20 million of higher operating costs and inefficiencies associated with the Trentwood Phase 7 outage and the ongoing Warrick Roll Coat ramp-up, which we don't expect to continue. These discrete costs were offset by a year-over-year increase in metal lag gains, primarily attributed to the continuing increase in metal price during the quarter. Now turning to a discussion of our balance sheet and cash flow. As of September 30, 2025, we had $577 million in total liquidity, including $17 million in cash and $560 million in availability on the revolver. Importantly, as of the end of the third quarter, our net debt leverage ratio improved to 3.6x from 4.3x at the end of 2024. Earlier this month, we announced the extension of our $575 million revolving credit facility, underscoring the continued strength of our financial position and the confidence our lending partners place in our long-term strategy. The extended facility is set to mature in October 2030, subject to certain conditions. We generated cash flow from operations of $59 million during the third quarter with our capital expenditures totaling $25 million. We expect capital expenditures for the full year 2025 to be approximately $130 million with free cash flow anticipated to be in the range of $30 million to $50 million, reflecting temporary working capital impacts tied to higher metal costs. Importantly, we remain on track to complete our major growth capital projects this year and continue funding our quarterly dividend of $0.77 per share, reinforcing our commitment to returning value to our shareholders. With that, I'll turn the call back over to Keith to discuss our outlook. Keith? Keith Harvey: Thanks, Neal. We continue to be encouraged by the momentum and visibility we're seeing across our markets. Let me now walk you through our full year outlook by end market on Slide 13. Starting with aero and high strength. Commercial aircraft recovery remained on pace throughout the third quarter with build rates strengthening and the supply chain normalization progressing, providing us with greater confidence of growing demand heading into 2026. As build rates ramp, we expect elevated aluminum inventory levels in the channel to be rapidly absorbed. Demand in defense, space and business jet remains steady at strong levels. Looking ahead, we're confident in our position as a leading global supplier of aluminum products in these end markets. Our capital investments continue to strengthen that leadership and position us well for the long term. As a result of our planned 12-week partial outage for our Phase 7 investment at Trentwood and the resulting lower sales in Q3, we now expect full year aerospace shipments and conversion revenue to be down approximately 10% year-over-year as destocking works through the system and shipments recover in the fourth quarter. Let's move on to packaging. We remain confident in the long-term outlook and the strength of our customer pipeline with the full ramp-up of our coating line on pace for late fourth quarter of 2025. North American demand continues to far outpace available supply, and we expect that dynamic to persist well beyond 2025. Our team is fully focused on accelerating capacity and throughput across our value stream to meet the growing needs of our customers. Due mainly to the previously discussed delay in the start-up of our new roll coat line, we now expect conversion revenue for the year to be up 12% to 15% as the mix shift to higher-margin coated products continues to build. Shipments are still expected to decline approximately 3% to 5% year-over-year as we finalize the ramp of our new roll coating line, ahead of fully benefiting from the mix shift in volumes. We expect a higher output from the new roll coat line in the fourth quarter as we improve line speeds and realize the full capabilities of the line. Turning to general engineering. Our strong momentum from the first half carried into the third quarter with shipments up mid-single digits and solid pricing supporting growth in conversion revenue. Looking ahead, we expect shipments to remain strong for the remainder of the year, driven by a favorable mix shift towards plate products, which will further support conversion revenue growth. We continue to expect full year shipments and conversion revenue to be up approximately 5% to 10% year-over-year. Finally, turning to automotive. Our outlook for the remainder of the year remains stable. Auto production forecast have varied throughout the year, hitting a low point post tariffs in mid-summer before expectations improved into the fall. The resilience of our portfolio and favorable mix toward SUVs and light truck ICE vehicles has kept us steady. As a result, we continue to expect our full year conversion revenue to increase approximately 3% to 5% year-over-year on approximately 5% to 7% lower shipments. Now turning to our summary outlook on Slide 14. Our end market fundamentals remain strong, and our operational execution continues to improve. Based on our year-to-date performance in 2025 and our updated expectations for aero and high strength and packaging, we're updating our full year conversion revenue guidance to be flat to up 5% year-over-year. And raising our full year EBITDA outlook by 10%, now expecting 20% to 25% year-over-year growth over our recasted 2024 EBITDA of $241 million. We remain firmly focused on our long-term objective of achieving mid- to high 20% EBITDA margins. And we see clear tangible progress toward that goal as our investments come fully online and end market demand continues to improve. With that, I will now open the call to any questions you may have. Operator? Operator: [Operator Instructions] The first question is from Bill Peterson from JPMorgan. William Peterson: On the aero and high strength, shipments down 30% quarter-on-quarter. It sounds like a lot of that was based off the Trentwood and planned maintenance. But how much -- can you help delineate between the planned maintenance versus weakness, continued weakness you've seen? Based off your revised guidance, it looks like you see more or less a recovery back to first, second quarter levels in 4Q. But I guess with your comments on destocking abating, how should we think about your aero high strength trajectory in 2026? I guess how fast can we see a recovery? Keith Harvey: Yes. Bill, first, your assessment of what we are looking at in Q4 is right on. You look at the run rate we had in the first half of the year, we expect that to come back very close to those levels. Now we're still finalizing the Phase 7 at Trentwood. So that's going to cut into the fourth quarter a little bit, but I wouldn't expect that to impact shipments any more than 5% or 10% off of the first half. With respect to destocking and where we see in 2026, we're going to be able to give you a much clearer view of that in February of next year. But I will say that as we had anticipated, we're beginning to see these ramp rates continue to increase. And when those build rates up, that expedites the condition and the inventory levels. So I think Boeing and others are on a really good pace moving forward. As you saw, we had another rate increase. And most of these rate increases generally around 5 shipsets ramp increments. And I would expect to see a couple -- 2 or 3 more of those as we go into 2026. So again, it's just expediting the situation we've had. And I think it will be continued improvement. We'll have more detailed information on that in February. William Peterson: Okay. Yes, fair enough. On packaging, it sounds like you're prioritizing more higher value add. But I guess in terms of your contract negotiations, where do the last, I guess, renegotiations stand. And when these new packaging contracts kick in, how should we think about the magnitude of the pricing uplift as we look into next year? Keith Harvey: Yes. Well, we're staying pretty firm with our 300 to 400 basis points increase on the EBITDA side of -- the EBITDA margin side of the business here, Bill. We've had great progress throughout the year with regard to putting those contracts in place. I've been very pleased with the progress there. We're down to, quite frankly, one last major customer, long-term customer with Kaiser, and that's really progressed well. I believe that will be finalized before the end of the year and you'll start to see those ramp-ups and the change in the volume. If you go look at our conversion per pound rate that's happened, you'll see some pretty significant growth over the last 4 to 5 quarters. And that's even before we put in the new capacities. So I'm expecting some pretty accelerated rates there. I'll give you some insight where people -- the other question that has been asked of us quite a good bit is will that be fully committed then? Will Warrick be at full total run rate? And I can tell you, no, we're going to actually take the measured approach next year. We're only going to put out about 75% or 80% of that capacity just to make sure that we don't get ourselves in a situation where we're not giving exemplary delivery performance back to our customer base. They've struggled a little bit with the delays we've had this year, but I believe the outcome is going to be really solid. So we're really looking forward to cranking this thing up beginning first of the year. William Peterson: Maybe just a housekeeping. You talked about the commissioning charge. How much of that was between the roll coat line versus Phase 7? And is there any more that we should expect in the fourth quarter? Keith Harvey: Well, I would say it's fair to bet. The majority of that was related to the Warrick roll coat 4 start-up, okay? As we've talked in the past, Trentwood's -- even though these start-ups are always difficult, and there's some uncertainty associated with them. For Trentwood, who's done 7 -- 6 of these prior, they managed through this very well. And so very little impact of that cost was part of that $20 million. Now I will say we do expect less cost through the balance of the year. We expect that number to be lower, as I mentioned in my comments, and then to have this well positioned to fully execute in January of next year. Operator: The next question is from Timna Tanners from Wells Fargo. Timna Tanners: Keith, nice to catch up. I wanted to hear a little bit more about the impact of tariffs. I feel like that we're getting kind of into that a couple of quarters since they've been announced. And how you -- any pushback on prices with your customers? Any ability to take more share from import or anything else you can elaborate on would be great. Keith Harvey: Yes. Nice to hear you again. Yes, the tariffs, we remain neutral to slightly positive from our perspective. As you know, all of our facilities are North America based. We do have one extrusion facility in Canada. But the impact to us is, as I said, neutral to slightly positive. And I'll explain the positives, and you mentioned those quite well, quite frankly, in your opening comments there. First of all, what we've seen is a large move on the premiums associated with the LME. And so as we know, the majority, if not all of our business has pretty straight pass-through on those costs. So we enable that, move that through to our customers. We're mindful that, that's gone up significantly and that, that could come down, but we'll see how negotiations progress with USMCA and other things. But on the positive side, what we've done in the marketplace is that it is a little more difficult for imports, and they've come into more about the same type of inability to rapidly lower their prices below us as a result of that premium. And so far, we're seeing better demand for domestic products. And because of the large portfolio of products that we provide to our service centers and other customers in the marketplace, we're seeing good pull on that demand as you can reflect in our general engineering business that throughout the year, which has held up amazingly well, not just from a demand perspective, but also on the pricing front. So we see opportunities. Again, we've got a lot of this capacity. The Trentwood capacity can -- we expect to also help us strengthen on the GE side of the business. And if we get a little bit of tailwind beginning in 2026, I expect really strong demand for GE products, and I expect opportunities for additional price enhancement of our business. So I think we're at the front of the bow wave of this, and we're riding it very well. And I'm very, very pleased with how the operations are performing and meeting this current demand. Timna Tanners: Okay. I wanted to touch base, particularly on the packaging side. I know you said that was strong, but we're hearing from our colleague who covers the space that there's some concern about cost inflation impacting demand. I wonder if maybe you're shielded from that a bit, given that you're doing more of the ends and tabs or any thoughts on the impact on packaging? Keith Harvey: Yes. Timna, this -- we're seeing still overall good demand on our products. And I think there some industry incidents can exasperate some of the supply scenario at different times. I know we had our challenges at the beginning of the year. I think others have had some challenges. But overall, I feel the demand for aluminum substrate products and packaging are very strong. I'll remind you that a good portion of our business is food related, and that's held up very strong. And we still continue to see that, quite frankly, outpace the demand for beverage. And so we may be insulated from that somewhat based on the markets that we serve. But overall, we're not seeing anyone reduce or wanting to reduce the capacities that we're contracted for. As a matter of fact, we continue to have customers asking for more. So that's really the basis behind our comments and where we see our business. Timna Tanners: Okay. That makes sense. Along those same lines, actually, one of your competitors had an outage recently that's caused some attention to the space and where there might be spare capacity. So I don't think you're a player in the auto sheet market, but do you have spare capacity if needed to fill in for can sheet? Keith Harvey: We're actually fairly full right now, Timna. I mean the -- it's really difficult for me to see when others have challenges because I've lived those before. A lot of times, we're in positions to help our customers. I think our customers have expectations that Kaiser, we want you to hit your commitments to us. And we're beginning to do those very well as our equipment ramps up. Really not in a strong pace to do anything other than that. As you know, a lot of that is probably bare product that's coming into the market. And we've been busy shifting our capacity more to the coated side. So we're really not one of the areas to help on the bare in a very big way. Timna Tanners: Okay. And I guess I'll just ask one last one, but kind of a big picture. I know you talked about 2025 guidance, and it's appreciated, but we're almost done with the year and looking ahead to 2026, how do we think about the cadence of the ramp-up of some of these -- the new facilities? Is it full run rate Q1 and straight line? Or do we kind of have some gradual improvements even as the year progresses? Keith Harvey: Yes. It's a great question. We -- look, for purposes of making sure we don't disappoint customers, there's somewhat of a ramp rate that we're going to be putting into our outlooks in the first half of the year. But those are going to be marginal with strong demand, expectations are that all the businesses, all these major growth investments will be behind us. And we're, quite frankly, ready to hit the run at rate buttons as quick as we can. Again, we'll give you more insight as to what we think the cadence of that by probably first half to second half. I think it's fair to say the second half with demand coming with, I think, ramp moving up on aero as packaging continues to show full ramp rate and especially if GE becomes on a little stronger next year, I think you'll see some -- we'll begin to see some of these rates that we had expectations for this business. And I'm going to be very thankful that we've got these growth assets in place to be able to take full advantage of those next year. So I'm pretty excited about next year. Operator: There are no further questions at this time. I would like to turn the floor back over to Keith Harvey, CEO, for closing comments. Keith Harvey: Thank you, operator. Thank you for your time and interest in Kaiser. We're excited about our future, and we look forward to sharing our full year 2025 results in February of next year. Have a good rest of your day, and thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the Gentherm Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gregory Blanchette, Senior Director, Investor Relations. Thank you, sir. You may begin. Gregory Blanchette: Thank you, and good morning, everyone. Thanks for joining us today. Gentherm's earnings results were released earlier this morning, and a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gentherm's website. During this call, we will make forward-looking statements within the meaning of federal securities laws. These statements reflect our current views with respect to future events and financial performance, and actual results may differ materially. We undertake no obligation to update them, except as required by law. Please see Gentherm's earnings release and its SEC filings, including the latest 10-K and subsequent reports for discussions of our risk factors and other significant assumptions, risks and uncertainties underlying such forward-looking statements. During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and investor presentation. On the call with me today are Bill Presley, President and Chief Executive Officer; and Jon Douyard, Chief Financial Officer. During their comments, they will be referring to a presentation deck that we made available on the Investors section of Gentherm's website. After the prepared remarks, we'd be pleased to take your questions. Now I'd like to turn the call over to Bill. William Presley: Thank you, Greg, and good morning, everyone. Our third quarter results showcase improved execution across Gentherm, allowing us to deliver record quarterly revenue and strong operating cash flow. We are committed to the execution of our strategic priorities while focusing on the day-to-day actions required to drive financial results. Now let's turn to Slide 3 to discuss highlights. Third quarter Automotive new business awards of $745 million puts us at $1.8 billion year-to-date and on track to deliver a full year above $2 billion. Momentum for lumbar and massage comfort solutions continued as we secured another important strategic conquest win with Mercedes-Benz on one of their highest volume platforms, which includes the S-Class, GLS, GLE and CLS vehicles. It is important to note that this is 100% incremental revenue for us as we were able to displace a competitor for this award. The platform will include a proprietary pulsating massage system, Puls.A, marking the fourth global OEM to adopt our innovative technology since we introduced it to the market last year. Securing this award demonstrates we have innovative, highly desirable and value-added solutions that customers demand from the OEMs, driving continued market adoption, increasing take rates and revenue growth for our Automotive business. Additionally, we achieved record quarterly revenue of $387 million, driven by high demand for our products and improved third quarter light vehicle industry production versus our prior expectations. Automotive Climate and Comfort Solutions outperformed actual light vehicle production in our key markets by 160 basis points, excluding FX. And we were pleased to see improved performance in China during the quarter. In addition, our operational excellence initiatives are gaining traction, which contributed to operating cash generation of $88 million year-to-date. Before I finish this slide, I want to share my perspective on recent supply chain news. We are keeping a very close eye on the supply chain and the potential impacts across the industry. There will likely be an impact on OEM production, though it is too early to call at this time. Our teams are working with customers and suppliers to mitigate potential exposure and maintain visibility. The situation continues to evolve, and we'll keep you updated as necessary. Now turning to Slide 4. We continue our relentless focus on our strategic priorities to drive long-term shareholder value. We spoke earlier this year about our strategy of scaling our core technologies across multiple end markets to drive profitable growth. We saw success in the second quarter with wins in powersports and commercial vehicles, and we made further progress on this initiative during the third quarter. Our efforts in the past 90 days have generated a commercial funnel of over $300 million of lifetime revenue, and we are still early in our efforts. I'm excited to say that we were selected by a large global furniture brand to supply our comfort solutions and are preparing for production to start in Q1 of 2026. The product we will be supplying utilizes existing plant, property, equipment and installed capacity. We are in discussions with several other furniture brands for our thermal and pneumatic solutions and see this as an attractive adjacent market given the annual volumes, margin profile and limited incremental investment. As mentioned, we are preparing to deliver components in Q1 of 2026, demonstrating that the development cycles and time to revenue in these markets is much faster than our traditional automotive business. Moving to Medical. Our new product development is progressing, and we are on track for a significant product announcement near year-end. The refresh of the product line in Medical is a priority, and we are accelerating plans by leveraging existing automotive intellectual property. Operationally, we continue the rollout of our standardized company operating system across the globe, and we are starting to see early signs of traction. This is the type of foundational work that will maximize utilization of our existing assets, deliver expanded margins, lower CapEx requirements and generate increased cash flows. In September, we brought Gentherm's top leadership together for an in-person summit. We used this time to align on strategic initiatives and key priorities, including the standardization of global business processes. We understand that people are Gentherm's most valuable asset and ultimately drive performance of our business. The leaders left with a clear vision of how we will drive value creation and the sense of urgency at which we must move to deliver the required results. Our global strategic manufacturing footprint realignment plans remain on track to be substantially complete by the end of next year. We have made significant progress relocating and launching manufacturing processes in Tianjin, China and Tangier, Morocco. Customers have been supportive, and we are actively shipping production components from both facilities. As we think about deploying capital to achieve superior financial performance, we believe that M&A will serve an important role for the company in achieving our strategic priorities. We are cultivating a wide range of opportunities that are aligned with our core technology platforms and provide access to new markets and expand our product portfolio. We will evaluate these opportunities as a lever to accelerate our strategy. And with that, I will turn the call over to Jon to review third quarter highlights and results. Jon? Jonathan Douyard: Thanks, Bill. Now turning to Slide 5. In the third quarter, we secured $745 million of Automotive new business awards, one of the highest quarters on record for the company. As Bill discussed earlier, awards were highlighted by a significant win with Mercedes-Benz. Our team did a fantastic job securing this conquest business, which will more than double the annual lumbar and massage revenue with this customer after it goes into production in 2028, and it will also support lumbar and massage growth into the future. Additionally, we had another strategic win with GM for our ComfortScale solution, which is our patented next-generation integrated thermal and pneumatic hardware system. Last year, we secured our first ComfortScale award on the full-size GM truck platform, including the Chevrolet Silverado and GMC Sierra. And in the third quarter, GM expanded this solution to its midsize truck platform, including the Chevy Colorado and GMC Canyon through a mid-cycle change in 2026. ComfortScale is a win-win for all involved as we receive more content and value add, OEMs reduce their labor costs and end consumers get an improved in-vehicle experience. This award highlights our close partnership with General Motors and our ability to provide value-added innovative solutions to our customers. Next, I want to highlight our success in partnering with Japanese OEMs as we look to drive growth and customer diversification across Asia. We secured multiple awards in the quarter, including one for climate control seats on a Honda platform for the Indian market. Although Gentherm has not historically prioritized this market, on our hunt for strategic profitable growth, we are evaluating the broader opportunity India may present for our products, and we'll provide updates as we progress. Moving on to the third quarter launch activity. We again made progress in China as our solutions were included on several new programs with Chinese domestic OEMs, including our thermal solutions with Xiaopeng and our full suite of thermal and pneumatic solutions with Li Auto on the i6, both of which contributed to improved growth over market performance in China. Coupled with a focus on winning new business with domestic OEMs, these launches will shift our customer mix and result in our business being more closely aligned to the overall Chinese market over time. In Europe, we launched thermal and pneumatic solutions on the all-new Jeep Compass. Stellantis first introduced this vehicle to the European market in September, and we will soon launch it with our content in other regions. This vehicle will be offered in a variety of powertrain options, highlighting the powertrain-agnostic nature of our solutions. Finally, our Climate Controlled Seat solution is included on Subaru's high-volume Forester. This is another great example of the success we have had in expanding our business with Japanese OEMs. Please turn to Slide 6 for a more detailed review of the financial results. Overall, third quarter results were above expectations as revenue came in higher, driven by increased industry volumes. We also delivered sequential adjusted EBITDA improvement in the quarter. Overall, revenue of $387 million was up 4.1% compared to the same period last year. Revenues excluding foreign currency translation increased 2.4%. Automotive Climate and Comfort Solutions revenue increased 8.6% year-over-year or 7% ex-FX, which more than offset planned revenue decreases from previously discussed strategic exits. Medical revenue decreased 0.4% year-over-year or 1.6% ex-FX. Turning to profitability. We delivered $49 million of adjusted EBITDA or 12.7% of sales compared to 12.9% in the third quarter of last year. The 20-basis point decline was primarily driven by higher material costs, including a minor impact from tariffs, expenses related to our footprint realignment and higher operating expenses, partially offset by operating leverage and favorable foreign exchange. Consistent with our prior communication, the impact from tariffs has been minimal, and our team has done a nice job of working with customers to mitigate our exposure. Adjusted diluted earnings per share was $0.73 per share compared to $0.75 per share in the third quarter of last year. On cash, we have generated $88 million of operating cash flow year-to-date, further strengthening our balance sheet. Net leverage stands at 0.2x at the end of the quarter, providing us with ample access to capital to deliver on our strategic priorities. Please turn to Slide 7 for a discussion on our guidance for the remainder of the year. Based on our year-to-date performance and current visibility into OEM production schedules, we are increasing the midpoint of our revenue guidance while narrowing our EBITDA range. For the full year, we now expect revenue to be in the range of $1.47 billion to $1.49 billion, with the increase driven by improved second half light vehicle industry production versus our prior expectations. Our outlook for the fourth quarter includes the assumption of seasonally lower revenue versus Q3. This revision does not include the potential impact of supply chain disruptions that Bill discussed earlier. Year-to-date, we have delivered 12% adjusted EBITDA margin and are narrowing our adjusted EBITDA margin range to 11.9% to 12.3% for the full year. The EBITDA range primarily accounts for the impact of volume as well as the potential timing of year-end initiative spending, including expenses related to footprint transitions and new product introductions. On CapEx, we are again reducing our expected range of spend from $45 million to $55 million, which reflects an ongoing focus on optimizing current plant and equipment while also scrutinizing new projects. In closing, we are pleased with the results year-to-date, and our team is focused on finishing the year strong. With that, I will hand it back to Bill for closing remarks. William Presley: Thanks, Jon. Our third quarter results demonstrate improved execution and progress toward our long-term strategic initiatives. We delivered record revenue with strong cash flow and have made notable progress entering into adjacent markets. With innovative solutions and a strong balance sheet, we are well positioned to deliver profitable growth, margin expansion and increased levels of cash flow. We remain focused on these strategic imperatives that will result in long-term value creation for our shareholders. With that, I will turn the call back to the operator to begin the Q&A session. Operator: [Operator Instructions] Our first question comes from Matt Koranda from ROTH Capital Partners. Matt Koranda: Good to see the further conquest award with Mercedes. I'm curious if maybe you can just point to a few of the factors that are giving you momentum in winning that conquest business. Is it technology superiority? Is it sort of having the full suite of comfort and thermal? Maybe just touch base on sort of some of the factors that are at play there. William Presley: Yes, Matt, it's Bill Presley. I would start with it's certainly an innovative edge, right? Our solutions provide the OEMs with an experience that they can pass on to their customer and price for us. So there's a true value-added proposition there, and we have an innovative lead there. Our commercial relationships with our customers are very strong. So I would say our commercial model of interacting directly with the OEMs to impact their product plan versus attempting to sell through a Tier 1 gives us a position with the OEMs, I think, that maybe not a lot of our competitors share. And I think a really interesting one here is, it included Puls.A. So this is the fourth OEM to adopt our Puls.A technology globally since we introduced it to the market last year. So in order, I would say it's the innovative edge, the value proposition it provides to their end users and our customer relationships. Matt Koranda: Okay. I appreciate the clarity there. And then just on the adjacent market opportunity, good to see the $300 million funnel that you guys highlighted. Maybe curious how that breaks out between some of the opportunities that you have mentioned in prior calls, powersports, commercial vehicles, furniture, I believe. And then how do we think about that converting to commercial wins that could impact 2026 or 2027? I know you mentioned there's some shipments on furniture in the first quarter of '26, but I would imagine that it builds into '27. So maybe just level-set us on sort of how to think about that. William Presley: Yes. So that $300 million pipeline, as you mentioned, I mean, that was with just 6 months' worth of work, right? So teams moved very fast there, which is very encouraging. I would say in rough numbers, it would be roughly 1/3 what I would call the furniture, 1/3 what I would call specifically commercial vehicle and 1/3 what I would call other mobility. In order of excitement in that space, the furniture industry seems to be actually growing rapidly. So they're talking exciting adoption rates. Their speed to market is quite impressive. I anticipate further awards in that space that we'll be able to announce, but that revenue will start flowing in '26. On the commercial vehicle side, they're very interested in our fluid systems. So that's a new market that we're quoting with the valve business that came with Alfmeier. So fluid systems is gaining traction there. And steering wheel technology, specifically like heaters, hands-on detection, which we supply in the light vehicle market. And then other mobility, things that we've talked about, like 2-wheelers, construction vehicles, that's the other 1/3. That one, we'll have to see how it develops. But I would say, motion, furniture -- or sorry, furniture and commercial vehicle are really gaining traction. Jonathan Douyard: Yes, Matt, I would just add in terms of time to revenue, I think we did talk about Q1 production on the furniture award. We think that's a $3 million to $5 million opportunity just that one award as we look at 2026. And so to the extent that the team can continue to stack these up, we think it can be a meaningful growth driver, certainly a couple of points here as we get maybe later into '26 and '27. William Presley: And just piling on to that to make sure it wasn't lost in the script, that's capacity that we already have installed equipment we already have installed. So it's incremental dollars on existing assets. Operator: Our next question comes from Ryan Sigdahl with Craig-Hallum Capital Group. Ryan Sigdahl: I want to start on kind of the near-term production environment. I know there's some noise out there. You called it out in your prepared remarks, but Jaguar Land Rover, you have an aluminum supplier. I don't know if there are others, but curious if there are others beyond those 2. And then I guess the question -- second question would be, why you're not including it in guidances. One, are you not expecting it in Q4? Or is there just not visibility on kind of the magnitude to put it in numbers, but curious that decision. William Presley: Yes. I would say -- so you touched on the JLR cyber issue. That seems to be behind us now. They're ramping back up. That was more heavy for us in Q3. You touched on the Novelis fire, which impacts aluminum. I can tell you that that's heavy Ford, maybe Stellantis based on what they've said publicly. We talk to them on a daily basis. Right now, they are working to mitigate the issue. So it's difficult for us to see or say what the impact will be. Certainly, we haven't seen any meaningful impact in the schedules yet with regard to that. And then the third one, which is widely known that we're watching very closely is just the Nexperia issue going on between the Dutch government, the Chinese government and that company and the U.S. trade barriers. Nexperia for us right now, our supply chain team has done a phenomenal job of mitigating any direct Gentherm impacts. So we don't see any near-term Gentherm impacts. We've done a good job of finding alternative sources for what we need. The bigger question there will be who does it impact in the industry because they're widely used components. It's likely that somebody will be impacted, not sure who. You want to talk about the guidance piece? Jonathan Douyard: Yes. I mean I think to Bill's point, the Jaguar piece certainly impacted us. There was a headwind for us in September. There'll be a little bit of hangover from that in fourth quarter. We've contemplated that in the guidance. I think as you look at the fire as well as the Nexperia piece, we're really looking to our customer ADI schedules to adjust our forecast. So there's been a little bit of movement here, I would say, in the last week or 2 that has been contemplated, but we don't want to speculate more broadly than what we have with communication we have from our customers. And so it's really the latter of what you said in terms of just visibility that we have today and the impact on the business. So we're trying to be transparent as to what we see, but we haven't seen any significant schedule shifts to this point. Ryan Sigdahl: Helpful. Then India, I don't know that I've heard that before. I guess as you think about adjacencies, I always thought of adjacent sectors, adjacent market opportunities. Can you maybe provide a little more? I know you said you'll give more color there in the future. But are there other markets around the world, whether you want to be specific or not, but that could be potential pockets of opportunity as you hunt for profitable adjacent opportunities? William Presley: Yes. I mean the Indian market, as you heard Jon say, talk about the conquest win, that was with a Japanese OEM in the Indian market, but that's our first entry into the Indian market. And although we haven't historically looked at the India market, we're actively evaluating that. Look, it's an attractive market to us for a couple of reasons. One is scale, and we have no presence there. Number 2 is if you look at some of the proof of concepts we're developing on what we call alternative markets, 2-wheelers is a huge market in India. And there's a desire there for cooled seats. So that's a market that we're evaluating, and it looks like a very good market for us with regard to our valve technology. So it's something that we're exploring and considering, but it could certainly open up alternative streams of revenue for us. Jon, I don't know what else you want to add? Operator: [Operator Instructions] Our next question comes from Ryan Brinkman with JPMorgan. Ryan Brinkman: I thought to ask first on the strategic footprint alignment plan. Now that you are growing near its completion by the end of 2026, what is the latest in terms of how you anticipate the layering on of the incremental savings with the phaseout of the associated spending to drive those savings? How should we expect the cadence of margin to progress throughout and beyond 2026 on account of both of those factors? Jonathan Douyard: Yes. I think a couple of points there. I mean we talked about the impact in the year being about 50 basis points. I think it will come in a little bit higher than that just based on the timing of where we are. And the fact, frankly, that we've seen higher volumes in the year that's impacted some of the ability to build inventory. I think as you look at 2026, we will start to see some of the legacy costs fall off, but we'll also see the impact of sort of the inventory build that we've had this year. And so the real savings from that is probably late '26, but really more like 2027 in terms of when we see the benefit of the footprint transitions. Ryan Brinkman: That's helpful. And then with regard to the M&A pipeline, given all the traction that you're seeing expanding into nonautomotive end markets in a really capital-light way, should we think about M&A being aimed more at product expansion rather than channel diversification? Or what are the strategic priorities that you're most looking to accelerate through M&A? William Presley: Yes. I mean when we think about M&A, we look at it, I would say, through a threefold lens, right? I mean ultimately, we're trying to build a more resilient company, right? So we're looking for 2 things. We're looking for something that provides access to markets that we're interested in, and we've been very vocal about becoming more than a light vehicle producer alone. So markets are important. Number 2 is it has to fit our core strategy, which means they are products that align with our current mission. So you won't see us take any wild left turns. So product expansion is important as well, right? So more resilient company. So it has to fit the right margin profiles. It has to create value. Number 2 is access to other markets; and number 3 is broadening the product portfolio. Operator: We have reached the end of our question-and-answer session as there are no further questions, which now concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.
Operator: Welcome to WEG's Third Quarter 2025 Earnings Conference Call. I would like to highlight that simultaneous translation is available on the platform on the interpretation button via the globe icon at the bottom of the screen. We would like to inform you that this conference call is being streamed live and the audio will be available afterward on our Investor Relations website. [Operator Instructions] If we do not have time to answer all questions live, please feel free to send your questions to our email at ri@weg.net, and we will answer after completion of our conference call. We would like to emphasize that any forward-looking statements contained in this document or any statements that may be made during the conference call regarding future events, business outlook, operational and financial projections and goals and WEG's potential future growth are merely beliefs and expectations of WEG's management based on currently available information. Forward-looking statements involve risks and uncertainties and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors could affect WEG's future performance and lead to results that will be materially different from those in the forward-looking statements. Joining us today from Jaraguá do Sul are Andre Luis Rodrigues, Chief Administrative and Financial Officer; Andre Menegueti Salgueiro, Finance and Investor Relations Officer; and Felipe Scopel Hoffmann, Investor Relations Manager. Please, Mr. Andre Rodrigues, you may proceed. André Rodrigues: Good morning, everyone. It's a pleasure to be with you once again for WEG's earnings conference call. I'll begin with the highlights of the quarter on Slide 3, where net operating revenue grew 4.2% compared to the third quarter '24. In Brazil, performance was driven by solid industrial activity, continued deliveries in transmission and distribution projects and healthy demand for commercial motors and appliances. Growth was partially offset by a significant year-on-year decline in wind power generation revenue. In the external market, industrial activity remained strong in our main regions of operation, especially in Europe. In the power generation, transmission and distribution businesses, T&D operations in North America continued to show solid delivery volumes despite some fluctuations in general project deliveries. Our operating result measured by EBITDA reached BRL 2.3 billion, an increase of 2.3% compared to 3Q '24. EBITDA margin remained at a very healthy level, closing the quarter at 22.2%. Along the presentation, Andre Salgueiro will provide more details on this point. As for our return on invested capital, one of our main financial indicators remained at the high level of 32.4%, as we can see in more details on the next slide. Revenue growth and sustained high operating margins contributed to maintaining our return on invested capital at healthy levels despite the decrease compared to the same period last year. The reduction was mainly due to higher invested capital driven by investments in fixed assets and acquisitions during the period. It's important to remember that the ROIC for 3Q '25 or was positively impacted by the recognition of nonrecurring tax incentives in 4Q '23. Now I'll turn the floor over to Andre Salgueiro. André Salgueiro: Thank you, Andre. Good morning, everyone. On Slide 5, we show the evolution of net revenue by business area. In Brazil, demand for short-cycle products remained solid, particularly for low-voltage industrial motors and gearboxes across several operating segments. We also observed positive performance in long-cycle equipment deliveries such as medium voltage electric motors, especially in the oil and gas and mining sectors despite an investment environment that remains somewhat restricted. In GTD, the T&D business continued to perform well, driven by deliveries of large transformers and substations. The decline in revenue in this area was mainly due to the absence of new wind turbine deliveries as the pipeline for 2025 had already been anticipated. There was also a reduction in solar generation revenue this quarter, mainly reflecting the completion of large centralized solar generation projects executed over the last 3 quarters. In commercial motors and appliances, we continue to deliver positive results with growth in sales to key segments such as air conditioning, water pumps and compressors. In coatings and varnishes, sales of our main products remained strong with notable demand for liquid coatings used in the oil and gas segment. In the external market, short-cycle equipment benefited from continued healthy industrial activity across multiple regions with an improvement in the European market standing out. For long-cycle equipment such as high-voltage motors and automation panels, delivery volumes contributed positively, although geopolitical uncertainty continues to weigh on new investment levels. In GTD, we maintained good delivery volumes in T&D operations in North America despite a lower volume of deliveries in another key region, South Africa. Revenue moderation in this area was mainly driven by fluctuations in generation project deliveries in Europe and in India, a typical dynamic for this type of business, even with strong performance from the marathon generator operations in the United States and China. In commercial motors and appliances, demand remained positive, particularly in China and North America, along with contributions from both electric motor operations in Turkey. In coatings and varnishes, revenue growth was supported by strong performance in Mexico and the recent acquisition of the operations of Heresite in the United States. Slide 6 show EBITDA evolution, which grew 2.3%, while EBITDA margin closed the quarter at 22.2%, although slightly lower than the same period last year, mainly due to higher costs of some raw materials EBITDA margin remains strong, supported by the current project mix. Finally, on Slide 7, we show the evolution of our investments, which totaled BRL 673 million with 72% -- in 52% in Brazil and 48% abroad. In Brazil, we continue to modernize and expand production capacity at T&D while increasing capacity and productivity at our Jaraguá do Sul and Linhares sites. Internationally, we continue investments in Mexico, particularly the progress in building the new transformer factory and in the expansion of more production capacity in China. That concludes my section. And now I'll hand it back to Andre. André Rodrigues: On Slide 8, before moving on to the Q&A session, I would like to highlight a few points. First, during the quarter, we announced several important investments, including a BRL 1.1 billion plant in Santa Catarina to expand the energies unit's product portfolio and production capacity and also a USD 77 million investment in the special transformers plant in Washington, Missouri and BRL 160 million investment to further integrate and expand the electric motor production at the Linhares unit in Espírito Santo. In September, we also announced a target to address greenhouse gas emissions reduction in Scope 3. In addition to having our Scope 1, 2 and 3 targets for 2030 validated by the science-based targets initiative. More recently, we announced the acquisition of a controlling stake in Tupinamba Energia, a company with a strong presence in software and services for electric vehicle charging network management, aligned with our strategy presented at the last WEG Day to provide complete solutions for the e-mobility market. Finally, a few words on our outlook for the remainder of the year. Despite mitigation measures already underway, the geopolitical and macroeconomic environment requires close attention and brings short-term challenges. We remain focused on our investment plan to support growth in Brazil and abroad, both to strengthen our market mature businesses and to develop opportunities in new markets. Even amid a complex geopolitical backdrop, we continue to expect annual revenue growth and high operating margins, supported by our international presence and diversified product and solutions portfolio. This concludes our presentation, and we can now move on to the Q&A session. Operator: [Operator Instructions] Our first question comes from Lucas Esteves from Santander. Lucas Esteves: Congratulations on your results. I have 2 topics that I would like to approach, starting with the results acquired from Regal that you did not disclose this quarter. So I'd like you to give a bit more color on this business, how it behaved. Then I ask that because previously, you said that you were increasing capacity with generators. So I would like to understand that this is already reversing in an increasing volume and results or this is to be seen in the coming quarters? Second question, how WEG is positioning itself as a solution provider more than an equipment supplier. I ask that because when talking to stakeholders, we hear more and more that WEG is offering complete solutions, a generator instead of solar panels. So all that said, I would like to understand your strategy, if the company is going to position more and more as an OEM to product, if that can expand your market and if that somehow connects to the company's strategy to expand its footprint in the aftermarket. André Rodrigues: Lucas, this is Andre Rodrigues speaking. Thanks for your questions. It's a long question. If we forget something, please just remind us of the main points. I will start talking a bit about the integration of Regal. It is going on. It is as expected. When we talk about Regal -- Marathon, I'm sorry, when we talk about the businesses of Marathon, we are basically talking about 2 businesses, low-voltage motors and alternators. For low-voltage motors, we saw an accommodation in the market. And I think the main focus now of the entire industrial team of WEG Motors is gains synergies in the stage where we are without many investments in terms of verticalization. So optimizations of products, opportunities to reduce costs, all following as expected. The alternators business, as we mentioned on WEG Day, is a business that is developing very well. João Paulo, right after the acquisition, focused to try and increase capacity the most. We are making investments to increase capacity. This is probably to be completed at the end of this year, beginning of next year to continue developing the business giving the markets that demand this equipment and that have contributed positively for this business. So Marathon businesses have a very strong recognized brand in the U.S. market, particularly. Integration of admin areas, we are also evolving relatively well. We did have a huge challenge in terms of the carve-out of systems. We are talking about more than 150 systems. We're able to develop all the efforts before the deadline of the CSI that we had with them and also in terms of shared services that was provided, especially in the North America region by the Regal organization Rexnord, we also were able before the deadline to migrate to our shared service model, which is called WEG Business Services. So in this migration, we had especially gains in IT and to bring the business to our model. And with this, we had already a reduction of approximately $6 million in annual costs. Consequently, with this, together with all efforts in the industrial area, the good performance of alternators, Regal's margins are improving quarter-on-quarter. And we highlight that it is an integration process that will take 4 to 5 years. But the message is positive, and it is following as scheduled. André Salgueiro: This is Salgueiro speaking. As for your second question, WEG's model of becoming more and more focused on solutions. This is a reality. This was the main focus of our presentations on WEG Day, the last WEG Day that we held recently. And there, we brought 3 major topics: one, solutions for e-mobility. So WEG not only focusing on manufacturing powertrains or recharge stations or batteries for buses, but rather being more and more focused on following a complete solution, integrating it all. And this comes from the service center that we announced in São Bernardo do Campo for support and also the acquisition that we released -- recently announced of Tupinambá to complement the ecosystem. So we have been working to integrate more and more services and solutions. And the 3 main topics of WEG Day was e-mobility, microgrid and network reliability. That is to have more and more complete solutions for the market, not only focused on the product, but on the whole solutions and how we can help our clients on their journey. Operator: Moving on. Our next question comes from Gabriel Rezende from Itaú BBA. Gabriel Rezende: I have 2 questions. First, I would like to understand about the added capacity for transformers in West. I think this is going to be effected by '26, beginning of '27. And the market is more and more thinking of what '27 is going to be like for WEG. So are you selling already the additional capacity that you're going to have in transformers for '27? What is your pipeline for transformers? If you could talk about prices and volumes, that would be very good, especially about the additional capacity. And the second question, we have been monitoring yourself and the competitors and prices are going up in the U.S. because of tariffs and some inflation in the sector. I would like to know if you understand price increases in the U.S. offset loss in competitiveness or if you could have a drop in volume as price increases take place. André Rodrigues: Gabriel, I'm going to talk a bit about transformers, okay? Well, we have been announcing for some time now, 3 years, I would say, every year, a new package of investments of the business given the demand and how the market is heated in several segments, energy efficiency, generative AI. So WEG by the end of '23 made a solution. And in the beginning of the '27, we would have double global capacity for WEG in the transformer business. We are following the investment plans unchanged. Whenever we see a new opportunity, we reinforce the plan. We had a recent announcement, the modernization and increase of capacity in the special transformers plant in Missouri, an investment of $77 million. In addition, we have the new plant in Mexico, a new plant in Colombia, increasing capacity in Gravataí in Brazil to use the opportunities in the market. And when we have visibility, as we are having now of the completion of the project, we start already to have a backlog. So the answer is, yes, we are building our backlog in all the units in where we have visibility of completion. That is going to be by the first half of '26 to the end of '26 for us to seize opportunities as of '27. Of course, perhaps enjoying opportunities in the second half of '26. As for prices in the U.S., Gabriel, I think the whole process when the tariffs started to be discussed, made it clear that inflation would happen, not only for WEG, but for the whole American market as a whole. So it's just natural in our strategy to try and mitigate impacts is to use our commercial strategy in prices in the U.S. And you did say it's not only WEGs, it is WEGs and almost all the players in the market. And so this is a movement, especially the most relevant part that happened more recently that we still cannot measure in terms of details of impacts because in practice, it came into force in October. So we have to see how the activity is going to evolve from now on. So this is something that we'll have to monitor in the coming months how the market will respond to the commercial strategy. But again, it's not only motors, transformers or other products. It is the U.S. economic activity as a whole due to tariffs and price adjustments are being made throughout the industry. Operator: Our next question comes from Lucas Marquiori from BTG Pactual. Lucas Marquiori: I have just one question, but perhaps with some items. Still about tariffs, I was a bit lost in terms of times. Probably you already had an impact of the tariff this quarter. You are saying that you are having an effort of repricing of products. And then you have the waiver of what was shipped until mid-October. So perhaps the full impact in cost and margins is just going to show in Q4. I would just like to see if my understanding is correct. So the full quarter is just going to be in Q4 and how far you are in terms of passing on prices. You mentioned 10% in Q2, then we said mid-teens for the next quarter. Just to understand how long the curve is. And finally, the passing on costs to balance tariffs, this is something that the whole market changed the price dynamics. If you have a decrease in tariffs, you don't necessarily have to return that to clients. You can keep it in margin. So do you think this is standing if and if tariffs are renegotiated next year? So just the question with the same topic, tariffs. André Rodrigues: Thanks for your question, Lucas. I'll try to answer all the parts. The first point, what you mentioned is correct. We are going to have the full impact in the fourth quarter. We did have some impact in the third quarter, particularly the last month of the quarter in the month of October, we did have this impact. But throughout this moment when we had the information of tariffs, we started working on several fronts to mitigate the impact. There is not a silver bullet. You talked about recomposition or realigning prices, WEG's logistics chain to minimize that, and the company continues to work along these lines. Our expectation for the fourth quarter is to have a greater impact because of the tariffs. But again, we have lots of action plans and initiatives to mitigate the impact. In the end of the quarter, we are going to have a clearer view of whatever was possible to be mitigated and the impact. As for price realignment, well, the thing is we have to know what the market is going to be pricing. I cannot say that this is a given because if the tariffs change, if there is a change in process, a change in dynamics, we have to adjust according to the wind. Operator: Moving on. Our next question comes from Alberto Valerio from UBS. Alberto Valerio: A follow-up on tariffs because we are seeing lots of news on WEGs suiting its capacity in Mexico, United States, Brazil, Mexico. What is missing in Brazil for WEGs to eliminate 100% of its tariffs that is not producing anything in Brazil to be exported to the U.S. And second question, the exposure of BESS in WEG. There is an auction now in December, another larger auction for June next year. What should we expect from WEG for '26? André Rodrigues: Alberto, thanks for your questions. Okay. One point that is very important to reinforce is the investments that WEG is making in the U.S. along the recent years, the revenue that is produced and generated in the U.S. is increasing and WEG is doing that. In transformers alone, we expanded in the last 5 years, our 2 existing plants. We had a greenfield project. We are renovating a new one and increasing capacity. So added to everything we mentioned, restructuring, logistic chains and other initiatives that we are talking about, also the increase in capacity in the U.S. will help us to minimize the impact. André Salgueiro: Alberto, as for BESS, we did show on WEG Day our solutions for microgrid, even home use, the monogrid, industrial use, commercial agribusiness, until getting to that. So it's important to mention that WEG has a full portfolio today of products to serve the different segments, and we have been working very hard in this project of the small medium size, which is a good market demand. To give an estimate for the next year, perhaps it's too early because that depends on the development of the market from now on. And it did mention 2 important things, the auctions that are expected to happen this year and next year. And indeed, if they do happen, they may be a very interesting opportunity, much greater than we have today because today, opportunities are concentrated on mid-sized projects. We are seeing people wanting projects perhaps with a greater scale that we are having, but different from utility projects, which are the large projects that generally take place. So if the auctions happen, that can change. The market as a whole can grow, and that will depend on how much WEG is going to capture up this market along the next years. Operator: Moving on, our next question comes from Rogério Araújo from Bank of America. Rogério Araújo: I have 2 questions on my side. The first is the external GTD revenue. It did go down despite the favorable T&D movement. We did some accounts with transformers in North America, some assumptions considering the revenue of generation abroad. It may have dropped from 30% to 50% year-on-year. Does it make sense? Are our accounts correct? And if you could talk about the deliveries in the past until when this comparison basis is going to be kept? So this is my first question. Second, about margins. I do not recall if it was 1 or 2 quarters ago, you said if it weren't for the renewables mix, especially solar farms, margin would have gone up. And now the mix is down, especially solar farms and the margin did not really show the difference. I would like to know what hurt you. You did talk about tariffs affecting October. Was it this? Any other factors? But just for us to understand margins in the short term. André Salgueiro: Rogério, this is Salgueiro speaking. Thanks for your question. I'll answer the first GTD in the foreign market, and then Andre is going to talk about margins. We don't break down in our releases. What I can say is that indeed, generation did have a significant drop this quarter, especially because of somewhat weaker performance in the joint venture that we have in Europe compared to last year. And that, especially for the fact that we did have some important projects and concentration of deliveries last year that were not replicated this year and also because of reduction of revenue in generation in Asia Pacific, especially for projects that are served by the Indian operation. We did mention that in our release. I don't know if it was 100% clear, but in T&D, the quarter was slightly different. T&D had been growing in all operations in the external market this quarter. We continue with positive performance in T&D. North America continued with good performance. But in Africa, it did have a drop in revenue in the quarter. because some large transformers that we delivered last year and that these projects were not replicated this year. So there is an effect of a lower growth in GTD, the external market in generation, but also a portion of T&D in Africa. So what is doing well, positive without changes is T&D, North America and Colombia, altogether in this context. And Rogério, about margins, you were right. I think it was in the first quarter that we broke down how much margin we would have consolidated excluding that movement that started in the last quarter last year about solar farms and continued in the first and second quarters. I don't recall exactly the amount, but we can talk about that later on, but we did mention that, and it is in the transcription of our last call. I think it was the first quarter. Undoubtedly, what we see in terms of margin behavior, it is according expected. We expected a first half a bit more pressured because of the product mix. As the product mix with solar went down, the margin will improve, and it is improving. If you get year-to-date margins of WEG, it is within expectation to fluctuate between what we had in '23 and '24. Remember that when we are monitoring margins, we cannot talk about one quarter. This is very complicated because we have several business dynamics and everything. For instance, we did have the impact of the tariffs this quarter, not all action plans to mitigate that in place. And what we saw this quarter, compared to what we had last year and perhaps it is a bit of the result of the margins is that there was a bit of an increase in prices of the main raw materials, especially steel and copper, which also impacted the margin of the quarter. But again, I would like to stress that margins are improving quarter-on-quarter as expected, and we want to -- we believe that it's going to be fluctuating between what we had in the last 2 years. Operator: Our next question comes from Lucas Laghi from XP Investments. Lucas Laghi: I have 2. Thinking about the performance, I think it was the highlight of the performance this quarter. I would like to know your dynamics for external markets, especially in the U.S. Any concentrated delivery, any anticipation of purchases because of tariffs. So anything out of the ordinary? I'm thinking of industrial activity as a whole, when I take a look at the release of your competitors, you see a backlog that is very strong in the third quarter from the U.S. So in the U.S., some segments are doing very well. Others are doing poorly. I would like to understand if you could have an acceleration of revenues driven by the U.S. So try and understand how you see industrial activity as a whole, especially the U.S. And for internal GTD and perhaps that was the downside in terms of revenues, especially because of the drop in solar, as you had mentioned. So just to understand if we are already on a normal level or if you think that you can still have a decline in solar? How are things going on in [indiscernible] residential other? And do you think that 1/3 would be in T&D? I know that things are changing with solar, but how would you consider the internal GTD? So basically, external GTD and internal GTD, that's my question. André Salgueiro: Lucas, this is Salgueiro. Thanks for your questions. As for industrial electronic equipment, first, I would like to reinforce that we did see the market resuming. That's the upside. Brazil grew by 3.3%. And we do see also growth in the external market of 7.1% in reals and even stronger in dollars, almost 9%. So that shows a market and an industrial activity that's quite interesting. And that is reflected in our numbers. We did highlight the performance of Europe. I think it was the main highlight in terms of recovery because Europe was a region that was not doing well in recent quarters. And as of this quarter, we did see significant improvement. So that's an important point to highlight. And in the U.S. well, the U.S. has a bit of a different dynamic because of tariffs and everything that we have discussed before, but also the performance of industrial activity, especially with motors and projects is going on. It's happening, not at the same pace as before. We did mention in the call last year that the decision of new investment was on hold with the dynamics we still do not see a major change. But an important point that you did mention, and we can talk about that is that when you see orders coming, the performance is better than in the past, which shows that we might have for the future, an industrial activity in the external market with a more positive dynamics and here considering all regions and also the U.S. When we talk about GTD in the domestic market, you did mention 2 important points that justify the drop, the wind power, because we already knew that there was a lack of new projects and that continues. And the news this quarter that we tried to address to you in the comments of last call is that solar would be weaker in the second half of the year, especially for the fact that we no longer had the GC projects. So that was the main reason. And when we look into the performance of the third quarter compared to the second quarter, this is clear. When we compare the third quarter and third quarter, that's not so relevant because in the third quarter last year, we didn't have these projects. They started in the fourth quarter. And that's interesting, considering your question, when you look into the future, we do have a challenge for the fourth quarter, which is when we started centralized generation a bit stronger, and we don't have the projects this year. And another point is that the GTD market distributed generation is not heated either. So we do have projects. They are evolving, but at a pace that's slightly slower than in the past. So putting together the factors, we have a solar dynamics already reflected this quarter with a weaker performance and expectation because of the comparison base of centralized generation of last year, this movement can be even accelerated in the fourth quarter. Operator: Our next question comes from André Mazini from Citi. André Mazini: My question is about the competitive scenario with the acquisition of 50% of Prolec. In yesterday's call of GE Vernova, they talked about commercial synergies. Do you think that changes anything in the North American market? And also in the call, they said 20% of the orders of Prolec comes from hyperscalers and data centers. So if you would have an estimate of how much T&D orders in the foreign market comes from this type of customer? And finally, a follow-up of the last question. I don't know if you did mention that there was a prebuy. I didn't understand that. That's it. André Rodrigues: Thanks for your question. Well, the competitive scenario, what we saw yesterday, I think does not change much. It's a competitor that has already been in the market. They are just acquiring the remainder of the business. And we know that everyone is making investments to expand capacity and to enjoy demand. WEG positioned itself in the past. We believe that we started before the competition if we compare most of the competitors. And we also understand that in '26, we are going to be one of the first in the main markets to add this new capacity. As for supply to data centers, the number that you mentioned to WEG is very close to that in the U.S. So again, we do not see major changes considering the competition. I did not understand the second part of your question. Of course, it's another topic. If there was a prebuy in the third quarter in EEI given the tariffs. If there was a pre-buy people advance their orders. André Salgueiro: Mazini, this is Salgueiro. We cannot say that. The increase in tariffs started in the beginning of the year. The discussions and more concrete effect started with the 10%. Then we had the 50%. So it's important to reinforce that the 50% was specific to Brazil. And obviously, people know that WEG is a Brazilian company. It is based in Brazil, but it is very specific with its dynamics with local players. It can provide matters from different countries, Mexico, Asia. So we cannot say that this movement was relevant or if there was a significant effect on the third quarter. Operator: Our next question comes from Marcelo Motta from JPMorgan. Marcelo Motta: I have 2 questions. First, a follow-up on tariffs. We have a meeting of Trump Donald this weekend. We don't know if it's going to happen. But do you see anything, I don't know, considering information from the Ministry of Industry, what kind of a lobby is going on? Do you have backstage information for something that we should look into? And also your effective tax rate along the year, it has been going down. 15% was the top compared to the 7.5%. Do you think that this rate is going to continue to go down or it was just something that happened this quarter? So just to understand its curve because it's now below what was last year. André Rodrigues: Thanks for your questions, Motta. We would love to have some additional information. But unfortunately, we are also following the information with the same channels that you have. But when there is an opportunity to sit down and negotiate, we see it as a good time. And we hope that when it happens, when the meeting happens, it will help all of us to try and decrease tariffs to a more reasonable level. As for the effective rate, we always say that this is a number that will continue to fluctuate quarter-on-quarter. It's natural that it happens, especially because of the mix of results that are generated in Brazil compared to what is generated in other regions. So I think that's very important to say. When we compare it to last year, there are 2 effects. One, it is a better use of interest on equity for 2 reasons. We had an increase in our profit and loss. We had a capitalization this year and also an increase of PJLP, which is the rate that we use to calculate interest on equity. And in addition to that, we had the mix of growing results in the external market compared to Brazil, which also contributed to the positive fluctuation. For the future, once again, fluctuations are part of the day-to-day. But from what we understand, considered PJLP and others, we don't think we are going to have any significant change, at least in the short term. In the mid to long term, it is hard to elaborate because there are too many variables, too many discussions going on that may change assumptions. So in the future, the scenario can change. But we do not expect major changes when we consider this year, beginning of next year, so more of the short term. Operator: Moving on, our next question comes from Pedro Martin from Bradesco BBI. Daniel Federle: It's Daniel Federle from Bradesco asking. My question is about I, especially long cycles. It seems that past portfolios contributed to revenues, but sales are weaker at the front end. My question is, should we expect a drop in long-cycle products for the coming quarters? And how long does it take from weaker orders to generate weaker revenues? And the second question related to that, should we see a weakness in long-cycle products as an indicator of what's going to happen in short-cycle. That is the projects that are not happening right now would generate for the future a drop in short-cycle products? André Rodrigues: Daniel, thanks for your questions. You are correct when we look into projects, considering Brazil and also the external market. we do see an environment in which products are running at a slightly lower level than what we had in the recent past and abroad more concentrated in the U.S., because of uncertainties related to tariffs, and we did mention that in the last call, we were feeling that clients were postponing projects and in Brazil, because of higher interest rates. Some markets and remember, projects, sometimes they are connected to commodity cycles. And we had a very important cycle of investments in pulp and paper 2 or 3 years ago, and it went down. Now we are seeing some projects being resumed. But mining continues to be okay. Then we had a drop. We're seeing now some resumption. So it depends on the dynamic of each of the markets. When we talk about leading indicators, generally, the normal cycle is to see a deceleration in the demand of short cycle that will impact in long-cycle projects. And quite often when long-cycle projects is being impacted, we see a resumption in short cycle. I did mention that, that the coming of orders in short cycle gives us positive signs for Brazil and the external market. So we already see a resumption in a short cycle. Eventually, we can see a resumption of projects for the coming quarters. We cannot say that because we still do not have hard numbers on that. But perhaps the natural cycle would be like this. So let's wait and see, and we are going to give you updates as months go by to see if the demand and the long-cycle portfolio starts to respond to what we are seeing in recent quarters. Operator: We are now closing our Q&A session. Remember, if you have any more questions, you can send your questions to our e-mail ri@weg.net. I'm going to turn to Andre Rodrigues for his final remarks. Mr. Rodrigues? André Rodrigues: Well, once again, thank you so much for attending, and I wish you all an excellent day. Operator: WEG conference call is now concluded. We thank you for your attendance and wish you a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Welcome to the O'Reilly Automotive, Inc. Third Quarter 2025 Earnings Call. My name is Matthew, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin. Jeremy Fletcher: Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our third quarter 2025 results and our outlook for the remainder of the year. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I would like to remind everyone that our comments today contain forward-looking statements, and we intend to be covered by, and we claim the protection under the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended December 31, 2024, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I would like to introduce Brad Beckham. Brad Beckham: Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts third quarter conference call. Participating on the call with me this morning are Brent Kirby, our President; and Jeremy Fletcher, our Chief Financial Officer; Greg Hensley, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman, are also present on the call. I'll begin our call today by expressing my appreciation to more than 93,000 team members across all in North America for the hard work they put in to deliver the third quarter results we released yesterday. . Team O'Reilly continues to win in each of our markets. In our team's dedication to excellent customer service drove the solid comparable store sales increase of 5.6% we generated in the third quarter. This performance was at the high end of our expectations, and we are pleased with the momentum our teams have been able to sustain on both sides of our business. The combination of our strong sales results with a 9% increase in operating income and a 12% increase in diluted earnings per share demonstrates our team's focus on driving profitable growth. Thank you, Team O'Reilly for your commitment to our culture, and absolute dedication to taking care of our customers. Now I'll walk through the details of our comparable store sales performance for the third quarter. Our professional business continues to be the more significant driver of our sales results with an increase in comparable store sales of just over 10%. We continue to be pleased with the strength in our Pro ticket count growth, which was the primary driver of our professional comp increase and the biggest contributor to our outperformance relative to our expectations. We also saw increased benefit in the quarter from average ticket on both sides of our business that I will detail in a minute. We remain confident that the professional sales growth our teams are delivering is the result of share gains and as we continue to be the supplier of choice for our professional customers. Our share gains have been broad-based with strong contributions from all of our market areas. The strength of our professional business is anchored in the valuable relationship we have developed with our customers who value the end-to-end partnership our team is able to provide to their business through service, availability and business tools that help them be a service provider of choice to their customers. We were also pleased to deliver DIY comparable store sales growth with this side of our business, finishing the quarter with a low single-digit comp, driven by average ticket benefits, partially offset by pressure to ticket counts. Our DIY business was in line with our expectations in July, after having experienced pressure in June as we exited the second quarter. We began to encounter modest pressure to DIY transaction counts midway through the third quarter, which we believe reflects some degree of initial short-term reaction by DIY consumers in response to rising price levels. The contribution to same SKU inflation during the third quarter, which was felt evenly on both sides of the business was just over 4%. As we've anticipated coming into the third quarter, we saw a significant ramp in tariff-driven acquisition cost increases and made appropriate adjustments to selling prices. On a category basis, the pressure to our DIY business as we moved through the quarter was primarily felt in some categories where we could be seeing some deferral in larger ticket jobs. However, we continue to see strength broadly in other DIY maintenance categories, including oil, filters and fluids that have continued the outperformance we have seen throughout the year. We want to emphasize that we are still in the early stages of the consumer response to the ramp-up in price levels. It can be difficult to parse to finally the initial response from our DIY customers, but the pressure we have seen thus far is modest and in line with consumer reactions to economic shocks we have seen in the past. As we've noted the last several quarters, we remain cautious in our outlook on the consumer and expect that we could continue to see a conservative stance from consumers and how they manage spending in this environment. However, even in this environment, our DIY consumers are still showing a willingness to invest in and maintain their vehicles and we believe any potential deferral pressure will be short term. When looking at category dynamics on the professional side of our business, we are seeing very strong performance across both failure and maintenance-related categories and are pleased with the resiliency of customer demand. The customer has taken their vehicle to a professional shop for their repair and maintenance work tends to be less economically constrained than our average DIY customer and less reactive to inflationary pressures on spend in a large -- largely nondiscretionary category of their wallet. Looking at the cadence of our sales results. In total for the quarter, we generated consistently strong comparable store sales growth as we move through the quarter with positive comps on both sides of our business in each month. We would characterize weather as neutral on balance for the quarter as we experienced normalized summer weather across most of our market areas. Now I would like to provide some color on our updated full year comparable store sales guidance. As noted in yesterday's press release, we updated our guidance from the previous range of 3% to 4.5% to a range of 4% to 5%. At the midpoint of our full year range reflects our outlook when factoring in current sales volumes as we progress through September and thus far into October. We have incorporated into our guidance range the current pricing environment. While the broader tariff landscape has the potential to remain fluid, at this stage, we believe we have seen the lion's share of the cost impacts we are expecting as they relate to the tariffs currently in effect. As a result, we anticipate a mid-single-digit same-SKU benefit in the fourth quarter, but have also factored into our guidance a continuation of the pressure to our DIY customers from the dynamics I mentioned earlier. Our industry has continued to behave rationally in response to the pressure tariffs have placed on product acquisition costs and we continue to monitor industry pricing adjustments to ensure we are competitively priced for the value proposition we provide. Our industry backdrop remains or continues to be both stable and supportive. We believe the dynamics of the consumer uncertainty and continued pressure to the DIY business are being felt industry-wide. Most importantly, we believe our teams are winning share on both sides of the business against the current macroeconomic backdrop. In times when spending decisions become more difficult for our customers, having our excellent customer service, superior product availability and professional parts people to guide them becomes an even more important piece of the value we deliver. Before I turn the call over to Brent, I would like to highlight our updated diluted earnings per share guidance. As noted in our press release, we have updated our EPS guidance to a range of $2.90 to $3. This incorporates our year-to-date performance, the revised sales outlook and our expectations for gross margin and SG&A for the fourth quarter, which Brent will discuss next. At the midpoint, our current EPS guidance is an increase of approximately 2% from the midpoint of our previous guidance and a year-over-year increase of 9%. We are pleased that the team has been able to deliver both strong sales and earnings growth even in a rapidly changing environment of economic uncertainty. As I wrap up my prepared comments, I would like to once again thank Team O'Reilly for their strong performance in the third quarter. Now I'll turn the call over to Brent. Brent Kirby: Thanks, Fred. I would like to start by thanking Team O'Reilly for their outstanding work during the quarter. Our team continues to outperform and remain steadfast in their focus on our culture and our customers to drive our success. Today, I will start by discussing our third quarter gross margin and SG&A results as well as provide an update on capital expansion and our updated outlook on these items. Starting with gross margin. For the third quarter, our gross margin of 51.9%, was up 27 basis points from the third quarter of 2024 and in line with our expectations. Our team was able to offset the gross margin headwind resulting from our customer mix from faster growth on the professional side of the business with prudent supply chain management and solid distribution productivity. . While the third quarter gross margin rate was above our full year gross margin guidance range, we expected a higher gross margin rate in the third quarter as compared to the rest of the year, which is typical for the seasonal composition of our product mix and consistent with our results in 2024. We are maintaining our full year gross margin guidance range of 51.2% to 51.7% and expect to see a similar progression of gross margin rate from the third to fourth quarter as we experienced last year. Our supply chain teams continue to work diligently, both internally and with our supplier partners to navigate the evolving tariff environment. Our ability to maintain consistent gross margins with the amount of change we have faced during the year is a true testament to their hard work and dedication. As expected, we realized significant acquisition cost pressure from tariffs in the quarter. The impact from product cost inflation in the quarter closely mirrored in timing the adjustments we made in pricing. As Brad mentioned earlier, we have now seen the biggest impacts from the current tariff environment, and our guidance for sales and gross margin does not contemplate substantial impacts from further tariffs beyond what is reflected in our product acquisition costs today. However, to the extent any future tariff revisions result in further acquisition cost increases, we will prudently navigate those in the same way that we have done to date. As the tariff landscape and cost environment has evolved in 2025, we have maintained a close eye on the pricing environment within our industry to ensure that we are making the appropriate adjustments in remaining competitive. Against this volatile backdrop, our goal remains the same. To provide the exceptional service and industry-leading availability, our customers know and expect from O'Reilly Auto Parts to continue to earn their business. Overall, we believe our supply chain is at its healthiest point since we emerged from the pandemic. With the support of a strong supplier community, we have sustained robust in-stock availability across our tiered distribution network, this strong distribution infrastructure is the foundation for our industry-leading inventory availability and a critical factor in how we serve our customers and earn additional share. Our merchandising teams work diligently to maintain our diversified supplier base in order to actively manage exposure and risk on numerous fronts. This risk can range from country of origin to diversification of supply within a single product category. Supplier health and supplier performance can often go hand in hand. So an important part of our risk management process is monitoring our supplier partner health from all angles, ranging from shipping performance, product quality, catalog support, all the way to financial stability. While these processes always involve some level of effort to mitigate risk in a small subset of our supplier base, we would again reiterate that we are pleased with the collective health of our supplier partners. Our goal is always to foster supplier partnerships that are both long-standing and deep as we repeatedly earn our status as the desired priority customer for each of our suppliers. Now I'd like to turn to SG&A and give some color on the quarter. Our SG&A per store growth of 4% was at the top end of our expectations for the quarter. Driving this spend were expenses related to our strong sales performance, coupled with continued inflationary pressures in our cost structure, again, centered around medical and casualty insurance programs. Based on our third quarter results and outlook for the remainder of the year, we expect our SG&A per store growth to come in at or slightly above the top end of our full year guide of 3.5%. We have factored in our updated expectations for comp sales and corresponding incremental SG&A dollars into our guide, and we have been pleased with how our teams are managing expenses while driving sales volumes above expectations. As a reminder, our fourth quarter SG&A per store growth is expected to be below the full year run rate as a result of comparing against the charge we took in the fourth quarter of 2024 and to adjust reserves for self-insurance liability for historic auto liability claims. Based on our SG&A expectations and projected gross margin range we continue to expect our full year operating margin to come within our guidance range of 19.2% to 19.7%. As always, our top objective in managing our expense structure is ensuring that we are meeting our high standard of customer service by supporting our team of experienced professional parts people. Turning to an update on our expansion. We opened 55 net new stores across the U.S. and Mexico during the third quarter, bringing our year-to-date store opening to 160 stores. We are on track to achieve our 2025 new store opening target of 200 to 210 net new stores by year-end, and we continue to be pleased with the performance of our new stores. New store growth remains an attractive use of capital for us, and we see ample growth opportunities spread across all of our North American footprint. In this regard, we are pleased to announce our 2026 store opening target of 225 to 235 net new stores. Just as our 2025 growth has been spread across 37 U.S. states, Puerto Rico and Mexico, we anticipate growth in all of those markets as well as in Canada in 2026. Our store growth in 2026 will continue to be concentrated in the U.S. markets but we will also continue our measured growth within our international markets as we work to develop the teams and infrastructure to support our O'Reilly operating model. Our tiered distribution network continues to help drive our stores' competitive advantage in parts availability, and we are pleased to begin servicing stores out of our new Stafford, Virginia distribution center in the fourth quarter of this year. I would like to express my gratitude to our distribution and supply chain teams for all the hard work that has gone into this state-of-the-art new greenfield distribution center in the Mid-Atlantic market. This distribution center will be an important stepping stone for us to begin adding store count within heavily populated and untapped markets for us in the Mid-Atlantic I-95 corridor. As excited as we are about this new facility, there is no pause for our dedicated supply chain teams as we are full steam ahead with distribution growth and progress at our upcoming Fort Worth, Texas facility as well as future opportunities that will further support our store growth and inventory availability. Capital expenditures supporting both store and DC growth for the first 9 months of 2025 and were $900 million and are slightly below our expectations. Based on our year-to-date spend and fourth quarter outlook, we are reducing our full year capital expenditure guidance by $100 million to a range of $1.1 billion to $1.2 billion. This reduction is primarily the result of timing of spend on store and distribution center growth projects that we now expect to incur in 2026. As I close my comments, I want to once again thank Team O'Reilly for their hard work in driving our company's success. Your commitment to providing consistent, excellent service to all of our customers is the foundation for our long-term growth. Now I will turn the call over to Jeremy. Jeremy Fletcher: Thanks, Brent. I would also like to begin today by thanking Team O'Reilly for another successful quarter. Now we will take a closer look at our third quarter results and update our guidance for the remainder of 2025. For the third quarter, sales increased $341 million, driven by a 5.6% increase in comparable store sales and a $101 million noncomp contribution from stores opened in 2024 and 2025 that have not yet entered the comp base. For 2025, we now expect our total revenues to be between $17.6 billion and $17.8 billion. Our third quarter effective tax rate was 21.4% of pretax income comprised of a base rate of 22.2%, reduced by a 0.8% benefit for share-based compensation. This compares to the third quarter of 2024 rate of 21.5% of pretax income, which was comprised of a base tax rate of 23%, reduced by a 1.5% benefit for share-based compensation. As we noted in our press release, during the third quarter, we accelerated the payment timing of transferable renewable energy tax credits that were originally planned to settle in 2026. Our full year income tax rate guidance has been revised to reflect the incremental benefits we expect from the accelerated payment. Accordingly, for the full year of 2025, we now expect an effective tax rate of 21.6% versus our prior expectation of 22.3%. The updated tax rate guidance includes an anticipated benefit of 1% for share-based compensation. We expect the fourth quarter rate to be lower than the first 9 months of the year due to the tolling of certain open tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly rate. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first 9 months of 2025 was $1.2 billion versus $1.7 billion for the same period in 2024. The reduction in free cash flow was primarily the result of the accelerated timing of payment for renewable energy tax credits that I previously mentioned. For the full year 2025, we have updated our expected free cash flow guidance to a range of $1.5 billion to $1.8 billion, down from our previous range of $1.6 billion to $1.9 billion. This adjustment reflects the headwind from the accelerated tax payment timing partially offset by the reduction in our capital expenditures guidance Brent discussed in his prepared remarks. Inventory per store finished the quarter at $858,000, which was up 10% from this time last year and up 7% from the end of 2024. Our inventory investments continue to generate strong returns, and we've been pleased with the overall in-stock positions of our store and distribution network. We have executed our inventory growth strategy in 2025 at a faster pace than our initial expectations and could see elevated inventory balances above our original 5% per store plan as we finish out the year. We continue to manage the timing of inventory enhancements to capitalize on current opportunities we see to drive our business and are pleased with the productivity of these investments. This incremental inventory investment has been more than offset by our AP to inventory ratio. We finished the third quarter at 126%, which was down from 128% at the end of 2024 but above our expectations. Moving on to debt. We finished the third quarter with an adjusted debt-to-EBITDA ratio of 2.4x and as compared to our end of 2024 ratio of 1.99x with an increase in adjusted debt partially offset by EBITDA growth. We continue to be below our leverage target of 2.5x and plan and prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program. And during the third quarter, we repurchased 4.3 million shares at an average share price of $98.8 and for a total investment of $420 million. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business, and we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance, Brad outlined earlier includes the impact of shares repurchased through this call but does not include any additional share repurchases. Before I open up our call for your questions, I would like once again to thank the entire O'Reilly team for their continued hard work and dedication to providing consistently high levels of service to our customers. This concludes our prepared comments. At this time, I would like to ask Matthew, the operator, to return to the line, and we will be happy to answer your questions. Operator: [Operator Instructions] Your first question is coming from Greg Melich from Evercore. Gregory Melich: I wanted to start with I think a comment you guys made on the 4% same SKU inflation that you've seen the lion's share of it. Does that -- does that mean that from here, there's none? Or is there still some residual we flow through the next couple of quarters? Jeremy Fletcher: Yes, Greg. This is Jeremy. Thanks for the question. We still think that we'll see a tailwind from same SKU as we move through fourth quarter and first quarter we talked to the mid-single-digit range. As we move through third quarter, a lot of what we saw was came along pretty early on in the quarter, but there was some ramp during the course of the third quarter. As we look at incremental changes in prices moving forward, there's always a potential for some of that. And obviously, the tariff environment is is a little bit more static now, but has the potential to move and change. But we think from what we've seen so far under the current regime, most of that cost has flowed through to us. The adjustments that we needed to make are mostly behind us, and we don't see the same level of substantial incremental changes in how we go to market to what we've seen so far in 2025. Gregory Melich: Got it. And then my follow-up is really on the price elasticity. I think you mentioned that, that can take some time to play out. What have you seen historically from price elasticity, particularly on the DIY side? Brad Beckham: This is Brad. Thanks for the question. Yes. So in the past, things can always change. But what we've always seen in our industry, at least in my years this year working for O'Reilly and in this industry is when we've seen shocks like this, there can be some deferral, failure, our hardest part categories from a failure standpoint are obviously break fix, but you do have those larger ticket jobs that can be deferred somewhat. You have -- if a great job, if the pads are metal on metal, the most likely it is what it is, and that job has to be made. If it's a chassis job, for example, and there's some more alcohol joints or control arms or something like that, that's something that can be put off normally for weeks, months, but obviously not years. And so kind of what we're seeing right now is what we -- Brent and I talked about in our prepared comments is there's a lot of movement. Generally, we feel really good about what we're seeing on both sides of the business from a repair and maintenance standpoint. But to your question on the DIY side, what we did see a little bit of that we hadn't seen thus far this year, we saw in the third quarter was what we feel like could be some deferral of those larger ticket jobs. And there's a lot of moving pieces. You have not only -- it's not always a direct line just to what we feel like is a little bit of elasticity or what could be deferred. You have different weather patterns. You have 2- and 3-year stacks on some of those categories that have been extremely strong for us the last couple of years. but we still do think that we are seeing customers that are maybe putting some things off, and we'll just have to see how that plays out in the fourth quarter. Operator: Your next question is coming from Chris Horvers from JPMorgan. Christopher Horvers: I wanted to follow up on the elasticity concerns, mid-single-digit inflation for the fourth quarter. That's basically in line with where you're implying comps are in the fourth quarter. So is like as you think about guiding based on what you've seen over the past 2 months is that elasticity function getting worse? Or I guess, why wouldn't your comp be higher than the inflation that you expect in the fourth quarter? Jeremy Fletcher: Yes. Thanks, Chris. This is Jeremy. Lots of different things, obviously go into how we think we'll finish out the full year and that pushes us into I know how you guys read an implied guide in the fourth quarter. When we think about our outlook, just to finish out the year there are a lot of moving pieces. You have to remind everyone that it's our most difficult comparison as we think about where we finished up the year last year. As we look specifically at the question around the benefit from where prices have gone to and where we see in the same SKU, it's clearly a net incremental benefit to us in the third quarter. there's nothing about a potential build within any of those pressures that might impact the DIY consumer that we're implicitly forecasting how we think about fourth quarter to directly answer the question. To Brad's earlier point, you go into the back half of the year for us, there's always a lot of different factors. There can be volatility that we see just from how weather plays out, how some of the Christmas shopping season plays out. And then we do have just, I think, a cautious view to how consumer might might continue to react. But kind of understanding all those component pieces, there's nothing about how we've at least started in the fourth quarter that that really puts us in a changing environment. We're really still early stages on some of how we're viewing where the customer is going to go at these price levels, and we're cautious but still feel good about the overall trends in the business. Christopher Horvers: Makes a lot of sense. I wanted to ask a longer-term question. Can you -- you are accelerating the unit growth next year. It looks like it will be over 4% in 2016 based on you mentioned earlier. Can you talk about your latest thoughts around the U.S. store potential? And maybe Mexico and Canada as well to the extent that you have some thoughts there? And do you think as we look out over the next few years, could international accelerate enough that you bend that 4-ish type unit growth rate higher? Brad Beckham: Yes. Great. Great question, Chris. This is Brad. So first off, we feel extremely good about our new store cohorts. We continue to be extremely pleased with the way that our field teams are opening up new stores, just from the quality of the team, professional parts people putting in place the right store managers, the right district managers that absolutely drives the quality of our new store locations. Obviously, there's a lot more that goes into it than just the teams, but that's primarily how we make those decisions is our ability store count wise to staff them with great teams. We're also extremely pleased with the way our design and development teams have continued to develop here in the corporate office, not just from a U.S. perspective, but how those teams have matured and really understanding what the machine -- how the machine runs, what it really looks like as we ramp up internationally. To your question about where we can go in the U.S. we haven't put a new fine point on that. But I would just tell you, every year that goes on, we continue to ramp that number up of what we feel like our store count could be in the U.S., not just from a really not just from the way we've always looked at it, but as consolidation continues in the industry, which we believe it will continue to do so. We feel really good about continuing to ramp up and and continue to have a higher number in the U.S. and where we feel like that could be in 5 and 10 years. We're very excited about our international opportunities, continue to look at Mexico as such a huge opportunity for us mid- to long term. We lost a little bit of time during the pandemic in terms of our ability to build the muscle that we wanted to build in-country, in Mexico and the inability to really get down there, build the muscle from a people standpoint, a structural standpoint, supply chain systems, et cetera. But we've made a lot of progress over this last couple of years. Chris, and really excited about what the future holds in virtually an untapped market for us in Mexico over the next many years. Really, same thing for Canada. We're early stages in Canada, excited to make the announcement that Brent mentioned earlier in his prepared comments that our expansion is officially going to start in the Canadian market in 2026. And while that doesn't hold the total addressable market that in Mexico or obviously the U.S. does. The car park is very similar in Canada. We feel like that is an untapped market from a retail and DIFM standpoint in terms of our scale and size and ability to build the right teams, especially off that BaaS platform that's such an amazing people platform for us in Canada. So excited about all those markets and really excited about our target for 2026. Operator: Your next question is coming from Scott Ciccarelli from Truist Securities. Scot Ciccarelli: Hopefully, 2 quickies. Any notable differences in terms of geographic performance given some of the weather patterns that we've seen? And then secondly, you did spend a little bit more time than usual talking about supplier health. So can you directly address any risk or exposure you may have to the first brand situation? Brad Beckham: Scott. Yes, I'll take the first portion of that on regional performance and kick it over to Brent brand. So actually, we didn't see a lot of material differences in our geographies and regional performance in Q3. there's always going to be some differences. But directionally, they weren't much different than what we originally had planned with our internal plan month-to-month by region. So no material differences. There was I had bit of difference in our north south and a little bit east and west, but . [Audio Gap] In terms of First Brands specifically, they're a little bit more than 3% of our COGS. So it's not a huge material thing when you think about the fact that we've got we're dual and triple and quadruple sourced on most of our lines. We do that by DC. Again, over 50% of our revenue is in our proprietary brands, which gives us a lot of ability to multisource with multi suppliers. So -- and quite frankly, a lot of the brands that First Brands has acquired over the last several years, we had long-standing relationships with those brands even before they were acquired by the parent company of First brands. And we're still working with a lot of those same teams and feel very confident that in our ability to work with them and with our -- the rest of our supplier base to manage through what we don't really see as any disruption from wherever that may land. So we feel good overall again about the overall supplier health in the industry. Scott, I'll make just follow up really quick for -- Scott, I may just a follow up really quick. We have really good engagement with the new leadership at First Brands and a lot of leaders that have been there for some time. We also have great engagement from their competitors, meaning that to Brent's point, when you think about the majority of the lines that they provide to us, we have our distribution network split up, meaning that whether it be a first brands or one of their competitors in some of these categories, we are dual and triple source, sometimes quadrupled to Brent's point, and so we have our DC split up accordingly. So we're hopeful that first brands really gets where they need to be on fill rates, which we believe they will, but we also have opportunities to fill in with backfill orders, and we also have opportunities with other existing suppliers that compete in those categories to take on another DC or 2 here and there, and we don't feel like we'll have a material impact. Operator: Your next question is coming from Simeon Gutman from Morgan Stanley. Simeon Gutman: First, a follow-up, Brad, you mentioned some of the deferral that's happening in DIY. To what extent is that just price elasticity? And is there any sense that it could be the timing of when prices are moving around in the marketplace. It sounds like you've narrowed it down, but curious if that that's 1 of the potential maybe a head fake that's happened I mean, with some of the demand. Brad Beckham: Yes. Great question. Well, the reason we want to be balanced on that, and we just -- we wanted to characterize as some categories and the potential for some deferral is because it's to Jeremy's point earlier to another question, it's still so early, and there's enough factors with weather, seasonality, the way the weeks played out in Q3. And as we get into Q4, again, just really the first time we've seen some pressure to some of those larger ticket jobs, but it wasn't across the board, Simeon. And it's not always directly tied to the exact categories lines or sublines that we're seeing the tariffs. And so that line is not direct. And where we saw some pressure to some categories, we didn't see it in others. And so really, on the professional side, we continue to have a lot of conviction, even though the DIFM consumer can be a little bit cautious that we're not seeing any pressure there. And when we look at the DIY side, the thing that gives us balance on the other side of it is just the fact that we are seeing it in some categories, not seeing it in others. And again, it's not directly tied to to tariff-driven cost pressures always by line, by category, but also we continue to see strength in a lot of our DIY categories. Like we mentioned, oil changes, oil filters, chemicals, fluids, et cetera. And so we just want to sit back a little longer and really see how the fourth quarter plays out. Our teams are always just focused, as you know, just continue to take share. and just watching that closely. The other thing we didn't say in our prepared comments, Simeon, is we're really not seeing any trade down. We're seeing some pressure to those bigger ticket categories potentially those bigger ticket jobs. But the way we look at good, better, best, we're really not seeing any material shifts. If anything, we continue to see -- while some people may be moving down, so to speak, on the price side, we continue to seek even the lower to middle income consumers on the DIY side, trading up because they're looking for value, not just the cheapest price. They're trading up in areas like batteries and things like that to get a better warranty. And so long answer, I said a lot of things there. But I think the key is we just want to continue to take a balanced look and see how the rest of the year plays out. Simeon Gutman: Okay. And my follow-up is on your investment posture. We've had SG&A per store elevated for the better part of the last, call it, 2 years, and now you're stepping up your store growth. So is there maybe a shift from per store to new stores. And then within that, any different way you're approaching the operating margin of the business, either holding it or even letting it go down to take advantage of disruption or opportunities in the market. Jeremy Fletcher: Yes, Simeon, good questions, and maybe take the second 1 first. There's not been, I think, any fundamental shift as we think about our operating margin, our profile for how we go to market. Having said that, I think it's less of a question or consideration for where we see the potential kind of competitive balance or market opportunities so much as it does how do we run and operate our business, what do we think allows us and puts us in a position to be competitive. And I think much of what you've seen over the course of the last couple of years when we think about the investment profile of how we thought about our business has been really geared around where we see opportunities to continue to strengthen our operating posture to help put our teams in the best position to also support the teams that we've got taking care of our customers within our stores. some of what we've seen candidly in the current year are just more inflation-driven cost pressures in some of the areas of our business that I think have put pressure on us that we were not maybe as anticipated as as being as significant as it was when we came into the year, ultimately, those things from time to time are going to -- are going to move in flex. We will obviously have to take a hard look at that and think about where that sits for the for the next year. But that hasn't really changed our outlook on how we think about the right way to manage the business to take care of our customers and grow our share. Brad Beckham: Simeon, the one thing I'd add to that is really just -- when I think about the controllables within our 4 walls, we're very pleased. Jeremy, Brent and I are very pleased with the way that our internal teams are managing SG&A to sales, walking the fine line between acceptable SG&A profitability and taking our service levels to the next level. . Some of the things we saw throughout the year and for sure in Q3 was just some of that inflation in some of the medical and some of the self-insurance stuff that's somewhat out of our control. There's always things we can do better and different from a safety and health and well-being of our team members, but some of that's out of the control of the team, and we feel really good about the way the teams are managing SG&A. Operator: Your next question is coming from Michael Lasser from UBS. Michael Lasser: You talked about a mid-single-digit inflation benefit in 4Q, which it sounds like that will be the peak of the inflation contribution So, a, is that right? Is that the way we should think about it? And b, overall, is this as good as it gets that O'Reilly can do a mid-single-digit comp under the right conditions. It's just a -- it's a different model than it's been in the past. Jeremy Fletcher: Yes, maybe I can address the question there, Michael. At this point in time, when we think about the current tariff and pricing environment, we would think that most of the benefit that we might expect to see moving forward would be in the fourth quarter numbers. And I think both with Brad and Brent spoke to that. it's always a little bit of a crystal ball exercise to say exactly what happens from this point forward. And we're obviously going to be very sensitive and responsive to making sure that from a market perspective, we're priced right in where we need to be. Ultimately, that -- while it's an important consideration, it's a factor that, obviously, we're all paying pretty close attention to that historically has not been what's driven our business and the ability to grow share. And we feel -- we still feel very bullish about our opportunity over the course of time. to be able to be a consolidator of the industry to pro forma model that's the best within our industry and to be able to gain share over the course of time. . And we feel good about our performance, particularly when you look at it on a 2-, 3-year stack perspective. And so ultimately, it is -- as we've talked many times, a very grinded-out business and and the long-term trajectory of what we can deliver as we consolidate the industry and gain share is dependent upon executing day in and day out and growing faster than the marketplace. We'll see ultimately where those numbers push out. But there have been -- there have been plenty of years within our history where the results that we're producing. This year have been in line with that long-term growth rate, we feel good about it. Brad Beckham: Yes. No, Michael, Well, Jeremy, I think the key is the reason we don't want to talk in absolute if we've seen everything. It's because we don't know what's going to be in the headline next week or next month. It is still fluid. We feel good about what we said about the majority being already in but we don't know what's next. What I do know and this Parley is in the kind of your second part of your question, what I do know is when I look at Brent and our merchandise teams and our pricing teams they are operating at a very high level. I feel very good about the way that they are navigating not only from a negotiation with our suppliers the way we're thinking about pricing. But the overall way that we look at the fine line between walking all those things. And just the way we can continue to compete the value proposition we provide. And we never think internally here teams, the way our supply chain runs, new DCs, hub stores, all the things we do from a culture standpoint, promote from within and supply chain, we really feel good about what we can do over the next many years. Michael Lasser: Got you. My follow-up question, what conditions would be necessary in order for O'Reilly to restore its SG&A per store growth back to the 2% range, that was consistent for a long period of time prior to the last couple of years. And as a management team, how focused are you on deploying technology or making proactive investments today in order to ease some of the pressures from health care costs and other factors in order to restore that level so you can generate the margin expansion that the market has known to from [indiscernible]. Jeremy Fletcher: Yes, Michael. I appreciate that question. It's a little bit of, I think, a challenge for us to to really address a hypothetical around kind of a lot of the other broader conditions that contribute to how we might think about SG&A moving forward. For sure, when we look at where we sit today versus other periods of time, where wage rate inflation was much more muted where we weren't seeing some of the other inflation pressures where we weren't seeing kind of rising price levels, I think more broadly around the economy. Those were some of the, I think, broader macro conditions that we would have seen during the course of time there that I think play into the consideration. I think from our perspective, we've always had, I think, a pretty intense expense control focus as a company. And ultimately, those are all things that we manage for the long-term growth rate and the success and health of our business. While we're always, I think, pushing to be more efficient and more effective, and there are always ways in which you can do that within our business. . It's also important to note that I think one of the core strengths of our business is the ability to provide a high service level in an industry where that's still, I think, a critical factor in how consumers perceive value, how they make buying decisions. And so for us, there's always going to be some level of understanding that the strength of our business is built around running the best model that ultimately our ability to grow operating profit dollars from a long-term perspective means that we're going to want to to manage our business in the right way, and we're not going to view it necessarily as just an offset [indiscernible]. Let's go find cuts and reductions that don't otherwise make sense because some other components of the business have seen inflation. So that's really from a philosophy perspective where we see it. Some of the -- where we've seen lower nominal numbers in different environments still reflected that same philosophy. And ultimately, I think that's the right way to manage the business for the long term. Brad Beckham: Yes. And Michael, I may just real quick add, Jeremy said it very well. We we have a lot of pride in our ability to lever when we have a comparable store sales level that we've had. We have a lot of pride in the operating profit rate that we've delivered over a long period of time, and that's going to continue to be our focus. That said, for the mid and long term back to the 10% share across North America, we are going to continue to invest in our business in a very disciplined way when it comes to technology, when it comes to our teams. When it comes to our supply chain, we are going to continue to play from a position of strength we continue to feel like we have a unique opportunity over the next many years to do all that within the discipline we have with our capital allocation, the discipline we have with our OpEx and we're going to continue to balance the 2 sides of what I just said as good as we possibly can over the next year. Operator: Your next question is coming from Bret Jordan from Jefferies. . Bret Jordan: If you look at the expectations for 4% same-SKU inflation, are supply chains in the industry sort of creating a delta between your expectations maybe versus a peer, I think that NAPA guys were saying maybe 2.5 million, is that because they're sourcing out of different regions and markets and have less tariff exposure? Or is it really sort of a relatively even playing field on a same SKU basis? Brent Kirby: Yes. Brett, this is Brent. I'll start and the other guys can chime in. I think we talked about supplier diversification for years now. And again, the team. Our merchandise team has done a fantastic job continuing to diversify that supplier base. And we've talked a little bit about China, what that looks like specifically for us. We're in the mid-20s. Some others may report somewhere in that range or a little bit less. But generally speaking, we feel like we're very diversified globally and the teams continue to get more diversified. That number is down hundreds of basis points from where it was a few years ago and continues to fall. What's interesting, though, when you look at some of the other countries right now in the tariff environment that we've been operating in, especially in 2025, some of the -- when you think about 25%, you look at some of those other countries, Vietnam, Thailand, India, some of the other countries that a lot of sourcing has moved to -- supply has moved to Mexico as well and some South American countries, that 25% or more is the same rate. So what I would tell you is it's less about what's that China number look like, and it's more about the blend and the ability to multisource from multiple countries of origin and to manage that dynamically and to work with suppliers that are managing that dynamically. And I feel like our team has done a great job with that. . It continues to be a challenge. And Brad mentioned earlier, and we've talked about on the call in the prepared comments about what we feel like the lion's share passed through in Q3 from tariffs, but I think we all know, we all listen to the news. I mean there's still some uncertainty about where that may go in the future with some of these countries until it's all said and done. So we feel like we're very well positioned to respond and react to whatever comes our way. The teams have done a great job with sourcing across the globe, and we're going to continue to do that and work with suppliers that are doing a great job of that. Brad Beckham: Yes, Brett, I may just jump in real quick. In terms of us directly to other competitors, we don't know. I mean we don't we don't spend near as much time frankly, looking at trying to parse the details of anybody else. That would be up to them to explain what we know is our merchandise teams and our pricing teams. Like I mentioned earlier, just doing a masterful job managing through this. We feel good about our scale, our negotiating power, our pricing power feel really good about the way that we have worked with our suppliers to mitigate all of this, I feel really good about where we're at from a pricing perspective versus our versus all our competitors, both small and big. WD independent all the way up to the other big 3, I feel really good about all that. So hard to say in differences of COGS and all those things. But -- we feel really good about where we're at, the way we've negotiated and just so proud of the teams managing through this. . Unknown Analyst: Okay. And then as sort of a follow through on that. And that 10% inventory per store growth is something maybe 4 of that is on a same SKU basis. The other 6, are you buying ahead of expected further price increases sort of getting a lower cost inventory into the DC ahead of additional expansion? Or are you adding units just from a strategic standpoint of a better fill rate and take more share? I guess, what's the growth in inventory ex the price factor? Michael Lasser: Yes, Brett. It's really more just us executing on our inventory strategies and how we think about deploying incremental inventory enhancements. Price has a little bit less of an impact on on the inventory balances just from the standpoint of being a LIFO reporter of this. You really only see inflation have an impact to the extent that you're kind of adding layers on top and there's been some of that, but not the same magnitude of what runs to the income statement. And I think conversely, no real change changes in that strategy as it relates to the broader cost environment, which we think is pretty stable. But obviously, those are decisions that we make based upon upon the objective of being the best in the industry from an availability perspective. Obviously, the cadence and timing of that can change period to period. It's not always does always roll out in the same kind of schedule as you were because we're pretty active about how we think about the right time and where we see opportunities to be able to execute that strategy. Brent Kirby: Brad, yes, just to add on to what Jeremy said too, Brett, specifically speaking we're going to continue to optimize our network. We talk all the time about our -- the strength of our tier distribution network, our regional DCs our hub stores and how we continue to optimize that network of SKU count and depth and breadth by secondary tertiary market, even the ones outside of the reach of our regional DCs. The other thing though is consider and think about for Q3 is we were stocking up our new DC in Stafford, Virginia as well, that's another component that brings more dollars into a system in a given quarter that may prove to be a little bit lumpy quarter-to-quarter with the investments in a new DC. . Operator: We've reached our allotted time for questions. I will now turn the call back over to Mr. Brad Beckham for closing remarks. . Brad Beckham: Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. I would like to thank everyone for joining our call today, and we look forward to reporting our fourth quarter and full year results in February. Thank you. . Operator: Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Vista's Third Quarter 2025 Earnings Webcast 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 speaker today, Alejandro Chernacov, Vista's Strategic Planning and Investor Relations Officer. Please go ahead. Alejandro Cherñacov: Thanks. Good morning, everyone. We are happy to welcome you to Vista's Third Quarter of 2025 Results Conference Call. I'm here with Miguel Galuccio, Vista's Chairman and CEO; Pablo Vera Pinto, Vista's CFO; Juan Garoby, Vista's CTO; and Matias Weissel, Vista's COO. Before we begin, I would like to draw your attention to our cautionary statements on Slide 2. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these remarks. Our financial figures are stated in U.S. dollars and in accordance with International Financial Reporting Standards, IFRS. However, during this conference call, we may discuss certain non-IFRS financial measures such as adjusted EBITDA and adjusted net income. Reconciliation of these measures to the closest IFRS measures can be found in the earnings release that we issued yesterday. So please check our website for further information. Our company is sociedad anónima bursátil de capital variable organized under the laws of Mexico, registered with the Bolsa Mexicana de Valores and the New York Stock Exchange. Our tickers are VISTA in the Bolsa Mexicana de Valores and VIST in the New York Stock Exchange. I will now turn the call over to Miguel. Miguel Galuccio: Thanks, Ale. Good morning, and welcome to this earnings call. During the third quarter of 2025, we recorded a strong performance across key operational and financial metrics, especially on a sequential basis, driven by strong productivity in new well tie-ins in Bajada del Palo Oeste and La Amarga Chica. Total production was 127,000 BOEs per day, an increase of 74% year-over-year and 7% quarter-on-quarter. Oil production was 110,000 barrels per day, an interannual increase of 73% and 7% sequentially. Total revenues during the quarter were $706 million, 53% above the same quarter of last year and 16% above the previous quarter. Lifting cost was $4.4 per BOE, 6% below year-over-year. Capital expenditure was $351 million, driven by new well activity during the quarter. Adjusted EBITDA was $472 million, an interannual increase of 52% and a sequential increase of 70%. Adjusted net income during the quarter was $155 million. Net income was $315 million, reflecting a nonrecurring gain of $288 million from the Petronas Argentina acquisition. Earnings per share was $3 and adjusted earnings per share was $1.5. Free cash flow in this quarter was almost neutral at minus $29 million, driven by higher adjusted EBITDA and a decrease in working capital. Finally, our net leverage ratio at quarter end was 1.5x on a pro forma basis. During Q3, we connected 24 wells, 11 in Bajada del Palo Oeste, 4 in Aguada Federal, and 9 corresponding to our 50% working interest in La Amarga Chica. We recorded solid productivity in the latest well tie-ins, which boosted Q3 production by 7% compared to the previous quarter. Based on robust well performance, improvement in our oil realization prices and financial flexibility award by the $500 million term loan closed in July. We have decided to accelerate new well activity in Q4. We are now planning between 12 and 16 tie-ins in the next quarter, leading to between 70 and 74 connections for the year. We are seeing Q4 production about 130,000 BOEs per day, which leaves us on track to over deliver on production guidance for the year and the second semester. Total production in Q3 was 126,800 BOEs per day, an interannual increase of 74%. Oil production was 109,700 barrels per day, 73% above year-over-year. On a sequential basis, both oil and total production increased 7%, reflecting solid execution of our drilling campaign and robust well productivity during Q3, especially in Bajada del Palo Oeste and La Amarga Chica. Bajada del Palo Oeste also drawn production in our operated block, which increased 50% compared to a year ago and 6% compared to the previous quarter. Gas production increased 87% on an interannual basis and 9% on a sequential basis. In Q3 2025, total revenues were $706 million, 53% above Q3 2024, driven by a strong increase in oil production, which more than offset lower oil prices. On a sequential basis, total revenues increased 16%, driven by 7% increase in total production and 4% higher oil prices. Oil exports increased 84% year-over-year to 6.3 million barrels for the quarter. Realized oil prices were $64.6 per barrel on average, down 5% on interannual basis and up 4% on a sequential basis, in both cases driven by international prices. We captured higher Brent prices and lower discounts, which were around $1 per barrel during the quarter. During Q3, 100% of oil volumes were sold at export parity prices. In Q3, lifting cost was $4.4 per BOE, 6% lower compared to both the previous quarter and the same quarter of last year. This reflects our continuous focus on efficiency. Selling expenses per BOE were down 24% on an interannual basis, driven by the elimination of oil trucking services as of the start of the last quarter. Adjusted EBITDA during the quarter was $472 million, 52% higher on interannual basis, mainly driven by production growth, explained by the 15% in our operated production and the consolidation of 50% of La Amarga Chica. Compared to the previous quarter, adjusted EBITDA increased 17%, mainly driven by oil production growth. Adjusted EBITDA margin was 67%, up 2 percentage points compared to the same quarter of last year as production growth and the elimination of oil trucking offset lower oil prices. Netback was $40.5 per BOE, up 8% on a sequential basis. During Q3 2025, cash flow from operating activities was $304 million, reflecting income tax payments of $179 million, partially offset by a decrease in working capital of $43 million. Cash flow used in investing activities was $333 million, reflecting accrued CapEx of $351 million partially offset by a decrease in CapEx-related working capital of $17 million. Free cash flow during the quarter was minus $29 million, reflecting higher adjusted EBITDA that drove cash from operations and a decrease of $59 million in working capital. Cash flow from financing activities was $195 million, driven by proceeds from borrowings of $500 million, partially offset by the repayment of borrowings' capital of $193 million and the repurchase of shares of $50 million. Finally, cash at period end was $320 million, our net leverage ratio on a pro forma basis reflecting the Petronas Argentina transaction stood at 1.5x adjusted EBITDA. To conclude this call and before we move to Q&A, I will make some closing remarks. During Q3, we recorded a robust well productivity in new well tie-ins, reflecting our high-quality asset base and peer-leading operating performance. This led to a material increase in adjusted EBITDA, both in a sequential and interannual basis, driven by production growth and continued focus on cost control. Q3 production was well within guidance range for the second semester. Production growth in the fourth quarter on the back of solid productivity and more investment in our profitable ready-to-drill inventory leaves us on track to potentially over-deliver on our guidance. I remind you that we will be hosting our third Investor Day on November 12. During this virtual event, we will present an updated strategic plan, focusing on profitable growth, cost efficiency and cash generation. Before we move to Q&A, I would like to thank everyone at Vista for delivering a remarkable quarter. Operator, we can now move to Q&A. Operator: [Operator Instructions] Our first question comes from the line of Rodolfo Angele from JPMorgan. Rodolfo De Angele: Thanks for the time to discuss the numbers presented yesterday. I'm sure we would like -- looking forward to the investor event where you're going to revise the strategic numbers. But for the time being, I think my question to you is on price realization. The numbers were pretty good. And compared to our expectations here, one of the positive surprises came from a realization of prices pretty solid versus Brent. So can you expand a little bit on what drove this? And what should we expect for the coming quarters? That's it for me. Miguel Galuccio: Rodolfo, thank you very much for your question. It's a good one. There are basically 2 factors driving this good realization prices. With our spot export via the Atlantic, we have some flexibility regarding when we trigger the Brent price. This can potentially usually help us to capture some Brent price slightly above what you can see as a quarterly average. In Q3, the Brent averaged around [indiscernible], but the trigger Brent that we use to price the cargo was on average $1 higher. Also, the average discount of Brent was around $1 per barrel during Q3. So this is explained by 3 main factors. The first one is the high oil demand that we saw from West Coast U.S. due to seasonal factor. The other one was the very good demand that we have for Medanito. And the last factor was the lower availability of other type of crude oil that usually compete with us like [indiscernible] crude. So that mainly explains why we have some good realization pricing during the Q3. Operator: Our next question comes from the line of Leonardo Marcondes from Bank of America. Leonardo Marcondes: So my question is regarding the drilling completion and tie-in of the wells since September's figures beat the market expectations, right? So I would like to know if you could provide some color on the rationale of this significant increase in well tie-ins now, right? And also some color on what can we expect from this team for the remainder of the year? I mean, should you keep the rhythm on October, November, December? Miguel Galuccio: Leonardo, thank you very much for the question. And I will explain and give you a bit of context on the rationale on the increase of well tie-ins. So I mean, as a recap, in April, we took on a bridge loan to finance the Petronas Argentina acquisition, as you know. In May, we successfully tapped to the international market and issued a bond of $500 million to take out the bridge loan. And also in July, a $500 million term loan to refinance all our short-term maturities, and that basically give us or regain full financial flexibility. We also consolidate the new assets. We saw very good productivity and production growth, even, I would say, better than our original expectation. And on the top of this, now there is less bearish consensus regarding the oil price. So in summary, due to all these factors, we decide -- we saw that we are aware in a position that we were more comfortable to basically accelerate CapEx. Regarding Q4, the short answer to your question is yes. You will see pretty much, I would say, 11 to 14 wells. And regarding '26, you have to bear with me, I mean we have in a few weeks at our Investor Day in November 12, and I will probably wait to give you a full view of what we're going to do in 2026 and onwards. Operator: Our next question comes from the line of Bruno Amorim from Goldman Sachs. Bruno Amorim: I have a follow-up question on the production outlook. It seems that you ended third quarter on a strong tone. So what does it mean for the fourth quarter, given you just mentioned you're going to continue to drill and tie-in a significant number of wells into the fourth quarter. Can you elaborate on where do your current expectations stand versus your guidance for the remainder of the year? Miguel Galuccio: Bruno. Yes, you can expect that the production for Q4 to be about the 130,000 barrels oil per day that we guide. As always, you will see the typical up and downs that we see month-over-month. As you know, the natural rhythm of how we tie-in the wells sometimes it's not quarterly, but it's changing month-by-month. But on average, Q4 will be similar to September. So this implies that we will likely be above guidance for the year. The guidance was between 112,000 and 114,000 barrels oil per day. And also [indiscernible] we will be about the guidance for the second semester, which was between 125,000 and 128,000 barrels oil per day. So yes, you can you can probably look at Q4 about 130,000. Operator: Our next question comes from the line of Alejandro Demichelis from Jefferies. Alejandro Anibal Demichelis: Congratulations on the quarter. Miguel, one quick question. Could you please indicate how you're seeing the evolution of drilling and completion costs over the next few quarters? We have seen a bit of volatility on the FX. We have seen kind of inflation kind of going up a little bit. So just some kind of direction on how you see those costs go on, please? Operator: [Operator Instructions] Alejandro Anibal Demichelis: Congratulations on the quarter. Miguel, one quick question. Could you please indicate how you're seeing the evolution of cost of drilling and completion costs over the next few quarters given the volatility on the FX, inflation and so on. Miguel Galuccio: Yes, Ale here again. I mean we listened the first one, but thanks for the question. So we announced, I was saying in Q2 that our cost of the well was around $12.8 million. This is drilling and completion cost for well with a lateral length of approximately 2,800 meters and 47 stages. Today, we are slightly below this number and we are seeing very good results from the initiatives that also we announced last quarter that we will implement it. We are currently working on further initiatives on the same 2 verticals that were contracts and technology, so -- which basically, we believe and we feel very strongly that will lead to further savings. So the idea is to comment and to give a lot of color and more color because we have very good news coming on that front on the Investor Day. So I hope you take that answer now, and we will give you more detail when we see you in the [ field ] on November 12. Operator: Our next question comes from the line of Thiago Casqueiro from Morgan Stanley. Thiago Casqueiro: Congratulations on the results. My question here is regarding La Amarga Chica. It's been about 6 months since you acquired the stake in the assets. So looking back on this initial learning period, what would you say are the key challenges and opportunities you have identified in the assets so far? Miguel Galuccio: Thiago, thanks for the question. Look, I mean, we have a very open and contractive relationship with YPF, I will say, at all levels. At my level, CEO and at the level of Matias in the field and everybody. You imagine they have been for many years, co-worker of us. So very good relationship, very good collaboration. We are collaborating in many fronts. First, I would say, sharing technical learnings. We regard ourselves as lead operator. We have learned a lot. YPF has a very extense experience in unconventional. So the sharing of practices has been very rich. Second, in opportunities on services and also in infrastructure, very collaborative and very open discussion also in those both fronts. The performance of the production and the cost efficiency this quarter was very good, I have to say, very good. So we are now focusing and discussing the 2026 [indiscernible] and the budget for that. But overall, it's going very well. Operator: Our next question comes from the line of [ Matteo Tosti ] from Citi. Unknown Analyst: Congratulations on results as well. I was wondering while you may comment on M&A. I mean I remember last quarter, you touched on this, and we -- you said maybe there was still appetite for M&A. And has this appetite continued? Is something that has maybe weighed down a bit? What can you comment on this? Miguel Galuccio: Matteos, well, the short answer is the appetite is intact. So we have a proven track record, as I said before, creating value through M&A. So we are not only good operators, we have been very good M&A wise all the way up to here. And the best example of that probably the Petronas acquisition earlier this year. So that is part of our strategic approach as Vista. So given also that we are increasing our scale and our cash profile going forward, we will continue assessing opportunities. The only thing I will say that you have to take in consideration that we have a very high value in terms of value accretion and also in terms of strategic fit. But yes, the short answer is the appetite to M&A is intact for us, and we will continue looking to opportunities as they come. Unknown Analyst: If I may add a quick follow-up. Are there any open processes today, maybe the opportunities to engage with other companies? Are there any open process, any assets available that you're looking into? Or has the temperature cooled on that front, too? Miguel Galuccio: No, I don't think -- I mean, as we said in a formal process, I don't see any formal process that we are participating. We are having, yes, several discussions as always we have. As you know, the interest in Argentina have renewed a lot during the last few -- during the last year. And also, we see new players coming into the country, I would say, exploring opportunities. So yes, we are maintaining discussion with all of them. But I will not say that we are participating in any formal process at the moment. Operator: Our next question comes from the line of Tasso Vasconcellos from UBS. Tasso Vasconcellos: Great. Miguel, maybe a follow-up question on the discussion on CapEx and production levels. If Vista were to only maintain current level of production is stable without much growth, what would be the level of CapEx required? And in this same sense here, what would be the maintenance CapEx to maintain production stable closer to 150,000 barrels a day. That's my question. Miguel Galuccio: Thank you, Tasso for the question. Yes, these are numbers that usually when we simulate our plans, we look into. I will say using 100,000 barrel per day of production as a reference, we will need around $700 million of CapEx to keep the production flat going forward. And that will imply probably between 50 and 55 wells. If we in [indiscernible] of 130,000 with 150,000 barrel per day, then I think that we should add one rounding the CapEx around $800 million and then the number of wells would be between 55 and 60 wells. So that will be around numbers. Of course, that could change also depend of the context now. Operator: Our next question comes from the line of Michael Furrow from Pickering Energy Partners. Michael Furrow: So there's been a lot of attention on the upcoming midterm election. And for good reason, the outcome could have meaningful implications to the country. Now that said, the Vaca Muerta is an extremely valuable natural resource, and it seems to us that regardless of the outcome, this resource will continue to be developed. So I was hoping that you could maybe take some time to discuss your thoughts on the matter and if you see any outcomes from this weekend's election that would have a material impact on Vista's operations. Miguel Galuccio: Thank you, Michael, for the question. It's a recurring question and a good question. In short, the elections do not change our plan. We've been growing Vista from the scratch to where we are today, participating in 4 different administrations. And even before that, most of us came back to the country in 2012. And as we said, we were part of making Argentina a structural net exporter today and being part of the solution of the country. So the fact that we are holding an Investor Day 2 weeks after the elections is a full reflection of what we feel about the business. Our business model is solid, is dollarized, and we are increasing as we grow the amount of sales to the export market. So also, we said that we have secured the funding to continue growing, and we will discuss that in November 12. And we don't have any large financial debt maturity in the coming years. We also have secured the services, the rigs, the completions, the frac set with flexible contracts going forward. So no, Michael, I don't think, I mean, the elections will affect multiples and other things or the perception of Argentina, but will not affect Vaca Muerta. It doesn't affect our ability to continue growing and to execute our plan. Michael Furrow: That's great. I appreciate such a comprehensive answer. Operator: Our next question comes from the line of George Gasztowtt from Latin Securities. George Gasztowtt: Brent has remained pretty volatile again this quarter. And I was wondering what your EBITDA sensitivity to oil prices was now in 4Q. Miguel Galuccio: Thanks, for the question. Yes, there is a sensitivity. Using 130,000 barrel oil per day production as a reference, you should think that for every dollar per barrel of changing in realized oil prices, the adjusted EBITDA in the fourth quarter will change approximately between USD 8 million and USD 9 million. That's more or less will be the impact. Operator: Our next question comes from the line of Juan Jose Munoz from BTG. Juan Muñoz: Regarding La Amarga Chica, could you provide more color about the production of the 3Q? I understand that you finished on a strong note and also regarding the outlook that you have for La Amarga Chica in the last quarter of the year. Miguel Galuccio: Thank you, Juan Jose, for the question. So in La Amarga Chica, let me do a bit of a recap of La Amarga Chica. In La Amarga Chica, we connect around 18 wells. And we have 50% of that work [indiscernible], so YPF connect 18. This well correspond to 4 parts, Pad 120, Pad 67, and these Pads, if I'm not mistaken, in the south triangle of the block and also the Pad 105 and the PAD 83 that are in the center of the block. All the 4 pads are producing above budget. The well performance of La Amarga Chica was good and the production was for Q2, 38.7 and they took it from 38.7 to 43.5 in Q3. So very good performance for Q3. And we are expecting -- I cannot give you a number, but we are expecting a very strong performance also in Q4. So I hope that gives you a feeling of how we are looking at La Amarga Chica. Operator: Our next question comes from the line of Francisco Cascarón from DON Capital. Francisco Javier Cascarón: My question is what caused the decline in operated production during the first 2 months of the quarter? And if you are looking to accelerate that production going forward like we saw in September? Miguel Galuccio: Thank you, Francisco. So yes, we saw a very good productivity in the wells that we connect during the quarter, specifically Bajada del Palo Oeste where we connect 11 wells that correspond to 3 different pads. Bajada del Palo 35 was connected in July, has 5 wells of around 3,400 meters in lateral length and 57 completion stages on average. Then we connect Bajada del Palo Oeste 36 that has 4 wells, lateral of 3,300 meters. On average, I think, around 50 stages. And then we -- that was -- the last one was connected in August. And then we connect Bajada del Palo Oeste 37 that has only 2 wells, 2,800 meters length and 48 stages on average that was connected in September. So what you're seeing is the solid productivity of this 11 wells is the result of the boost production that you saw from Bajada del Palo Oeste that went from 56,400 barrels of oil per day in Q2 to 60,200 barrels oil per day in Q3. So that are the pads that somehow result in the boosted production. You will see that also continuing in Q4. Operator: Our next question comes from the line of Matías Cattaruzzi from Adcap Securities. Matías Cattaruzzi: Miguel and Alejandro, my question goes on the regard of CapEx guidance. Given the current activity levels and the pulse of -- the pace of well tie-ins, do you see a possibility of this year CapEx ending above the $1.2 billion guidance closer to $1.3 billion or over that number as recent trends in activity suggest? Miguel Galuccio: Matias, yes, thanks for the question. Yes, I mean, we guide 59 wells, and we will be end up drilling between 70 and 74 wells. So you should add 11 to 15 wells to our original guidance. Of course, that will involve more CapEx or some additional CapEx. So you should think that [indiscernible] $1.2 billion. So you should think that we will end up between $1.2 billion and $1.3 billion for total CapEx for the year and Q4, a little over $300 million. So that is how you should look to the actual CapEx numbers. Operator: Thank you. At this time, I would now like to turn the conference back over to Miguel Galuccio for closing remarks. Miguel Galuccio: Well, thank you very much, everybody, for the participation. Of course, we are super happy with the quarter, a fantastic quarter for us. And I'm looking forward to see you all on November 12 in Argentina. Thank you very much, and have a good day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Welcome to the Ardagh Metal Packaging S.A. Quarterly Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Stephen Lyons. Please go ahead. Stephen Lyons: Thank you, operator, and welcome, everybody. Thank you for joining today for Ardagh Metal Packaging's Third Quarter 2025 Earnings Call, which follows the earlier publication of AMP's earnings release for the third quarter. I'm joined today by Oliver Graham, AMP's Chief Executive Officer; and Stefan Schellinger, AMP's Chief Financial Officer. Before moving to your questions, we will first provide some introductory remarks around AMP's performance and outlook. AMP's earnings release and related materials for the third quarter can be found on AMP's website at ir.ardaghmetalpackaging.com. Remarks today will include certain forward-looking statements and include use of non-IFRS financial measures. Actual results could vary materially from such statements. Please review the details of AMP's forward-looking statements disclaimer and reconciliation of non-IFRS financial measures to IFRS financial measures in AMP's earnings release. I will now turn the call over to Oliver Graham. Oliver Graham: Thanks, Stephen. We delivered a strong performance in the third quarter with adjusted EBITDA growth of 6% versus the prior year quarter or 3% on a constant currency basis. Our adjusted EBITDA result of $208 million was towards the upper end of our guidance with both segments performing broadly in line with our expectations. Adjusted EBITDA growth in the quarter was supported by shipments growth in Europe and North America, lower operational and overhead costs as well as favorable category mix. Although global volumes were below our expectations in the quarter, on a year-to-date basis, they are up over 3% versus the prior year. The beverage can continue to benefit from innovation and share gains in our customers' packaging mix, underpinning our growth expectations. We continue to progress our sustainability agenda and our recently published sustainability report highlights strong progress towards our targets in 2024, including a 10% annual reduction in Scope 1 and 2 emissions and a 14% reduction in Scope 3 emissions with Scope 3 emissions now 25% below the 2020 baseline. We anticipate further good progress in 2025 and beyond. Turning to AMP's Q3 results by segment. In Europe, third quarter revenue increased by 9% to $625 million or by 3% on a constant currency basis compared with the same period in 2024, principally due to volume growth. Shipments grew by 2% for the quarter, driven by growth in energy drinks and faster-growing categories such as ciders, ready-to-drink teas and coffees, wines and water. This growth offset continued weakness in the beer category, which represents over 40% of our European portfolio. Third quarter adjusted EBITDA in Europe increased by 4% to $82 million, in line with expectation. On a constant currency basis, adjusted EBITDA reduced by 4% due to input cost recovery headwinds, partly offset by the contribution from higher volumes and favorable category mix. Given the continued softness in the beer category, we now expect full year shipment growth for Europe of low single-digit percentage for full year 2025. As we look into 2026, we continue to expect the market to grow around 3% to 4% and for our volumes to broadly match that growth. In the Americas, revenue in the third quarter increased by 8% to $803 million, which mainly reflected the pass-through of higher input costs to customers, including the impact of the higher Midwest premium in North America. Americas adjusted EBITDA for the quarter increased by 8% to $126 million, in line with expectations due to lower operational and overhead costs and favorable category mix, partly offset by the impact of lower volumes in Brazil. In North America, shipments increased by 1% for the quarter, broadly in line with the industry, following stronger-than-expected growth during the first half of the year. Year-to-date, North America shipments are up by 5%, ahead of the overall industry. The slower rate of growth during the quarter reflects some moderation in industry growth rates as well as temporary operational challenges. These included a modest impact related to aluminum can sheet supply as well as some temporary plant and network issues. We continue to monitor the metal supply situation as we progress through Q4. If the supply chain performs as currently projected, we anticipate only a modest impact to our expected Q4 North America performance. Customer demand for nonalcoholic beverages in cans in North America remains strong. And as such, we maintain our guidance for full year North America shipments of a mid-single-digit percentage growth. Looking into 2026, we expect industry growth of a low single-digit percentage. We expect a somewhat softer outlook for AMP following some volume resets largely related to specific footprint situations. We anticipate 2026 being a transition year before good growth in 2027 on the back of some contracted additional filling locations and ongoing market growth. In Brazil, third quarter beverage can shipments decreased by 17%, largely due to a weak industry backdrop across all categories, with industry beer can volumes falling by around 14% due to adverse weather and weak household consumption. Our weaker performance in Q3 follows a strong performance in the first half of the year. Year-to-date, Brazil shipments are down 1% versus a mid-single-digit percentage decline for the rest of the industry. We expect an improved volume trend for Q4 compared to Q3, and hence, full year shipments for Brazil to be broadly in line with the prior year. Looking into 2026, we expect the Brazilian industry to return to growth and for our volumes to broadly track the industry. I'll hand over now to Stefan to talk you through our financial position for the quarter before finishing with some concluding remarks. Stefan Schellinger: Thanks, Ollie, and good morning, good afternoon, everyone. We ended the quarter with a robust liquidity position of over $600 million. The net leverage of 5.2x net debt over last 12 months adjusted EBITDA represents a decline of 0.4x of leverage versus Q2 2024, reflecting adjusted EBITDA growth. It remains our expectation that the leverage ratio at year-end will be around 5x. We reiterate our expectation for adjusted free cash flow for 2025 of at least $150 million. In terms of the various components of free cash flow, our expectations are mostly in line with what we said in July. We expect maintenance CapEx of around $135 million, lease principal repayments of just over $100 million, cash interest of just over $200 million and a small outflow in working capital. We now expect cash tax to be in the range of $35 million to $40 million, growth CapEx to be around $65 million and a small cash exceptional outflow of approximately $50 million. Today, we have announced our quarterly ordinary dividend of $0.10 per share. And with that, I'll hand it back to Ollie. Oliver Graham: Thanks, Stefan. So before moving to take your questions, just to recap on AMP's performance and key messages. Firstly, adjusted EBITDA growth in the third quarter of 6% was at the upper end of our guidance range with both segments performing in line with expectations. Adjusted EBITDA growth was supported by shipments growth in both Europe and North America by lower operational and overhead costs and a favorable category mix. And the beverage can continue to outperform other substrates in our customers' packaging mix, supporting our growth. Reflecting our resilient performance, we are upgrading our full year adjusted EBITDA guidance. Full year adjusted EBITDA is now expected to be in the range of $720 million to $735 million based on current FX rates. We expect full year shipments growth for AMP to be approximately 3%. Having made these opening remarks, we'll now proceed to take any questions that you may have. Operator: [Operator Instructions] We'll take our first question from George Staphos with Bank of America. George Staphos: Congrats on the progress. I guess the first question I had, only have a couple. Can you talk, and Stefan, about what, if any, effects you're seeing from demand elasticity and higher realized or potentially realized aluminum pricing from can sheet within cans, both in North America and Brazil and then, I guess, broadly. And in that regard, with Brazil, the down, I think you said 17% on weak industry trends. Obviously, others have also put up some weaker industry volumes so far during reporting period in Brazil. Do you sense any of that is a pack shift mix back to other substrates because of, in fact, higher aluminum prices? How would you have us think about that? And along with the elasticity question, just can you talk a bit more about what's baked into your guidance for fourth quarter and realize you're not guiding on '26, just the outlook for '26 on can sheet. What operational challenges do you -- are you -- how are you going to -- we know what issues hit the supply chain? How are you managing against that and what's baked in to the extent you can comment? Oliver Graham: Yes. So yes, on the first question, I mean, I don't think we're seeing a huge amount on demand elasticity at this point. Obviously, everybody -- more or less everybody will have gone into 2025 pretty hedged, so a lot of the tariff impact won't come through in North America at this point, probably similar story for Brazil in some respects. So I don't think we're seeing it hugely impacting sales at this point. I think that there's a bit more risk for 2026 for exactly the same reason that hedges will be rolling. And so you would expect to see some higher aluminum costs come into the supply chain. And then it will be down to whether our customers pass those through or retailers pass those through and then how the consumer reacts in the overall consumer environment. So I think we're probably guiding North America for next year at a market level sort of 1% to 2%, and that's partly reflecting some of that caution about potential inflation in the can. I think in Brazil, I don't think we've seen a big reversion back into 2-way glass. I think it stayed pretty much steady the shares of cans. It just seems to be a general weakness on the volume level on the liquid level, and we see that in the reporting of the big brewers. And obviously, it was a pretty poor winter, a very cold winter that's been commented on. And obviously, there is a weak consumer backdrop in the category, particularly in beer, but actually soft drinks wasn't great either. So I think Brazil is just having a tough year. Again, as we look into '26, we'd assume that it reverts more back to its long-term trend. So maybe low to mid-singles. And as we said in the remarks, we'd be in line with that. In terms of Q4, so I think the can sheet, we're cautiously optimistic at this point. Obviously, there's been a lot of disruption in the supply chain. We were having it actually before the fire at that key facility. There was already some disruption in the supply chain, which we mentioned. And obviously, the fire didn't help. At this point, we think we're managing through. And obviously, it gets easier as the quarter progresses because alternative sources of supply can come into the mix, and we're obviously supplied from various domestic and international sources. And we also have 1 of the 2 new mills in North America now coming online, which is obviously very helpful to the situation. So at the minute, we're optimistic that we can get through that, as we said in the remarks, with relatively limited impact on North America performance. But we probably did lose 1 to 2 points of growth in Q3 across all of the operation issues that included a couple of plants that didn't perform at the level we expected and also the network was under some stress with some seismic issues. Operator: We'll take our next question from Matt Roberts with Raymond James. Matthew Roberts: First, on the 2026 growth in North America, it seems like there's a lot of innovation, potential shelf space distribution opportunities within your energy portfolio. So what's behind that transition here? And given your exposure, why in line with the market in North America? Oliver Graham: Yes. Great question. So look, I think we've talked about it on calls. It's been on other calls. There's a lot of contract reset activity in North America over the last couple of years. We're seeing that increasingly settle down now. And we're broadly very comfortable with the outcomes. We see ourselves increasingly strongly contracted through '28 and beyond. We do see some softness, as we said, in 2026, particularly on the 12-ounce side of the portfolio due to some resets within those situations. And as I said on the remarks, it's really about some specific footprint situations. So by -- what I mean by that is, for example, we had a customer with a very long freight lane out of the COVID years. We were at one point, thinking of building capacity. We decided not to with the overall volume situation. So now there is a plant much closer than our plant, and so that naturally reverts. And then another situation example is that one of our competition built a plant during this period of expansion and that plant is now closer to a customer filling location than our plant. And so we're seeing some, I think, relatively natural resets in the market. As you know, I mean, obviously, beverage cans are very susceptible to freight and footprint is critical. So yes, as I say, I think we're very comfortable with where we're coming out now. We do see '26 as a softer year in North America, where we will be behind the market. But if we take '27, we see good growth. We see we're gaining a couple of extra filling locations, and we see the market growing again. And as you say, I think if you look at the innovation that's going into the can and you look at the way energy has performed this year, that's a big part of our portfolio. We actually don't know where that's going to be. It certainly surprised us on the upside this year. I think it's got good potential next year, probably not to the same level, but it's a big part of our portfolio. So yes, we can be optimistic about those kind of categories as well. Matthew Roberts: Right, right. And then speaking of capacity and footprint, last quarter, you noted potential for adds in Europe. I believe it was Southern Europe, but recognizing these projects are long term in nature, has the volume outlook changed either the timing in regard to any potential projects? Or are you still expecting Europe to be pretty tight and needing additional lines in the future? And any early indications that how you think about CapEx in 2026? Oliver Graham: No. No, we don't see any change to the timing. So I mean, I think that the Europe market is pretty tight. We're particularly tight on certain sizes, and we'll address that. That definitely cost us some growth this year. Again, it's sort of specialty sizes in the season. We weren't completely able to follow and that cost us a bit of growth Q2 and probably persisted into Q3. So we'll do some projects around that in the off-season. And then, yes, we're running pretty tight. We've got some room for growth with continued improvement in the existing footprint, but we don't see any change to the timing of needing new capacity. Europe is a long-term growth market. It's been talked about on other calls. We're talking 3% to 4%. Some years, it's been more, some years a bit less, but it's been very consistent as per capita can penetration grows. So yes, we don't see anything. It's obviously had a bit of a weak summer, particularly in the beer category, but we're very optimistic about that market. And as we said in the remarks, we see ourselves growing in line with the market in '26. Operator: We'll go next to Stefan Diaz with Morgan Stanley. Stefan Diaz: Maybe just sticking with Europe. So obviously, the can continues to outperform underlying liquids volumes in the region. But in your opinion, how much more runway does the can have for outperformance? Like, for example, if overall liquid demand sort of remains kind of flat to down in Europe, can the can still grow in 2026, '27 and beyond? Oliver Graham: Yes, definitely. So I think if you look at the things that drive the growth, I mean, there's still significant underpenetration of cans relative to other geographies. Some of that is legacy with the German deposit scheme that took all cans out of the German market. So you still see German can growth at very high levels, obviously, a big market. You have growth out of 2-way and plastic in different parts of the region, Eastern Europe. We have the ongoing sustainability advantages of the can relative to other substrates. And obviously, you have in Europe, particularly the energy cost situation that's impacting glass. So we see a lot of runway for growth for the can in Europe. And I think that view is shared right across the industry and is backed up every quarter. If we look at our performance in the quarter, when we look at our markets that we were in, we were a touch behind, but only a touch behind. So I think there are always geographic and category mix impacts in individual company growth rates. But overall, we're happy with our performance, and we definitely see a lot of runway for can growth in Europe in the next few years, yes. Stefan Diaz: Great. That's helpful. And then maybe just can you -- if you could just touch on quarter-to-date trends by geography and maybe particularly if you could go into detail on Brazil, just given how weak this past quarter was on an industry level and just now how we're in the busy season down there. And then if I could just slip in one more. I might have missed this in the release, but can you quantify the IFRS 15 contract timing benefit? And is this potentially a headwind in 4Q? Oliver Graham: Sure. So I think -- I mean, quarter-to-date, I think trends look good, very much in line with guidance across all geographies. I think Brazil, clearly significantly better where we're guiding. If we're at the top end of the guidance, then we expect Brazil to be flat growth year-on-year, which obviously is, therefore, growth in Q4. And we already see in October significantly better performance than Q3. So we do see improvement. I think it's still a bit on the weak side, and we're still maintaining a cautious stance in our guide, but it's definitely better than Q3. And I think that Europe and North America would just say absolutely in line with where we expected. So it seems that there's a reasonable degree of forecast stability in our markets right now. I think the specific question on IFRS 15 is just a couple of million dollars, right? And maybe, Stefan, I don't know that we anticipate anything particular in Q4, but I'll hand that to you. Stefan Schellinger: No, I don't think we expect a major headwind in Q4 from IFRS. And sort of, yes, it's sort of around a couple of million dollars sort of in the Americas and then also a few more in sort of the European segment. But net-net, yes, we don't expect a major headwind from there. Operator: We'll go next to Josh Spector with UBS. Joshua Spector: I just had 2 questions. One on the cost side is within your comments, you talked about less input cost recovery in Europe. I assume that's non-metals related, but can you talk about kind of what that is and if that is something that can be recovered? And then with North America with some of the temporary network issues you've called out, I don't know if you can size that at all? And is that something that's resolved? Or is this kind of just an effect of a tighter market maybe leading to inefficiencies that persist? Oliver Graham: Sure. So taking the North American one first, I think those issues are resolved as we go into Q4. I think that they were a consequence of our strong growth in the first half, particularly on certain sizes. So we ended up with the network. We're basically pushing the shortage around different sizes across the summer. It landed on 12 ounce in Q3. And I think we mentioned in the remarks -- or I mentioned in one of my earlier replies that we probably lost 1 to 2 points of growth in North America in Q3, which was everything, including metal supply issues and some of our network and plant issues. So yes, we see those as fully resolved going into Q4. And the issue we're really very focused on is the metal supply, but as I say, cautiously optimistic at this point. And then the input cost, yes, we talked about it earlier in the year. Nothing's changed here. This is European aluminum prices. It's really a legacy of the Ukraine war and the energy spike. We managed to hold that off for several years. But in the end, there is energy and aluminum and those prices came through. And I think there has been commentary certainly at least in one of our peers on similar lines. So I think that not surprisingly, eventually, that energy shock translated through into some input cost price rises and that impact came particularly for us this year, it's different for different players depending on their supply mix. So nothing new there, exactly what we talked about earlier in the year. Operator: We'll go next to Arun Viswanathan with RBC Capital. Arun Viswanathan: I just wanted to get your thoughts on EBITDA and I guess, growth as you look into '26. So it looks like you're kind of on a $725 million or so run rate on an annualized basis. If you think about maybe low single-digit growth as you discussed for '26, it seems like you are executing relatively well. So does that translate to, say, maybe mid-single-digit growth on the EBITDA line? And then maybe is there any further leverage as you delever? Or how should we think about that progressing forward as you look at it? Oliver Graham: Yes, sure. Look, obviously, we don't guide '26 until our Q4s, and there's good reason for that. We're still rolling up the budget and all the detail. And also, there's still, at this time of the year, quite a bit of volume still under discussion or moving around. So we won't be guiding specifically. But if I just talk at the highest level, so I think I didn't say we were growing low single digits next year. I think what I said was Europe, we see growing 3% to 4% and us broadly in line. I said I think Brazil will grow low to mid, us broadly in line. And I said I think North America will grow 1% to 2% and will be softer than the market. So we don't yet have a global number. I think we definitely see earnings growth in '26 over '25. So some of those growth positions, particularly Europe, Brazil, we also see good operational cost savings. We've got a lot of opportunity in plants, in freight, in lightweighting, the usual places where can makers make operational cost savings, input costs, we're hopeful for '26 as well at this point. And obviously, we'll be keeping a tight eye as we always do on SG&A. Mix, we'd hope to be a tailwind '26. So we see a number of areas where we see earnings growth in '26, and we definitely see earnings growth over 2025, but we won't guide specifically on that until February. Arun Viswanathan: Great. And then maybe we can just discuss Europe just briefly. So in North America, we obviously saw a nice proliferation of new categories in nonalcoholic beverages. Could you just discuss maybe where we are in that trajectory within Europe? Is there maybe a tailwind that's coming? Or are we obviously already seeing it? And would you expect that to drive your results a little bit higher? Or would you be still maybe below the market because of the beer exposure? Oliver Graham: Yes. I mean we saw a bit of that in Q3, as I mentioned. So I mean, if you look where our Q3 growth came from, it came particularly out of the energy category, a bit like North America, came out of some of these faster-growing categories like ready-to-drink teas, coffees, wines, waters, we're strong in all those categories. So we definitely saw that. But I think the other piece with Europe, I think we also see general soft drinks in growth with substitution of plastic and also some 2-way systems being substituted still. So it's definitely not reliant on those more innovative categories to get growth in Europe. You can get growth fully in the core, if you like. And then I think what we're saying for 2026 is absolutely that this looks like a poor year for beer. There's no particular reason to believe that continues. So assuming beer stabilizes more into normal growth rates, then we would be in the 3% to 4% range, and that would be very good growth for all the can makers in Europe. Arun Viswanathan: If I can just squeeze in one last one. The recapitalization or the new structure -- do you see that at all impacting maybe your operations? Or does it allow for maybe a different way of thinking about capital allocation? Or is it just not really that impactful? Oliver Graham: Yes. I think too early to say anything on it. Obviously, the transaction hasn't closed. It's progressing well from what we understand, but too early to comment on anything, I think, with relation to that. Operator: We'll go next to Mike Roxland with Truist Securities. Michael Roxland: Congrats on all the progress. I just wanted to follow up on a comment you made in one of the prior questions about the growth you lost in Europe. And you mentioned also on the last quarterly call, calling out 1 or 2 points of growth in Europe because you couldn't pivot into smaller formats. You had good growth in soft drinks and energy. But given your existing beer position, which you noted is 40-plus percent in Europe, you couldn't make that transition. So can you just tell us how you expect to make that transition, how do you expect to become a little bit more nimble to target those growth categories to maybe try to minimize beer? Obviously, it didn't sound like you did that -- you didn't make much of a shift in 3Q, but can you tell us how you're going to ultimately do that, be 4Q, early 2026, how you're pivoting your mix to capture stronger growth end markets relative to beer in Europe, please? Oliver Graham: Yes, sure. So look, we're doing a couple of projects in the network, converting lines into those sizes, making lines flexible to allow us to be more agile in the season. So yes, we've got a couple of projects on the books for Q4, Q1 that will then have impact and be -- put us in a better position in Q2, Q3 next year. And then obviously, any capacity we're building out in the next few years, we'll make sure we're covering the growth sizes in the market. So we think we'll be in pretty good shape once we do these next few projects. Michael Roxland: Got it. And when you think about some of the conversions that you're doing or the flexibility that you're adding, when you add new lines, I guess, are you going to build those new lines with this functionality, with this flexibility to be able to switch sizes more easily in case market dynamics change? Oliver Graham: Yes, definitely. I mean, it costs a lot less if you do it at the beginning than when you try and retrofit, especially when you try and retrofit much older lines. So absolutely, I think it makes a lot of sense at the minute. The market is quite dynamic with different products coming to market, and we've seen in different summers, different products doing better or worse. So yes, it definitely makes sense for us as we build out new capacity to put that flexibility into the lines for sure. Michael Roxland: Got it. Okay. And then my last question is on North America. You mentioned the network issue has been resolved, and you remain optimistic on the metal supply issue resolving itself at some point. But fair to say, is there a risk to that 1% to 2% growth that you're targeting for North America next year should these metal supply issues persist into 2026? Oliver Graham: Yes. I guess, Mike, just to be clear, the 1% to 2% is the market growth, right? So we're saying we expect to be a bit softer than that. I don't see a risk to the industry or to ourselves in terms of metal supply next year. So obviously, we have 1 of the 2 new mills ramping up as we speak. That's extremely helpful to the situation. We expect the operational issues that are being suffered by Novelis to be resolved. Obviously, they're working very hard to address them. And then equally, we've all -- anybody that's in the market is sourcing other sources of aluminum and successfully doing so. So I think with the flexibility we all have in our supply chain with multiple sources of supply with the fixes they're doing and with the new mill ramping up, I don't see a risk of industry volumes or AMP volumes for metal supply in 2026. Operator: We'll go next to Anthony Pettinari with Citi. Anthony Pettinari: Ollie, I think you talked about kind of a bad year in beer in Europe, maybe not expected to repeat next year. And I'm just wondering if you can talk a little bit more about sort of the puts and takes there in terms of what you think really drove the weakness in Europe this year, whether it was consumer, weather? And then, I mean, in North America, there's been a lot of discussion around secular pressure on beer, given lifestyle changes, especially with younger consumers. Does that have a parallel in Europe? Or just wondering if you can kind of give us your big picture thoughts on beer into next year? Yes. Oliver Graham: Yes. Look, I think it's definitely too early to call a secular shift in Europe. I mean we don't have the depth of other products that we see in the North American market, other alcohol products with similar drinking characteristics that you have in North America. I think we've had a poor year. I don't think weather has really added. I think there's definitely some consumer weakness, which is hitting the category. We only generally work out later what the players did, were they promoting, not promoting. So we don't have all the data on that yet. So I think my view on this is that it's a big category. It's got some very strong players. And I think they won't be happy with this year at all and that they'll be putting in place strategies to reverse that into 2026. And as I say, I don't -- I think it's definitely too early to call any kind of secular shift in European drinking behavior. Anthony Pettinari: Got it. Got it. That's helpful. And then based on kind of an early view, do you expect that the aluminum conversion cost headwinds maybe continue in Europe next year? Or are there maybe some savings that we should kind of think about that could help you reach that sort of normalized operating leverage? Or just how should we think about that? Oliver Graham: I don't think we think there's necessarily savings, but there's no question that the step-up that we had this year moderates very significantly. So this was our step-up. I think if you look back over '23, '24, we really held it back despite the increase in energy costs that had flowed through. So this is where we took it. I mean the European market is tight on aluminum. So I don't see a huge savings opportunity there until there is more capacity put into the market, it needs that. But fortunately, there are significant import routes that are pretty competitive. And so I don't also see a major headwind, and we'll be exploiting on those routes. But yes, no savings, I think, but a definite moderating of some of the headwinds that we had this year. Operator: We'll go next to Gabe Hajde with Wells Fargo Securities. Gabe Hajde: I think earlier this week was the first time that we had heard that there might have been a little bit of movement in terms of contracts and maybe customers, maybe on the private label side. You mentioned next year that there's going to be, again, for your system, some changes and maybe underperform the market a tad. I'm just curious, as you're going through those negotiations with customers, what are their talking points as it relates to -- I mean, you already called out proximity to customer filling sites, so that makes sense to me. But just price or service levels, quality, et cetera, that's informing some of those decisions. Oliver Graham: Sure. Yes. Look, as I said in the remarks, I think that by far, the dominant factor that we've seen has been this footprint issue. As I said, we had planned back in '21, '22 to put some capacity in the north, and then we had -- people were very tight. So we had a contract that we served out of a long freight lane. And when we chose not to put the capacity in, obviously, we still have the contract for a few years. But then when it runs out, it's naturally going back to a closer can plant. And then as I said, we have the opposite effect where some of the new capacity that's come to North America obviously changes footprint dynamics for customers. So they get a plant that's actually nearer to them than they used to have and that our legacy plant is placed. And then we also had one situation with customer that halfway through the process, they had their own footprint review, which resulted in a filling location that we serve closing down. So I think if we look at the overall reason for softness in '26, its majority is down to footprint. I think the market is competitive, but I think it's normally competitive maybe after a few years where it was so tight through COVID, but I think it's in a normal competitive environment. And we don't hear anything particular on service. We generally get very high ratings on service and very good feedback for relationship management and customer support. So I think predominantly, we're talking about footprint-related changes and the fact that there is some capacity in the market for people to make moves. Gabe Hajde: Okay. Two questions on aluminum. Again, earlier this week, I think it was mentioned that all-in aluminum costs kind of crept up above, I think, all-time highs that we even saw during the pandemic. I think we were talking about maybe penny and a half or so of inflation just from raw material costs. That's maybe closer to $0.03 now if we were to mark-to-market. And again, I appreciate your customers hedge and probably roll that in 3 years in advance. So it's not going to all hit at once. But I'm just curious, when we've seen this type of inflation through the system, is it typically -- do they typically address that on an annual basis with pricing on the shelf? And then maybe relatedly, we observed a decent amount of promotional activity, especially on the carbonated soft drink and energy drink side in the first half of this year, maybe even the first 8, 9 months. Should we be mindful or thinking about anything? You mentioned volumes or sell into the channel decelerating a little bit in the second half here versus the first half. Is there any sort of dynamic in the first half of '26 that we could be mindful of maybe volumes actually -- industry volumes down in the first half and maybe growing in the second half, just given the tough comps? Oliver Graham: Yes. I think it's a good question. Look, I think you can't say there's no impact from that level of increase of aluminum pricing. So I think you have to assume there's some risk of inflation on the shelf and that, that has some impact on volumes because the categories are elastic. I think trying to predict exactly what our customers and retailers do with that is a fool's game. I think it depends a lot on where they are. They've taken a lot of price the last few years. And so they've probably got some firepower, which I think they deployed this year. I think not because of any personally, I don't think it's because of any particular sort of tariff-related insights. I think it's more that they have got that firepower in their margin structures and they can use it to drive volumes. And they are looking to balance cans versus plastic in their portfolios for all sorts of reasons. So I think predicting exactly what happens in '26 is very difficult to do. We're maintaining a 1% to 2% stance on North America growth for next year with us softer. And that's probably because we are being a little bit cautious around that issue. So yes, I think something is flowing through. You can't say it has no impact, but I think that hopefully, we see what we're expecting, which is that sort of growth rate. Gabe Hajde: Well, let's be honest, glass and other substrates are not immune, right? Like everything has embedded energy costs. So I'm curious. Oliver Graham: No -- that's really important -- sorry, Gabe, I was just going to build on that, right, which is that every quarter, we see that the can is outgrowing the other substrates. So then I think you take the sustainability piece, you take the energy cost piece, you take the fundamental cost structure of cans in North America. You look at the recapitalization that we've done as can makers and that our suppliers have done on the can sheet side, I think that the industry is very significantly more efficient than 10 years ago, and that is going to play through into overall cost structure. So yes, that's why I'm very bullish about long-term can growth rates in North America. I think there is a little bit of a headwind potentially from the tariff situation in the next 12, 18 months. Gabe Hajde: Understood. Last one, and it's just sort of digging into the supply chain a little bit. Obviously, it's been, I don't know, maybe 40 years that we've had new rolling capacity here in North America. Does that -- that does not address any sort of the ingot cost, Midwest premium cost that's embedded in. This is just more about localizing that can sheet supply. And so there's better efficiency, I guess, from a logistics standpoint. So then we got to kind of wait to see what happens politically if there's any change for cost structure for aluminum. And then in Europe, we're reading articles about they're frustrated that they're actually exporting scrap to the U.S. because maybe apparently, that's a way to circumvent some of the tariffs. Is that coming up in conversations in terms of cost of aluminum or can sheet over in Europe? Oliver Graham: Yes. So look, I think on North America, obviously, those mills are massively helpful to the industry, both in terms of supply, but also long-term cost structure, very efficient. Obviously, they had to get investment-grade returns to be built. So -- but I think those sorts of costs are built into the supply chain now. And so we don't see major changes. I think they're extremely positive for the industry to have that much domestic supply coming on and stopping a lot of the imports that were needed in North America and generally improving the quality of the industry. So that -- they're hugely positive, I think. And then in Europe, yes, look, I think the scrap situation isn't helpful as a way to avoid tariffs. Obviously, we were already hearing that the U.S. was very short scrap with issues that have gone on in Mexico and related to China, and that was impacting North American can sheet makers. So these flows will have impact, but we don't see them particularly changing what we're seeing in Europe at the moment. So nothing particular to report from that, I think. Operator: At this time, there are no further questions. I will now turn the call back to Mr. Oliver Graham for any additional or closing remarks. Oliver Graham: Thank you, and thanks to everyone on the call. So just summarizing again, adjusted EBITDA in Q3 grew by 6% at the upper end of our guidance with both segments in line with expectations. And reflecting that resilient performance, we're raising our expectations for full year adjusted EBITDA. So with that, thanks for joining the call, and we look forward to talking to you again at our Q4 results. Operator: This does conclude today's conference. We thank you for your participation.
Operator: Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Integer Holdings Corporation Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Sanjiv Arora, Senior Vice President, Strategy, Business Development and Investor Relations. Please go ahead. Sanjiv Arora: Good morning, everyone. Thank you for joining us, and welcome to Integer's Third Quarter 2025 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer; Payman Khales, President and CEO elect; Diron Smith, Executive Vice President and Chief Financial Officer; and Kristen Stewart, Director of Investor Relations. As a reminder, the results and data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP financial measures. For reconciliation of non-GAAP financial measures, please refer to the appendix of today's presentation, today's earnings press release and trending schedules, which are available on our website at integer.net. Please note that today's presentation includes forward-looking statements. Please refer to the company's SEC filings for a discussion of the risk factors that could cause our results to materially differ. On today's call, Joe and Payman will provide opening comments, Diron will then review our adjusted financial results for the third quarter of 2025 and provide an update for the full year 2025 outlook. Payman will then share our preliminary 2026 and 2027 outlooks and then we'll open up the call for your questions. With that, I'll turn it over to Joe. Joseph Dziedzic: Thank you, Sanjiv, and thank you to everyone for joining the call today. Today is my last call as Integer's President and CEO and my 64th and final as a public company CEO or CFO. As I reflect on the past 8 years as Integer's CEO, I am incredibly proud of what we've accomplished together. We've built a company with a clear vision, a compelling growth strategy and a strong values-based culture. When the CEO transition process began, I did not envision my last earnings call would include a reduction in our financial outlook. The recent customer forecast changes reflect the reality that not all new products achieve the level of success we expect or want. We expect this dynamic to be short-lived. Despite this news, we are still delivering strong results over the last 3 years. Our sales are up 39% from 2022 to 2025 at the midpoint of our outlook. Adjusted operating income is up 77% and adjusted EPS is up 73%. Our strategy and execution have delivered. And despite what the next few quarters hold, we remain confident in our strategy because when measured over time, it is working. I'm excited for Integer's future under Payman's leadership. He has played a pivotal role in shaping and executing our strategy and fostering our high-performance culture. As the President of our Cardio & Vascular business for 7 years, Payman delivered outstanding results, doubling sales and improving profitability. Tomorrow, Payman will become CEO and join the Integer Board. Thank you for your support of Integer during the last 8 years. I am now officially passing the baton and turning the call over to Payman to lead the remainder of the call, including the Q&A. Payman Khales: Thank you, Joe. On behalf of the entire Integer team, we extend our deepest gratitude for your exceptional leadership and strategic vision over the past 8 years. Your unwavering commitment to excellence has made Integer stronger, more innovative, better positioned to serve our customers and create value for our shareholders. The legacy you leave behind will continue to shape our future. I believe our strategy will continue to deliver for patients, customers and shareholders over the long term. I'm truly honored to step into the role of President and CEO. With great enthusiasm, I look forward to leading Integer in its next chapter of growth. We will build on the strong foundation that you've created and continue to advance our strategy with purpose and passion. We wish you well in your retirement. Now let's turn to our quarterly results and outlook. We delivered a strong third quarter in line with our expectations. Sales grew 8% on a reported basis and 7% organically, reflecting solid demand and execution. Our adjusted operating income increased 14%, driven by continued focus on operational excellence and expanding margins. Our adjusted earnings per share grew 25% year-over-year to $1.79. Despite this strong third quarter, we recently received customer updates related to the adoption of new products in the market that we expect will impact the next 3 quarters. The magnitude of these changes on multiple products at the same time is highly unusual. As a result, we are reducing the midpoint of our 2025 sales outlook by $16 million. This reflects recent changes in customer demand within our CRM&N product line primarily related to select emerging customers with PMA products. We are actively managing our costs to minimize the profit impact. As a result, we have reduced the midpoint of our adjusted operating income range by only $3 million and our adjusting EPS range by $0.02. For the full year 2025, we now expect to grow our sales between 7% and 8% or 7.6% at midpoint. We expect adjusted operating income to grow between 12% and 14% and adjusted EPS to grow between 19% and 21%. All in, this is a strong performance for the year. We usually provide our outlook for the upcoming year during our fourth quarter call in February after the completion of our annual budgeting process. However, given recent customer updates, we are providing a preliminary outlook for 2026. Based on the recent customer updates, we expect sales of 3 new products to decline in 2026, 2 electrophysiology products and 1 neuromodulation product for an emerging customer. The market adoption of these products has been slower than forecasted. We anticipate this will represent a 3% to 4% headwind to our total company sales for the next year. As a result, we expect organic sales in 2026 to be flat to up 4%. The impact of these specific products is expected to be more pronounced in the first half of 2026, leading to organic sales decline during that period. We anticipate a recovery to market growth during the second half as the new product headwinds moderate. On a reported basis, we expect sales to be down 2% to up 2%. This includes the final decline in Portable Medical as we complete the delivery of the last time buy orders in the fourth quarter of 2025, which is a headwind of approximately 2% to our total sales in 2026. While our 2026 outlook is not where we would like it to be, we remain confident in the strength of our long-term growth strategy, our portfolio and the depth of our customer relationships. Our continued focus on being designed into high-growth products early in the development process positions us well in the fastest-growing markets. Our product development pipeline continues to expand, fueled by close collaboration with our customers as they advance the next generation of medical technologies. Given the strength of this pipeline and our strategic positioning, we expect to return to above-market organic sales growth in 2027, which is consistent with our long-term financial strategic objective. I'll now turn the call over to Diron to review the quarter and the 2025 outlook in greater detail. Diron Smith: Thank you, Payman. Good morning, everyone, and thank you again for joining today's call. I'll provide more details on our third quarter 2025 financial results and provide an update on our full year 2025 outlook. In the third quarter of 2025, we delivered strong financial results. Sales totaled $468 million, reflecting 8% growth on a reported basis and 7% growth on an organic basis. Organic sales growth removes the impact of the Precision and VSI acquisitions, the strategic exit of the portable medical market and foreign currency fluctuations. We delivered $106 million of adjusted EBITDA, up $10 million compared to the prior year or an increase of 11%. Adjusted operating income grew 14% versus last year as we continue to make progress on our year-over-year margin expansion. Adjusted operating income as a percentage of sales expanded approximately 80 basis points year-over-year to 18.4% comprised of 10 basis points from gross margin and 70 basis points from operating expense leverage. Adjusted net income for the third quarter of 2025 was $63 million, up 27% year-over-year, while adjusted earnings per share totaled $1.79, up 25% from the same period last year. On a year-to-date basis, we are delivering strong results with sales up 9%, adjusted operating income up 14% and adjusted EPS up 20%. Turning to our sales performance by product line. Cardio & Vascular sales increased 15% in the third quarter 2025, driven by new product ramps in electrophysiology and incremental sales related to the Precision and VSI acquisitions as well as strong demand in neurovascular. On a trailing 4-quarter basis, C&V sales increased 18% year-over-year with strong growth from new product ramps in electrophysiology and neurovascular, as well as contribution from acquisitions. For the full year 2025, we expect C&V sales to grow in the mid-teens compared to full year 2024, which is consistent with what we shared on our July earnings call. In the fourth quarter of 2025, we expect C&V sales growth to decelerate from recent trends, reflecting a decline in the 2 new products in electrophysiology mentioned earlier. This is consistent with our prior outlook. However, we now expect this impact to continue into 2026, primarily the first half. Cardiac Rhythm Management & Neuromodulation sales increased year-over-year 2% in the third quarter 2025 and 4% on a trailing 4-quarter basis, driven by strong growth from emerging neuromodulation customers with PMA products and normalized CRM growth, partially offset by the planned decline of a neuromodulation program. For the full year 2025, we now expect CRM&N sales to grow low single digit versus 2024 compared to our previous expectation of mid-single-digit growth. This is primarily due to lower demand related to select emerging customers with PMA products. Product line detail for other markets is included in the appendix of the presentation, which can be found on our website at integer.net. In the third quarter 2025, we delivered $63 million of adjusted net income, up $13 million versus a year ago. This increase was driven mainly by operational improvements, which include higher sales volume, manufacturing efficiencies, gross margin expansion, operating expense management and acquisition performance. We also benefited from lower interest expense as a result of our convertible debt offering in March 2025 as well as a slightly lower adjusted effective tax rate. Our adjusted effective tax rate was 16.3% for the third quarter of 2025, down from 17.2% in the prior year. We now expect our full year 2025 rate to be within the range of 17% to 18%, which is 150 basis points better than our guidance in July. This improvement is primarily due to an improved outlook regarding R&D tax credits given our higher R&D investments. The year-over-year increase in adjusted weighted average shares outstanding drove approximately $0.02 reduction to our adjusted EPS. In aggregate, third quarter 2025 adjusted net income is up 27% year-over-year and adjusted earnings per share is up 25%, both growing much faster than our 8% sales growth, a very strong profit performance in the third quarter. In the third quarter of 2025, we generated $66 million of cash flow from operations, and our CapEx spend in the third quarter was $19 million. Free cash flow was $46 million in the third quarter, flat with the prior year. At the end of the third quarter, net total debt was $1.158 billion, which is a $46 million decrease compared to the second quarter 2025 ending balance. Our net total debt leverage at the end of the third quarter was 3x trailing 4-quarter adjusted EBITDA at the midpoint of our strategic target range of 2.5x to 3.5x. As Payman mentioned earlier, we are adjusting our sales and profit outlook ranges for 2025. Starting with our sales outlook. For the full year, we now expect reported sales to be in the range of $1.840 billion to $1.854 billion, reflecting growth of 7% to 8% on a reported basis. This includes inorganic growth of approximately $59 million from the Precision and VSI acquisitions, offset by an approximate $29 million decline from the previously announced Portable Medical exit, which is expected to be completed by the end of 2025. On an organic basis, we now expect sales to increase 5% to 6%. Our updated outlook represents a $16 million reduction at the midpoint compared to our July outlook, reflecting reduced expectations for our CRM&N product line. As mentioned earlier, the reduction in CRM&N sales was primarily driven by reduced customer demand for select emerging customers. For the fourth quarter, we expect reported sales growth of 2% to 5%. On an organic basis, sales are expected to be down 1% to up 2%. We have a more challenging year-over-year growth comparison as last year we benefited from new product ramps in both our C&V and CRM&N product lines. Consistent with our prior outlook, we expect lower sales in our electrophysiology business. The fourth quarter also reflects our reduced outlook for CRM&N. Even though we are adjusting our sales outlook, we continue to expect strong margin expansion driven by improvement in manufacturing efficiency and operating expense leverage. At the midpoint of our outlook, we continue to expect adjusted operating income as a percentage of sales to be 17.4% in 2025, an 85 basis point expansion compared to the full year 2024. This would result in a 13% increase in adjusted operating profit, a strong performance for the year. For adjusted operating income, we now expect a range of between $319 million to $325 million, growth of 12% to 14%, reflecting cost management actions to minimize the impact of our lower sales outlook. While still maintaining the same low end of our previous outlook range, this represents a $3 million reduction at the midpoint. For adjusted net income, we now expect a range of between $222 million and $227 million, an increase of 21% to 24% versus 2024, reflecting the strong operational performance, reduced interest expense and a lower adjusted effective tax rate. Lastly, we now expect adjusted earnings per share of between $6.29 and $6.43 which is a strong growth of 19% to 21% on a year-over-year basis. Our outlook assumes an adjusted weighted average diluted shares outstanding of 35.4 million shares for the full year 2025. Given the changes in our profit outlook, we are also updating our cash flow projections. We expect cash flow from operations to be between $230 million to $240 million, which represents a 15% year-over-year increase at the midpoint of the outlook. We now expect capital expenditures to be $95 million to $105 million. As a result, we expect to generate free cash flow between $130 million and $140 million, which represents a 35% year-over-year increase at the midpoint. We expect our 2025 year-end net total debt to be between $1.098 billion and $1.108 billion. This would result in a leverage ratio of between 2.7 and 2.8x trailing 4 quarter adjusted EBITDA, which is towards the lower end of our target range of 2.5 to 3.5x. I'll now turn the call over to Payman to discuss our preliminary outlook for 2026 and 2027. Payman Khales: Thank you, Diron. Due to the recent customer updates reducing volume of select new product in 2026 because of lower adoption in the marketplace and its expected impact on our 2026 sales. We are sharing our preliminary 2026 outlook earlier than usual. We remain confident in our long-term growth based on our robust development pipeline and the strong visibility we have to new product launches. This is why we're also providing a preliminary 2027 outlook. We expect 2026 reported sales to be down 2% to up 2% versus 2025, which includes an approximate 2% headwind from the planned portable medical exit that we will complete in 2025. On an organic sales basis, we expect to be flat to up low single digits. As I mentioned earlier, we recently received customer updates regarding 3 new products. Based on these updates, we now anticipate our sales for these 3 products to decline in 2026, which we expect to be a 3% to 4% headwind to our sales outlook. This offsets the expected 4% to 7% growth across the remaining portion of the business. The new product headwinds will be more pronounced in the first half of 2026. As a result, we expect our organic sales to decline low single digits in the first half of the year, with a recovery to market growth in the second half of the year. We expect the inorganic headwind from the portable medical exit to be similar in the first half and the second half of 2026. From a product line perspective, we expect both C&V and CRM&N to be flat to up low single digits on a reported basis as we navigate the select new product headwinds. In other markets, we expect a decline of approximately $30 million to $35 million, primarily driven by the Portable Medical exit. We're actively taking steps to align our costs with manufacturing volumes. Based on our preliminary assessment, we expect adjusted operating income in 2026 to range from a decline of 5% to an increase of 4% and adjusted EPS to range from down 6% to up 5%. As we look beyond 2026, we have a strong development pipeline with good visibility to new product introduction schedules over the next couple of years. Given the strength of this development pipeline, we expect to return to above-market growth in 2027. We continue to expand our product development pipeline with a focus on getting designed in early to new products in higher-growth markets. Since 2017, we project that by the end of 2025, our product development sales will increase by over 300%. This is up from the 270% growth that we shared at the end of 2024. Our mix continues to be approximately 80% in emerging and growth markets and 20% in more mature markets. We remain confident in our strategy and the long-term outlook for the business. The markets in which we compete are growing at a steady mid-single-digit rate in aggregate, and our approach is to secure early design wins in higher growth end markets. Approximately 70% of our sales are under multiyear agreements. In addition to driving strong organic growth, we plan to continue our tuck-in acquisition strategy while maintaining our leverage ratio within our targeted range of 2.5 to 3.5x. We have demonstrated that our strategy delivers results over the long term and remain focused on execution while we navigate the next 3 quarters. In summary, we delivered strong results for the third quarter, with sales growth of 8%, adjusted operating income growth of 14% and adjusted EPS growth of 25%. On a year-to-date basis, sales are up 9%, adjusted operating income up 14% and adjusted EPS up 20%. While we're updating our 2025 sales and profit outlook, and expect a more flattish sales performance in 2026. We are confident in our ability to return to 200 basis points above market growth in 2027, driven by our strong new product development pipeline. We will now turn the call over to our moderator for the Q&A portion of the call. Operator: [Operator Instructions] Our first question comes from the line of Brett Fishbin with KeyBanc. Brett Fishbin: Just a couple on the early 2026, if you can hit on the specific headwinds in a second. I was just curious, the green bar that related to rest of portfolio, organic growth is 4% to 7%. And I was hoping you could maybe touch on that part of the plan, given the deviation from the typical 6% to 8% when looking at it, excluding some of those new product introduction headwinds? Payman Khales: Yes, let me take that question. So what drives above-market growth of the 6% to 8% that you talked about is the new product introductions. Without new product introductions, the rest of our portfolio will grow at the rate of market. Now the headwinds that we're talking about, these 3 programs that we've highlighted that have given us headwinds in 2026, they're actually declining in 2026, which is -- which normally that would have helped us drive growth and get to that 6% to 8% range. So it's -- when you remove new products, the rest of the portfolio is expected to grow at the rate of market. Brett Fishbin: All right. Helpful. And then maybe specifically on the Cardio & Vascular items. I was hoping you could elaborate just a little bit on kind of the nature of the expected headwinds, whether it's a matter of loss of customer share of wallet for either of the 2 programs or whether it's tied to actual end market demand on both sides there? And then maybe I'll just squeeze in, like 1 quick follow-up. Just any thoughts on level of visibility into the return to market growth by 2H of next year, like how you get confident in such an improvement from, call it, like 2Q '26 into 3Q '26? Payman Khales: Yes, no problem. Thank you. So let me actually broaden your first question a little bit. I know your question was related to C&V. None of the products and customers that are talking about giving us headwinds either in 2025 or 2026 are loss products, loss of share, in-sourcing or products that are being pulled from the market. We are still the supplier for these products, and these products, all of them are still in the marketplace. Now getting specific to your Cardio & Vascular question, the headwinds that we are seeing is related to 2 electrophysiology products that had strong ramp in the first half of 2025, that we had anticipated would level out and that set down a little bit in the second half of 2025. And then we had visibility to the rate of growth kind of entering into 2026. These EP programs were scheduled to step up as we enter 2026. What we learned during the course of the third quarter is that the market adoption of these products has been less than what we had anticipated. This is new news. And as you can imagine, with the changing production plans and whatnot, we were -- we have been in discussion with our customers, since -- during the course of the third quarter, entering into the fourth quarter to kind of get our arms around it and the outlook that we're giving you right now for 2026 is as a result of this reduction in forecast. Now you talked about your second question being the level of visibility that we have. We still believe that we have very good visibility in our business. We have -- our backlog has remained steady. We entered the year at above $728 million of backlog and our backlog is still around the same number, around $730 million. That gives us good visibility. We have rolling customer forecasts from our customers for 12 months. We still have that visibility. Now what brings into question is the change that we're talking about today. And what I would like to highlight is maybe a little bit of a delineation between -- the -- some of the variability that we have in new product launches and how that can change over time as the products ramp, get into the market, get adopted at different rates and how our customers see changes that's what we're talking about. New product launches are inherently lumpy, if you will. But generally speaking, we see some do better, some do worse, Net total is that we kind of end up in the range that we had anticipated. What is unusual in this case is that we have a number of these programs having a big magnitude of change all at the same time. That is unusual. Let me just add 1 more answer to the question. I think one of the questions that you had is, in the second half of 2026, we are going to be anniversarying the big ramp, the growth that we had in the first half of 2026, which gives us also confidence in getting back to growth -- of 2025, pardon me, the first half of 2025. Operator: Next question comes from the line of Travis Steed with Bank of America. Travis Steed: I guess one, just -- is this a PSA product or an RF product that's changed in EP? And is it -- basically, it sounds like it's a customer who as of Q3 you didn't really know about it until Q3. I just want to make sure that's clear. And it sounds like it's a customer where they just have a different view of the end market demand, and that's really the only change in the EP side. Is that right? Payman Khales: Yes. So let me try to frame it in the context of 2 EP products. I can't be specific about the type of product, Travis, but it is 2 EP products. Now what you stated about the customer's learning about their demand is accurate. So what happened is that they had given us a forecast based on what they anticipated the rate of adoption in the market would be. There was a ramp period in the first half of 2025 and there was a leveling out and a little bit of a lowering as they were trying to gauge the rate of market adoption and their rate of sales. And then we had a forecast entering into 2026 that would be then stepping up. What changed is that they came to us in the third quarter effectively telling us that the rate of adoption has not been as they had anticipated as a result, 2026 is going to be impacting. Travis Steed: Okay. And you didn't know about it until Q3, it sounds like? Payman Khales: We did not know about it until the third quarter. And as I mentioned earlier, when we learned about this, obviously, we worked with them to try to understand the rate of change, the magnitude, our production plans because, obviously, you can't change your production plans very quickly. So these discussions also continued into the fourth quarter. Travis Steed: Okay. And is it a U.S. product or an international product? Or both? Payman Khales: We -- I can't be more specific than that Travis. I wish I could be. But because of the confidentiality that we have with our customers, I need to be -- I need to make sure that I can't be overly specific that the product is identifiable other than these are 2 products in the EP space. Operator: Your next question comes from the line of Joanne Wuensch with Citi. Joanne Wuensch: So it sounds -- I think I have an idea of what's going on in EP. Could you please explain if it was a similar dynamic that went on in neuromodulation, where things were supposed to ramp at a particular rate. And then in the third quarter, people came back and said, "No, no, that's not what's really going on." Is it a similar dynamic or a different dynamic? Payman Khales: We believe that it has to do with the rate of market adoption of select products in this space. So this book of business, our emerging customers with PMA product has done really well over the past many years. We've talked about the rate of growth of this book of business. And as we entered in 2025, we continue to have very strong growth. In fact, I would even say into the third quarter, that book of business was growing well in the rate of 15% to 20%, and we had anticipated the same rate of growth in the second half that we had seen in the first half. But what happened is that in the third quarter, some of these customers, we learned that the forecast that we had anticipated is not materializing for some of these customers. And we think what's happening is that the primary reason for the change is they are they're trying to align the purchases from us to match the market demand that they're seeing. Joanne Wuensch: That's in both section, sorry... Payman Khales: Yes, I apologize. So I think your question was, to make sure that I'm answering your question accurately. I think your question was related to 2025 because the impact that I talked about is specific to the fourth quarter of 2025. Was that your question? Joanne Wuensch: No. Actually, I thought you did a great explanation of EP, and I was curious if it was a similar explanation for neuromod? Payman Khales: It's similar in the sense that we believe that a handful of these customers are not seeing the rate of market adoption that they had anticipated. This is -- it's a similar dynamic from that perspective. Now the book of business of these emerging customers is still growing. It's growing in 2025, even with a decline in the fourth quarter. The rate of growth is going to be in the high single-digit rate, which is in alignment with neuromodulation. So it is -- we think there are -- we think this is just a question of a handful of these customers chewing up what they've bought from us with what they're seeing in the marketplace. Joanne Wuensch: Okay. Have you ever had an experience where you've had multiple customers, 3 in this case, sort of change their path in terms of their forecast and their ordering patterns with you? Or do you view this as sort of an aberration in your history of this business? Payman Khales: This is an aberration and is highly unusual. We see a rate of variation with new products. This is just normal. Our customers see that too. And we always take a step back and we look at what do we think the outcomes would be for each of these new products. And we kind of calculate a low case, if you will, a balanced view on the low case and a balanced view on the high case and on aggregate, we provide our guidance based on that. Some products do better than others, but usually washes out. So what we're talking about today is a number of them happening at the same time with a high level of magnitude. This is highly unusual. Operator: Next question comes from the line of Matthew O'Brien with Piper Sandler. Matthew O'Brien: Joe, best of luck in retirement. So Payman, just -- and sorry to stay on this topic on the C&V side. But as I calculated, I think it's about a $70 million reduction to your outlook for C&V for next year for those 2 EP products. I don't know if that's exactly the right number, but is that split evenly between these 2 programs? And then you say emerging customers, is that people coming along that were outside of maybe the top 3, your big 3 that are -- that make up about 45% of total sales. Is that how we should think about it? Payman Khales: So with regards to your first question, the math that you did is generally in the ballpark, but let me remind you that, that would be for 3 products, not for 2 EP products. So we have 3 products that have given us headwinds in 2026. 2 in electrophysiology, 1 in neuromodulation. Your second question is related, I think, to the emerging customers with PMA. No, these are emerging customers. That's why we put them in that bucket. These are customers that have new products, emerging therapies. We have about 39 customers that we've been working with and we have development pipeline with. Ten of those customers have products that are in the market or in different phases of launch. So these are not -- we're not necessarily talking about neuromodulation with the big customers. This is generally the grouping of customers that are newer and more emerging. Matthew O'Brien: Okay. And the same goes on the EP side. It's people that are emerging versus those that are maybe a little bit more established for you guys again, you've got customer concentration among 3 big providers out there that I think is just under half of total sales. So it's the people that are not in that top 50 for you guys, top 50%, it's other providers. Payman Khales: Yes. Our EP business is very broad. So obviously, we have a good book of business with the largest OEMs as well as others. So it's a pretty broad business that we have. And we have products across the procedure. So any ablation procedure has different steps into it from the access to body, from navigating the body, from mapping, diagnosing and, of course, doing ablation. We have product across the board with a different range of customers. Beyond that, I hope you understand that I can't be more specific. Matthew O'Brien: Got it. Okay. That's helpful. And then on the neuromod side, is it -- I guess, just kind of Joanne's question, it's an existing customer that is now seeing a little less adoption than they had expected. I mean, again, it would seem to be a pretty sizable customer. Is that a sizable amount of revenue that you hadn't been anticipating. So is that a fair assessment of kind of what's going on in the neuromod side too? Payman Khales: I think this is a question related to 2026. Is that correct? Matthew O'Brien: That's right, yes. Payman Khales: Yes. So the 1 customer that you're talking about, yes, they had a sizable growth in 2025 and they were seeing less adoption in the market that they had hoped. So they have a sizable decline in 2026. Operator: Your next question comes from the line of Nathan Treybeck with Wells Fargo. Nathan Treybeck: Can you just give color on -- so these 2 EP products and the neuromod product, how long were they in the market? I'm trying to understand, was there an inventory build in 2025 that contributed to the sales growth and then the end market demand is just not panning out? Is that what happened? Payman Khales: So these products have been launched recently, and they have been ramping. Both of them had strong ramp in -- excuse me, all 3 of them had strong ramp in 2025. The EP product specifically had strong ramp in the first half of the year, in the first 2 quarters which is typical when our customers launch -- continue launching products, there's usually a period of ramp because they want to make sure they have sufficient product in their distribution channels as they get products out. And then there was a leveling out, which was, again, expected and anticipated once our customers then kind of proceed with launch and they wait to see what the rate of adoption is. And as I mentioned earlier, they're seeing less than rate of adoption. The -- which is why they changed their forecast on us for, which is primarily 2026 impact. The neuromodulation product was a similar scenario in the sense that they had strong demand and strong growth in 2025, but they are not seeing the rate of adoption and they're seeing headwinds in the marketplace, which is why we're seeing a decline. Nathan Treybeck: Okay. And just to confirm the 2 EP products, they are from 2 separate customers? Payman Khales: I'm not at liberty to specify that again because we need to make sure that we maintain the confidentiality. So I had to be a little bit less specific in terms of how many customers, but I can tell you that there are 2 products. Nathan Treybeck: Right. Right. So at a high level, I mean, the EP market is -- the outlook is for a pretty strong growth. It sounds like these were novel products and not tied to like existing procedures because the overall outlook is pretty positive and what we're hearing from the manufacturers is pretty strong growth. So I'm just trying to understand were these kind of products that were not tied to procedure volumes as they are right now? Payman Khales: These are -- so let me start with the strength of the EP market in general, you're correct. The EP market is very strong. We have seen very strong growth in our EP business over the past 4 or 5 years, actually, including in 2025. So we -- our EP business has done really well, because, again, you're referencing some new products. But even if you take any new products out of the equation, we have a portfolio that goes into a typical ablation procedure. So as the EP market grows, our business has tailwind because of that. Now -- if we -- if then I come back to the impact of these 2 products, if I remove the impact of these 2 products, our EP business still grows at the rate of market, which is doing really well. So this is isolated to the impact of these 2 EP products. Nathan Treybeck: Okay. And just the last one for me. As we think about your prior outlook for the PMA portfolio, you're targeting 15% to 20%, 3- to 5-year CAGR. Is this kind of no longer intact. Payman Khales: No, it is still 15%, 20% CAGR over the next 3 to 5 years. We do anticipate some shorter-term headwinds, as we mentioned a little bit in the fourth quarter and during the course of 2026. Let me maybe add a little bit of color in 2026. We have -- if you take the one customer that we mentioned -- that I mentioned earlier that has headwind in 2026. If you take that out, the rest of the portfolio still grows at the rate of market, and we expect to get to above market growth in 2027 and beyond. And that's because new products that we have in the pipeline that are scheduled to launch and within that grouping of customers. We're not counting of any of the products that are giving us headwinds now to rebound in '27. It's more new product launches that we're expecting. Operator: Your next question comes from the line of Andrew Cooper with Raymond James. Andrew Cooper: I'm going to ask maybe 1 more on the EP side, similar to 1 that was already asked. I know you can't get into the specific products, but like mentioned, EP procedures aren't really inflecting away from expectations from a market perspective. So given you talk about that breadth of portfolio, is there any potential for you to recapture some of this volume elsewhere with other customers? And what would that look like? And when could we think about seeing that if or when it potentially could play out? Payman Khales: Yes. Thank you for the question. So we -- our EP business, I would reiterate, as I said earlier, is doing very well, excluding these 2 products that are giving us headwind. And then I would also add that we have new products that are scheduled to launch in the second half of 2026 and 2027. In fact, we have new product launches. I'll go a little bit more broad and then I'll come back specific to EP. We have new product launches schedule in every one of our growth markets in EP, in neurovascular, structural, heart and neuromodulation in the second half of 2026 and 2027. So we fully expect that we're going to get back to growth. Now back to EP specifically, one of the reasons why we are confident that we're going to get back to growth is because we're going to be anniversarying the strong rate of growth that we had in the first half of 2025 in the second half of 2026. We're not -- we don't have those costs anymore. And when you add the strength of our EP portfolio in general and some of the other product launches that are planned, we are confident that we're going to get to growth in the second half of 2026 and to above market growth in 2027. Andrew Cooper: Okay. Helpful. And then maybe a second one, just on margins and your ability to sort of offset the drag here looking for close to flat profitability similar to what you're expecting for revenue. So how do we think about the magnitude of potential cost out that you might be able to achieve here? Or is this, hey, we've got to be able to drive volume back to where we would expect and that's when we get back to more of that margin expansion like a typical year. Diron Smith: Yes. And Andrew, this is Diron. Just to confirm, you're referring to the 2026 margin? Andrew Cooper: 2026, correct, sorry. Correct. Diron Smith: Yes. So when we look at the '26 profit, as you know, we have put in a range of our adjusted operating income of down 5% to up 4%. That range, first of all, to note is very consistent with our sales range that we have also provided. So we're matching the sales range with that. Our profit algorithm, essentially, we rely on operating expense leverage on volume as well as our gross margin expansion primarily from an Integer Production System. As you can imagine, the volume piece of that algorithm will be a little bit more challenging in 2026. But we still have a very strong foundational process in our Integer Production System we focus on direct labor efficiency, where we reflect a focus on direct material efficiency as well. And we believe that's where we'll still be able to drive continuous improvement and see margin expansion. At the same time, with the lower volumes, we will be very disciplined in our cost management as we manage through these 3 quarters of headwind that we're facing. And so we believe next year, although down 5% to up 4% on the AOI range, we believe that we will be able to deliver on that, and we'll work to narrow that range as we get into February. Andrew Cooper: Okay. I'll stop there. And Joe, congrats and enjoy your retirement. Operator: Your next question comes from the line of Richard Newitter from Truist Security. Richard Newitter: Maybe I want to just go back to the process that you guys have for forecasting the business. I appreciate your [ CMO ], things are lumpy. You're dependent on customer orders. Historically, I think you said you have 3 months or more visibility. And usually, things work out, right, when you don't have 3 customers coalescing at once. So the puts and the takes work out. But I guess just in light of the fact that this happened this year, can you talk to us about any of the processes that need to be changed for your forecasting or how you potentially took into account the possibility for something like this happening again next year with the guidance that you're providing, where you guys are more of a [ Steady Eddie ] even with some of the quarterly variability. So I'm just trying to get a sense for how much visibility and then with the outlook that you're putting out now in '26, how we should be interpreting that from a conservatism standpoint. Payman Khales: Yes. And look, as you can imagine, we have been reflecting on this a lot. And we get customer forecast and we get purchase orders, as you correctly pointed out, and we got great visibility by our backlog, which, again, as I mentioned earlier, still in the range of $730-ish million, which gives us good visibility at least 1.5 quarters plus and then tie that to the forecasting that we get from our customers. This is highly unusual. We are looking at what our algorithm is and has been and how we calculate, if you will, our forecast has not changed. We -- for products that are in the longer term in our pipeline, we risk adjust those. Our customers tell us a certain range of outcomes. We look at that, we risk adjust those. And also, as you correctly pointed out, in sum total, they kind of wash out, and we usually end up in that range, that we expect 4 products that are longer, if you will, in the development cycle. In the shorter term, our production plan is based on what our customers tell us. If the customers tell us to build and deliver X, that's what we will do. So what's unusual is that they came to us and revised their forecast that impacted a shorter term than we would normally expect. So again, we're talking about the unusual nature of multiple customers, multiple products, large magnitude, all in a short period of time. We don't expect and anticipate that this will be a recurring thing. This is unusual. Richard Newitter: Okay. And then -- hello, can you hear me? Payman Khales: Yes, yes, of course. Richard Newitter: Sorry. Just maybe going back to the differences in the EP products, the electrophysiology projects and the neuromod projects. These are both products that were on the market and generating revenues throughout 2025 and in prior periods. These are not new and emerging PMA products where the PMA is about to get going or waiting for approval, correct? They just fall in the bucket of your PMA kind of R&D division. Is that right? Payman Khales: Both of these -- or all 3 of the products in EP and neuromod are products that have been in the market in 2025 and are still on the market and expected to be in the market in 2026. We are also the supplier for these products. In terms of the supply, nothing has changed. It just has to do with the rate of adoption of the products that our customers are seeing. Richard Newitter: Okay. And then just a follow-up on that. Are any of them finished good situations. I know you have -- you guys insert yourselves in many parts of the manufacturing processes. You can be very small slivers for different product areas. Is this -- are any of these related to finished goods where you have a bigger percentage of the overall manufacturing? Payman Khales: It's -- we have had a good portion. What I can be specific on is that we have a good portion of a bill of material beyond that, Rich, I can't be more specific. Operator: Your next question comes from the line of Suraj Kalia with Oppenheimer. Suraj Kalia: Good morning, gentlemen. Joe, congrats on your retirement. Wish you the very best. Payman, can you hear me all right? Payman Khales: Yes, I can. Suraj Kalia: So Payman, Diron, a lot of things have been thrown in this call. So forgive me if this question is long, just hopefully, I make sense here. So Payman, by definition, there are demand schedules established through which you'll come up with your backlog, right? You say your backlog is largely unchanged, but 2 EP customers are seeing softness. So I'm struggling to reconcile the contractual arrangements versus the suddenness of the demand curve moving leftward. I'm also struggling, Payman, just doing an exercise here, right? I'm trying to connect all the dots here on the EP side. So you're bullish about a new product in second half '26. Logic tells us that's [ bold ]. BSX already has -- is in the market, right? But there are 2 customers that you'll have seen the demand schedule move left. I mean, logic tells me you are implicitly telegraphing it's change in Medtronic. I know it's a long question, Payman. Help us understand because it's like suddenly a lot has been thrown in this whole story. Payman Khales: Suraj, I fully appreciate the question and what you're talking about. Yes, there are a number of moving parts, and that's what I keep referring as being highly unusual for us. So let me talk specifically about your first question, which had to do with our backlog and our visibility to orders. Yes, customers place orders. Again, if we have about $730-ish million in backlog, that is about 1.5 quarter worth of orders, right? I mean, if you want to just kind of look at it on average. So that's where we have good visibility to. Now let me highlight the following: we always work with our customers to meet their demand needs. If our customers tell us that they have purchase orders that they need us to then exceed and try to increase our capacity, we do everything that we can to do that, and we do the opposite as well. We try to work with them. If they come and tell us, look, I have more demand on you that I need, and I would like to scale that down. We work with them to do this in an orderly manner. And not necessarily look at, if you will, contracts and whatnot. We try to work with them to try to meet their demands and needs. Now let me highlight and be specific that the impact of electrophysiology products is 2026. We don't expect an impact on that in 2025, and our C&V business is still expected to grow per our previous guidance, which was in the mid-teens. So that has not changed, that is purely a 2026 impact. And let me also highlight that we are mostly sole sourced in our business. And ultimately, we see the products that end up in the marketplace even though if there are fluctuations in the shorter term and a little bit of variability, where we are sole sourcing the products, we end up seeing that demand over time. Maybe I think you had another question, Suraj, that was specific to products and customers. And of course, you understand that I can't be more specific on those. Suraj Kalia: I totally respect it, Payman and I hope you all appreciate. That's why all of us are trying to get bits and pieces here. So Payman, on the second part of my question, right, on the Q2 call, you had $5 million to $10 million, at least that was, if I remember correctly, pull-through in revenues. Payman, can you be a little more specific and tell us if it was specifically in EP? And part of the reason I ask this is if you were already -- there was already a sense of softness brewing on the EP side. Ultimately, Payman, it is hard to reconcile other company commentary in the EP space with what you all are seeing, right, the RFA softness has already been telegraphed. I cannot imagine that is the reason for the softness. So logic tells us there's something brewing in PFA. I'm just trying to connect all the dots here. Sorry for the lengthy question. Payman Khales: No, fully understand Suraj, thanks for all the questions. So let me try to address them one by one. The shift between 3Q and 2Q was multiple products. There were about 3 separate events that I had mentioned that were not specific to EP. So that was multiple products. With regards to what you're talking about the strength in the EP space, you're absolutely correct. The EP market is doing really well. And we have and in 2025, continue to do well and will do so in 2016 as well if you exclude the impact of the 2 products in question that are declining. So our portfolio in the electrophysiology continues to do really well, and we expect it to grow at the rate of market in 2026, excluding the negative impact of these 2 EP products. And once we anniversary in the second half of the year, the impact of the ramp that we had in the first half of 2025, we fully expect to get back to growth for our total business, but of course, in EP as well to the rate of market growth and then be above market growth in 2027. We see this as a 3-quarter headwind, in the fourth quarter and the first half of 2026, and we fully expect to get back to growth in the second half of '26 and above market growth in 2027. Operator: Your next question comes from the line of Andrew Cooper with Raymond James. Andrew Cooper: One more follow-up here. But -- maybe just diving into this one other way. Can you share a little bit of context on the EP side of how much of this is lapping inventory build versus truly lowering how you and your customers think about the end market demand because I think that's the question we're all trying to get to. If these customers are slower, are you telling us the end market is a little bit slower and it's not getting made up for elsewhere, it's getting made up for in other customers that you don't work with or other players that you don't work with or kind of what is the situation there? Because I think that's kind of one of the key pieces here. That all these questions are going to in terms of what's going on in the EP market versus specific customers given you are broadly exposed like you talked about. Payman Khales: Yes, I fully understand the question. And it's as an element of both. I mean our customers had a ramp. They got products from us. They're adjusting. They're getting real-time feedback as to the rate of adoption in the marketplace, what they're seeing those products doing and they're adjusting their demand on us. So it's probably an element of both. Operator: And that's all the time we have for questions. I will now turn the call back over to Payman Khales for closing remarks. Payman Khales: Okay. Thanks, everyone, and I'd like to summarize our conversation today. We're facing a 3-quarter sales headwind, and we expect to return to growth in the second half of 2026. We have a strong development pipeline and expect to get to above market growth in 2027 and as I take on the helm, I'm excited to lead our team to deliver for patients, customers and shareholders. And thank you again for your time and interest in Integer. Operator: Thank you again for joining us today. You can access the replay of this call as well as the presentation on Integer's investor website at integer.net. This concludes today's conference call. You may now disconnect.
Operator: Hello, and thank you for standing by. Welcome to Valley National Bancorp Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Andrew Jianette. Please go ahead, sir. Andrew Jianette: Good morning, and welcome to Valley's Third Quarter 2025 Earnings Conference Call. I am joined today by CEO, Ira Robbins; and CFO, Travis Lan. Our quarterly earnings release and supporting documents are available at valley.com. Reconciliations of any non-GAAP measures mentioned on the call can be found in today's earnings release. Please also note Slide 2 of our earnings presentation and remember that comments made today may include forward-looking statements about Valley National Bancorp and the banking industry. For more information on these forward-looking statements and associated risk factors, please refer to our SEC filings, including Forms 8-K, 10-Q and 10-K. With that, I'll turn the call over to Ira Robbins. Ira Robbins: Thank you, Andrew. Valley delivered strong results in the third quarter, reporting net income of approximately $163 million or $0.28 per diluted share. This is up from $133 million or $0.22 last quarter and represents our highest level of quarterly profitability since the end of 2022. This performance reflects a significant operating momentum that has been building in our organization. This quarter's results were highlighted by robust core customer deposit growth, continued momentum in net interest income and fee income, disciplined expense control and a meaningful reduction in credit costs. Our balance sheet remains extremely strong, and we have achieved many of our stated profitability goals ahead of schedule, including annualized return on average assets being above 1%. Valley is well positioned in the current environment. In 2024, we enhanced our balance sheet and are now leveraging this strength to improve our profitability and franchise value. Today, I'm thrilled to formally introduce our new commercial and consumer banking leaders who we believe will help accelerate the next phase of our evolution and success. Gino Martocci joined Valley in March as President of Commercial Banking, bringing extensive experience from M&T Bank, where he led national commercial and CRE banking efforts. Gino played a key role in M&T's growth and has already contributed his market knowledge, network and strategic insight to support our commercial franchises further development. In September, Patrick Smith joined as President of the Consumer Banking, following leadership roles at Santander, Capital One and other large financial institutions. Patrick will oversee retail, consumer and small business sectors, drawing on a notable record of growth and execution. Gino and Patrick are already making an incredible impact by enhancing our customer acquisition efforts, talent base and strategic operating model. Their expertise helps position Valley to further leverage our strong foundation and accelerate our strategic initiatives. Before passing the call to Travis, let me highlight a few of the key areas of sustained momentum. First, ongoing growth in core deposits and funding transformation. Over the past 12 months, we've added nearly 110,000 new deposit accounts, which have contributed to nearly 10% core deposit growth. Targeted investments in products, technology and talent, especially in commercial and specialty lines have driven this progress. Consequently, indirect deposits as a percent of total deposits dropped from 18% to 11%, the lowest level since the third quarter of 2022. This has been achieved alongside a 56 basis point reduction in our average cost of deposits since the third quarter of 2024. We continue to actively manage deposit pricing in the back book and expect to benefit from lower deposit costs in the fourth quarter and into 2026. Secondly, noninterest income. Excluding volatile net gains on loans sold, noninterest income has grown at an annual rate of 15% since 2017, 3x faster than publicly traded peers in our size range. We spoke last quarter about our focused efforts with respect to treasury management and tax credit advisory opportunities. These initiatives collectively contribute roughly $3 million of incremental revenue during the third quarter. The success of our treasury management demonstrates our effective combination of technology and talent. The implementation of an upgraded platform following our core conversion 2 years ago, coupled with expanding our expert sales team has resulted in nearly $16 million of incremental deposit service charge revenue on an annualized basis since the third quarter of 2024. Thirdly, the resilience of our credit performance. Consistent with our guidance, we saw a significant reduction in net charge-offs and provisions during the third quarter. We expect to sustain these levels again in the fourth quarter. At the start of 2024, Valley was notably CRE-heavy in a challenging environment. However, differentiated underwriting and credit management have limited aggregate CRE losses to just 57 basis points of average CRE loans over the last 7 quarters. Although 2024 CRE charge-off rates were beyond our internal standards, loss rates have remained far below larger banks, more pessimistic stress test forecast. From a C&I perspective, we continue to focus our growth efforts on traditional small business and middle market opportunities in our well-known geographies and established specialty verticals. As I mentioned last quarter, we have specifically targeted the health care C&I and capital call line areas, given their compelling risk-adjusted return profiles. We've been active in both verticals for some time, and we have never taken a loss on a Valley originated health care C&I or capital call loan. I am extremely proud of our organization's achievements over the past few years, and I'm highly optimistic about our future prospects. The bank continues to demonstrate exceptional momentum with respect to customer growth, talent acquisition and profitability. We have set ambitious goals for ourselves and are confident that continued execution of our strategic initiatives will deliver substantial value to our associates, shareholders and clients. With that, I will turn the call over to Travis to discuss this quarter's financial highlights. After Travis concludes his remarks, Gino, Patrick, Travis, Mark Saeger and I will be available for your questions. Travis Lan: Thank you, Ira. Slide 9 illustrates our continued core customer deposit growth momentum. We gathered about $1 billion of core deposits during the quarter, which enabled us to pay off approximately $700 million of maturing brokered deposits. Brokered deposits now comprise 11% of our total deposit base, representing the lowest level since the third quarter of 2022. Roughly 80% of the quarter's core deposit growth came from commercial clients, reflecting our proactive business development efforts and the continued success of our treasury management sales efforts. The relative stability of average deposit costs during the quarter masked a 7 basis point reduction in spot deposit costs from June 30 to September 30, which positions us well heading into the fourth quarter. Turning to Slide 12. Gross loans decreased modestly on a spot basis due to targeted runoff in transactional CRE and the C&I commodity subsegment, which was acquired from Bank Leumi USA in 2022. Commodities payoffs accelerated during the third quarter, leaving a modest $100 million of C&I loans left in this business line at September 30. CRE loans made to more holistic banking clients increased during the quarter, supported by the conversion of construction projects to permanent financing. Other C&I activity slowed from the second quarter's exceptional pace of growth. Average loans increased 0.5% during the quarter. The pipeline is rebuilt, and we anticipate solid origination activity as the fourth quarter progresses. New origination yields were stable during the quarter at around 6.8%. Average loan yields improved 7 basis points on a linked quarter basis due to the fixed rate asset repricing dynamic that we have previously discussed. As a result, our cumulative loan beta stands at 21% for the current cycle. Slide 15 illustrates the second consecutive quarter of 3% net interest income growth. NIM improved for the sixth consecutive quarter aided by asset repricing and sequential growth in average noninterest deposits. While excess cash held during the quarter weighed on our margin by an estimated 3 basis points, we are on track to achieve our above 3.1% NIM target for the fourth quarter of 2025. We expect that net interest income will grow another 3% sequentially in the fourth quarter. The current interest rate backdrop, combined with anticipated fixed rate asset repricing remains supportive of further NIM expansion in 2026. Noninterest income continued its strong momentum this quarter. Deposit service charges saw continued growth as we expanded the penetration of our commercial client base with our robust treasury management platform. Wealth management was also strong, lifted partially by our tax credit advisory business. We anticipate that fourth quarter fee income will be generally stable within the range of the last 2 quarters. Turning to Slide 18. Adjusted noninterest expenses declined modestly, driven by lower compensation, occupancy and FDIC assessments. These improvements were partially offset by higher third-party spend. Professional fees are expected to remain at this modestly elevated level, but total expenses should remain flat or only marginally higher in the fourth quarter as compared to the third quarter. Our efficiency ratio continues to improve, and we anticipate further progress as we generate additional positive operating leverage in the fourth quarter of 2025 and into 2026. Slide 19 illustrates our asset quality and reserve trends. Nonaccrual loans increased during the quarter, primarily due to the migration of a $35 million construction loan. It was in the 30- to 59-day past due bucket at June 30. We anticipate resolution of this credit with no incremental impact, but from a timing perspective, it necessitated migration to nonaccrual. On a combined basis, total past dues and nonaccrual loans as a percentage of total loans declined 9 basis points from June 30 to September 30. Net charge-offs and loan loss provisions saw meaningful declines during the quarter, consistent with our prior guidance. We foresee general stability in 4Q, implying improved 2025 guidance relative to the range of our prior expectations. Slide 20 emphasizes our cumulative commercial real estate charge-off experience since early 2024, affirming the effectiveness of Valley's distinctive underwriting and credit management practices. Despite the relative challenges of 2024, cumulative losses remained far below the adverse forecast of DFAST eligible banks. Turning to Slide 21. Tangible book value increased as a result of retained earnings and a favorable OCI impact associated with our available-for-sale portfolio. Regulatory capital ratios continue to increase, and we utilized around $12 million of capital to repurchase 1.3 million common shares during the quarter. We remain extremely well capitalized relative to our risk profile and have ample flexibility to support our strategic objectives and sustain the strong momentum that we are experiencing. With that, I will turn the call back to the operator to begin Q&A. Thank you. Operator: [Operator Instructions] Our first question comes from the line of David Smith with Truist Securities. David Smith: Could you speak to the competitive backdrop, just given the decline in C&I loans? I understand some of that was commodities driven and the increase in deposit costs for the quarter on average. I think I understood there was a decline on the spot deposit rate, but just help us unpack what's happening on a competitive basis driving some of those trends and what you -- how you're expecting them to revert in the fourth quarter and the coming year? Travis Lan: Yes. Thanks, David. This is Travis. Maybe I'll start on the deposit cost side, and Ira and Gino can chat a little bit about the competitive environment from a loan perspective. So to your point, spot balance or spot deposit cost declined from $630 million to $930 million by 6 basis points. I'll tell you, quarter-to-date, we're down another 7 basis points from a spot perspective. So when you factor all that together, I think the beta relative to the 25 basis point cut in late September is consistent with what we've modeled. I would just say quarter-to-date, since 9/30, we paid off another $500 million plus of additional brokered at a rate of $450 million. The environment for new deposit relationships remains competitive. We originated $1.4 billion of new deposits this quarter at 2.9%. That compares to $1.8 billion in the second quarter at 2.8%. So the competitive environment for new relationships is still there. I would just say we have continued opportunity on repricing the back book, which we were effective with during the quarter. So I think as we enter the fourth quarter, I mean, deposit costs will come down. And I think there's more opportunity as we head into 2026. Gino Martocci: Thanks, Travis. This is Gino Martocci. As it relates to the competitive landscape, we continue to see very strong demand both in C&I and CRE. There is ample liquidity in the marketplace. Banks are -- and nonbanks are fighting pretty hard for loans. And we have seen some decline in spreads. But our pipeline remains very strong, and we continue to add loans and then add clients. David Smith: Okay. And then just on capital, stock is barely 1x tangible right now, and you've got 11% CET1 and TCE almost 9%. Just with loan growth expectations, about 1% for the next quarter, how are you thinking about the buyback opportunity against conserving capital for longer-term organic growth ambitions? Travis Lan: Yes. I think, look, over the last couple of quarters, we've talked about a near-term CET1 target of around 11%. And the reality is, given our risk profile, we'd be very comfortable in a range below that, call it, 10.50% to 11%. Historically, we've thought about the buyback in the context of repurchasing shares that we issue for incentive purposes. But to your point, I mean, based on the progress that we've made, the outlook that we have and the incredible confidence that we have in investing in ourselves, I do think that the buyback will be an increasing source of capital deployment going forward. Operator: Our next question comes from the line of Feddie Strickland with Hovde Group. Feddie Strickland: Just wanted to ask on the geography of CRE and C&I. I think you've got a majority of C&I outside the Northeast at this point. As you look at your pipeline today, do you expect to continue to have more business coming from outside the Northeast than inside the legacy Northeast footprint? Gino Martocci: So our originations for the quarter and actually for the last year really reflected 1/3, 1/3, 1/3; 1/3 in the Southeast, 1/3 in the Northeast in 1/3 in our specialty businesses. So as it relates to CRE, Florida franchise remains very strong, and we expect to see slightly more originations down there, but it's pretty evenly split amongst the geographies. Ira Robbins: Maybe I'll just add to that, Feddie. I think as you know, we've spent a lot of time investing into the Florida footprint. We went into Florida, I think, back in 2014 with the acquisition of First United Bank. We then acquired a couple of other banks in that footprint. I think in the aggregate, it's about $4 billion to $5 billion of commercial assets that we acquired. Today, we sit with commercial assets that are well north of $15 billion, right? From a loan perspective, it's one of our largest geographies. That's $10 billion of organic growth in just a 10-year window, I think represents really the foundation and footprint that we have in that Florida area, an unbelievable set of lenders and unbelievable set of bankers there and obviously very strong markets. And we continue to really make sure that we're focusing on letting that be a more sizable piece of what our franchise is. So as we think about the growth projections that we've outlined, obviously, as Gino said, we're seeing strong contributions coming from the specialty and coming from the Northeast as well. But we feel really strong and confident in the growth numbers are largely a function of what we're seeing in the Florida footprint as well. Feddie Strickland: Ira, I appreciate that. And just one more for me. I just want to ask on the fee side. How should we think about the capital markets business and the insurance businesses in particular over the next quarter or so? It seems like capital markets has held up pretty well. Insurance maybe have some seasonality. Just within the guide, obviously, how should we think about those businesses? Travis Lan: Yes, I would anticipate general stability for the fourth quarter, general stability in both areas. I think heading into 2026, there is definitely momentum on the capital market side. So just as a reminder, for us, capital markets is 3 businesses. It's our syndications business, our FX desk and our swaps desk. The swap activity tends to be more tied to commercial real estate originations, which have picked up over the last couple of quarters and helped support revenue there. FX has been a long-term growth trend for us as we continue to expand our commercial client base and the folks that utilize that offering. So I think there's good tailwinds definitely on the capital market side. Operator: Our next question comes from the line of Anthony Elian with JPMorgan. Anthony Elian: Could you provide more color on the increase in nonaccrual loans? I know you called out the construction loan that migrated to nonaccrual but no further impacts, but I would love to hear more on the commercial real estate loans that migrated. Mark Saeger: Certainly, yes. Again, this is Mark Saeger, Anthony. The increase primarily driven by the one $35 million loan, while it's in construction bucket, I'd note that it's really a land loan. So really strong value there. The borrowers in the midst of a refinance to take us out. We don't anticipate any issues with that at all on the go forward. The other primary migration into nonaccrual is based off of updated appraisals. What I would note is that 50% of our nonaccrual portfolio is current on payment. So there's just some appraisal valuation and consistent with our [Audio Gap] to go there, but that is a much higher percentage of paying nonaccruals than we've seen in the portfolio in quite some time. Our overall view of the real estate market is we're starting to see definitely positive activity even within the office market in the real estate portfolio. I'd point to the improvement in our criticized assets for the quarter after a stable second quarter, and that improvement really came from approximately 2/3 of payoffs in refinance at par and about 1/3 upgrade. So we're definitely seeing positive movement in the real estate market. Anthony Elian: And then my follow-up, on your commercial real estate concentration fairly well below the 350% level now at 337%. Looking ahead, how low do you think you can take that level? And at some point, would you expect to actually grow CRE balances? Travis Lan: Thanks. This is Travis. So look, I think we are targeting growth in CRE. I think we're looking at low single-digit growth for 2026 and beyond. But as a result of capital growth, that ratio would continue to decline. I mean for us, the next kind of guidepost is 300%. I think you're probably there at the end of '26, early '27 and then continuing to grind lower over time. And again, that's just our own focus on ensuring that we're diversifying the balance sheet. And candidly, when you look at our peer group and the set of peers that are above us from a size perspective, I mean, we do remain somewhat of an outlier. So it's something that we've been focused on. We've made a ton of progress on. But at this point, we expect that CRE balances will stabilize and begin to grow and then allow that capital to build to drive the next leg down in the ratio. Operator: Our next question comes from the line of Manan Gosalia with Morgan Stanley. Manan Gosalia: A question for Gino. Where do you see the biggest white space for Valley? What areas are you most focused on? And which subsegments or geographies do you think you need to invest most in? I recognize that you're focused on health care, C&I and capital call, but maybe if you can talk about opportunities outside of that. And maybe same question for Patrick, although that might be an unfair question. I know you've only been there for a month now. Gino Martocci: Yes. So thanks for the question. As Ira mentioned, the Florida franchise is an incredible differentiator from my perspective. It's had sustained momentum and growth for many years now, and that growth continues. It's now a $15 billion franchise. It's largely organic. And there's considerable opportunities ahead for that. In addition to that, I think Valley has an opportunity to go upmarket in C&I. And in fact, we're adding some upmarket C&I lenders. It's more in that $150 million to $500 million revenue space than Valley traditionally played in. They're actually onboarding 5 senior bankers who're building out their teams currently. In addition, I really see a tremendous opportunity for Valley in business banking. But currently, we didn't sell it into that book as much in the deposits as we should -- as we could have. And we have a real opportunity to do that. And I think we can gain significant deposits from that book. And as part of that effort, we're going to build out a professional -- we're going to expand our professional services book to focus on law firms, accounting firms, medical and dental practices. And the deposit profile of those companies is extremely good. So we think that going upmarket C&I is a real differentiator for us as well because there's a real void left by the larger institutions and regional banks that are consolidating away. Valley's attention to the relationship, their responsiveness is frankly superior to the super regional banks and is rewarded by our customers. So as I mentioned, we're bringing on seasoned bankers. They're going to build out teams. We're doing it in every geography. We're adding business bankers as well. And we went through the efficiency exercise in order to create that capacity. So there's a number of opportunities, I think, for Valley to grow in 2026 and beyond. Patrick Smith: This is Patrick. First of all, let me say that I am incredibly enthusiastic about what I've seen so far in my first few weeks at Valley. And to your question, I'd offer up a few points. One is small business. When I -- I've been conducting an evaluation of our small business segment, and I'm excited about the opportunity we have to really grow in this segment. We've been underpenetrated in small business. And we have a real opportunity to grow organically in that segment across our footprint. So we've been adding experienced small business bankers and enhancing our product set to go after that opportunity. So I think it's a wonderful opportunity for us. We've already added 8 bakers in principally in Florida and New Jersey to take advantage of the opportunity. The other one I'd say quickly is that we have an opportunity to organically grow deposits from a retail perspective in our branches. Our branches have been positioned historically in support of our commercial business. as we pivot more toward a focus on -- or add a focus on retail, there's a real opportunity for us to grow our small business -- sorry, our retail franchise through our branches. And so we have a really good branch network across our footprint. That's an incredible opportunity. And then finally, I'd echo what Gino said, which is we are acquiring really strong talent across the retail bank, and I expect us to continue to do that. And that's going to be a core driver as it is in commercial of our retail franchise growth. Manan Gosalia: That's great. I really appreciate the thorough response here. Maybe a follow-up for Ira and Travis. So you're beating your expense guide. You're clearly investing and there's clearly some more white space to invest in. How should we think about the expenses as we go into 2026? How much of these investments are already in the run rate versus how much do you think you'll need to accelerate that spend? And I guess I'm asking from the point of view of as NIM expands further from here, should we expect that you can drop most of those benefits to the bottom line? Or are there areas where you'd want to invest as we go into next year? Travis Lan: Yes, thanks. From an expense perspective, I mean, we undertook over the last couple of months an efficiency exercise where we tried to unlock savings in some of the back office and corporate service areas that could be reinvested in the front office that Gino and Patrick have talked about. So this is all baked into the near-term expense guide that we provided for the fourth quarter. And I'd just tell you as we begin to kind of pencil out 2026, I mean, I don't think there's any reason to move ourselves off of a low single-digit expense growth rate for that year as well. So our goal is to invest in revenue-generating talent that's going to enhance franchise value and ensure that we're dropping the majority of that revenue growth to the bottom line. Ira Robbins: Maybe I'll just talk about sort of in my mind where we sit from sort of positive operating leverage. And I'll maybe take a step backwards and go where we were before the regional banking challenges that we had in 2023. But if you go back to June of '23 in that period of time, we had 3,957 associates across our entire footprint. Today, we're 3,624, so a contraction of 333 associates, about 8.5% over that period of time. Just once again, taking a step back, in 2022 at the end, we had a return on tangible common of 17.20%, right? So obviously, a lot of focus on continuing to grow the organization and delivering returns for our shareholders that we think are appropriate, and we definitely believe that we'll get back to. Obviously, we had to sort of recalibrate how we thought about investing into the organization in 2023 based on some of the external challenges that happened with SVB and Signature, et cetera. And then obviously, a refocus on commercial real estate based on what happened with NYCB and a few others at that point in time. So we feel really strongly that we've made the cuts necessary to really open up the ability for us to reinvest back into revenue in this organization. And as Gino alluded to, as Patrick alluded to, you're going to see continued hiring within the organization and really a growth trajectory that's going to get us back to return on tangible common numbers that we think we've delivered before and more in line with where the higher-performing peers are. So we don't believe we're going to need to really add on a lot of incremental expenses that we've created space for that. And we are really, really confident in the positive operating leverage that we're going to be able to generate here. Operator: Our next question comes from the line of Chris McGratty with KBW. Christopher McGratty: Travis, going back to your comment about the CRE book troughing and growing low single digit, how do you think about the impact at low rates -- lower rates will influence that, I guess, that statement? Travis Lan: Yes. Look, I think we assume, obviously, in our loan growth guide, some amount of payoffs consistent with our loan growth -- or excuse me, with our rate forecast. So it's in there and look to the degree that rates are significantly lower than we anticipate payoffs would accelerate. There's no doubt and then we'd end up kind of on the lower end of our guidance range for loan growth. But what I would say is when you look at -- we took 2024 off effectively from a CRE origination perspective, which is a period of time in which I think the highest yield in CRE loans were put on. So I don't really think that we have maybe the headwind that others do in terms of potential impact of lower rates on payoff activity. I mean we still have a fixed rate loan portfolio that's yielding in the mid-4s to 5%. And so you got to pull rates down pretty significantly before you'd see a significant acceleration of payoff activity. So I'm not saying it's not a factor, but I just think we're a little bit more insulated than maybe other lenders would have been. Gino Martocci: I would add that lower rates will also drive some transaction volume. I mean our pipeline is $3.3 billion today in total C&I and CRE. That's up from $2.1 billion in 2024. And it's much more -- so it's more like 50-50 CRE, C&I where it was more like 60-40 up until this quarter. So we're seeing good momentum in C&I and CRE and the payoffs are here, but -- and the liquidity is in the marketplace, but we're effectively building our pipeline. Christopher McGratty: That's helpful. And I guess my follow-up, Ira, is more of a strategic question. It seems very clear that buying back your stock at book value is the right move. Is there a scenario where you deviate and consider inorganic at these levels? Ira Robbins: Look, I think -- let me just start with, there really is no change in how we think about M&A across the organization. For us, I would say, being shareholder-friendly and focusing on shareholder is the primary focus of how we think about anything when it comes to capital allocation across the organization. Obviously, as you know, we've done a handful of M&A acquisitions over a period of time. And there's always been a focus on what that tangible book value dilution would look like and what the return to the shareholder is going to be. As we think about sort of capital deployment as we continue to move forward, I think as Travis has alluded to, we're sitting at a pretty significant discount to where our peers are. We feel really confident in the trajectory of where the earnings profile is. And when you're sitting at 1% on tangible book, it seems like a pretty good use of capital to me. Travis Lan: I would just add, Chris, just from an M&A perspective, I mean we -- as you can hear in Gino's voice and Patrick's voice, like we have an incredible organic opportunity set ahead of us. And so our primary focus is supporting the growth that we'll generate organically. I would say more M&A in the system is good for us, right? It creates additional disruption that we can capitalize on. And through the investments that we're making in the talent, we're working to position ourselves to capitalize on that. Operator: Our next question comes from the line of Dave Rochester with Cantor. David Rochester: You mentioned NIM expansion in 2026. That makes a lot of sense. And without trying to nail you down to a range right now, how are you thinking about what a more normalized NIM level could look like just given the forward curve and then everything you guys are doing on the remix of CRE and the other work on the funding side? Travis Lan: Yes. Look, I think, I mean, for legacy Valley, which would have been CRE-heavy and overreliance on wholesale funding, that normalized NIM probably would have been 2.90% to 3.10%. I think if you look back over time, that's where you would see them fall most of the time. Look, I think structurally, the balance sheet has already improved materially with the increase in C&I and the enhancement of the core funding base. And I would say now a more normalized margin for Valley is probably be closer to 3.20% to 3.40%. I think, as I said in my prepared remarks, I have high confidence we'll be at 3.10% or above in the fourth quarter. And I think you can pencil out another 20 basis points of expansion from the fourth quarter of '25 to the fourth quarter of '26, which gets you kind of within that more normalized range. And I think there's additional upside as we further enhance the funding base because none of what I just described includes any growth in the composition of noninterest deposits. And I think we have a real opportunity there. So look, I think we got a lot of tailwinds heading into 2026, and we look forward to executing on them. David Rochester: Great. And on the effort to go upmarket, where are you in the innings of that hiring in that effort? Are you hiring underwriters as well along with the senior bankers? And then when are you expecting to be really hitting the ground running on that effort? When will you start to see the boost in growth from that? Gino Martocci: We've had a lot of traction in hiring both senior people and underwriters thus far. We wanted to get them in here so that we can hit the ground running in January really and really all through 2026. I think you're going to see some real momentum in more upmarket C&I and in business banking, frankly, for next year. And we are -- which inning, I think we're probably only in the second or third inning at this point, but momentum has been strong. And people have a willingness to come to Valley. It's got a good perception in the marketplace and we're just excited about the opportunity. David Rochester: It seems like that boost to growth could be pretty substantial, right? I mean how are you guys quantifying that? Ira Robbins: Maybe just before we get into that, I think, look, there's obviously headwinds in different quarters. You look at this quarter, the unused line or usage changed. There was the commodity headwind that we had. So we've had strong contribution as you think about sort of what the C&I growth has looked like for an extended period of time. We do believe, obviously, as you think about sort of the new hires that are coming into the organization on the commercial side that there'll be a lot of strength there. And maybe I'll just reiterate real quickly what Patrick said also. I mean SMB has been a solid performing vertical for us. But we're really leveraging that up as you think about the people that are coming in. And these are known people to Patrick, known to the market that we've been in. So it's really across the board as to how we think about what loan growth is going to look like. Obviously, as we talked earlier, there's potential headwinds when it comes to interest rates and CRE runoff and everything like that. But as Gino said, we're sitting with a $3.3 billion pipeline today. That's like $1.2 billion more than where we were about a year ago. I mean that's unbelievable. So we think the tailwinds there for loan growth in addition to the fact that Gino is still hiring and Patrick is still hiring. Travis Lan: Yes. We're penciling out mid-single-digit loan growth expectation for 2026. So call it at a range of 4% to 6%. I think the more hirings that you get done, you'd get to the upper end of that for sure. And I think if you zoom out and think about where Valley has been, we've been a high single-digit, low double-digit loan grower in our history. Now a lot of that's been driven by high single-digit CRE growth. And to the point we've made before, we expect CRE growth will pick up, but we're not going to return to that level. And so think about low single-digit CRE growth, low double-digit C&I growth, contributions from consumer. I think that's how you begin to get to that 4% to 6%. The other thing I would add on the hires is these are not transactional lenders and we're talking about holistic bankers that are bringing deposits as well. We haven't talked yet on the call about the significant deposit growth that we saw this quarter, but core customer deposits were up $1 billion. It's a significant annualized pace. It's due to a variety of factors. It's very broad-based. But part of it was this is the first year we've incentivized our bankers more on deposit growth than loan growth. And so I think that's paid off significantly. Operator: Our next question comes from the line of David Smith with Truist Securities. David Smith: Just thinking a little bit longer term now, you did 11.6% adjusted ROTCE in the third quarter, guiding to operating leverage with cost of credit improving this coming quarter, and it sounds like pretty decent operating leverage next year as well. The cost of credit can stay controlled like you think. Can you just give us the latest on how you're thinking about profitability improvement over the next year or 2 in the context of your 15% goal? Travis Lan: Yes. So there's no change to our 15% ROTCE target. I think we're pretty confident we can effectively achieve it by late '27, early '28. If you think about where we're starting today in rough numbers, we have a 350 basis point gap to close in that period of time. 75% of that's going to come from net income expansion based on all things we're talking about mid-single-digit loan growth, margin expanding into the high 330s, continuation of high single-digit fee income growth and low single-digit operating expense growth and to your point, normalized credit costs. Under those assumptions, you get pretty close to the 15%. The delta is going to be with that backdrop, you're going to build excess capital dramatically. I think that leads into the buyback conversation we've already had today. So I think those are the factors that we think about. But again, we think that we have high confidence in the target on that time line. And I do think there's also some flexibility in the levers that we'll get there because ultimately, the environment isn't going to play out the way that we model it to, but we have flexibility to ensure that we achieve that. Operator: Our next question comes from the line of Matthew Breese with Stephens. Matthew Breese: Travis, I want to go back to a comment you had made. I just want to clarify. I thought you had said maybe kind of normalized loan growth in the 4% to 6% range. Is that accurate, did I hear that right? Is that a good bogey for 2026? Travis Lan: Yes. Matthew Breese: And then alongside that, maybe just help us out with the deposit growth alongside that and the outlook. And is there a potential we might see a further lowering of the loan-to-deposit ratio in '26? Travis Lan: Yes, I think that's part of our plan, Matt. So we would anticipate that deposit growth will exceed loan growth. The loan-to-deposit ratio today is 96.4%. I mean, over time, we'd love to get that to 90%. There's no time line on that expectation. But I think each year, we'd make progress. It doesn't mean it's a straight line down. I mean you may have quarters where it bumps around a little bit, but we've made a lot of progress and have a lot of momentum. The other thing that we think about from a funding perspective is loans to nonbrokered deposits today is 108% and that should be closer to 100% for sure. So we would need to obviously grow core deposits in excess of loans to continue to make progress there. But again, based on some of the efforts that we've undertaken, I would just add, Matt, I talked about the incentive plans with our bankers, incentivizing deposit growth. The treasury management capabilities that we have has been another key driver there. So that's been significant as well. Matthew Breese: Got it. All right. And then my last one, admittedly feels a bit out of tune given all the positive and optimism on the organic front. But it feels like the M&A deal window is open, and I heard your comments loud and clear, Ira, on focusing on organic. But I did want to get your sense on or thoughts on all strategic alternatives, including maybe a potential sale because the big bank M&A window appears open as well. I haven't seen that in a while, and just would love your thinking there. What would type -- will drive that type of outcome? Ira Robbins: I'll just go back to the one commented shareholder first, right? And I think that's how we need to think about anything that happens in this organization. Operator: Our next question comes from the line of Jared Shaw with Barclays. Jonathan Rau: This is Jon Rau on for Jared. I guess maybe looking at the CRE side of things, it sounds like there's a pretty good capacity for these borrowers to refinance away from Valley and I guess, the banking system. Is there any subset of CRE borrower that's having a little more difficulty in finding that alternative capital source? And then particularly, if there's any insight on how that would look for like rent-regulated multifamily? I know they're small there for you, but just any color would be helpful. Mark Saeger: So Jon, Mark Saeger again. As I mentioned, we're actually seeing really positive trends in the office space with stabilization there and really some rational transactions. So I think you hit the nail on the head. The only other segment that continues to be a little stagnant is that rent stabilized in New York. But as you mentioned, it's a very small part of our overall portfolio. We have just around $600 million that has more than 50% rent stabilized, very small portion of our overall portfolio, not a growth portfolio for us. We weren't competitive in that market because we offered a lower loan amount traditionally and required stronger in-place debt service coverage or our lower level and why that portfolio continues to perform for us. But it's still an area that we're watching on a go forward. Jonathan Rau: Okay. Perfect. That's helpful. And then just looking at expenses, it sounds like professional fees are still expected to remain elevated in the fourth quarter. Does that continue into 2026? And I guess what's driven the increase in the last 2 quarters? Travis Lan: Yes. I would expect it remains at the current level for the fourth quarter and into 2026, at least for the first half of the year. As part of the efficiency exercise, we've utilized consultants to help us enhance our operating model and organizational design. So those are temporary dollars that we have to spend. But again, we've offset it with the savings that we've generated in the compensation line and elsewhere. Jonathan Rau: Okay. Great. And then just last one for me, that land loan that the borrowers refying away from you. There's -- just wanted to confirm there's no loss expected on that -- through that process. Mark Saeger: No, we have more than adequate value there. No loss anticipated. Operator: Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: Mark, maybe for you. What do you think the time line is for nonaccrual balances to start declining? I know you feel comfortable, but just curious on your thoughts on that topic. Mark Saeger: So I would point, right, it's hard to talk about a time line on resolution of some of these items other than the one that I just mentioned, which we do think has a short-term resolution. But I point kind of to the strength that we're seeing in the CRE market, the reduction in criticized. I think that will also translate in some resolution on especially that 50% of our nonaccruals that are continuing to pay current. So I don't anticipate a material inflow on a go-forward basis, but it may take some time to see some of those CRE-loans finance out. Jon Arfstrom: Yes. Okay. That's helpful. I appreciate that. Just kind of bigger picture, it looks like it's a good quarter. I'm just curious if you guys feel like this is a new floor for EPS for the company. And I'm especially curious, I guess, if you feel like this is a more normalized provision as we look forward? Travis Lan: Yes. I think that's absolutely true. So I mean, just the progress that we've made, I mean, part of the overhang coming out of the liquidity crisis is on the funding side. I think we've done a lot of work over the last years to rectify that, which has enhanced our net interest income, obviously. We still have a significant fixed rate asset repricing tailwind behind us. As we head into 2026, we have $1.7 billion of loans that are coming off from a fixed perspective at a rate of around 4.75%. That creates significant opportunity and supports the margin expansion that we've talked about. From a credit perspective, I mean, I think we all anticipate here that you need to see normalized charge-off rates in '26. So call that around 15 basis points, give or take, and a generally stable reserve. So when you factor that all together, I think you are seeing -- this provision level is effectively sustainable from my perspective within a given range. Operator: Our next question comes from the line of Janet Lee with TD Cowen. Sun Young Lee: On deposits, when I look at specialized deposit growth over the past quarter, that's about $700 million. It looks like a lot of that is going into replacing indirect deposits. You mentioned deposit growth should be picking up at a -- should be growing at a faster pace than loan and with the incentivized structure change, I guess that's going to help. If I look at the pace of deposit growth from the specialized deposits, I guess, more specifically on other commercial and small business, could -- is this the area where you expect a lot of your deposit growth to come from? Could it continue to grow at the $2 billion pace per year that you reported over the past year? Travis Lan: Thanks, Janet. This is Travis. I think, look, that it is an area of focus for sure. This quarter, we had $100 million of specialty deposit growth within the bucket you're describing came from health care clients. I mean there's still momentum there. We had $200 million between HOA, cannabis and our national deposits group. So those are kind of specialty niches that we bank. That was $300 million of growth this quarter. We look broad-based across the franchise, whether it's in the branch network, which is a combination of consumer and commercial deposits as well as the other commercial bucket that you're talking about. I mean there was significant growth in all of our markets. New Jersey was up $200 million commercial. New York up $150 million commercial. These are deposits. Florida up $150 million commercial. So there's significant tailwind and momentum across the franchise. So I think specialty deposits should grow at an above average rate, but it's not the only source of growth that we have. Sun Young Lee: Got it. And you made your point clear about that 4% to 6% loan growth over the intermediate term in 2026. So in terms of over the near term that had -- that 3Q headwinds from commodities, C&I payoffs, can I consider that as temporary? And there's -- or is there any parts of Bank Leumi or within Valley that you might want to run off? Travis Lan: No. I think that's temporary. It was a dynamic unique to this quarter. I think if you zoom out over the last 6 months, that gives you a better sense for some of the pace of growth. I think total loans are up 2.5% annualized in that time line, but that includes some additional headwinds from CRE runoff. So look, I think from a given quarter, loan growth may move around a little bit based on the timing of closings. But I think you'd see more significant momentum if you zoom out a little bit. Operator: Our next question comes from the line of Steve Moss with Raymond James. Stephen Moss: Maybe just circling back to the loan pipeline here. With the $3.3 billion pipeline, just curious what's the coupon on those new originations? Travis Lan: This is Travis. So this quarter, new origination yields were 6.8%, which was consistent with last quarter. I'd say the pipeline yield is similar, although slightly lower because benchmark rates are lower. We saw some spread tightening earlier this year. I'd way that's fairly consistent, maybe a little bit more now, but that's kind of where we sit. Stephen Moss: Okay. And then on the expansion moving upstream into larger loans, just kind of curious how do we think about pricing for those types of loans will be relatively tighter? And are you thinking about them being syndicated? Just kind of curious. Any color you can give there. Gino Martocci: Valley has always been done loans of this size. They just haven't had the focus on it. And we're just going to -- we're going to more intently focus on it and bring in talent that's done this before. The pricing tends to be a little thinner and we're building out our syndication. We continue to build out our syndications platform. We will want to originate these loans and sell some of them. The pricing, as you know, it tends to be 1.75 to 2.25, more or less. And we wouldn't play much below that amount. So -- and then the relationships tend to be fulsome, deposits, fees, opportunities for capital markets, et cetera. So we see it as a driver of profitability going forward. Stephen Moss: Okay. Great. I appreciate that color there. And then just on the criticized and classified, I think I heard that they went down. Just kind of curious if you could quantify the level of decline and also wondering if substandards declined this quarter. Mark Saeger: So yes, we had a $100 million reduction in criticized in total for the period. Again, I mentioned that was through not just upgrades, but payoffs in financing out, which is positive. And I'll have to get back on the -- specifically on that substandard component. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. And that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to Intel Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, John Pitzer, Vice President, Investor Relations. Please go ahead, sir. John Pitzer: Thank you, Jonathan, and good afternoon to everyone joining us today. By now, you should have received a copy of the Q3 earnings release and earnings presentation, both of which are available on our Investor Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I am joined today by our CEO, Lip-Bu Tan; and our CFO, David Zinsner. Lip-Bu will open up with comments on our third quarter results as well as provide an update on our progress implementing strategic priorities. Dave will then discuss our overall financial results, including fourth quarter guidance before we transition to answer your questions. Before we begin, please note that today's discussion contains forward-looking statements based on the environment as we currently see it and as such, are subject to various risks and uncertainties. It also contains references to non-GAAP financial measures that we believe provide useful information to our investors. Our earnings release, most recent annual report on Form 10-K and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on our non-GAAP financial measures including reconciliations where appropriate to our corresponding GAAP financial measures. With that, let me turn things over to Lip-Bu. Lip-Bu Tan: Thank you, John, and let me add my welcome this afternoon. we delivered a solid Q3 with revenue, gross margin, earnings per share above guidance. This marks the fourth consecutive quarter of improved execution delivered by the underwriting growth in our core markets and the steady progress we are making to rebuild the company. While we are still a long way to go we are taking the right steps to create sustainable shareholder value. We significantly improved our cash position and liquidity in Q3, a key focus for me since becoming CEO in March. This includes accelerated funding from the United States government, important investments from NVIDIA and SoftBank Group and monetizing portion of Altera and Mobileye. The action we took to strengthen the balance sheet give us greater operational flexibility and position us well to continue to execute our strategy with confidence. In particular, I'm honored by the trust and confidence President Trump and Secretary Lutnick has placed in me. Their support highlights Intel's strategic role as the only U.S.-based semiconductor company with leading-edge logic R&D and manufacturing. We are fully committed to advancing the Trump administration's vision to restoring semiconductor production and proudly welcome the U.S. government as our essential partners in our efforts. We also made tangible progress to improve our execution this quarter. We remain on track not only to rightsize the company by year-end but also to evolve the talent mix, reestablish the engineering-first mindset and optimize the executive and management levels across the organization. We are seeing a significant increase in day-to-day energy and collaborations as our employees return to office after a sustained period of remote and hybrid work. Let me dive deeper into our underlying business trend. Over the course of my career, I have had the privilege of contributing multiple ways of disruptive innovation. But I can't recall a time that I have been more excited about the future of computing and opportunities in front of us. We are still in the early stage of AI revolution, and I believe Intel can and will play a much more significant role as we transform the company. Let's start with our core x86 franchise, which continues to play a critical role in the age of AI. AI is clearly accelerating demand for new compute architectures, hardware models and algorithms, at the same time, is fueling renewed growth of traditional compute as the underwriting data and the resulting insights continue to rely heavily on our existing products from cloud to edge. AI is driving near-term upside to our business, and it is a strong foundation for sustainable long-term growth as we execute. In addition, with unmatched compatibility, security and flexibility by virtue of being the largest installed base of general purpose compute, x86 is well positioned to power the hybrid compute environment that AI workloads demand, particularly for inference edge workloads and agentic system. It is a great starting point from which to rebuild our market position to revitalizing and rejuvenating the x86 ISA and positioning for the new era of computing with great products and partnerships. Our collaboration with NVIDIA is a prime example. We are joining forces to create a new class of products and experience spanning multiple generation that accelerate the adoption of AI for the hyperscale, enterprise and consumer markets. By connecting our architectures to NVIDIA NVLink, we combined Intel CPU and x86 leadership with NVIDIA unmatched AI and accelerated computing strength, unlocking innovative solutions that will deliver better customer experience and provide a big hit for Intel in the leading AI platform of tomorrow. We need to continue to build on this momentum and capitalize on our position by improving our engineering and design execution. This includes hiring, promoting top architecture talent as well as reimagining our core road map to ensure it is the best-in-class features. To accelerate this effort, we recently created the Central Engineering Group, which will unify our horizontal engineering functions to drive leverage across foundational IP development, test chip design, EDA tools and design platforms. This new structure will eliminate duplications, improve time to decision-making and enhance coherence across all product development. In addition and just as important, the group will spearhead the build-out of our new ASIC and design service business to deliver purpose-built silicon for a broad range of external customers. This will not only extend the reach of our core x86 IP but also leverage our design strength to deliver an array of solutions from general purpose to fixed function computing. In client, we are on track to launch our first Panther Lake SKU by year-end, followed by additional SKUs in the first half of next year. This will help us to solidify our strong position in the notebook segment across both consumer and enterprise with cost-optimized products across our full PC stack from our entry-level offering to our mainstream core family, up through our highest-performing Core Ultra family. In high-end desktop, competition remains intense, but we are making steady progress. Arrow Lake shipments have increased throughout the year, and our next-generation Nova Lake product will bring new architecture and software upgrades to further strengthen our offerings, particularly in the PC gaming [ hollow ] space. With this lineup, we believe we will have the strongest PC portfolio in years. In traditional servers, AI workloads are driving both refresh of the installed base and capacity expansion, fueled by rapid growth in tokenization, the increased demands around data storage and processing, and a need to elevate power and space constraints. We remain the AI head nodes of choice with strong demand for Granite Rapids, including instances across every major hyperscalers. We are listening to what customers need, and strong performance per watt and TCO are top of mind, as I shared with you last quarter, the key part, including improving our multi-trading capabilities as we close existing gap and work to regain shares. Finally, on our AI accelerator strategy, I continue to believe that we can play a meaningful role in developing compute platforms for emerging inference workloads driven by agentic AI and physical AI. This will be a far larger market than that for AI training workloads. We will work to position Intel as a compute platform of choice for AI inference, and we look to partner with arrays of incumbents as well as emerging companies that are defining this new compute paradigm. This is a multiyear initiative, and we will strike partnership when we can deliver true differentiation and market-leading products. In the near term, we will continue delivering AI capabilities to Xeon, AI PCs, Arc, GPUs and our open software stack. Looking ahead, we plan to launch successive generation of inference-optimized GPUs on the annual cadence that features enhanced memory and bandwidth to meet enterprise needs. Turning to Intel Foundry. Our momentum continues. We are making steady progress on Intel 18A. We are on track to bring Panther Lake to market this year. Intel 18A yields are progressing at a predictable rate and Fab 52 in Arizona, which is dedicated to high-volume manufacturing, is now fully operational. In addition, we are advancing our work on Intel 18AP, and we continue to hit our PDK milestones. Our Intel 18A family is the foundation for at least next 3 generation of client and server products. I will work with U.S. government within the secure enclave and other committed customers. It is a critical node that will drive wafer volumes well into the next decade and generate a healthy return on our investment. On Intel 14A, the team continued to focus on technology definition, transistor architecture, process flow, design enablement and foundation IPs. We remain active, engaged with potential external customers and are encouraged by the earlier feedback which help us to drive and inform our decisions. Lastly, our advanced packaging activities continue to progress well, especially in the area like EMIB and EMIB-T, which we have 2 differentiations. Like our Intel products, my conviction in the market potential for Intel Foundry continue to grow. The rapid expansion of critical AI infrastructure is fueling unprecedented demand for wafer capacity and advanced packaging services that present a substantial opportunity demanding multiple suppliers. Intel Foundry is uniquely positioned to capitalize on this unprecedented demand as we execute. As I mentioned last quarter, our investment in foundry will be disciplined, and we will focus on capability and scalability, giving us flexibility to ramp quickly, and we will only add capacity when we have committed external demand. Building a world-class foundry is a long-term effort founded on trust. As a foundry, we need to ensure that our process can be easily used by a variety of customers, each with a unique way of building their own products. We must learn to delight our customers as they call on us to build wafers to meet all their needs for power, performance, yield, cost and schedule. This is only by doing this that they can rely on us as a true long-term partner to ensure their success. This requires a change of mindset that I'm driving across Intel Foundry as we position this business for long-term success. As we look ahead, my focus remains firmly on the long-term opportunity across every market we serve today and those we will enter tomorrow. Our strategy is crystallized around our unique strength and value proposition, supported by the accelerating and unprecedented demand for compute in the AI-driven economy. Our leadership continues to strengthen. Our culture is becoming more accountable, collaborative and execution oriented. And my confidence in the future grow stronger every day. I look forward to keep you updated as we advance our journey. I will now turn it over to Dave for detail on our current business trends and financials. David Zinsner: Thank you, Lip-Bu. In Q3, we delivered the fourth consecutive quarter of revenue above our guidance, driven by continued strength in our core markets. Although we remain vigilant regarding macroeconomic volatility, customer purchasing behavior and inventory levels are healthy and industry supply has tightened materially. Furthermore, we are increasingly confident that the rapid adoption of AI is driving growth in traditional compute and reinforcing momentum across our businesses. In client, we are 5 years post the COVID pull forward and are benefiting from the refresh of a larger installed base. Enterprises continue to migrate to Windows 11, and AI PC adoption is growing. In data center, the accelerating build-out of AI infrastructure is positive for server CPU demand from head nodes, inference, orchestration layers and storage. We are cautiously optimistic that the CPU TAM will continue to grow in 2026 even as we have work to do to improve our competitive position. Third quarter revenue was $13.7 billion, coming in above the high end of our guidance range and up 6% sequentially. Capacity constraints, especially on Intel 10 and Intel 7 limited our ability to fully meet demand in Q3 for both data center and client products. Non-GAAP gross margin was 40%, 4 percentage points better than our guidance on higher revenue, a more favorable mix and lower inventory reserves, partially offset by higher volume of Lunar Lake and the early ramp of Intel 18A. We delivered third quarter earnings per share of $0.23 versus our guidance of breakeven EPS driven by higher revenue, stronger gross margins and continued cost discipline. Q3 operating cash flow was $2.5 billion with gross CapEx of $3 billion in the quarter and positive adjusted free cash flow of $900 million. One of our top priorities for 2025 was shoring up our balance sheet. To that end, we executed on deals to secure roughly $20 billion of cash, including 3 important strategic partnerships. We exited Q3 with $30.9 billion of cash and short-term investments. In Q3, we received $5.7 billion from the U.S. government, $2 billion from SoftBank Group, $4.3 billion from the Altera closure and $900 million from the Mobileye stake sale. We expect NVIDIA's $5 billion investment to close by the end of Q4. Finally, we repaid $4.3 billion of debt in the quarter and we will continue prioritizing deleveraging by paying maturities as they come due in 2026. Moving to segment results for Q3. Intel products revenue was $12.7 billion, up 7% sequentially and above our expectations across client and server. The team executed well to support upside in the quarter given the current tight capacity environment, which we expect to persist into 2026. We are working closely with customers to maximize our available output, including adjusting pricing and mix to shift demand towards products where we have supply and they have demand. CCG revenue was $8.5 billion, up 8% quarter-over-quarter and above our expectation due to a seasonally stronger TAM, Windows 11-driven refresh and a stronger pricing mix with the ramp of Lunar Lake and Arrow Lake. Within the quarter, CCG further advanced its relationship with Microsoft through a collaboration with Windows ML and the deep integration of Intel vPro manageability with Microsoft Intune enabling secure cloud connected fleet management for businesses of all sizes. The team also met all key milestones in support of launching Core Ultra 3, code-named Panther Lake. We expect the client consumption TAM to approach 290 million units in 2025, marking 2 straight years of growth off the post-COVID bottom in 2023. This represents the fastest TAM growth since 2021, and we're prudently preparing for another year of strong demand in 2026 as Core Ultra 3 ramps into a healthy PC ecosystem. PC AI revenue was $4.1 billion, up 5% sequentially, above expectations, driven by improved product mix and higher enterprise demand. The strength in host CPUs for AI servers and storage compute continued in the quarter even as supply constraints limited additional upside. Our latest Xeon 6 processors, code-named Granite Rapids, offer significant benefits, including up to 68% TCO savings and up to 80% less power as compared to the average server installed today. It is increasingly clear that CPUs play a critical role today and will going forward within the AI data center as AI usage expands and especially as inference workloads outpaced that of training. Some data center customers are beginning to ask about longer-term strategic supply agreements to support their business goals due to the rapid expansion of AI infrastructure. This dynamic, combined with the underinvestment in traditional infrastructure over the last couple of years should enable the revenue TAM for server CPUs to comfortably grow going forward. Operating profit for Intel products was $3.7 billion, 29% of revenue and up $972 million quarter-over-quarter on stronger product margin, lower operating expenses and a favorable compare due to period costs in Q2. Before discussing Intel Foundry, I want to acknowledge the tireless effort of the NVIDIA and Intel teams. There's a lot of work in front of us, but the collaboration we announced this quarter was the culmination of almost a year of hard work with a company that cuts no corners and prioritizes engineering excellence above all. The x86 architecture has been the foundation of the digital revolution that powers the modern world. AI is the next phase of that revolution, and we're on a path to ensure x86 remains at the heart of it. Engagements like this one with NVIDIA are critical to this effort. Moving to Intel Foundry. Intel Foundry delivered revenue of $4.2 billion, down 4% sequentially. In Q3, Intel Foundry delivered Intel 10 and 7 volume above expectations, met key 18A milestones and released hardened 18A PDKs to the ecosystem. Foundry also advanced the development of Intel 14A and continues to make progress expanding its advanced packaging deal pipeline. Intel Foundry operating loss in Q3 was $2.3 billion, better by $847 million sequentially primarily on favorable comparison due to the approximately $800 million impairment charge in Q2. As Lip-Bu discussed, our confidence in the long-term foundry TAM continues to grow, bolstered by accelerating deployment and adoption of AI and the growing need for wafers and advanced packaging services. Projections are calling for a greater than 10x increase of gigawatts of AI capacity by 2030, creating significant opportunities for Intel Foundry with external customers, both for wafers and our differentiated advanced packaging capabilities like EMIB-T. We continue the work to earn the trust of our customers, and our improved balance sheet flexibility will allow us to quickly and responsibly respond to demand as it comes. Turning to all other. Revenue came in at $1 billion, of which Altera contributed $386 million and was down 6% sequentially due to the intra-quarter closure of Altera. The 3 primary components of all other in Q3 were Mobileye, Altera and IMS. Collectively, the category delivered $100 million of operating profit. Now turning to guidance. For Q4, we're forecasting a revenue range of $12.8 billion to $13.8 billion. At the midpoint, and adjusting for the Altera deconsolidation, Q4's revenue is roughly flat quarter-over-quarter. We expect Intel products up modestly sequentially but below customer demand as we continue to navigate supply environment. Within Intel products, we expect CCG to be down modestly and PC AI to be up strongly sequentially as we prioritize wafer capacity for server shipments over entry-level client parts. We expect Intel Foundry revenue up quarter-over-quarter on increased Intel 18A revenue and its external foundry revenue up due to the deconsolidation of Altera. For all other, which now excludes Altera, we expect revenue to decline consistent with Mobileye's guidance, partially offset by sequential growth in IMS. At the midpoint of $13.3 billion, we forecast a gross margin of approximately 36.5%, down sequentially due to product mix, the impact of the first shipments of Core Ultra 3, which has the typically higher cost you see in the early stages of a new product ramp and the deconsolidation of Altera. We forecast a tax rate of 12% and EPS of $0.08, all on a non-GAAP basis. We expect noncontrolled income to be approximately $350 million to $400 million in Q4 on a GAAP basis, and we forecast average fully diluted share count of roughly 5 billion shares for Q4. Moving to CapEx. We continue to anticipate 2025 gross capital investment will be approximately $18 billion, and we expect to deploy more than $27 billion of CapEx in 2025 versus $17 billion deployed in 2024. I'll wrap up by saying we exit Q3 with a significantly stronger balance sheet, solid demand in the near term and growing confidence in our core x86 franchise as well as the longer-term opportunities in foundry, ASICs and accelerators. We also recognize the work we need to reach our full potential. We continue to add external talent and unlock our workforce to improve our execution across product and process development as well as manufacturing. We will closely manage what's in our control, react quickly as the environment evolves and focus on delivering long-term shareholder value. At this time, I'll turn it back to John to start the Q&A. John Pitzer: Thank you, Dave. We will now transition to the Q&A potion of our call. [Operator Instructions] With that, Jonathan, can we take the first question, please? Operator: And our first question comes from the line of Ross Seymore from Deutsche Bank. Ross Seymore: Congratulations on the strong results. Lip-Bu, the first one for you is going to be on the foundry side. You guys announced a ton of collaborations in the quarter. You very much strengthened your balance sheet. And the tone you took in your preamble sounds much more confident on the progress you're making in foundry. Do any of these collaborative announcements or equity investments go into that increased confidence? Or are there some sort of technical merits that you're seeing that are rising your optimism in that part of your business? Lip-Bu Tan: Yes, Ross, thank you so much for the questions. So I think a couple of announcements we make is, I think, clearly more on the product side. And also, one is the SoftBank because they are building up all the infrastructure, AI infrastructure. That definitely will need more capacity on the foundry side. So I think that would be the answer. But meanwhile, I've been saying that, I think, clearly, from what I received from the 18A and 14A, we made tremendous good progress, the steady progress on 18A. And Panther Lake will depend on it. And then clearly, we see the yield in a more predictable way. And I visited fab 52 that fully in operation for the 18A. And then on the 14A, clearly, we're engaging with multiple customers in terms of milestone basis. And we're also really driving some of the yield and performance, reliability that are seeing improvement. And also more exciting, the advanced packaging, we also see important demands from some of the key customer from foundry -- from the cloud able and also enterprise side. So I think overall, I think we are looking quite excited to build this long-term trust with some of the customers and scaling it. And we also focus on hiring some of the top talent, driving some of the process technology improvement. John Pitzer: Ross, do you have a follow-up question? Ross Seymore: Yes, I do. One for Dave on the gross margin side of things. You talked through the upside in the third quarter and the sequential downside in the fourth. But could you just walk us through some of the pluses and minuses as we think about 2026, just kind of directionally? And I guess where I'm going is it seems like the biggest improvement has to come on the foundry gross margin side of things. Is that the biggest driver? What drives it? And as those gross margins go up, does that have any impact on the Intel products gross margin? David Zinsner: Yes, sure. So obviously, we're not going to guide '26, but I think I can give a little bit of color. I think, first of all, just be mindful that Altera is out of the numbers in '26. They were in the large part of the numbers for '25, so that's probably a point of margin headwind for us because they were accretive to our gross margins. So that's going to be a little bit of a challenge to overcome it. I'd say, we still believe in this 40% to 60% fall-through for margins. Of course, it's a little bit of a range. You could drive a truck through quite honestly. But a lot of it is because of mix. I mean we'll have -- obviously, Lunar Lake will be a big component in the -- at least in the first half of the year, and that is a dilutive product to us. And then Panther Lake, while, obviously, it's going to be a great cross structure for us over time given the wafers are fabbed internally -- initially, obviously, when you got a new product on a new process, they're pretty expensive products to start with. And so it's dilutive in the beginnings of the year, and then it gets better over the course of the year. I do agree. We should see gross margins improve on the foundry side for sure. Partly, that is the scale dynamic that we will see benefit from but also as we move towards more leading-edge mix, 18A for sure but also even Intel 4, 3, those products have better pricing and a better cost structure. And so those margins should be accretive. And really, the dynamic about how much it improves will largely be a function of how the mix plays out through the year. Operator: Our next question comes from the line of Joseph Moore from Morgan Stanley. Joseph Moore: I was really interested in a lot of the prepared remarks around the sort of differences to your approach to foundry, and you talked about this last quarter and this quarter that you're sort of looking for customer commitments before you make the investment. Can you just talk about how those conversations are going? And I certainly -- I can see the trade-off from a customer standpoint. They're making a commitment to you. Do they expect that capacity to be built ahead of time? Just is there a bit of a chicken and egg aspect to these investments? And just how are you approaching those conversations? Lip-Bu Tan: Yes, Joseph, thank you so much for the question. I think on the foundry side, clearly, we are engaging with multiple customers. And as the building the trust of the customer, you need to really show the yield improvement, reliability and also, you need to have all the specific IP that they require. It's a service industry. You need to have all the right IP. That's why I formed the Central Engineering to get all the right IP to matching with the customer requirement. And then I think the best way is really show the performance, the yield and then we can [ data ] test chip so that they can really work on it. And then they can starting to deploy their most important revenue wafer to depend on us so that we can drive the success for them. So I think those are very important. In terms of potential investment and collaboration, I think with a different customer, different requirements, we are working with them. But more important is to get their commitment to the foundry and the support. I think that's building the trust that's more important. David Zinsner: Yes. Maybe just to add on, I would say that I think customers understand that it takes time from the time you deploy capital to the time where you have output. And so our expectation is we will get those commitments firmed up in time to deploy the capital, in time to meet the demand. I'd also say we're in a reasonably decent position given the CapEx investments we've already made. So we have a lot of the assets on the books and in what we call assets under construction. We've made a lot of investments around the shelf space. So we do see line of sight to driving a reasonable amount of supply for our external foundry customers with our existing footprint and quite honestly, with the use of the assets under construction and reuse of equipment that we have on the books today. So I think we have flexibility. Obviously, if things go better, we may be looking to invest more into that more quickly, but we feel reasonably confident we can react to the situation. John Pitzer: Joe, do you have a follow-up question? Joseph Moore: I do, yes. Separately, the supply constraints in server CPUs and other CPUs, we see those in the market, I guess, but your growth was 5% sequentially, single-digit growth year-on-year. I guess where is the shortage coming from? Is there just better demand ahead that you're not able to meet? Is it some of the transitions that you guys have managed? Just -- and I certainly see that tightness in the marketplace, so I'm not arguing with that. I'm just curious where you see that shortage coming from and how it will get resolved. David Zinsner: Yes. I mean, shortage is pretty much across our business, I would say. We are definitely tight on Intel 10 and 7. Obviously, we're not looking to build more capacity there. And so as we get more demand, we're constrained. In some ways, we're living off of inventory. We're also trying to kind of demand shape to get customers to other products. There's also shortages even beyond our specific challenges on the foundry side. I think there's widely reported substrate shortages for example. So obviously, I think the demand -- there's a lot of caution coming into the year, I think, across the board. And it looks like things are going to be stronger this year, and probably that continues well into next year. And I think everybody is trying to manage through it. Operator: Our next question comes from the line of C.J. Muse from Cantor Fitzgerald. Christopher Muse: I guess a follow-up on the current outlook for demand outpacing supply into 2026. Curious if that's a comment largely focused on server or also including clients and I guess depending on your thoughts there. How should we be thinking about Q1 trends versus normal seasonality, which typically, I guess, would be down high single digits, low double digits? David Zinsner: Yes. It's both. Although as we said, we are yielding a bit of the small core market and client to fulfill customer requirements more broadly on the client space and more specifically in the server space. So that's how we're going to kind of manage it. As you look into Q1, obviously, again, this is something we'll probably give you a lot more color around in January. I would just say we may actually be at our peak in terms of shortages in the first quarter because we've lived through the Q3 and Q4 with a little bit of inventory to help us and just cranking the output as much as we could with the factory. We probably won't have as much of that luxury in Q1. So I'm not sure we'll buck the trend on seasonality given the fact that we're going to be really, really tight in the first quarter. After that, I think we'll start to see some improvements, and we can get ourselves caught up as we get through the rest of the year. John Pitzer: C.J., do you have a follow-up question? Christopher Muse: I do, John. I guess given the investments from the U.S. government and NVIDIA, SoftBank, et cetera, I'm curious, with that improved cash position and liquidity, how has your thinking evolved in terms of investments in either CapEx or other investments in your product businesses. David Zinsner: Yes. I mean, obviously, we're in a great position. I'd say, as we think about this cash, our first focus is to delever. I mean that's one of the things we really wanted to -- when Lip-Bu came in, he really was upset about the balance sheet. So we've done a lot to work on that and improve that for him. We took $4.3 billion of debt off the books this quarter, and all the maturities next quarter or next year should come off and we'll repay that. I think as you look at CapEx, it puts us in a position of flexibility on CapEx, but we want to be very disciplined around CapEx. So we will absolutely be looking at demand. Lip-Bu's been very direct with us on this. He wants to see the whites of the eyes of the customer that we can believe in that demand. And if that demand exists, of course, we will amp up the CapEx as necessary. As you think about investment, we still think that $16 billion of OpEx investment for next year is the right amount. Although Lip-Bu and I are constantly now looking at how we mix that $16 billion to drive the best possible growth and return for investors, and we will be making those changes. Beyond that, we'll see how things go. We want to be pretty disciplined about our OpEx as a percent of revenue and drive leverage. But we do see opportunities to make investments that can, I think, deliver great returns for shareholders, and we're not afraid to do that either. Operator: Our next question comes from the line of Blayne Curtis, Jefferies. Blayne Curtis: I had 2. Just on the CapEx, I think you reiterated $18 billion, but I think you spent, I guess, less than I was modeling in Q3. So is that really still the number? And I'm just kind of curious, as you start to ramp this 18A in Arizona, is there a way to think about the timing of when you add capacity there? David Zinsner: On the $18 billion, yes, I think that's still the number. Obviously, CapEx can be lumpy. It depends on when things get -- when all the requirements associated with paying the invoice are completed, that's when we make the payments. And so we would expect to be somewhere in that range. Obviously, there's an error bar around that. It might be a little bit less or a little bit more than that. 18A, we still have to ramp this. I wouldn't expect significant capacity increases in the near term. But I think as we said, we are not at peak supply for 18A. In fact, we don't get there until the end of the decade. And we do think that this node will be a fairly [ long-lived ] node for us. And so we will continue to make investments on 18A over time. There will be CapEx investments next year, but I wouldn't expect the supply to -- at least capacity to significantly change vis-a-vis our expectations right now. John Pitzer: Blayne, do you have a question -- follow-up? Blayne Curtis: Yes. Just I wanted to follow up on the gross margin trajectory as 18A layers in. I know comparing it to probably the prior couple nodes, not a great compare but maybe to a successful one. When you say yields are in a good spot and improving, is there a way to think about where those 18A yields are versus the successful product that you've seen in your history and kind of think about how that layers in, in the first half? David Zinsner: Yes. I would say, in general, I don't -- I'm not sure yields in older nodes has been a big focus of ours, quite honestly. So we're blazing new trail on this. Yields are -- what I would say, the yields are adequate to address the supply, but they are not where we need them to be in order to drive the appropriate level of margins. And by the end of next year, we'll probably be in that space. And certainly, the year after that, I think they'll be in what would be kind of an industry acceptable level on the yields. I would tell you, on 14A, we're off to a great start. And if you look at 14A in terms of its maturity relative to 18A at that same point of maturity, we're better in terms of performance and yield. So we're off to an even better start on 14A. We just got to kind of continue that progress. Operator: Our next question comes from the line of Stacy Rasgon from Bernstein Research. Stacy Rasgon: I wanted to go back and ask about the supply constraints again. So you talked a lot about how AI was driving a lot of demand across servers and across PCs, but at the same time, it doesn't look like customers want your AI products. In fact, they can't get enough of the older stuff. So I guess, you -- I mean, you must have plenty of supply for Granite and for Meteor and even for Lunar Lake. So how are you going to get the customers off of the older products where they haven't shown any desire to get off of them so far even given the constraints that they've been under? And I guess, how do we think about the transition of those customers? Because you're clearly -- I mean, you even said it yourself. You're not adding any more of the older capacity. In fact, you took some of it offline, right? David Zinsner: Yes. Yes, good question, Stacy. I would -- I think it's a misnomer to say AI hasn't done well. I mean it was sequentially up double digits quarter-over-quarter, and we talked about a number of about -- we would ship about 100 million units by the end of this year on AI PC, and we're going to be first order in that range. So I think it's going pretty well. Clearly, though, the older nodes have also done well, and that was probably the part that was more unexpected. We -- I think we've just got to participate in making sure that the ecosystem drives enough applications for AI in the PC space. And we work with the ISVs regularly to drive that. They're getting there. Like any market, it starts relatively immature and kind of builds out over time. But even in our company, we're starting to find uses for AI PC. In fact, IR is coming up with one here that we'll be using. So I think it's just kind of time. Now that said, what clearly is happening is the Windows refresh is happening more significantly than I think we expected. And that's not necessarily an AI PC story. And so Raptor Lake is also a product that addresses that. And so we're just seeing upside in that part of the market as well. Stacy Rasgon: Dave, I want to follow up on 2 things that I think I heard you say on 18A. I thought I heard you say, number one, the yields would not be in a great place at least until the end of next year. And then I thought I also heard you say that you were not going to be adding a lot of 18A capacity next year. Did I hear those wrong? I mean, how can such the latter one, how can how can that be true if you're ramping Panther? Or is that like a... David Zinsner: We're obviously at our infancy. What I'm saying is relative to the CapEx plan, it's not like we're going to incrementally add supply for 18A next year. But yes, of course, we're going to be ramping the volume over the course of the next year. I wouldn't say 18A yields are in a bad place. I mean, they're where we want them to be at this point. We had a goal for the end of the year, and they're going to hit that goal. But to be fully accretive in terms of the cost structure of 18A, we need the yields to be better. I mean that's like every process. That's what happens. And it's going to take all of next year, I think, to really get to a place where that's the case. Operator: Our next question comes from the line of Joshua Buchalter from TD Cowen. Joshua Buchalter: I wanted to ask about some comments Lip-Bu made in the prepared remarks about fixed function computing and potentially supporting more ASICs. Was this -- maybe could you provide more context on the scope of this? Is this for potential foundry customers? Or are these products? And if it's products, what types of applications do you expect to be supporting with custom silicon? Lip-Bu Tan: Good question. So I think, first of all, I just mentioned about the Central Engineering. We are driving the ASIC design, and that will be enhanced -- actually is a good opportunity for us to enhance, extend our reach of the core x86 IP and also drive some of the purpose-built silicon for some of our systems and cloud players and customer. And then definitely with the foundry and packaging, also they were helping us in terms of their requirement. So all in all, I think this AI will be driving a lot of growth especially in the double down, the Moore's Law, and that will help us a lot in our 86 uplift. And that's an opportunity for us to build the whole ASIC design to serve some of the customer requirement. John Pitzer: Josh, do you have a quick follow-up? Joshua Buchalter: Yes. So on the last quarter, obviously, the disclosure that you may decide to abandon 14A got a lot of attention. I just wanted to ask, given your balance sheet is in a lot different spot than it was 3 months ago, has anything changed from that regard? I don't think the Q is out, so I haven't seen if any of the language changed there. But was curious if anything had moved around since last quarter given all the changes in your balance sheet. Lip-Bu Tan: Yes. Since the last balance -- quarter, I think clearly, our engagement with the customer for 14A increase, and we are very heavily engaging with the customer in terms of defining the technology, the process, the yield and the IP requirement to serve them. And they clearly see the tremendous demand that they need to have Intel to be strong on the 14A. And so we are delighted and more confident. And meanwhile, we're also attracting some of the key talent for the process technology that can really drive success, and that's why it gives me a lot more confidence to drive that. Operator: Our next question comes from the line of Ben Reitzes from Melius. Benjamin Reitzes: Lip-Bu, anything -- can we get an update on the NVIDIA relationship timing of products? Have you gotten any feedback from customers in terms of your ability to articulate on the materiality of the relationship and in terms of timing and materiality or any other color you want to give us on that? Lip-Bu Tan: Sure. Thank you. And this is a very important collaboration with NVIDIA. It's a great company, as you guys know. And I've been known as a friend of Jensen for more than 30 years. And we are very excited about this effort of Intel CPU 86 leadership, and their unmatched AI and accelerated computing and then connecting with their NVLink and that will be -- really create a new class of product in the multigenerations. And this is something that very heavy engineering-to-engineering engagement. And that will be driving some of the new product that custom data center and PC product and that really optimize for the AI era. So I think all in all, I think this is going to be multiple years of engagement and then addressing our market that we are excited and also driving some of the requirement for the AI infrastructure. David Zinsner: And maybe just one more addition. Just what makes this really special for us is it's not attacking our existing TAM. It's an incremental opportunity for us to expand the TAM. And so these are great opportunities for us. John Pitzer: Ben, do you have a follow-up? Benjamin Reitzes: Yes. Lip-Bu, you mentioned a little bit about your AI strategy now to attack the inference market and that there's -- you see room for Intel solutions. And it sounds like you're going to partner a lot there. Is this strategy more about partnering? Is it more about -- is there a specific Intel IP for inferencing that you're excited about? Or is it more of a Switzerland approach where you could partner with a lot of the existing players out there to attack more of the TAM? Lip-Bu Tan: Yes, good question. So I think, first of all, I think with the AI driving a lot of growth, we definitely want to play in that. I think this is a very early inning. And so I think that's an opportunity for us. And I think one area that we are focused on is our revitalizing our 86 and to really tailor to purpose build CPU, GPU requirement for the new AI workload and then really addressing the power-efficient agentic and managing all the different agents. This is a new way of compute platform of choice and that we'll be also applying to the system and software. They're going to say to you, I think we're going to partnering with some of the incumbents and also the emerging companies that driving some of these changes. Operator: Our next question comes from the line of Timothy Arcuri from UBS. Timothy Arcuri: Dave, it's not that often we see high fixed cost businesses that are constrained that have gross margins less than 40%. And I certainly get that most of this is because of the wafer cost for Intel 10 and 7 and you still have low yields on 18A. But I'm wondering -- and this is probably a hard question to ask -- to answer, but I wonder if you could maybe just kind of fast forward a bit and say like what would gross margin be if you were off of 10 and 7 and you were on 18A. Is there a way you could like normalize it for us? David Zinsner: Yes. I mean obviously you may be listening in on some of my conversations with the team here because that's definitely something I've been making the point of. I would say there's 2 dynamics, 1 of which you're hitting on, and that is the high cost of older processes versus the better cost structure for the newer processes. And that's obviously meaningful. I mean we're in negative gross margin territory for foundry. That makes a meaningful improvement if you move it even into the positive territory. But the other aspect of our gross margin is a function of just the product quality. We're in reasonably decent shape on client in terms of product performance and competitiveness with a few exceptions, but we're not where we need to be on a cost basis. And so we've got to make improvements there. And we have that on the road map. The team recognizes it, but that's a multiyear process to get there. But it's more pronounced on the data center side. Not only do we not have the right cost structure, but we also don't have the right competitiveness to really get the right margins from our customers. And so we've got work to do there. And so that's what Lip-Bu and the team has pulled in, are hyper-focused on, is getting great products at the right cost structure to drive better gross margins. That to me, I think, is the linchpin in all this. The improvements on the foundry side are just going to come, I think. We're going to mix higher and higher to Intel 3, 4 and then 18A and ultimately, 14A. The cost structures of all of those are actually pretty similar. And it will just be a function of the fact that the value that's provided by those leading edge nodes is going to be significantly more, and that's going to just materially drive the gross margins up. The other thing that I would say is we are seeing a lot of start-up costs by virtue of the fact that we've jammed a whole bunch of new processes in kind of in rapid fashion. As we get into 14A, our cadence will be more normalized. And so you won't see so much start-up costs stacked on top of each other, which is affecting gross margins. And that's billions of dollars. So I think as you get beyond a few years, that rolls off and will also help. Timothy Arcuri: I do. Yes. Lip-Bu, you didn't give an update last call on Diamond Rapids launch date. I know the whole road map is under review, but you did sound -- the company sounds fairly optimistic about Coral Rapids. Can you just give us sort of an update on the data center road map a bit here? Lip-Bu Tan: Yes. Thank you. Good questions. So I think clearly, the Diamond Rapids is getting stronger hyperscale feedback. And then we also focus on the new product, the Coral Rapids, and that will be included SMT, the multithreading, and that can drive higher performance. We're in the definition stage. And then we will work out the road map and then we're going to execute that [ would be ] going forward. Operator: Our final question for today comes from the line of Aaron Rakers from Wells Fargo. Aaron Rakers: Just a couple of real quick ones. I guess going back to the NVIDIA relationship. I can appreciate that the announcement was really tied to the NVLink Fusion strategy and integrating that with the x86 ecosystem. But I think there's been some -- also some recent reports about maybe using Gaudi for some dedicated inference workloads within a stack of NVIDIA. How do you -- is this relationship a starting point? And should we expect to see more potential integration beyond NVLink going forward? Lip-Bu Tan: Yes, I think -- let me answer that. I think NVLink is kind of more the hub to connecting the 86 and GPU. In terms of the AI strategy, we clearly -- we are defining the Crescent Island that we talk about. And also, we also have a new product line in the lineup. So they're addressing the agentic and the physical AI and more in the inference side. And so I think stay tuned. We will update that. John Pitzer: Aaron, do you have a quick follow-up? Aaron Rakers: I do, and I'll make it really short. Can you just update us on how we think about the NCI, the noncontrolling interest expense, as we look through this year and think about that? I think you've given some comments in the past of how we should think about that into '26. David Zinsner: Yes. I think '26, we're looking at somewhere in the $1.2 billion to $1.4 billion range is probably a good estimate. Obviously, we're focused on that, and we'll work to minimize that as much as possible. Lip-Bu Tan: With that, I want to thank everyone for joining us today. We are on the journey of rebuild Intel, and we have a lot of works ahead of us, but we are making solid progress in Q3. I look forward seeing many of you throughout the quarter and provide you another update in January. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning, and welcome to the Origin Bancorp, Inc. Third Quarter Earnings Conference Call. My name is Tom, and I'll be your Evercall coordinator. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference call over to Chris Reigelman. Chris, you may proceed. Chris Reigelman: Good morning, and thank you for joining us today. We issued our earnings press release yesterday afternoon, a copy of which is available on our website, along with the slide presentation that we will refer to during this call. Please refer to Page 2 of our slide presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those joining by phone, please note the slide presentation is available on our website at www.ir.origin.bank. Please also note that our safe harbor statements are available on Page 7 of our earnings release filed with the SEC yesterday. All comments made during today's call are subject to safe harbor statements in our slide presentation and earnings release. I'm joined this morning by Origin Bancorp's Chairman, President and CEO, Drake Mills; President and CEO of Origin Bank, Lance Hall; our Chief Financial Officer, Wally Wallace; Chief Risk Officer, Jim Crotwell; our Chief Accounting Officer, Steve Brolly; and our Chief Credit and Banking Officer, Preston Moore. After the presentation, we'll be happy to address any questions you may have. Drake, the call is yours. Drake Mills: Thanks, Chris, and thanks for being with us this morning. Before we discuss our third quarter performance, I want to share my perspective on Tricolor and the related charge-off. We had a 20-year relationship with Tricolor. During that time, Origin has grown into a dynamic company that strategically builds relationships and has a strong system of risk mitigation. For Tricolor, our systems and processes included audited financials, various loan covenants, monthly borrowing base certificates and a third-party trust company as collateral custodian. However, even with the best practices of risk mitigation, losses can occur in the event of a customer fraud. As a leader, it's important to use an event like this as an opportunity to better your organization by diving deep into policies, processes and portfolios to identify lessons learned. Our decision to charge off the entire Tricolor outstanding debt is extremely conservative. We do anticipate recoveries through a combination of no collections, insurance claims and legal recourse. This isolated event does not define Origin. When I think of our long history of success, the depth of our management team, the momentum we have generated with Optimize Origin and the unprecedented opportunities within our markets due to M&A-driven disruption, I am passionate and confident we will achieve our ultimate goal of being a top-quartile performer. Now, I'll turn it over to Lance and the team. Martin Hall: Thanks, Drake, and good morning. I'm extremely proud of how we've executed on Optimize Origin and the momentum that has been created throughout our markets. We are ahead of pace on our stated plan and are creating real traction on our goal of being a top quartile ROA performer. Excluding notable items, our pretax pre-provision ROA increased 48 basis points to 1.63% for the third quarter of 2025 compared to 1.15% in the second quarter of 2024 when we began the planning stages of Optimize Origin. Over the same period, NIM has expanded 48 basis points. Total revenue, excluding notable items, is up 10% and noninterest expense, excluding notable items, is down 3%. We strongly believe the level of paydowns and payoffs that we've seen through the first 3 quarters of this year masks the high level of production we are experiencing. We continue to see positive trends in loan production with loan originations up 19.2% year-to-date compared to the same period last year. At a more granular level, business loan production under $2.5 million across our footprint is up 22.9% during that same period. Through Optimize and through insight into data gleaned from our banker profitability reports, our bankers have heightened their focus on generating ROA lift through relationship expansion. This is highlighted by treasury management fee income increasing 7% year-over-year and loan and swap fees up 62% during the same period. We've seen a strong build on the deposit side in Q3 as noninterest-bearing deposits were up $158.6 million or 8.6% quarter-over-quarter. While we've come a long way with Optimize Origin, I'm very optimistic about what we can continue to accomplish as we close out the remainder of the year and look towards 2026. The hires we have made in our DFW markets in addition to our Southeast team reaching profitability gives me great confidence in our ability to drive long-term value in the most dynamic markets in the country. Now, I'll turn it over to Jim. Jim Crotwell: Thanks, Lance. As Drake mentioned previously, in early September, we became aware of allegation of fraud related to Tricolor. As you are aware, Tricolor filed Chapter 7 bankruptcy last month. As of quarter end, our credit relationship with Tricolor totaled $30.1 million, including $1.5 million in unfunded letters of credit. We are working with a successor servicer to begin the process of not only servicing the notes, but also working closely with the bankruptcy trustee to identify duplicative and any potential fraudulent notes. Given fraud allegations and the inability to clearly establish the level of unduplicated notes supporting our loans to Tricolor, we elected to charge off the entirety of the outstanding Tricolor debt totaling $28.4 million and to fully reserve the $1.5 million in unfunded letters of credit. While we do anticipate there will be some level of recovery from the notes pledged, we are unable to determine the magnitude of the suspected fraud with 100% certainty at this time. We will aggressively pursue all available remedies to protect the bank's interest and maximize recoveries in this matter. As such, net charge-offs for Q3 came in at $31.4 million with $3 million in net charge-offs outside of Tricolor. On an annualized basis, excluding Tricolor, net charge-offs came in at 0.16% for the quarter. Loans past due 30 to 89 days and still accruing reduced from 0.16% last quarter to 0.10% as of 9/30. Classified loans increased $10.7 million and as a percentage of total loans increased to 1.84% at quarter end compared to 1.66% as of June 30, while nonperforming assets increased $1.6 million to 1.18% at quarter end compared to 1.14% as of the prior quarter. For the quarter, our allowance for credit losses increased from 1.29% to 1.35%, net of mortgage warehouse. We did not experience any significant changes in our CECL model assumptions for the quarter, and the increase was primarily driven by increases in the individually evaluated portion of the reserve associated with our nonaccruals. The level of our reserve at 1.35%, net of mortgage warehouse, compares to a level of 1.31% at year-end 2023. Lastly, as to total ADC and CRE, we continue to have ample capacity to meet the needs of our clients and grow this segment of our portfolio, reflecting funding to total risk-based capital of 47% for ADC and 235% for CRE. I'll now turn it over to Wally. William Wallace: Thanks, Jim, and good morning, everyone. Turning to the financial highlights, in Q3, we reported diluted earnings per share of $0.27. As you can see on Slide 26, the combined financial impact of notable items during the quarter equated to a net expense of $23.3 million, equivalent to $0.59 in EPS pressure. On a pretax pre-provision basis, we reported $47.8 million. Excluding $7.9 million in net benefits from notable items in Q3 and $15.6 million net pressures in Q2, pretax pre-provision earnings increased to $39.9 million from $37.1 million. On the balance sheet side, loans decreased 1.9% sequentially and decreased 0.6% when excluding mortgage warehouse. Total deposits increased 2.6% during the quarter and 2.9% excluding brokered. Importantly, noninterest-bearing deposits grew 8.6% sequentially, improving to 24% of total deposits. Both total and noninterest-bearing deposits also increased on an average basis, up 0.9% and 1.1%, respectively. As Lance mentioned, we are excited about the momentum we are seeing from our relationship managers across our markets, and we remain optimistic that loan production is accelerating, though paydowns have remained a near-term headwind to reported loan balances. While we currently are anticipating that loan growth will return in Q4, the continued declines in Q3 lead us to reduce our loan growth guidance from up low single digits to essentially flat for the year. Given the positive momentum we have seen on the deposit side of the balance sheet and the typically strong seasonal inflows in Q4, we are maintaining our deposit growth guidance of low single digits for the year. Turning to the income statement, net interest margin expanded 4 basis points during the quarter to 3.65%, in line with our expectations. Driving most of this expansion was increased interest income from our securities portfolio, in large part due to the portfolio optimization trade executed during Q2. Moving forward, as you can see in our outlook on Slide 4 and due primarily to the expectation of an additional Fed rate cut, we tightened our margin guidance range to 3.65% in Q4 '25 and 3.60% for the full year, plus or minus 3 basis points. Our modeling now considers 25 basis point rate cuts in each of October and December as opposed to only December in our prior guide. Shifting to noninterest income, we reported $26.1 million in Q3. Excluding $9 million in net benefits from notable items in Q3 and $14.6 million in net pressures in Q2, noninterest income increased to $17.1 million from $16 million in Q2, due in large part to the addition of $1.2 million of equity method investment income from increasing our ownership in Argent Financial to over 20%. Our noninterest expense was basically flat at $62 million in Q3. Excluding $1 million of notable items in both Q3 and Q2, noninterest expense increased slightly to $61.1 million from $61.0 million in Q2, in line with our expectations. We are maintaining our guidance for Q4 and lowering our guidance slightly for the full year to down low single digits from flat to down slightly. Lastly, turning to capital, we note that Q3 tangible book value grew sequentially to $33.95, the 12th consecutive quarter of growth. And the TCE ratio ended the quarter at 10.9%, flat from Q2. As shown on Slide 25, all of our regulatory capital levels remain above levels considered well capitalized. As such, we remain confident that we have the capital flexibility to take advantage of any capital deployment opportunities to drive value for our shareholders. In fact, during the quarter, we repurchased 265,248 shares at an average price of $35.85. Furthermore, we anticipate the full redemption of the remaining $74 million of subordinated debt on our balance sheet on November 1, which will allow us to save $3 million in net annual increased interest expense. With that, I will now turn it back to Drake. Drake Mills: Thanks, Wally. As you have heard throughout this call, we have a great deal of momentum heading into the fourth quarter and next year. I referenced in my opening remarks about the opportunities, particularly in our Texas markets, associated with disruption from recent M&A. This year alone, there have been 15 bank acquisitions in Texas, with selling banks totaling $37 billion in deposits. I firmly believe that we have the infrastructure and bankers to win new business and capitalize on this opportunity. Thank you for being on the call today, and thanks to our employees who remain committed to our strategic vision of optimizing origin. We'll open up for questions. Operator: [Operator Instructions]. Our first question comes from Matt with Stephens. Matt Olney: I want to dig a little bit more on credit. Can you just talk about your NBFI exposure about what this does include and maybe what it does not include? And then secondly, any more -- as you scrub the portfolio, anything you want to disclose as far as exposure to other auto lending or subprime credits that would be of interest? Jim Crotwell: Matt, it's Jim. I'll start with a little bit of recap color on subprime and then kind of move through some of the questions you asked. Our subprime portfolio at the end of the quarter was about $92 million that represented about 1.2% of total loans. The breakdown of that would be about 68% would be residential, about 15% RV and about 15% auto. And then kind of moving to your question about subprime auto, reflective, if you kind of do the math on that, it's only 0.2% of our entire portfolio and it consists of 2 relationships, both of which are performing. And on both of those, as the sole lender in both of those relationships, some of the issues that we are experiencing in Tricolor, the double pledging of collateral, is really not an issue in the situation of these 2 relationships. Moving to the total NBFI portfolio, which is excluding mortgage warehouse, our NBFI exposure is approximately 5% of total loans, 61% of that is real estate related, with 15% related to capital call lines of credit. And the remaining 25% is spread across about 6 different categories. We've done a deep dive into this entire segment of the portfolio, and these companies have experienced management teams. The underlying loans have good income and cash flow, and our long-term relationships with the bank. And we have no past dues and no performing loans in the entirety of our NBFI segment. Matt Olney: Drake, I heard you mention the Tricolor and the fraud allegations. Can you just walk us through any insurance that could offset some of these charge-offs? And what does that look like compared to the charge-offs that we just saw? And what are some thoughts on time lines around that insurance? Drake Mills: Matt, as I said, we are aggressively pursuing recovery on these loans. We believe in time that we will see some degree of recovery. But there are -- right now, there's too many variables at present for us to sit here and quantify how much that will be and when that will occur. That's why we took the charge the way we did. It's at this point, we feel very good that we have these avenues of recovery. And as I've told investors and other relationships I have, I am going to be working diligently to ensure that we have recovery, but it's unclear. That's why we took the charge away we did. We feel confident that we will have some recovery. It's just in this Chapter 7 and going through bankruptcy and understanding the timing of this is extremely difficult to quantify anything. Matt Olney: Okay. Appreciate that. And then if I could just shift gears over to the loan growth commentary. I think the updated guidance now calls for flat balances in 2025 year-over-year. If we go back to January earlier this year, I think the guidance was mid- to high single digits, and that was kind of walked down each successive quarter since then. And Origin is certainly not alone in seeing some of the slower loan growth trends this year, but it does feel more acute at Origin than maybe some of your peers. So can we just take a step back and remind us about your loan growth views throughout the year and how that evolves? And then would love to hear any kind of preliminary thoughts you may have on loan growth in 2026. Martin Hall: Matt, it's Lance. I'd be glad to go through it. I'm actually really bullish and optimistic about where loan growth is going in Q4 and next year, but we'll kind of step back and understand why I used the word earlier that I feel like our extraordinary origination and production has really been masked by paydowns and payoffs. So if you think about that, we have actually been averaging the last 4 quarters, $685 million a quarter in paydowns and payoffs, which are extraordinarily high historically for us. Combination of that is slowing things down purposely to stay under $10 billion has led to a little less than $400 million in reduction of our commercial construction and development portfolio. So that takes some time to rebuild that back up. So that is -- a big part of our originations for this year is kind of getting back active and aggressive in that space. And that's one of the reasons we're very bullish on the fundings that will come from that next year. But just to kind of give you a little color, that $685 million per quarter over the last 4 quarters is compared to a little over $500 million, which would be sort of a typical quarter for us. And so part of that is tariffs, part of that is us pushing out credits that Jim has talked about the last few quarters. But again, I think that has sort of covered up what has been pretty extraordinary on the origination side. Our originations for the first 9 months of this year are up almost 20% compared to the 9 months of the year previously. Strong pipeline for Q4. I think we're expecting about 2% growth, ex warehouse, for Q4. So if you annualize that kind of at 8% on an annualized basis, I think our guidance for 2026 would continue to be mid- to high single digits. But we're seeing really positive momentum kind of throughout each of our markets. Texas is starting to come on strong again. Louisiana has been really strong this year. We've had about 5.5% loan and deposit growth in our Louisiana market. Really like seeing what we're seeing out of Nate and the Southeast team, a good year out of Mississippi. So we are well positioned right now. And then, I'm sure later we'll talk about Optimize and kind of say how that's translating into NIM expansion and ROA expansion. And so the engine is running really well now, it's just having to kind of get past this unprecedented level of paydowns and payoffs. Operator: Our next question comes from Woody with KBW. Wood Lay: I wanted to start, I think in the opening comments, you mentioned sort of in wake of this event, you'll be evaluating sort of the processes and systems in place to avoid incidents like this in the future. Do you expect there to be any impact to the expense run rate if there's additional investments that need to be made? Drake Mills: At this point, we don't see any additional impact or an impact to expenses. We are going to be utilizing some -- actually a move with one of our executives to come in and create a new group that is internal at this point to really focus on credit management and credit audit process, looking at the components. And as I think about Tricolor and you can sit here and say what lessons were learned. This is a process that we're undergoing right now, and we've really identified several enhancements that we believe will mitigate risk going forward as we better detect fraud. As an example, we've conducted a deep dive, as Jim said, and have gone through a comprehensive review of the segment in our portfolio. We're enhancing our processes and controls for monitoring and testing our collateral. But outside of that, we're expanding the role, as I said of this executive, who will build out a team of internal resources to provide additional oversight and streamlined collateral protection, monitoring and documentation. So I don't see that creating significant or really any additional expense. Wood Lay: Got it. And then -- so you've essentially charged off the full exposure to Tricolor. Is there any indirect exposure to the company like personal loans made to Mr. Chu or any referrals from insiders in the business? Drake Mills: Yes. While we can't necessarily speak to any specific customer information, I feel very strongly that all the exposure in our portfolio has been properly identified and appropriately accounted for. We do have approximately $500,000 in mortgages with one of the executives, about a 50% LTV and performing. Outside of that, we've disclosed everything, but feel very confident in that we've addressed any type of exposure. Wood Lay: Got it. That's helpful. And then I guess just sort of excluding the impact of Tricolor, just overall thoughts on credit, were there any trends to note in criticized or classified? Drake Mills: Yes, I'm going to let Preston -- Preston and his team have worked diligently through this process to really be able to recap where we are with credit and how we feel. So Preston? Preston Moore: Yes. Clearly, we feel like the Tricolor situation was an isolated and one-off event for Origin Bank. But in terms of the credit trends to get to your question, in my opinion, we saw a normal cycle movement of credits, which in my experience can be lumpy, certainly. We saw an increase in classified loans, nonperforming loans, charge-offs and past dues in the quarter. The increase in classified loans and nonperforming loans was part of our expected credit migration for the quarter. With respect to looking at charge-offs, clearly, we had a very elevated charge-off with Tricolor. But if we exclude that, net charge-offs would have been 16 basis points for the quarter, which is very much in line with our past experiences. And then finally, while total past due loans rose modestly in the quarter, past due 30 to 89 days and still accruing loans declined from 16 basis points last quarter to 10 basis points at the end of the quarter. And I just would say, bottom line, we do not see signs of credit deterioration in our loan portfolio. Operator: [Operator Instructions]. Our next question comes from [ Evan ] with Raymond James. Unknown Analyst: I know it's been a busy year with Optimize Origin. You've added new benefits to the project each quarter. You're staying under $10 billion at year-end. But as we look towards 2026, can we expect that the heavy lifting on Optimize Origin is behind us? And is there -- will there be more balance towards balance sheet growth? Martin Hall: Evan, this is Lance. We have a tremendous amount of opportunities still in front of us around Optimize Origin. I think Drake jokingly said we're in the top of the fourth inning when it comes to opportunities. So yes, we've done a lot of heavy lift early. And you think about the tremendous progress we've made, and we commented on some of this earlier, Optimize was basically crafted in 2Q of '24. And so if you look at that period of time from 2Q '24 to now, as we noted earlier, I mean, ROA is up 48 bps, NIM is up 48 bps. Revenue is up about 10%, expenses are down about 3%. We've executed on what we said we were going to do with Argent Financial, which is a meaningful lift for us. We've recreated our mortgage business. We actually had positive contribution income out of our mortgage business this month for the first time in years. Our Southeast market hit profitability last quarter, which is a great trend for us. We're doing a lot of really cool stuff with data. The use -- and we've talked about this in the past, our banker profitability report since we started Optimize, the ROA of our banker portfolios is up 32 bps on average, and that's really through the identification and understanding of where our revenues are created, where our profits are created. But then just everything seems to be genuine in a positive way from treasury management to fee revenue. But for us, Optimize is a continuous process. There's not a stopping point to this for us. So the way that we're continuing to use third-party benchmarking company, we have actually created an internal group that we call performance optimization partners. They are digging into process improvement, revenue enhancement, expense controls, and the insights that we're getting from that group is setting what's going to be a pretty dynamic strategic planning and budget session for us here in the next 2 weeks. And so from that, I would expect continual projects that we'll be announcing on Optimize that's really going to continue to transform this company as we evolve this into a top-tier ROA producer. Unknown Analyst: Great. Great. That's helpful. And then I just had another question on capital. So you mentioned the buybacks this quarter and then I think the redemption of, I think you said $74 million in sub debt in the fourth quarter. But as we saw most capital ratios tick up, just kind of wondering what your priorities are on capital deployment at this point. William Wallace: Evan, it's Wally. As far as priorities go, I mean, I think that our #1 priority would be to deploy our capital organically through balance sheet growth. We are very focused on trying to take advantage of any and all disruption in our markets. And as you know, that disruption has been increasing as of late, we have a successful history of lifting our teams and growing our balance sheet organically. So that would be priority #1. We recognize the level of capital that we have. We've been in the market the last 2 quarters buying back our own stock, and we will continue to look for opportunities to do that if the stock price remains at levels that we believe are where it's attractive to deploy the capital in the market. And we are aware of M&A as an opportunity to deploy capital. I don't think that's our focus today, given where our stock is trading, but we would not take that off of the list. Operator: Our next question is a follow-up from Matt with Stephens. Matt Olney: Over the last year, we've talked a lot about this fixed loan repricing dynamic that will support the overall loan yields, and we're definitely seeing the benefits of that over the last few quarters. As we look at that into 2026 and 2027, how would you characterize the remaining benefits from this dynamic compared to kind of what we've seen more recently? William Wallace: Matt, it's Wally. So with our with our payoffs and paydowns being elevated, some of that benefit has been pulled forward to this year, which is great for today NIM, but it does take away from a little bit of the tailwind that we have. That said, though, we still right now, as it stands today, have over $300 million of loans that will have planned payoffs in 2026, those loans are yielding in the mid-4s. Today, we're putting on loans in the 6.9% to 7% range. So still plenty of opportunity there, and we have over $1 billion of forecasted principal and payoffs coming for the year. So it's still a tailwind, but we have pulled some of that tailwind forward. If I look at year-over-year, I think our margin is up in the 30 to 35 basis point range. I don't think we'll see that much benefit in 2026. We're putting 4 cuts in our modeling right now and still see 10 to 15 basis points of potential margin expansion from the tailwinds that I just mentioned over the next 5 quarters. Matt Olney: And then just one more point of clarification on the fee income guidance. I think there's some discussion in the deck about -- I see here, kind of a high single-digit -- I'm sorry, low double-digit growth in the fourth quarter. Can you just -- there are several nonrecurring items and some names that are nonoperating. So I'm a little confused as far as kind of what the base is. Can you -- any way you can clarify the fee income expectations in the near term and kind of the puts and takes around the components of that? William Wallace: Sure. If you take out the items that are fee income related from the notable items table at the end of the deck, you get to a third quarter base of about $17.1 million. The fourth quarter is a seasonally light quarter in both insurance and mortgage. So from a sequential basis, that's probably more in the $15.5 million or so million dollars, which is up pretty meaningfully from last year's fourth quarter where the base was about $14 million. So that's where that growth guidance is coming from year-over-year, fourth quarter over fourth quarter, excluding notable items. The benefits coming from swap fees, which have been very strong this year, we don't see the same level of swap fees in the fourth quarter that we saw in the second and third. But we also have the contribution now from Argent as another positive when you look year-over-year. Operator: [Operator Instructions]. It appears there are currently no further questions. Handing it back to Drake Mills for any final remarks. Drake Mills: Yes. I want to thank everyone for being on the call. And just from a recap of why we feel so positive about moving into '26, it's been extremely rewarding to me personally to see a deep commitment throughout our company from all our employees to deliver on Optimize Origin, which continues to build momentum. The momentum in all of our markets from Texas to the Southeast continue to build, the dislocation in the dynamic Texas market and Southeast market is significant for us. So as we add that to the acceleration of production, I love what's going on with our strong pipelines. I currently am very positive and optimistic about our opportunity to reach our ultimate goal of being the top-quartile performer. I appreciate your support. Sincerely appreciate you being on the call. I look forward to seeing each of you soon. Operator: Ladies and gentlemen, this concludes today's Evercall. Thank you, and have a great day.